Episode Transcript
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Speaker 1 (00:00):
And Romina is the director of Budget Entitlement Policy at
(00:04):
the Cato Institute, the world's premier libertarian organization that I've
been a fan of an occasional financial supporter of for decades.
And Romina wrote a really interesting piece just recently about
social security entitled Congress can't outgrow or inflate away the
Social Security Financing Problem.
Speaker 2 (00:23):
Romina, welcome back to the show.
Speaker 3 (00:24):
Thank you Rawson, Thank you also for being a supporter
of the Cato Institute.
Speaker 1 (00:28):
So, first describe the importance of the problem.
Speaker 3 (00:33):
Yes, the most concrete way to look at the social
security financing problem is that we have a twenty five
trillion dollar financing gap between what Congress has promised to
beneficiaries and benefits and what we'll be able to pay
given current tax policies, the way that we collect payroll
taxes and taxes on benefits. And so then the question
(00:55):
is how do you want to bridge that gap and
how do you want to share the burden Because the
simple fact of the matter is that, unlike what many
people believe, social Security is not a savings scheme. It
is a tax and transfer program. It doesn't work very
differently from say food stamps, except that we have very
different eligibility criteria. People pay taxes for Social Security and
(01:19):
then that money goes out the door right away to
pay for benefits. There's no more savings. In fact, we're
already running annual deficits in Social Security. A lot of
people don't realize this, or they think that the trust
cound has real money in it, which it does not.
So now that we're running one hundred plus billion dollar
annual deficit for Social Security, we're having to borrow that money.
(01:42):
People are living longer, so the collecting benefits for longer,
and the number of workers who are available to pay
for those benefits is shrinking. We are now below three
workers for every retiree, from a high of sixteen workers
for every retiring in the nineteen fifth these were down
to below three and we're heading towards two. And so
(02:04):
when you have benefits that are growing ever more generous,
that people are collecting for longer, as the number of
people paying for those benefits is shrinking, you have a
problem on your hands.
Speaker 1 (02:14):
So, based on what you just said, the system currently
exists with promises or what people think are promises to
pay out some amount of money in the future. And
it's impossible that we'll be able to pay off that
money in the future without any change to policy.
Speaker 2 (02:30):
And so what would either mean.
Speaker 1 (02:32):
I shouldn't say either, because it could be and rather
than or cutting benefits raising taxes.
Speaker 2 (02:38):
I don't know if there's any other choice. These seem
to be the two obvious choices. So do you think
one is more likely than the other? Do you think
that they're both going to happen?
Speaker 1 (02:48):
Do you think there's any slightly probable way of avoiding
them both?
Speaker 3 (02:53):
So I don't think we're going to avoid both under
any scenario. I would hope that we would rely much
more heavily on future benefit reductions because the Social Security
benefit is overly generous, especially in comparison with other plans
that other countries have. For example, a high earning couple
can collect one hundred and twenty thousand dollars annually from
(03:19):
social Security here in the United States. A similarly situated
couple in the UK could collect a maximum benefit of
thirty six thousand dollars annually. So that's a big difference.
And so the question is should social Security continue to
be an income transfer program that replaces your pre retirement
(03:40):
earnings at some rate, regardless of need. I think we
should move towards a system where the federal government primarily
supports vulnerable seniors who might not otherwise have the wherewithal
or the means to say for their own retirement. So
you savage a floor below which no one can think
(04:00):
of it as an anti poverty backstop, and you structure
that benefit in a way that's predictable, so that the
middle and upper income earners who have the capacity to
save for more of their own retirement security on their
own IT accounts, they own in control in real estate
by investing in their business however they want to do it,
that they would know here's what I can expect from
(04:21):
the government, and now I can supplement that with my
own plan and how I want to get there. Social
Security is an outdated program that doesn't reflect the demographic
or economic realities of today, or the fact that financial
markets have evolved in a way where most people don't
need to be financially savvy or work with an investment advisor.
They can just use a target date retirement fund or
(04:44):
some other kind of widely diversified index fund. It's save
for their own retirement. We don't need the government to
be controlling so much of American's income in old age.
Social Security is too expensive and provides benefits that are
excessive to some of the highest income earners. Instead, it
should be more targeted.
Speaker 1 (05:04):
I think that we'd all need to recognize that it
represents a massive change in what Social Security is supposed
to be, or at least what people think it's supposed
to be.
Speaker 2 (05:13):
They think of it as something.
Speaker 1 (05:15):
Like a retirement plan, and it's not, but people think
of it that way.
Speaker 2 (05:18):
And what you're talking about is turning.
Speaker 1 (05:20):
It explicitly into income or wealth transfer. You're talking about
turning it into a welfare program, which is an interesting change.
Speaker 2 (05:30):
So there's that question I want you to address.
Speaker 1 (05:33):
And then the other thing is, you know, politically, Let's see,
you've got someone my age, right, I've been paying into
social Security for a long time. I'm you know, a
decade away or something like that from collecting Social Security.
