Social Security Disability Insurance Reality One: At the National Level Disability Is Unemployment Insurance By Another Name

What’s Old Is New and What’s New is Old

My first exposure to disability insurance was building simulators (mathematical models) for a few states’ Temporary Disability Insurance (TDI) funds.  It was long ago, back when states took funding their trust funds seriously. The TDI funds were added as an afterthought to a project to build simulators for selected states’ Unemployment Insurance (UI) funds.

The UI simulator was quite simple.  As expected, unemployment was the primary explanatory variable and the only one useful for forecasting.  The historical analysis showed the impact of shifts to industries that were less cyclical and seasonal.  However, their effect was minor and dependent on how industry mix was measured.

What was surprising was that TDI claims paralleled UI claims.  Unemployment was the primary explanation for cycles in TDI claims.  Although the cycles were milder, clearly at the aggregate level, claiming disability was a response to a weak labor market. 

More telling was a trend in the frequency of TDI claims.  Although not a steep increase, there was a statistically significant increase in the frequency of claims.  Neither changes in labor force participation rates nor industry mix seemed to explain the trend.  In fact, the states involved were actually attracting industries with lower injury rates.  Casual inspection of the TDI data gave the appearance that each cyclical downturn produced about the same increase in claims when adjusted for their severity, but recoveries didn’t produce as large a decline in claims. One would almost believe rehabilitative medicine had taken a step backward. 

So, “long, long ago in a galaxy far, far away” it was apparent that, at the aggregate level, disability was driven by economics, not physical condition.  It’s still true and politicians know it.  How politicians respond explains the trend. That will be tomorrow's focus.

Social Security Reform: Disability Insurance Benefits

Reality should be hard on policy failures

As discussed in last month’s postings, the Old Age and Survivors Benefits component of Social Security could be made viable by voluntary individual actions.  It only requires adjusting the program to reflect twenty-first century reality. The adjustments have no financial cost and minimal political cost, but they require encouraging longer work lives necessitated by increased life expectancies. A major obstacle to responding to reality seems to be that it would mean those politicians who want to run on class warfare-based lies would have to leave Social Security out of their rhetoric.  Some politicians find changing their rhetoric difficult, but others would quickly recognize that there are other ways to take advantage of the politics of envy.

Fixing the Disability Insurance component is more complicated.  Disability is an interesting phenomenon.   At the aggregate level it’s easy to analyze and identify, and as will be discussed tomorrow, it has almost nothing to do with disability.  It’s a different story at the individual level.  It’s extremely hard to analyze and identify, and usually has everything to do with perceived disabilities.

As a consequence, Disability Insurance is too convenient as a way for politicians to hide policy failures.  It is just so darn easy to get away with contradictory positions.  It’s apparent nothing related to disability is ever questioned.  For example, we pay lip service to providing the disabled with equal opportunities.  Simultaneously we provide Social Security Disability Insurance on the assumption the “disabled” can’t work.  Yet, we see no contradiction.  Further, we embrace advances in medicine that improve the ability to diagnose disabling conditions while ignoring medical advances that improve the treatment (e.g., we will have an Olympic sprinter running on prosthetic lower legs).  The reason is that the more government uses SS Disability Insurance to offset economic policy failures (lack of growth and the resulting high unemployment), the more popular it becomes.  

Meanwhile, the public is wise to the game and plays along.  Yet, the public shouldn’t be blamed.  We acknowledge that individuals aren’t always capable of assessing their own capabilities.  However, we fail to realize the same situation all too often applies to disabilities.  We completely ignore the role of motivation as an influence on ability and disability.  We pretend experience doesn’t influence an individual’s perception of disability.  Further, we totally overlook the role of an individual’s economic circumstances in defining disability.  Finally, we concede the judgment of what constitutes a disability to the faceless bureaucracy of government while ignoring the additional complications introduced by the bureaucrat’s prejudices.

