“A reappraisal of social security financing”—revisited

Abstract

Richard Musgrave only touched on Social Security in his seminal book, A Theory of Public Finance (1959), but he addressed the issue directly for a 1980 Washington, D. C. symposium sponsored by the Social Security Administration (Musgrave 1981). The symposium brought together experts to help design a fix for Social Security’s financing problems that would be both effective and acceptable to the public. Musgrave’s contribution, “A Reappraisal of Social Security Financing,” reviewed the financing status of Social Security, explored the nature of the intergenerational compact, and, most pointedly, assessed the merits of the payroll tax as a means of financing Social Security. While acknowledging the importance of having an earmarked tax, Musgrave concluded that the payroll tax was unacceptably regressive and should be replaced by a flat percentage charge on a broadly defined income base. Given the importance of Social Security, solving its financing problems in a politically acceptable fashion remains a high national priority. For almost 70 years, Social Security has raised the living standards of millions of older Americans and markedly increased their sense of economic security. Currently, one-third of elderly households receive more than 90% of their income from Social Security and about two-thirds depend on Social Security for more than half of their retirement income. Social Security benefits keep some 15 million people above the poverty line and J Econ Finan (2008) 32:394–408 DOI 10.1007/s12197-008-9045-3