Summary: Today, concerns over the size of Social Security focus on the intrusion of payroll tax rates on workers’ ability to save for retirement. Concerns for the future relate to returns young workers will get on their payroll tax rates. The earliest architects of the system warned that shifting from advance funding to pay-as-you-go financing would yield problematic rates of return for future generations.
In a retirement context, Social Security insures against two risks: (1) an unsuccessful work career; and (2) workers’ myopia in saving for their own retirement. Rates of return calculations are misleading for the first risk because it has no private market counterpart. The value of this protection must be decided in the courts of public opinion through the political process. But rates of return calculations are very important for the second risk. We need a Social Security solution that gives people a greater sense of security and fairness than seems to prevail today.