The solution is so obvious, but it requires major changes in programs.  Most importantly, treat disability as a policy issue and totally separate it from Social Security.  Perhaps eliminate it as a component of the SS program.  There is no logical reason to complicate a program driven by demographics by folding in a program driven by business cycles. As administered by government, SS Disability Program is more like Unemployment Insurance than Old Age and Survivors benefits. 

Social Security Reality: Summary Related to Old Age and Survivor Benefits.

Realities That Have to Be Addressed.

Social Security as enacted in the 1930s is obsolete.  Demographics and technology of the twenty-first century will have to be accommodated.  Planners need to face the facts.   The most important change is a need to address longer life expectancies and the longer work lives they necessitate.  Ten realities that should be addressed are:

(1) Planning for a twenty-first century retirement isn’t easy or fun, and many people don’t bother.  The framers of Social Security never envisioned a broad-based need for such plans.  People didn’t live that long.  There’s a need for financial education.  Not sophisticated stuff.  Just basics like the fact that Social Security isn’t an adequate retirement plan. 

(2) In response to the difficulty of planning a twenty-first century retirement (and politicians’ continual lying to the public about Social Security), most baby boomers are financially unprepared for retirement.  They’re providing for retirement as if their life expectancies are no longer than their grandparents’.  Perhaps things like the “catch-up contributions” to IRAs and 401(k)s should be mandatory.  Even making IRA contributions mandatory should be considered. Something as simple as an “opt-out” tax may be enough.

(3) The best available data indicate other generations aren’t doing any better at providing for their retirement.  Their behavior in terms of financial management resembles their parents’ at the same age.  They too are ignoring their longer life expectancies.  There “opt-out” taxes could be used to fund their longer retirements.

(4) The public is often misled into believing that someone else can fund their retirement.  They choose to ignore the fact that no subset of the public provides a reliable enough potential income stream to justify depending upon it.   Social Security deserves and needs reliable funding.  Everyone needs to contribute.

(5) Much of the population knows it isn’t preparing for retirement and refuses to address the issue.  Thus, whatever incentives and penalties are used, they have to accommodate their choice while ensuring that they experience the full impact of their choice at the time the choice is made.

(6) Many people are planning not to have to retire.  That is true of people approaching what traditionally was a retirement age.  Even those slightly younger or slightly older than a traditional retirement age are deciding whether to retire based on factors other than age. Social Security should accommodate that fact that people make choices based on their needs, not the government’s wishes.

(7) Productivity changes with age and experience.  At some age it begins to decline.  The burden of the wage tax that we call Social Security contributions become harder to absorb as productivity declines. The current outcome, unemployment, is extremely in efficient.  Reduce the tax.

(8) At a national level, retirement is about producing the goods and services that non-working older people consume.  The potential productivity of older worker can’t continue to be ignored.  It is an easy part of the solution.  Accommodate longer work lives.

(9) Retired people are the capitalist class.  They live off of their capital.  Let retirees earn a reasonable return on the capital that they spent a lifetime accumulating.

(10) A society that consumes its capital stock can’t survive.  It is possible that Social Security can't survive as a pure pay-as-you-go system.  Stop draining the trust fund.

When these inconvenient truths are viewed collectively, they tell a story with obvious implications:

It seems obvious that if people aren’t able to plan for twenty-first century retirements, we shouldn’t be surprised that the baby boomers are not prepared.  It’s a bit more surprising that younger generations are witnessing the boomer’s failure, yet they are not preparing any better.  The fiction that someone else can provide for one’s retirement seems to appeal across generations.  

When forced to address the issue, the public acknowledges it hasn’t provided for retirement.  Overwhelmingly people display a preference for adjusting their own individual retirement age rather than providing for retirement.  That’s true of their pre-retirement planning and their actual retirement (labor force) behavior.  Unfortunately, often the decision isn’t left to the individual.

Meanwhile, our politicians seem even less capable of addressing twenty-first century reality than the public.  The Government aggravates the problem by pretending Social Security is a viable retirement option.  It wasn’t envisioned as a retirement plan, and it has never been more than a part of a viable retirement plan.  That would be easy to address.  It would just require some honesty on the part of politicians.  It could be started with accurate disclosures on Social Security statements. 

