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“Take a Gamble” might as well have been the slogan of President Franklin D. Roosevelt’s 1936 re-election campaign, not because Mr Roosevelt was a possible liability or because he was fond of Las Vegas—then a town of just over five-thousand. Rather, Mr Roosevelt’s slogan could have read as such because when his campaign started he was signing into law the Social Security Act, a Congressional act which, in effect, mandated that American citizens—of whom it’s estimated at least half at the time lived below the poverty line—play the lottery.

Mr Roosevelt had built the first national casino, where citizens wagered that they would lose their jobs, become disabled, live long into their eighties, or even better all three. The federal government was the house, its people the legally-compelled high rollers, and Mr Roosevelt the manager, who like any good bookie stacked the odds in his favor.

The primary feature of the Social Security Act, Old-Age Insurance, stipulated a monthly payout to any worker who contributed a minimum amount to the Social Security system once that worker reached sixty-five. There was only one catch; in 1940, when payouts first began, the average life expectancy of an American man—usually those who worked and thus received the insurance—was fifty-nine.

In the past seven decades advances in health care and health education have made the gamblers better at the game—the average life expectancy for an American born in 2009 is seventy-eight. And yet the game’s rules have remained largely the same; the retirement age, at which Americans can receive insurance benefits has been raised to sixty-seven and only for those born after 1960. While the average American male used to die years before he saw a dollar of his tax money, the average American entering the workforce these days will receive payouts for nearly ten years.

It’s no surprise that the casino is going broke.

The difference between a private casino and the Social Security Trust Fund (SSTF) is that no business would let this happen. Noticing that increasing life expectancies have made defined-benefit plans—those that guarantee a specific payout at specific intervals after retirement—like Social Security, difficult to manage, most companies have migrated pensions to defined-contribution plans—those that make a specific personal investment in a retirement account.

Depending on whom you ask, the SSTF will be exhausted sometime in the next thirty years, and the Medicare fund will be exhausted in the next ten years. Certainly, if Social Security is to resist privatization and becoming a defined-contribution program, contrary to what many conservatives suggest, the 111th Congress needs to amend the Act, raising the minimum retirement age and the Social Security Tax that funds the program.

But even if President Obama and his Congress muster the political willpower necessary to save Social Security, finding the right retirement age and tax rates will be difficult.  Before they can do so they need to decide whether or not the future of Social Security lies in its past. More aptly put, should Social Security be true “old-age insurance” as Mr Roosevelt planned or the retirement program it has since become?

Insurance is a form hedging risk against an unlikely, but potentially difficult scenario. When Mr Roosevelt signed the Social Security Act, he created an arrangement whereby workers were taxed 1% of their income—a tax that employers were required to match—to cover the few American workers who lived to sixty-five.

Now, when reaching sixty-seven is fast becoming a foregone conclusion, workers are taxed at 12.4% of their income, employers match that number, and the taxes function as a loan to the government which it pays back in the form of a retirement plan. That’s not insurance.

Reversing Social Security to the insurance plan it used to be is logistically simple, but politically thorny. To do so, Congress would need to raise the retirement benefits age to at least eighty, two years above the national life expectancy, allowing Mr Obama to cut the Social Security tax rate to around 3%. Once passed, this policy could take effect for all Americans entering the workforce—those already working would receive limited benefits at the age of sixty-seven, proportional to the amount they paid at the higher tax rate, and the payouts to those already retired would remain unchanged.

The obstacle with keeping the current pay-as-you-go Social Security system—where a current worker’s taxes act as a loan to the Trust, paying for a current retiree’s benefits—is tailoring the tax to a rate not affected by population cycles, one that creates a reservoir of wealth when a higher proportion of Americans are working and expends it when a higher proportion are retired. Moreover, the federal government needs to be able to predict how the fluctuations of the workforce, and not sacrifice long-term solvency for temporary advancement; when the ratio of workers to retirees was three-to-one—a particularly high proportion—during the 1970s, President Johnson used surpluses in the SSTF to finance the Vietnam War. Now, that large workforce, also called the “baby-boomers” is retiring.

The alternative to reverting to actual insurance is privatizing Social Security and therefore furthering its current role as a retirement strategy. If Mr Obama shaped the program into a defined-contribution plan, he could ditch the pay-as-you-go system that has caused the present Social Security crisis. Then, Congress could amend the Social Security Act to mandate that employees and members of the workforce invest a certain percentage of their income in a non-taxable retirement account. Of course Mr Obama would have to also decide whether or not to temporarily continue levying a Social Security tax to grant promised payments to current workers and retirees.

In Washington, it’s common knowledge that the elderly turn-out in greater percentages than any other age group. Thus it’s likely that any Social Security reform will keep the present payout system. The dilemma is that the Trust Fund needs to stay solvent to insure Americans, without unnecessarily hoarding America’s capital, which would no-doubt weaken the macro-economy. In other words, the Social Security bureaucracy needs to behave like a poorly-run business, but not one so poorly-run that it bankrupts itself. Then again, the first shouldn’t be a problem; year after year the federal government proves that it isn’t in the business of making money.

-David Lamb

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