How do you do something that would be politically palatable
so that I, who have had all this money pilford
from me in payroll taxes all these years, don't get
(05:55):
just straight up robbed in transition to a program such
as you describe.
Speaker 3 (06:00):
Yeah, well, the challenge is for people like you and me,
is that we are being actively robbed. The money is
not being saved on your behalf, it is not being invested.
It goes to pay for benefits of titatius retirees. What
you're looking at is an inner generational welfare transfer from
younger working Americans to older retired Americans, who, by the way,
(06:23):
on average, the older Americans tend to have much higher
net worth and income and even in retirement than the
working Americans who fund their benefits. And you know, I'm
not saying we should we should change social Security so
it's a welfare program. Instead, what I'm saying is that
Social Security is a welfare program. It is just a universal,
(06:45):
a largely universal welfare program that has a very strong
and powerful myth associated with it that gives people the
impression that it's something else, that it's a saving scheme,
that it's an earned benefit, all of that rhetoric. And
in the end, if you look under the hood of
how social Security actually works, it's an income transfer program already.
(07:06):
And so I'm saying we should acknowledge that, and then
we should discuss who needs that income transfer and what
what can we afford to do in terms of that
income transfer, and how do we want to pay for it,
because I don't think the answer can be to stick
it to working Americans by taking even more of their income,
like twelve point six percent of every paycheck up to
(07:28):
almost two hundred thousand dollars. Right now, that's a lot.
We just have to have an honest conversation about how
this program works, that it's basically a legal Ponzi scheme
that were you know, younger beneficiaries Americans in the forties, fifties, sixties,
and seventies made out like bandits. They got way way
more out of the program than they ever paid in benefits.
(07:50):
But the problem is that this means that later generations
end up paying way more for the program than they're
ever going to get back into benefits. But for people
like you who are ten years within retirement, it's probably
going to have to be the cutoff is to say,
anyone who's within ten years of retirement, Uh, you're gonna
be spared, right, You're gonna get grandfathered in, just politically
(08:12):
it probably won't work any other way. And then for
younger people you kind of phase it in, right, so
you don't. You don't go from one day to the
next and say boom, now it's a much lower benefit.
You have a transition period.
Speaker 1 (08:25):
Romina Baccia is Director of Budget and Entitlement Policy at
the Cato Institute. Cato dot org is the website. If
you go to my blog at Roskiminsky dot com, you
can find her latest report, Congress can't outgrow or inflate
away the Social Security financing problem.
Speaker 2 (08:42):
Thanks as always, Romina, talk to you again.
Speaker 3 (08:44):
Thanks so much.
And Romina is the director of Budget Entitlement Policy at
(00:04):
the Cato Institute, the world's premier libertarian organization that I've
been a fan of an occasional financial supporter of for decades.
And Romina wrote a really interesting piece just recently about
social security entitled Congress can't outgrow or inflate away the
Social Security Financing Problem.
Speaker 2 (00:23):
Romina, welcome back to the show.
Speaker 3 (00:24):
Thank you Rawson, Thank you also for being a supporter
of the Cato Institute.
Speaker 1 (00:28):
So, first describe the importance of the problem.
Speaker 3 (00:33):
Yes, the most concrete way to look at the social
security financing problem is that we have a twenty five
trillion dollar financing gap between what Congress has promised to
beneficiaries and benefits and what we'll be able to pay
given current tax policies, the way that we collect payroll
taxes and taxes on benefits. And so then the question
(00:55):
is how do you want to bridge that gap and
how do you want to share the burden Because the
simple fact of the matter is that, unlike what many
people believe, social Security is not a savings scheme. It
is a tax and transfer program. It doesn't work very
differently from say food stamps, except that we have very
different eligibility criteria. People pay taxes for Social Security and
(01:19):
then that money goes out the door right away to
pay for benefits. There's no more savings. In fact, we're
already running annual deficits in Social Security. A lot of
people don't realize this, or they think that the trust
cound has real money in it, which it does not.
So now that we're running one hundred plus billion dollar
annual deficit for Social Security, we're having to borrow that money.
(01:42):
People are living longer, so the collecting benefits for longer,
and the number of workers who are available to pay
for those benefits is shrinking. We are now below three
workers for every retiree, from a high of sixteen workers
for every retiring in the nineteen fifth these were down
to below three and we're heading towards two. And so
(02:04):
when you have benefits that are growing ever more generous,
that people are collecting for longer, as the number of
people paying for those benefits is shrinking, you have a
problem on your hands.
Speaker 1 (02:14):
So, based on what you just said, the system currently
exists with promises or what people think are promises to
pay out some amount of money in the future. And
it's impossible that we'll be able to pay off that
money in the future without any change to policy.
Speaker 2 (02:30):
And so what would either mean.
Speaker 1 (02:32):
I shouldn't say either, because it could be and rather
than or cutting benefits raising taxes.
Speaker 2 (02:38):
I don't know if there's any other choice. These seem
to be the two obvious choices. So do you think
one is more likely than the other? Do you think
that they're both going to happen?