However, the biggest issue isn’t disclosure.  It’s the failure to recognize that retirement at a national level is an output issue.  It is only aggravated by pretending it is anything else.  The pretense that it can be overcome by making someone else pay (i.e., produce the output) is extremely counterproductive.  Social Security isn’t made more viable by narrowing the funding base or excluding part of the public from benefits.  One of the major problems is that demographics are already narrowing the funding base. We should be trying to expand, not narrow, the part of the population making a contribution to Social Security.

Probably nothing is more important than encouraging and enabling older Americans who can continue to add the goods and services that a growing older population will consume.  Older Americans are a growth sector.  For starters, all Social Security and wage/income tax penalties related to benefits should be eliminated.  That will require recognition that older Americans may contribute by working, or they may choose to contribute by holding/investing in capital.   Further, a realistic approach would recognize that with age the amount a person can produce from one’s labor decreases.

Inadequate retirement savings, work/employment plans, and actual labor force behavior indicate the importance of employment as a potential and necessary component of how older Americans will secure (both finance and produce) the goods and services that they want to consume.  The government should recognize the fact that at some age workers can no longer produce enough to justify both their wages and the wage tax that we refer to as Social Security contributions.  The narrowing of the funding base that implies can be addressed with a small sales tax on all consumption. 

Social Security taxes paid by employers could phase out on workers age 50 or 55 thus reducing the employer’s cost of continuing to employ the older worker.  The employee’s contribution could phase out at age 55 or 60.  The revenue loss could be replaced by the general sales tax thus allowing the wages to be counted toward benefits.   The tax base for Social Security would be more stable since it would be expanded to include expenditures of “retired” workers and those not in the labor force.   Output and income would be increased by the continued production of the older employees.

More than anything else, the Social Security component that addresses “old age and survivor benefits” has to be reformed in the context of retirement planning.  Reformers who approach it as if Social Security is a standalone approach to retirement system are doomed to failure.  They aren’t protecting Social Security.  They will destroy it.

Reality Ten: It Can Get Worse.

Social Security Reform: Flows Matter.  

The last posting, “Reality Nine: Class and Age: Marxis Dead, Bury Him,” started with the statement:  “A key element of many Marxist’s (and liberal’s) thinking is a conflict between workers and capitalists…. At its extreme (among some Europeans and in Social Security), the pursuit of the conflict has been carried to the point of cutting-off-your-nose-to-spite-your-face.  They treat working as if being employed were antisocial (e.g., the displacing workers nonsense in the last posting).  But, that’s a side issue for another day or a different posting. The point is: anyone who is retired is living off of capital.”  This is that “another day.”

There is one of those inconvenient truths haunting the Social Security discussions.  It concerns the interaction between capital and labor.  Interestingly, many social scientists (including, most disgracefully, economists) address the issue with an apparent total ignorance of both the techniques of their discipline and the implications of those techniques. 

If quantitatively inclined, one can easily get lost in issues surrounding multivariate analysis, the aggregate production function, lag structures, multifactor productivity, and complexities surrounding variable interaction.  However, it’s easy to cut through the clutter.  Without getting into the details, it’s a simple concept to understand.  It can be illustrated with a simple saying: “One can’t drive many nails without a hammer, but a hammer doesn’t drive many nails by itself.”

The implications for discussions surrounding Social Security are stark.  To facilitate an appreciation of just how stark, let’s assume away all issues related to the relative effectiveness of public sector investment verses private sector investment.   That should eliminate a lot of the political rhetoric.  Granted, the efficient use of capital is important, but any increase or decrease in the efficiency of capital’s deployment is being overwhelmed by changes in the flow.  Put differently, we are disinvesting (liquidating capital) so fast and at such levels that any change in efficiency doesn’t make that big a difference. 

For example, consumer sector debt has an unsustainable upward trend.  What’s even worse, it has grown most among people least able to manage it.  People get credit cards before they have established a savings account.   They take on mortgages with no equity, basically renting money instead of renting without the long term liability.  They borrow in order to buy depreciating assets.  What’s astounding is that people who have previously displayed the ability to manage debt are imitating this financial mismanagement.

