Fixing Social Security: Pitting Young Against Old Douglas O. Walker Professor of Economics Robertson School of Government Regent University Virginia News Source—March 4, 2006

 "A generation that has taken a beating is always followed by a generation that deals one."
- Prince Otto Furst von Bismarck-Schonhausen -
When a Great Depression engulfed Europe in the mid-1870s, German Prince Otto Furst von Bismarck‑Schonhausen, the archconservative known as the “Iron Chancellor,” promoted old-age insurance and socialized medicine program to thwart his enemies’ more radical alternatives. Adopted in 1889 as the world’s first social welfare system, it steadily expanded for several decades until the brakes were applied by the Nazis, who replaced the insecurity of market-oriented work with the “security” of directed labor, the “joy” of army life and a “generous” pension based on government-determined “need.” After World War II, Germany resurrected and repackaged Bismark’s welfare system, and again it was gradually expanded until it sits once again on the brink of inevitable insolvency.

Four decades after Bismarck’s welfare innovations, another and worse Great Depression brought deep distress to the American worker as the economy collapsed with an uninterrupted decline in prices, production and trade. Radical reform was again in the air, spurred not only by shrinking incomes and mounting unemployment at home, but also by the example of a “workers paradise” under construction in Russia.

In response, Franklin D. Roosevelt, like Bismarck before him, initiated programs under his “New Deal” to counter his opponents’ more radical measures. His first proposals focused on public works, stimulating the farm economy, and financial reforms, which had modest short-term results. Next, he focused on labor legislation and old-age assistance in the form of the National Labor Relations Act and the Social Security Act, with its long-lasting consequences.

As with Bismarck, the programs introduced by FDR expanded greatly with time, first enrolling more and more people, and then increasing benefits through upward biased cost-of-living and benefit-definition formulas, and finally steadily broadening benefits to include disability, health and income security for all ages. The reach of the social welfare net eventually made these programs a key component in everyone’s pension plan and a key consideration in medical and income assistance decisions.

Under the “pay-as-you-go” financing approach adopted for Social Security, the rising wages of a later, larger and richer generation supports the consumption of an earlier, smaller and poorer generation. A post-war baby boom allowed each aging worker to contemplate the future with confidence, secure in the knowledge that the meal and medicine he provided to the elderly today would be generously reciprocated tomorrow by his younger colleagues, when he was the one living in contented retirement.

The realization came slowly that falling fertility, longer life spans and rising benefits would eventually destroy the underlying mathematics of this pay-as-you-go system. Insolvency means many things to many people, and there is always a definition that allows for immediate comfort in the face of inexorable disaster. No group is more inclined to avoid a disagreeable decision than politicians, and no decision is more disagreeable than imposing higher taxes on one group to benefit another or lowering promised benefits on which voters have come to rely. For this reason, Democrats and Republicans have not simply ignored the growing problems of Social Security, Medicare, and Medicaid: Much worse than that, they have consistently and persistently and shamelessly pursued the expansion of these programs, although they knew their long-term solvency was always questionable.

There is no question but that Social Security and Medicare are insolvent as now constituted, and reform must both cut benefits to the elderly and raise taxes on workers. In this sense, the older generation is now pitted against the younger. The question is how big a blow each generation will take, and whether the damage inflicted is sufficient to bring contributions in line with benefits.

Needless to say, Republicans and Democrats disavow any hint of a serious crisis. On this, you may rely on Bismarck’s advice:
"Never believe anything in politics until it has been officially denied.”
 
About the Author:
Formerly a senior economist at the United Nations Secretariat in New York, Dr. Walker served as Secretary of committees on world economic trends and policies, Speechwriter to the Under-Secretary-General for Economic and Social Affairs, Editor of Briefing Notes on the World Economic and Social Situation for the Secretary-General, and advisor on economic affairs to several African and Latin American governments. Dr. Walker has also served as a professor of economics at The City University of New York and other universities. He holds a Ph.D. from the University of Southern California.