Monday, March 20

SOCIAL SECURITY: "Old age is changing. So should Social Security" AND "Fire Grandpa, Hire Junior!"

Old age is changing. So should Social Security.
By William Saletan
Posted Saturday, March 18, 2006, at 8:17 AM ET

The bad news is, we're living longer.

Don't get me wrong. I hope you have a long and happy life. I just hope your kids don't end up paying one-fifth to one-third of their incomes to subsidize your retirement and mine. Because that's what awaits them: more and more boomers living to age 65 and beyond, perfectly healthy but collecting checks for decades. To head this off, we need a radical change in Social Security. I'm not talking about privatization. I'm talking about rethinking, and possibly abolishing, the whole idea of payments based on age.

The problem is grimly detailed in "65+ in the United States," a report released last week by the U.S. Census Bureau. Five years from now, the boomers will start hitting age 65. By 2030, we'll have more than twice as many old people as we did three years ago. As a percentage of the population, this increase is enormous. In 1935, when Social Security was established, about 6 percent of Americans were 65 or older. Since then, the percentage has doubled. By 2030, it will have tripled. Not only are more people reaching 65—they're living well beyond it. In 1900, an American who made it to 65 could expect fewer than 12 additional years. By 1960, he could expect more than 14 years. By 1980, remaining life expectancy at 65 reached 16 years. By 2000, it was 18 years.

If you thought this week's budget fights over Iraq and Katrina were bad, wait till you see the blood bath over retirement benefits. Hurricanes come and go. Iraq can be abandoned. But the debt to retirees increases every decade, and they're a lot harder to abandon. Their clout grows, perversely, in proportion to the burden they impose. In 1945, for every Social Security beneficiary, we had 42 workers paying in. By 2002, we had just 3.3 workers per beneficiary. By 2030, we'll have only 2.2 workers per beneficiary. To keep the system afloat for the next seven decades, its trustees say the Social Security tax rate will have to reach 19 percent. And if life expectancy keeps rising over that period, academics project a tax rate of 27 to 32 percent.

Now for the good news. We're not just living longer; we're staying healthy longer. From 1982 to 1999, the percentage of senior citizens who had chronic disabilities dropped from 26 percent to less than 20. Active-life expectancy at age 65—the average number of additional years a person could expect to live free of chronic functional impairment—rose from fewer than 12 years to nearly 14. That's a five-year gain from the 8.8 years of active life that a 65-year-old could expect in 1935, according to Dr. Kenneth Manton, a leading scholar of old-age disability. Men now get arthritis, heart disease, or respiratory disease a decade later in life than their forebears did. The experience of being 65 to 74 has changed so radically that the Census Bureau now calls this group the "young old."

So, all these young old folks are working longer, right? Wrong. In 1950, more than 45 percent of men 65 or older were still in the labor force. By 2003, that percentage had plunged below 20. Five years ago, a study showed that men and women were retiring five and six years earlier, respectively, than their predecessors did 45 years before. Why? Because they could. Pensions helped, but the bigger factor was Social Security. By 2001, the program was supporting 91 percent of people aged 65 or older. It provided nearly 40 percent of their income—equal to what they got from earnings and assets, and more than twice what they got from pensions. A study quoted in the census report documents the effect on work. When Social Security payments went up, men 65 and older quit the labor force at an accelerating pace. When payments were reined in, the trend reversed.

It's wonderful that Social Security brought so many old people out of poverty. But the point was to subsidize those who couldn't work, not those who could. The program's founding document said it would support old people who were "dependent," "beyond the productive period," and "without means of self-support." In 1935, that described people around age 65. Today, it more accurately describes people a decade older. The intuitive remedy is to raise the retirement age well beyond the measly increases currently scheduled. Last year, Manton calculated that if you were designing a system in 1999 for people who could expect as many active years as a 65-year-old person could expect in 1935, you'd set the retirement age at 70. And by 2015, you'd raise it to 73.

There are four obvious problems with this proposal. The first is that if we ask the young old to keep working, somebody's going to have to hire or retain them. This won't be easy. We all know that age discrimination is rampant in our economy and our culture. But we've seen this problem before, and we've shown it can be dealt with. As the census report notes, the 1967 Age Discrimination in Employment Act and subsequent related legislation raised the employment rate among older workers.

The second objection is that some jobs are too strenuous for a 65-year-old. But American jobs have become far less strenuous since 1935. One study shows that the percentage of Americans working in physically demanding jobs—defined as jobs "requiring frequent lifting or carrying of objects weighing more than 25 pounds"—declined from more than 20 percent in 1950 to less than 8 percent in 1996. Another study indicates that from 1992 to 2002, among 55- to 60-year-old workers who said their jobs always required physical effort, the percentage claiming to be in fair or poor health fell from 17 to 11 percent.