Granted, consumer debt is an asset from the lender’s perspective.  The lender owns a claim on an income stream, usually a bond.  However, as was unavoidably apparent during the financial crisis, the asset was not backed by a reliable claim on equity in an output-producing item.  The loan didn’t contribute to the stream of goods and services available.  In instances were one could argue that there was a real asset, new housing stock for example, the value of the future ability to house people was far less than the amount of the loan.

The US public sector is compounding the problem by pursuing the same strategy.  We’re imitating the Greeks and their fellow Europeans.  Of course, being Americans, we’ll do it bigger and better.  Interestingly, our government has discovered the trick to annuitizing capital thus making the liquidation that much harder to stop.  While the exact numbers are debatable, Dennis Cauchon of USA TODAY provides a telling calculation.  In “Federal Deficit Dwarfs Official Tally” he reports an estimate that the “Federal debt and retiree commitments equal $561,254 per household.”  That’s quite different from the official numbers reported by the government.

He goes on to explain why the half a million plus per household is a more honest estimate:  “The big difference between the official deficit and standard accounting: Congress exempts itself from including the cost of promised retirement benefits. Yet companies, states and local governments must include retirement commitments in financial statements, as required by federal law and private boards that set accounting rules.”

“The deficit was $5 trillion last year under those rules. The official number was $1.3 trillion. Liabilities for Social Security, Medicare and other retirement programs rose by $3.7 trillion in 2011, according to government actuaries….”

As if a government annuitizing whatever capital it can get out of the public isn’t bad enough, the rate at which they’re doing it is both astounding and accelerating.  For example, the article notes that under honest accounting practices, “the government ran red ink last year equal to $42,054 per household ….”

Put in plain terms, the government used capital at a rate that darn near equaled all of household income.  Figuring in the tax bite on households, one has to wonder how government officials can fail to understand why households are struggling.

As we deplete our capital stock, the productivity of labor falls.  That lost output is in addition to the direct loss attributable to the smaller capital stock.  It is the reduced labor productivity as workers have fewer “tools” to work with.  With fewer tool, the worker produces less. Since less is produced, incomes fall. In order to protect current consumption levels, which many citizens and politicians confuse with living standards, we consume more of our capital. 

So far, however, the focus has been on financial indicators of physical capital.  Yet, we know output is the result of multiple factors, not just physical capital.  Human capital is one of the terms used to refer to the skills and education.  It’s convenient since it conveys the idea that human capital is created as the result of purposeful effort.   However, the notion that education measures human capital is suspiciously self-serving when advanced by educators.  It’s particularly suspect when viewed against a longer history.  Yet, it could well be true of modern economies.  So, let’s consider it a viable issue.

Historically education made a major contribution to creating some basic social norms that represent major forms of human capital.  In development economics, there is a greater appreciation for things like regularly showing up, developing self-control, sticking to purposeful activities, listening to instructions, measuring performance based on criteria other than one’s own personal whim, recognizing the future consequences of actions and decisions, and accepting classroom/community standards for behavior.  When those “skills” are absent, the quality of human capital suffers. 

Despite the role education can play, education is far too broad a topic to treat as a uniform ingredient.  One doesn’t have to look beyond the occupants of some of the tents of the “occupy” movement to sense that we’ve educated some people in the fine art of contributing less to society then if they never went to school.  The truth is education contains a large component of consumption as well as investment.  Learning can be, and often is, great fun. 

In response, some observers focus on disciplines, as in the frequent lament that the US graduates too few scientists, mathematicians, and engineers.  Others focus on some other pet topics: prayer, classroom size, military training (ROTC for example), research, or the silliest of all, funding levels.  Depending on what ax one wants to grind, it’s always possible to find some spurious correlation to support one’s position.  Without agreement on what education is supposed to accomplish, the debate goes nowhere.

