Spero Consulting

Archive for February 8th, 2010

Actu­ally, a New Idea to Mit­i­gate the Problem

Update: after pub­lish­ing this post very late Sun­day (or very early) Mon­day, we noticed the col­umn, Toward a Dif­fer­ent Fis­cal Future, by Glen Hub­bard. His essay is sub-​titled, tax increases can’t plau­si­bly address the com­ing enti­tle­ment cri­sis, and that fits very nicely with our pro­posed mitigation.

We admit that the title is a bit over­stated, because we don’t know if any sin­gle and fea­si­ble idea can solve the bank­ruptcy prob­lem; so, we’ll look to mit­i­gate it a bit with a few long-​term recommendations.

We’ve heard for years that Social Secu­rity and Medicare will go bank­rupt within the next sev­eral decades. To the best of our mem­ory – i.e., with­out search­ing the web – we recall read­ing that with­out fur­ther changes in laws, Social Secu­rity will become insol­vent some­time between 2020 and 2040, or maybe it was a few years later.

Let’s take those pro­jec­tions as given because the exact year is far enough away that it doesn’t affect our pro­posed mitigation.

So, we ask: besides rais­ing pay­roll taxes, which are already out­ra­geously high, what other solu­tions exist?

Well, ben­e­fits could be cut, but any bill propos­ing such cuts would be unlikely to pass Congress.

That means that get­ting the great­est num­ber of cit­i­zens work­ing (and not col­lect­ing ben­e­fits) is the best way to stave-​off bank­ruptcy. You may have already heard how when the pro­gram began in the 1930’s there were more than ten work­ers for every recip­i­ent and now that ratio has dras­ti­cally shrunk (to some­thing like four:one or three:one today).

Already, the age to col­lect full ben­e­fits has been pushed back from age 65 to 67 for those of us born after 1960. (Actu­ally, it’s a grad­u­ated scale that you can see here.) All else equal, that forces older folks to con­tinue work­ing (and pay­ing taxes) while delay­ing receipt of their checks.

We sus­pect that laws will be passed to fur­ther delay full-​retirement age – for us and for those born after us. (We can’t imag­ine retir­ing any­way; so, those changes won’t affect us.) How­ever, unless the full-​retirement age is increased to 80-​or-​so (a com­pletely wild-​a** guess on our part) that exten­sion alone won’t elim­i­nate the problem.

So then the ques­tion becomes: once full-​retirement age is max­i­mized at an age greater than 67, say, at age 70, what other solu­tions exist?

Some folks call for more immi­gra­tion as a way to increase the ratio of workers-​to-​recipients, but there are other ways to increase the size of the work­force with­out per­mit­ting an influx of new­com­ers. (By the way, our solu­tion to ille­gal immi­gra­tion–well, actu­ally to what to do with ille­gal immi­grants – would help with the social secu­rity prob­lem, too.)

Now, the gov­ern­ment could imple­ment pro-​family poli­cies that, at the mar­gin, would induce par­ents to have more chil­dren. (That can’t hurt, and we see no rea­son to wait until the USA is fac­ing neg­a­tive pop­u­la­tion growth – like Japan and cer­tain coun­tries in Europe now face – before imple­ment­ing such policies.)

With­out any cal­cu­lat­ing any­thing, we doubt that pro-​baby poli­cies would be suf­fi­cient to grow the nation out of the Social Secu­rity prob­lem. (How­ever, we do have a quick ques­tion: if the esti­mated 30 mil­lion or so aborted babies had been born since the early 1970’s, how many more work­ers would be avail­able to sup­port those cur­rently receiv­ing ben­e­fits and how much further-​off could insol­vency be put?)

So, what else can our soci­ety do?

If the sup­ply of poten­tial work­ers is fixed (or already max­i­mized) and it’s not fea­si­ble to get them to work to an older age, then the only option left is to get them to…start work­ing earlier.

We don’t mean per­mit­ting child labor as some other nations do. We do mean: (1) motivating par­ents to have their child(ren) start kinder­garten at a younger age so that they can grad­u­ate from high school a year ear­lier. That would move the aver­age start­ing age back closer to five than six, and means that many stu­dents would grad­u­ate an entire year ear­lier than they oth­er­wise would have. That pol­icy can be eas­ily imple­mented by chang­ing state laws, which can be “influ­enced” by fed­eral laws and grants.

We also mean pro­vid­ing incen­tives to induce those in col­lege (and grad­u­ate school) to begin their careers – or at least begin work­ing full-​time – at a younger age. There are sev­eral ways to do that. We’ll men­tion a few and prob­a­bly add more through time.

One way would be to limit under­grad­u­ate loans and grants from the gov­ern­ment to four con­sec­u­tive years begin­ning the year of high school grad­u­a­tion (with sim­i­lar types of restric­tions for grad­u­ate schools).

Another would be to (a) induce more stu­dents to attend col­lege part-​time, espe­cially for grad­u­ate school, and (b) simul­ta­ne­ously induce grad­u­ate schools to offer more degrees on a part-​time basis. One way to do that would be to make tuition ben­e­fits for col­lege and grad-​school com­pletely tax-​free when paid by employ­ers or com­pletely tax-​deductible when paid by work­ers (with earned income).

A third way to reduce the aver­age time spent in col­lege would be to pro­vide more rig­or­ous ele­men­tary and sec­ondary edu­ca­tions so that stu­dents are better-​prepared for col­lege, and one way the fed­eral gov­ern­ment can (indi­rectly) do that is to make fed­eral grants and loans for col­lege – like aca­d­e­mic schol­ar­ships – con­di­tional upon test scores and/​or grades.

A fourth way would be to pro­vide a tax credit (or a per­ma­nent reduc­tion in pay­roll tax rates) for cit­i­zens who enter the full-​time work­force at a younger age.

The gen­eral idea is to get twenty-​somethings in col­lege to grad­u­ate and mature ear­lier than they do now so that they seek gain­ful employ­ment at an ear­lier age and, there­fore, begin pay­ing taxes sooner. We don’t see how that is harm­ful to any­one. In fact, hav­ing them grow-​up sooner seems ben­e­fi­cial to everyone.

P.S. Like many other top­ics that we write about for the first time, we’ll likely revise this post as we think more about it.