Speaker 1 (02:48):
Do you think there's any slightly probable way of avoiding
them both?
Speaker 3 (02:53):
So I don't think we're going to avoid both under
any scenario. I would hope that we would rely much
more heavily on future benefit reductions because the Social Security
benefit is overly generous, especially in comparison with other plans
that other countries have. For example, a high earning couple
can collect one hundred and twenty thousand dollars annually from
(03:19):
social Security here in the United States. A similarly situated
couple in the UK could collect a maximum benefit of
thirty six thousand dollars annually. So that's a big difference.
And so the question is should social Security continue to
be an income transfer program that replaces your pre retirement
(03:40):
earnings at some rate, regardless of need. I think we
should move towards a system where the federal government primarily
supports vulnerable seniors who might not otherwise have the wherewithal
or the means to say for their own retirement. So
you savage a floor below which no one can think
(04:00):
of it as an anti poverty backstop, and you structure
that benefit in a way that's predictable, so that the
middle and upper income earners who have the capacity to
save for more of their own retirement security on their
own IT accounts, they own in control in real estate
by investing in their business however they want to do it,
that they would know here's what I can expect from
(04:21):
the government, and now I can supplement that with my
own plan and how I want to get there. Social
Security is an outdated program that doesn't reflect the demographic
or economic realities of today, or the fact that financial
markets have evolved in a way where most people don't
need to be financially savvy or work with an investment advisor.
They can just use a target date retirement fund or
(04:44):
some other kind of widely diversified index fund. It's save
for their own retirement. We don't need the government to
be controlling so much of American's income in old age.
Social Security is too expensive and provides benefits that are
excessive to some of the highest income earners. Instead, it
should be more targeted.
Speaker 1 (05:04):
I think that we'd all need to recognize that it
represents a massive change in what Social Security is supposed
to be, or at least what people think it's supposed
to be.
Speaker 2 (05:13):
They think of it as something.
Speaker 1 (05:15):
Like a retirement plan, and it's not, but people think
of it that way.
Speaker 2 (05:18):
And what you're talking about is turning.
Speaker 1 (05:20):
It explicitly into income or wealth transfer. You're talking about
turning it into a welfare program, which is an interesting change.
Speaker 2 (05:30):
So there's that question I want you to address.
Speaker 1 (05:33):
And then the other thing is, you know, politically, Let's see,
you've got someone my age, right, I've been paying into
social Security for a long time. I'm you know, a
decade away or something like that from collecting Social Security.
How do you do something that would be politically palatable
so that I, who have had all this money pilford
from me in payroll taxes all these years, don't get
(05:55):
just straight up robbed in transition to a program such
as you describe.
Speaker 3 (06:00):
Yeah, well, the challenge is for people like you and me,
is that we are being actively robbed. The money is
not being saved on your behalf, it is not being invested.
It goes to pay for benefits of titatius retirees. What
you're looking at is an inner generational welfare transfer from
younger working Americans to older retired Americans, who, by the way,
(06:23):
on average, the older Americans tend to have much higher
net worth and income and even in retirement than the
working Americans who fund their benefits. And you know, I'm
not saying we should we should change social Security so
it's a welfare program. Instead, what I'm saying is that
Social Security is a welfare program. It is just a universal,
(06:45):
a largely universal welfare program that has a very strong
and powerful myth associated with it that gives people the
impression that it's something else, that it's a saving scheme,
that it's an earned benefit, all of that rhetoric. And
in the end, if you look under the hood of
how social Security actually works, it's an income transfer program already.
(07:06):
And so I'm saying we should acknowledge that, and then
we should discuss who needs that income transfer and what
what can we afford to do in terms of that
income transfer, and how do we want to pay for it,
because I don't think the answer can be to stick
it to working Americans by taking even more of their income,
like twelve point six percent of every paycheck up to
(07:28):
almost two hundred thousand dollars. Right now, that's a lot.
We just have to have an honest conversation about how
this program works, that it's basically a legal Ponzi scheme
that were you know, younger beneficiaries Americans in the forties, fifties, sixties,
and seventies made out like bandits. They got way way
more out of the program than they ever paid in benefits.
(07:50):
But the problem is that this means that later generations
end up paying way more for the program than they're
ever going to get back into benefits. But for people
like you who are ten years within retirement, it's probably
going to have to be the cutoff is to say,
anyone who's within ten years of retirement, Uh, you're gonna
be spared, right, You're gonna get grandfathered in, just politically
(08:12):
it probably won't work any other way. And then for
younger people you kind of phase it in, right, so
you don't. You don't go from one day to the
next and say boom, now it's a much lower benefit.
You have a transition period.
Speaker 1 (08:25):
Romina Baccia is Director of Budget and Entitlement Policy at
the Cato Institute. Cato dot org is the website. If
you go to my blog at Roskiminsky dot com, you
can find her latest report, Congress can't outgrow or inflate
away the Social Security financing problem.
Speaker 2 (08:42):
Thanks as always, Romina, talk to you again.
Speaker 3 (08:44):
Thanks so much.
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