Fortunately, when the issue is human capital as a factor of production (i.e., something that contributes to the ability to feed, clothe, and house oneself; basically support one’s own consumption) the issue is simpler.  Once the criterion is clear, it is possible to establish clear measurement of results. For example, Chinese government funds for education are expected to improve employability.   If the education doesn’t result in a target level of employment upon graduation, government funding is reallocated to different programs.

For better or worse, we seem to have decided that preparing people to provide for themselves isn’t the role of education.  It’s as if we are afraid that preparing people to provide for themselves implies a value judgment we aren’t willing to make.  Understand this is a very different issue from the “scientist, engineer, prayer, classroom size, military training (ROTC for example), research and funding levels debate.”  It’s very fundamental.  More oriented toward whether we are teaching basics like “regularly showing up, developing self-control, sticking to purposeful activities, listening to instructions, measuring performance based on criteria other than one’s own personal whim, recognizing the future consequences of actions and decisions, and accepting classroom/community standard for behavior.”

If you think it is phony issue, a red herring, consider these facts.   A person can virtually assure that they and their family will avoid poverty by accomplishing three simple goals.  The goals are (1) complete at least a high school education, (2) work full time, and (3) wait until age 21 before getting married and having a baby.  Census data shows that people who followed all three of these rules had only a 2% chance of being in poverty and a 72% chance of joining the middle class (defined as above $55,000 in 2010). These numbers were almost precisely reversed for people who violated all three rules.  Ignorance of these basic principles (or ignoring them) raised the chance of being poor to 77% and reduced their chance of making the middle class to 4%. 

This simple recital of Census data is confirmed by extensive social science research.   It isn’t ideological.  One can find serious social scientists from libertarians to liberals who only differ in interpretation and prescribed responses, although each will add his or her pet items to the list.  From the perspective of human capital, the facts leave little doubt that continued poverty in the US is the result of a failure to teach some basic life skills.  

So, neither human capital nor physical capital is being added at a pace that can support Social Security through the twenty-first century.  By contrast, it is very reasonable to argue that historically Social Security succeeded during a period when the US was expanding both its human and physical capital.  The issue isn’t really whether the capital stock is large enough.  The issue is whether Social Security can succeed when the capital stock is shrinking.  The unfortunate answer is: Yes, if your time horizon is an election cycle, and no, if your time horizon is the life expectance of an average American.

Reality Nine: Class and Age: Marx is Dead, Bury Him.

Social Security Reform: If twentieth century thinking is obsolete, try nineteenth.

A key element of many Marxist’s (and liberal’s) thinking is a conflict between workers and capitalists.  It ignores their common interest (and society’s interest) in having the worker working (i.e., employed).  At its extreme (among some Europeans and in Social Security), the pursuit of the conflict has been carried to the point of cutting-off-your-nose-to-spite-your-face.  They treat working as if being employed were antisocial (e.g., the displacing workers nonsense in the last posting).  But, that’s a side issue for another day or a different posting. The point is: anyone who is retired is living off of capital.  They’re capitalists.

Once life expectancies grew longer than most peoples’ working lives, it guaranteed that most people would spend part of their lives largely in each class.  Part of their life, they will be labor, the proletariat. Part of their life, they will be capitalists, living off of their capital, be it a pension, IRA, 401(k) or whatever. 

One needs to remember that the issue is how to produce goods the elderly want to consume.  Transporting productive capability from one period to another isn’t done by saving as such.  It is the use of the resources to produce in the future that allow retirement. That is capital formation.  It’s funneling production that isn’t being consumed currently into things that enhance production in the future.  It is only in that sense that future consumption becomes possible.

For an individual, the funnel that directs production into capital may be contributions to a well-run pension, an IRA, a defined contribution plan like a 401(k), an annuity, and stock, bonds, mutual funds, a business, real estate, etc..  For Social Security, the capital is all government debt. The interest and principal fund benefits to the extent benefits are paid from the trust fund. 

