‘Retirees are stealing from their kids!" This claim of intergenerational theft is frequently heard in the hotter versions of the debate over Social Security. How does it square with the facts?
The first step in determining the intergenerational impact of Social Security is to recognize how the system gets its money. Today, there are two sources of revenue: a payroll tax and a bond fund.
The payroll tax is levied on the earnings of current workers, and most of the revenue derived from that tax is immediately paid out in benefits to former workers who are current retirees. Originally, the payroll tax was the sole source of revenue. By 1983, however, it was clear that the retirement of the baby boomers, to begin 30 years later (that is, right now in 2013), would require much greater program revenue. Rather than postpone remedies for this problem, which would have resulted in a huge payroll tax increase on future workers, President Ronald Reagan decided to raise the payroll tax rate beginning in 1985. Consequently, the baby boom generation was forced to save more for its own retirement during their working years.
At this higher payroll tax rate, Social Security generated yearly surpluses. These surpluses were invested in special U.S. Treasury bonds, which were traded solely between Social Security and Treasury but not sold on the open market. The intent was timing: Use surpluses to buy bonds during the early years when the payroll tax revenue was more than was needed for benefit payments; offset deficits by selling bonds during the later years to supplement the payroll tax revenue when it would be less than needed for benefit payments.
What is usually lost in the discussion is that during the early years when Treasury sold bonds to Social Security, it received cash that should have been used to foster economic growth through investment in infrastructure and reduction in the national debt. Such investments would have made the economy more productive and would have eased the burden of paying boomer retirement benefits.
Unfortunately, this did not occur. The cash lent by Social Security to the rest of the nation was not spent on growth-enhancing investments; instead, it was consumed on wars and tax cuts, resulting in slower growth and a neglected infrastructure. However, this is not the fault of Social Security recipients; the responsibility for this is general and should not be focused on the future retirees.
A nation, not just a place
The second step is to recognize that Social Security is not a one-way flow of resources from young to old. Instead, it formalizes an intergenerational reciprocity between young and old. As we proclaim in the Pledge of Allegiance, we are "one nation under God," not some spot on the planet where we exist without regard for one another. The many incredible achievements that each generation produces are bequeathed to the lasting benefit of later generations.
In turn, as each generation lives beyond their working years, the retirees rely on the productivity of younger people. Each generation's productivity is enhanced by the efforts of preceding generations, and each generation pays a part of that increased productivity in the form of retirement benefits for the preceding generation that made it possible.
The "Greatest Generation" brought the country through times of great social, economic and military peril to a period of peace and prosperity. They received Social Security benefits that far exceeded their payroll tax contributions. They never had a bond fund, and none was required to justify their benefits; there was never a hint that they "stole" from subsequent generations.
The baby boomers are a numerically large and talented generation. Just as the inheritance from the Greatest Generation was of historic proportions, the bequest of the boomer generation is similarly incalculable — more than can be expressed in dollars and far beyond the small imbalance in the income statement of the Social Security Administration.
This reciprocal responsibility between young and old is not intergenerational theft — it is basic economics: The young pay the old out of enhanced productivity made possible by the old when they were young.
William L. Holahan is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, also recently retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.