A Vision for the U.S. Pension System at 100

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

January 29, 2009


More than seventy years have passed since Congress laid the foundation of the modern U.S. pension system by enacting the Social Security Act. The full structure took nearly fifty years to complete and encompasses private pensions and tax-sheltered saving, as well as Social Security. From the start, some critics thought Social Security was a wrong-headed interference with personal liberty that would undermine self-reliance. Others came to believe that however well Social Security served an industrial nation less affluent and less mobile than America is today, it is not well designed for a post-industrial, twenty-first-century America. Still others argue that the original vision, although attractive, is unsustainable because of the much-cited “entitlement crisis.”

I believe that each of these views is wrong. In broad outline, the system is sound, sensibly designed, and affordable. Some changes are now desirable. Others will, and should, be made as economic and political conditions warrant. But they should affirm and strengthen the system, not scale it back or repeal it.

In recent years, the risks from which Social Security is intended to provide protection have increased. These risks include job loss and financial market instability. Other elements of the overall pension system now expose workers to more risk than in the recent past. For these reasons, Social Security replacement rates—the percentage of a worker’s earnings that the program pays during retirement—should be maintained or increased, not cut to deal with an imagined entitlement crisis.

The term “entitlement crisis” has been repeated often. It is so widely and uncritically accepted that, in denying its reality, one risks impugning one’s own credibility. But there is no general entitlement crisis. There is not even a general entitlement problem. Projections do indicate serious future budget problems. They also show that these gaps stem entirely from predicted increases in health care spending. According to projections of the Congressional Budget Office (CBO) in 2007, increases in spending on Medicare and Medicaid account for either 95 percent, or more than 200 percent, of the deficit that is forecast for 2050, depending on which CBO projection is used. Related projections of the Center on Budget and Policy Priorities foresee Medicare and Medicaid spending growing by about eight percentage points of gross domestic product (GDP) between 2010 and 2050. That growth exceeds the projected budget deficit (excluding interest) in 2050. Quite simply, these projections indicate that current-law general revenues, plus payroll and other taxes earmarked for pensions, are sufficient to pay for all projected non-health budget outlays, including all Social Security benefits promised under current law and all non-health entitlements. That was true before the current economic slowdown. But, even after the recession ends, the long-term budget challenges will come mostly from rising health care spending.

Nor are the challenges posed by growing health care spending confined to the public sector. The continued growth of health care spending promises to devastate private, as well as public, budgets. Unless we Americans abandon our commitment to assure the elderly, the disabled, and the poor health care similar to that available to other U.S. residents, it is not possible to deal with the public, fiscal challenge without simultaneously addressing the way we pay for and deliver both privately and publicly financed health care.

The term “entitlement crisis” was always inaccurate. At one time, it was at least fresh and vivid. Now, it is both clichéd and false. In the name of intelligent and constructive debate about how to reform the way we pay for and deliver health care, the concept should be scrapped.

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