Clearly during the twentieth century anyone who was retired was living off of capital.  Most people were living off capital they created.  Granted, we have always structured Social Security such that there was an element of transfer payment from those best able to fund their Social Security retirement benefits to those less capable of funding their Social Security benefits.  The subsidy to those unable to fund their retirement was from a capital base that was increasing (i.e., a trust fund that was growing). However, benefits began being funded from current contributions as the trust fund growth stopped, and once the trust fund (i.e., the capital) is all sold off, Social Security will become nothing but a transfer from younger working Americans to older Americans.

The definition of capital as used above is very broad.  The traditional things people think of as capital are very important.   The total stock of things like tools; plants like factories, refineries, etc.; transportation equipment and infrastructure like pipelines, the power transmission grid, trucks, ships, roads, bridges, etc. is staggering.  Capital also includes long-lived assets like wells, mines, commercial structure, canals, dams, etc.. 

Agricultural land is one of my favorite examples. In agricultural areas it’s amazing how much effort has been put into making American agriculture as productive as it is. In some areas, there are huge piles of rocks or stone fences at the edge of fields.  Those fields have been producing for hundreds of years. Every one of those rocks was removed from the field.  Most were removed before much more than human muscle and a team of draft animals were available to do the task. In still other areas, one sees wells, diverted and dammed streams, or drained swamps.  Often trees at the boarder of the field tell of the effort to clear the land and remove the stumps.   The history of the effort to bring the prairies “under the plow” is probably the source of more myths, legends, and tales of heroes, villains and adventure than any other aspect of American development.

Long-lived consumer goods that are consumed over time, with housing being the leading example, are also capital.  However, from an individual’s perspective, they only allow retirement to the extent they are owned by the individual.   It’s the ownership, not the existence or occupancy that are relevant to retirement.  It’s the ability to consume the benefits the goods provide, not price change that creates the capital.

Since the passage of Social Security in 1935, the investment in human capital that allows generations to be more productive than their predecessors has been massive.  Prime examples are near universal k through 12 education, and, with the GI bill, greatly expanded access to college.  The elimination of historical patterns of excluding selected qualified students has continued the process.  The investment is substantial.  It includes the expense of the education, but also the forgone consumption implied by not spending the income the student could be earning from fulltime employment.    

From a society’s (or nation’s) perspective, human capital creation may be the most important capital formation.  However, from an individual’s perspective, it doesn’t facilitate retirement since the product it facilitates ends with retirement. When discussing Social Security it has to be mentioned.  It was vital to making Social Security viable. 

The issue we are facing is often seen as whether we, as a nation, have enough capital.  An individual facing the issue has two options: consume the income the capital produces or consume the capital by selling it off.  The individual’s task is simplified by the ability to assume that whether they provide capital for future generations can be ignored.  Consequently, many individuals ignore any responsibility for whether future generations are left better off than they were.  The financial service industry has developed products to accommodate the individual’s freedom from such concerns.  Most annuities are good illustrations, but many pensions actually fall under the umbrella of products designed to avoid leaving anything for future generations.

For a nation or a society the issue is a bit more complicated.  For starters, it shouldn’t, and in the long run can’t, ignore the impact of how it manages its capital.  Future generations count.  The scorched earth, “I’ll-spend-every-cent” philosophy many individuals display won’t work for a society.   

More importantly, compared to an individual, a nation’s choices are severely constrained.  It is not as free to choose between restricting consumption to the production generated by its assets verses selling off the capital. 

Nations do sell off private capital to foreigners, letting them buy companies, real estate, their debts, etc..  In the past, they generally restricted it to capital held by the people rather than common assets like roads.  Currently, some developed nations, with the US as a prime example, have found a way to relax the constraint.  They simply sell foreigners a general claim on future production in the form of government debt.  Technical knowledge is harder to sell.  Anyone who had American history knows how easily the US learned the industrial secrets of Europe’s industrial revolution.  Finally, human capital is so important, and it gets awkward when a nation tries to liquidate its human capital. 

The biggest stumbling block for those who try to hang on to this outdated, labor-verses-capital rhetoric is life itself as most people will experience it in the twenty-first century.  Social Security needs to address the role of capital as the only way retirement is possible.

