Education reform: Social Security meets Higher Ed

I recently returned from a working trip in DC and on the way back, I had a very intriguing conversation with an accountant who I will call Joe. The bulk of our conversation was me trying to explain to Joe the serious need and benefits of making college more affordable and accessible. While making college more affordable is good, Joe played a very good devil’s advocate by making me point out that in the end, I really think higher education should be free. He agreed with me but the problem came up with having to pay for it. Joe had an idea that I think should be fleshed out.

Simply put, Joe’s idea involves reforming social security and using the savings to fully fund higher education. But we should first put this issue in context. Social Security was created in 1935 under President Franklin D. Roosevelt. The bulk of what we usually think of as social security does in fact go to provide retirement benefits to elderly people who are in retirement, but there are earmarks for the widowed, disabled, and unemployed.

Throughout a worker’s career, the Social Security Administration keeps track of his or her earnings. The amount of the monthly benefit to which the worker is entitled depends upon that earnings record and upon the age at which the retiree chooses to begin receiving benefits. For the entire history of Social Security, benefits have been paid almost entirely by using revenue from payroll taxes. It is essentially a pay-as-you-go system.

Unfortunately, by about 2018, years or so, payroll taxes will not be enough to cover the Social Security benefits and the system will begin to withdraw money from the Social Security Trust Fund. The Trust Fund is estimated to be depleted by 2042 or 2052.


It should be noted that Social Security, along with Medicare and Medicaid, are entitlement programs, which means they are generally free from political interference. Potential beneficiaries of entitlement programs have a legal right, (whenever they meet eligibility conditions) that are specified by the standing law that authorizes the program. And because it is difficult to know in advance who will meet entitlement requirements from year to year, it makes it that more difficult for the government to plan for the total costs of the program when appropriations bills are marked up.

And with baby boomers coming into retirement age, there is considerable strain being put on the Social Security System. This is because now there are 3.3 workers per beneficiary and as baby boomers draw down these benefits, there will be fewer workers to support them. This, combined with the fact that the Social Security Trust Fund will have to be tapped in the near future is causing many, including President Bush, to make calls for social security reform.

This brings me back to my conversation with Joe. He told me that the death of social security will come when a means test is implemented. Right now, if you pay into social security, you get benefits regardless of your income or assets. A means test (there are various ways this could be implemented) would essentially set a threshold, probably sliding, by which the more money a person made, they would either be ineligible to receive benefits or otherwise be able to collect decreasing amounts of benefits. Conversely, the less money a retiree made the more benefits they would be able to collect. If enacted, this could conceivably preserve the financial integrity of the program while making sure that those who need it the most actually receive the benefits. On face value, it sounds good to me. If you are sitting on 4 million from your income and assets, your social security income isn’t exactly going to make or break you.

But here is the problem, according to Joe and a report by the American Academy of Actuaries, means testing would compromise two important principles that have sustained the political support for social security, universality and earned right. Universality means that regardless of how much money you make, social security will be there for you. Therefore, any perceived threat to social security would affect all current and future beneficiaries. The earned right principle would be jeopardized because if more wealthy workers are paying into a system that they won’t be able to collect on (or collect a disproportionately smaller share) their contributions, it essentially becomes a tax, and we all know taxes are every politician’s death kiss.

But if we could find a means test that was politically feasible, Joe said that we could use these savings to fully fund higher education. Now I don’t know how much it would cost to fully fund higher education but I do know that Social Security alone cost taxpayers in FY 2006, $544 billion. And I am sure that our ability to fund higher education is a whole lot less than half a trillion dollars. Joe mentioned that these savings could be transferred to the public in the form of a tax credit. I am not sure how this would work, or what method would be best, but the principle I think is sound. If people with higher education end up making more money over the course of their lifetimes, they will probably be able to make good use of their money such that they won’t need to rely on social security by the time they are ready to retire. Sounds like a win win to me.

What do you think?

Stay up fam,

Categories:
Education Reform
Social Security
Retirement
Higher Education

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3 responses to “Education reform: Social Security meets Higher Ed”

  1. Garlin II says :

    It sounds like the “means test” will be the pre-cursor to making Social Security and opt-in program, which I think will be the death of it.

    The “means test”/tax credit piece sounds eerily similar to the attempts to privatize social security. I think that the privatization is a bad thing because it is motivated by a desire to rid the government of accountability or responsibility to its citizens. Social Security is in trouble for more reasons than shifts in population demographics…

  2. Brandon Q. says :

    G,

    I am under no illusion that a means test will be the death of social security as we know it. However, reform of that system is needed, period. I think there is a lot of negotiation that is often over looked between the status quo and privatizing the entire system.

    As such, I think that it is possible to have a means test that does not put us on the slippery slope towards privatization. The problem with the federal budget is that between paying social security, medicare, and medicaid, our entitlement costs are freezing the discretionary budget that we could use to make meaningful investments in people while still taking care of the people that need it the most.

    Our generation will be instrumental in shaping the future of Social Security and we need to be informed of different options to save the basic principle of social security, while the winds of reform blow harder in the years to come.

    Thanks G,

  3. Garlin II says :

    B,

    You are definitely right that there is more than a little wiggle-room to figure out a solution; I just want to be clear about the extreme I want to avoid.

    Perhaps the problem is that entitlement programs are funded out of the discretionary budget and not out of funds earmarked for this purpose?

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