The third objection is that people don't age at the same rate. That's true. But it's not an argument for a low benefits-eligibility age. It's an argument for ending the link between age and benefits. Social Security actually consists of three programs. One pays benefits based on age; another pays you if you lose your spouse; a third pays you if you become disabled. As of 2002, 70 percent of the money paid out was based on age; only 15 percent was based on disability. That's insane. Inequality of aging means that age is a bad proxy for disability, which is a good proxy for need. If you turn 65 on the same day as your neighbor, but she's disabled and you aren't, we should pay her, not you.

Abolishing age as a standard of fitness would be fairer than simply raising the eligibility age. We've already taken steps in this direction. In 1983, when critics complained that raising the retirement age would abandon people who could no longer physically handle their jobs, a Social Security reform commission pointed out that the program's disability benefits would fill in the gap. And in 1986, Congress removed the upper age limit on people protected by the Age Discrimination in Employment Act. If you're healthy enough to do the job, age doesn't matter.

The final objection to both proposals is that Social Security is a trust fund; you made your deposits, and you're entitled to your withdrawals. But if you think the reason you'll live longer than your grandparents is that you're a better person, think again. Programs such as the ones Congress debated this week—Medicare, public sanitation, and biomedical research—bought you longer life and better health. Maybe, instead of asking what your country owes you at 65, you should ask what you owe your country.

A version of this article also appears in the Outlook section of the Sunday Washington Post.

William Saletan is Slate's national correspondent and author of Bearing Right: How Conservatives Won the Abortion War.


[and yet...]

the undercover economist
Fire Grandpa! Hire Junior!
Why older workers are paid way too much, and younger workers way too little.
By Tim Harford
Posted Saturday, March 18, 2006, at 8:16 AM ET

When I first came to London to seek my fortune, I was taken out to lunch by a family friend with about three decades more experience than I. She cheerfully told me that I wasn't worth the salary that my brand new job was paying me. She was right, as it happens, since I was an extraordinarily bad management consultant, but she was betting against the odds. The typical young person is worth more than he or she is paid. Young people who feel that the odds are stacked against them turn out to be right.

Older workers, on the other hand, tend to be overpaid relative to what they produce. This is not because they are less productive than the young—although many important skills do start to decline at the age of 30, or even earlier—but because they are paid so much more. Decades of economic studies have produced the conclusion that average wages increase with age almost until retirement, yet average productivity seems to be flat or perhaps even declining after the age of 50. (The studies are not unanimous, because productivity is very hard to measure, and, of course, the averages hide huge variations from job to job and person to person). Perhaps my plain-speaking mentor was paid five times as much as I was, but if she was only three times as productive, then I was the bargain-basement employee.

I can look forward to a big bag of hate mail for reporting on this research, but I think that subconsciously we know it's true, because we tend to fret about the problem of age discrimination in the workplace. Age discrimination is much more of a risk if older workers are indeed paid well relative to young ones: It means older people are the ones managers want to sack to save a bit of cash. The British government is introducing new, tougher rules against age discrimination in October; if older workers tended to be worth much more than they were paid, it would scarcely be necessary. And overpayment of older workers seems to be an international phenomenon.

This is a puzzle. Young workers can rightly grumble that they are paid a pittance for doing valuable work. Older workers also have good cause to worry: They are being subsidized, but subsidies are expensive, and that means they have every reason to fear the sack. Wouldn't it make more sense for young workers to be paid a bit more, old workers to be paid a bit less, nobody to feel exploited, and nobody to fear premature retirement?

The income of self-employed people does tend to track their productivity more closely, which suggests that the odd relationship of underpaying and then overpaying is a corporate phenomenon. The intuitive explanation is that this is some kind of corporate welfarism: After all, a 50-year-old middle-manager with one kid in private school and another at Harvard needs all the financial help he can get. Twenty-two-year-old wunderkinds are perhaps happy when they realize they can buy all the beer they want.

Economists have little patience with this kind of story. Corporations keen to recruit the best are unlikely to sit back and let competitors poach the most talented graduates with a few sign-on freebies, so pay for young workers should reflect their performance. Meanwhile, few people believe that companies are really in the business of subsidizing their employees, at least not until they reach the board.

Economists tend to prefer the insights of Edward Lazear, who suggested that young employees are often encouraged to perform by the promise of a cushy cruise toward retirement. Lazear realized that it is hard to measure and reward performance directly, but underpaying the young and overpaying the old tends to encourage effort. As long as there is some risk that shirkers will be sacked, workers will beaver away knowing that if they can hold onto their jobs, it will all be worthwhile.

Lazear also suggested that the boss's fat-cat salary is designed to motivate the lean and hungry young junior executives beneath him and has very little connection to his own performance. (Much is explained.)

This is all fine in theory, but not so great if the firm goes bankrupt or decides under new competitive pressures that the "job for life" system has to go. But seniority wages are probably here to stay as long as it is hard to reward good performance instantly and accurately.

Meanwhile, Professor Lazear has in his late '50s been named chairman of President Bush's Council of Economic Advisers. It is a difficult job; we shall see whether his performance exceeds his pay.