Reality Eight: It Isn’t About the Money.

Social Security Reform: Money Is the Easy Good To Produce.

At a personal level, Social Security is about money.  However, at the level of a society, it isn’t about money at all.  It’s about producing the goods and services older Americans want to consume.  To do that, we need the output older workers can generate. 

The reality is that the Social Security issue isn’t a financial issue, a budget issue, or a deficit issue.  It’s an output issue.  In “Oldest Baby Boomers Face Jobs Bust,” E. S. Browning gets awful close to the issue.  But, the focus on jobs and personal finance keep Browning from directly addressing output.

Those older Americans want to consume.  Unfortunately there are fewer and fewer young workers to generate the output for them to consume.  The sheer size of the boomer generation is highlighting the issue, but smaller families and longer life expectancies are the cause.  Neither of those will change quickly.  As currently constituted, Social Security has been made obsolete by the demographic trends toward smaller families and longer lives.

The article notes, “The problem of older, out-of-work Americans extends beyond individuals to the U.S. economy. Among jobless people aged 55 to 64 who want to work, lost annual wages exceed an estimated $100 billion, based on the median income of this age group….Retirement savings losses exceed $10 billion a year, assuming contribution rates of 8% for employees and 2% for employers. Even if only half the people were working, the economy would gain $50 billion a year in income and another $5 billion in retirement savings.”

The key phrase is, “the economy would gain $50 billion a year in income.”  The exact number is irrelevant.  Income is either real or nominal.  It’s either output or inflation.  Here the writer is acknowledging the fact that employment and savings generate output and income.  Unfortunately, he or she doesn’t seem to fully recognize the significance of the relationship.  At another point the article loses its way.   It’s as if the author went bonkers.  The article states, “The trouble spreads across generations. Older people hang on to jobs…. they displace younger workers.” 

Suddenly it’s a zero sum game where the number of jobs is fixed. What happened to the income the older workers generate and the consumption it implies?  Wouldn’t that create more demand which would generate more jobs to satisfy the demand which would generate more income?  Where’s the consumption multiplier?  People working has never been responsible for other people being unemployed.  It just doesn’t work that way. One needs to remember that the same displacement nonsense cropped up in connection with women working and equality of employment opportunities for other minorities as far back as the first waves of immigrants.  It’s nonsense. 

What is particularly odd about much of the discussion of Social Security is that it ignores the output post- 65 year olds can and do generate.  Browning focuses on 55 to 64 year olds. He or she isn’t alone in ignoring the income that post-65 year olds could and often do generate.   In a curious twist to logic, we’ve set up Social Security in a way that penalizes the very workers that would contribute the most to income and output, and who would thereby make the largest contribution to the viability of the program.

Reality Seven: Becoming an Older American Involves Getting Old.

Social Security Reform: Peter Pan grew up anyway

Somehow we have let governments all over the world divide our lives into discrete segments that are convenient for governments to administer.  Never mind if they have nothing to do with the real world.  Nowhere is this more apparent than with retirement.  To governments, life seems divided into: work, work, work, then don’t work, don’t work, don’t work.   Allow minor adjustments for education if done early on, and of course weekends, holidays, and vacations in order to accommodate the insanity of the ridged segmentation.  Even allow early Social Security enrollment for individuals where the phony segmenting does a "crash and burn."  If you really screw up, try to bridge the gap with unemployment insurance and lax administration of other social safety net programs.  Of course amply provide resources to make the segmentation work for government employees. 

The truth is aging is a continuous process.  It happens one day at a time.  From the perspective of twenty-first century life expectancies, someone who is 64 years and 364 days old is the same age as someone 65 years old. In fact, the life expectancy of the 64 plus individual isn’t that different from that of a 69 year old.

There is an inconvenient truth about a realistic view of aging.  It devastates a lot of fictions that have grown up around the work, work, work, don’t work nonsense.  That is the notion that in 1935 Social Security was set up so that people could retire.  The truth is poverty among older Americans was the problem.  The combination of a stock market crash, an agriculture depression, and bank failures had wiped out most peoples’ savings.  It was disgraceful that people who had worked and saved all their life were left destitute. 

