In 1900, the average life expectancy at birth was 49.2 years. It’s a good thing President William McKinley didn’t sign on to a Social Security-type law back then. Instead of arguing about whether 70 is the new 65, as Michelle Malkin did in a recent column, we might still be in the middle of a century-old argument about whether 55 is the new 50.
Until the 1930s, how late into life people chose to work was their own business. What many don’t fully appreciate is how determined President Franklin Delano Roosevelt and the early blue-collar unions were to make it their business instead. Operating under a silly assumption that older people continuing to work were denying new workforce entrants their chance at employment, the Retirement Earnings Test in early Social Security legislation prohibited everyone age 65 and over from getting a benefit in any month during which they engaged in “regular employment.” Similarly, though their enforcement was spotty, early pension systems established by the United Auto Workers and others, even the 30-and-out arrangements enabling some UAW members to retire in their late-40s and early-50s, penalized workers on a dollar-for-dollar basis for any earnings from work after retirement.
In the ensuing decades, for better or worse, Social Security has morphed into a somewhat generous lifetime retirement entitlement. The system’s current structure is unsustainable, but salvageable. Meanwhile, unconstrained by competitive market forces and insufficiently monitored by voters, many public-sector retirement plans turned into early-retirement gravy trains. Most of them are in similar or worse peril; we will find in the next several years that many can’t be saved.
The politicians who created these systems have over a period of decades made promises they should have known could not possibly be kept. Why should they have known? Because they had every reason to anticipate that life expectancies would continue to increase.
This takes us to a critical point which, though inarguably true, may be difficult for some to handle.
Each year, as long as legislated or contractual retirement ages remain fixed while life expectancies quietly grow through improvements in safety, medicine, and manual labor-sparing technologies, the population as whole picks up a couple of tenths of a year of extended lifespan — and, as long as the laws or contracts don’t change, extended retirement. This represents a very real annual “handout.” It certainly isn’t earned; the only thing you have to do to pick up each year’s additional gift is to remain here on planet earth. One could argue about intent — was it sloth and inertia, or did the politicians realize that they would be creating an ever-growing number of beneficiaries? — but no one can dispute the accuracy of my characterization.
This has come about because nobody has asked (or again, no one wanted to ask) two fundamental questions which the New Deal, subsequently elected Congresses and presidents, the unions, employers, and other government entities should have been asking from the very start:
1. What kind of balance do we need to have between the number of people working and the number of retirees and genuinely disabled?
2. What should we do to encourage people who want to continue to work past their traditional retirement age?
Concerning the first question, the answer for Social Security is definitely not the current ratio of a bit less than three workers for each retiree; that ratio has the system running cash deficits already. The Greenspan Commission got it partially right in the 1980s when it extended the retirement age for full benefits to 67 for anyone born in 1960 or later. The age for full benefits needs to move gradually higher for anyone born in 1961 or later, so that in about 20 years it gets back to an agreed-upon sustainable worker-beneficiary ratio. Beyond that, it should be re-evaluated annually and adjusted as needed.
Additionally, Washington should enact something closely resembling Wisconsin Congressman Paul Ryan’s proposal to give workers the option of directing a portion of their FICA taxes towards selected investment accounts. The answer for public-sector pensions is that they should either mirror Social Security’s retirement age structure or move to defined-contribution arrangements similar to 401(k) plans.
As to encouraging people to continue working past retirement if they wish, there are several good ideas. The most obvious is that the remnants of Social Security’s Retirement Earnings Test, which significantly discourages work among benefit recipients in their early- and mid-60s, must be repealed. Another is to end federal income taxation of benefits, which was something the Greenspan Commission got horribly wrong, and which Bill Clinton made even worse in 1993. Yet another would be to exempt those who are taking Social Security benefits and still working from their portion of the FICA tax (employers would continue to pay their portion).
One thing is certain: The dangerous retirement entitlement mentality which is more prevalent than you might think must go. The mindset runs as follows: “I should be able to retire at 62 or a bit later (or for many in the public sector, a bit to somewhat earlier), stop working entirely, and be able to maintain my lifestyle, regardless of whether or not I planned for retirement, and regardless of whether I’m capable of working. And if I can’t, it’s the politicians’ fault.” This is completely unacceptable, especially in the serious economic circumstances we face in the coming decade.