Since there is a lot of hullaboo about the “crisis” in social security I tried to find what it’s all about. To my considerable surprise, I found that if the current trends continue, the system will go insolvent in early 2040’s. This kind of foresight in fiscal planning came as a surprise to me – but it is welcome. The crisis is attributed to a demographic shift towards the aged that is going to sharply increase as the baby boomers start retiring. Apart from Social Security, expenditure on Medicaid and Medicare has been increasing quite rapidly since 1960s and stands as a large proportion of the Federal budget expenditure. The debates over these issues are polarized and confusing. So here’s my lay understanding culled out from a labyrinth of arguments. I find it useful to separate out arguments at the aggregate and the individual levels – let me start with the individual.

Increasing life expectancy, high health costs

Life expectancy has gone up in the United States significantly since the inception of Social Security in 1930s. If people continue to retire at ages that one did during the world wars, one is going to live an increasing number of years without earning. On top of this, old age involves huge medical expenditure and this is much higher that what is spent on children or young adults. So one has to spread the earnings into longer years of retirement – and these years are also very expensive. I understand the “crisis” in social security as saving at an older rate, but living longer and costlier. This also lies at the root of higher health expenditure Medicare.

If this were the problem of an isolated individual, rising life expectancy and associated health costs means that I have to earn more (perhaps by working longer) and save more (in part by consuming lesser). Though there are many other considerations at the aggregate level, I think this broad lesson holds no matter how we articulate arguments. Since incomes are growing increased savings can be achieved without cutting back as much on expenditure.

Baby boomers, demographic shift and macro implications

The story at the aggregate level is not identical to the case of the ‘isolated individual’. Distributional issues, rigidities arising out of laws and policies, demography and other issues transpose the issue in new terms. The need to save more, work longer, etc. now get read as increased taxes, changing age of retirement, etc. These terms look imposing and unfriendly but (I think) necessary.

The hue and cry about the “crisis” in social security and the impending “insolvency” of social security has a basis. Similarly it is important to anticipate a sharp increase in Medicare and other expenses relating to old age. Unfortunately those who raise this issue do not often articulate the problem well. For example, analysts just make it look like the bad government is spending too much these days on Medicare and Medicaid and this is ‘unsustainable’ (implying it should be cut). Seen only in this light, it looks like all will be well if spending on these is reduced. This is wrong.

The issue is one that of saving more for old age in the context of raising life expectancy and huge health costs during old age. This cannot be tackled by reducing health spending. A part of the solution lies in financial management by individuals and the government by retiring later, consuming lesser, raising taxes, etc. An important part lies in creating a policy space for cheap health and other care for aged.

The merrit of democratic debate

The crisis rhetoric has a merit in raising public attention to the issue, but is poor in articulating the causes, implications or options. The implications of cutting budgetary expenditure are articulated by other groups that often ignore or undermine the fiscal issue. Still others are creating visions of policy and personal options for old age. If any of these arguments were implemented in their pristine form, they are likely to lead to a crisis. What is important today is to learn from each, let a democratic debate flourish and to create a vision from these visions together.