Many older Americans would have continued to work if they could find employment.  Stories of “retirees” coming back to work to support the war effort illustrate the point.  If there was a job older Americans could do, we as a nation welcomed their contribution.  It is no accident that it is an “old age and disability” program.  In 1935 old age and disability meant reduced productivity; a reduction that, in 1935, precluded the person from completing in the labor market. 

To illustrate how much the fictions confuse people, consider this quote from the Browning article.  When talking about 55 to 64 year olds it states: “At an age when they should be generating peak incomes and savings, many unemployed and underemployed Americans are applying for early Social Security benefits and spending what's left in their retirement accounts.”  Note the ridiculous assumption that productivity, the basis for wages, increases throughout the pre-65 magic age.  Then at 65 it disappears.   The productivity of post-65 workers is ignored.

Now it may seem like these postings are picking on Browning.  That’s not the case.  Browning addresses the issue so much better and thoroughly than most reports.  It covers more aspects of the issue and thus better illustrates the realities even when focusing on other issues.  Thus, this posting draws heavily on it even when highlighting issues the article ignores.

The article screams for the realization that productivity grows with age and experience for some period of time, then it declines.  There is no magic age where this happens.  Both the increased productivity and the decline happen one day at a time.  But, at some point, the reality is productivity drops with age. One isn’t as strong.  Ones skills become old, perhaps obsolete.  Ones interest in acquiring new skills or knowledge may shift from job related to a personal passion.  Ones command of “modern technology” requires larger investments as more and more of ones accumulated technical skills age.  Ones increased skills become more and more tailored to a specific employer and thus increasing vulnerable to changes at a specific employer or in a specific industry.  This happens at different rates for different occupation and even for different people in the same occupation, but it happens.

All of these factors contribute to a massive misunderstanding of the realities Social Security must address.  For example, from the Browning article addressing 55 to 64 year olds, “That doesn't count the lost wages of people who have taken salary cuts to get new jobs.”  The pay cuts reflect the abandonment or obsolescing of skills tailored to a specific employer. Consider this quote from a discussion of one individual’s situation: “The older he gets, the more trouble he has finding jobs in computer mainframes, his specialty, amid changing technologies.”   One wonders how Browning, sitting there writing on his or her PC, missed the point.

Interpretations can get totally turned around by ignoring reality.  Consider this quote cited in part in another context: “Older people hang on to jobs or, out of desperation, take lower-level jobs for which they are over-qualified. Either way, they displace younger workers.”  Older workers “hang on to their jobs” because they’re productive in those specific jobs at that employer.  If so, younger workers couldn’t possibly be displaced unless they too have acquired the employer-specific skills and knowledge that allow the older worker to keep the job.  That will happen eventually as the relative importance of old skills and newer skills shifts.  But displacement? What nonsense. 

As to older workers taking jobs “for which they are over-qualified,” one is always best qualified for one’s last job. After all, one has done it.  In that sense we are all over qualified for any new job.  Every new job requires the acquisition of new skills and knowledge.  Who gets a job depends on who has less to learn and looks most interested in acquiring the new skills and knowledge required. 

To me, nothing makes the point more clearly than this quote: “Older people have more trouble finding new jobs. Among unemployed workers older than 55, more than half have been looking for more than two years, compared with 31% of younger workers, according to the Heldrich Center. Among older workers who found a new job, 72% took a pay cut, often a big one, the Rutgers data show.”  The obvious explanation is skills have become specialized.  Thus, it takes longer to find an employer where they are relevant.  Since the general productivity drop is accompanied by a move that makes many employer-specific skills irrelevant, the wage income implications can be dramatic. The chances of finding a job where the value of the new skills is larger than that of the obsolete or abandoned skills decrease with age.

It’s only in government that the idea of a new program to address these realities would seem more reasonable than fixing the existing programs for older workers. Why not reforming Social Security to address the reality that at some point productivity declines with age?   We don’t need a new program.  Fix Social Security.