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Social Security's Finances, Past and Future: Echoes

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By Amity Shlaes and Ilan Kolet

When President Franklin D. Roosevelt created Social Security, Americans typically had more children, and died younger, than Americans today. As our demographics have changed, the balance of retirees to workers has shifted along with them. Lawmakers, as this chart shows, have not shifted the tax structure sufficiently to respond to this change.

The relationship between the amount workers pay into the Social Security system and the amount they receive as benefits is known as the replacement rate. The original American commitment was that Social Security payments to seniors should be correlated to some degree to the wages they had paid into the system, so that higher earners who had paid more in taxes would get somewhat more in retirement.

Given our current budgetary constraints, one way of shoring up Social Security's finances -- which could be part of the reform package I proposed earlier this week -- is to give poorer seniors a greater share of what they earned as workers while suspending the replacement concept for higher earners. One thing we should not do is cut off payments to higher earners altogether. This would sever the contractual element that has made Social Security an enduring American institution.

(Amity Shlaes, the author of this post, is a Bloomberg View columnist. The opinions expressed are her own. Ilan Kolet, who created this graphic, is a data editor at Bloomberg News. For more Echoes posts, visit: bloomberg.com/view/echoes.)

To contact the author of this blog post: Amity Shlaes at amityshlaes@hotmail.com.

To contact the editor responsible for this post: Timothy Lavin at tlavin1@bloomberg.net.

-0- Jun/03/2011 21:22 GMT

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