Early in the next century, as the post-war boom babies leave the workforce, the ratio of working to retired persons is projected to fall dramatically in the U.S.. 1 This shift will place a tremendous strain on the Social Security System. Some have suggested that the pensions promised to current workers will not be paid. Evaluation of this prediction requires more than an examination of the underlying demographic assumptions. It requires in addition an understanding of the decision making process which initially established and now continues Social Security. 2 The Social Security System is not a voluntary association, Participants do not individually choose their contributions to balance their own preferences for future and present consumption. Rather these contributions are publicly chosen, and the decision making process that must by understood is political.
The Social Security Act became law in 1935. The Great Depression had destroyed much of the wealth that had been accumulated through private saving, and Franklin Roosevelt championed the system as an institution that would insure against similar events in the future. In his vision, articulated in the initial act, Social Security was to function as a publicly administered, fully funded pension plan with the pension one received tied closely to the contributions one made. ~ Soon after the system was in place, however, it began to evolve in a different direction. In 1939 the act was amended to move forward the date that the first pension would be paid, increase the benefits to be paid in the early years of the plan, and defer the tax increase scheduled for 1940. Through the 1940s, each scheduled tax increase was repealed by congress before it became effective. In 1950 the act was again amended, this time to increase pensions and to broaden the coverage of the system. 4 The shift to a pay-as-you-go system was then essentially completed, though the trust fund remained solvent for another twenty five years. Social Security redistributes income from the working to the retired. The simplest majority voting model fails to explain this pattern of transfers. * I would like to thank James Laing and Gordon Tullock for their helpfull comments on earlier drafts of this paper.