Scott Galloway has a great track record in business, having predicted everything from Amazon buying Whole Foods to WeWork’s finances being a hot mess.
So when the New York University business professor outlined his thoughts on reforming Social Security recently on his podcast, his remarks were reposted on multiple financial news sites.
The problem is that Galloway’s fix would undermine the program by destroying the political logic behind it, increasing administrative costs and creating perverse incentives.
The plan, which is summarized in a minutelong short you can see here, is simply to stop giving Social Security benefits to wealthier seniors, which by his count could be anywhere from 10% to 30% of recipients. Since benefits are paid by current workers, he argues this amounts to a transfer of wealth from young to old.
“Every year we effect a $1.2 trillion transfer from young people who are not doing as well as they have in past generations to the wealthiest generation in history,” he said.
This idea is not new. It’s called “means testing” — since the government looks at a household’s financial means — and it’s been proposed in various forms since Social Security began in 1935. But there are several reasons it hasn’t happened (other than some minor reductions in benefits for people younger than 70).
• Social Security would no longer be universal. The program is hugely popular — 79% viewed it favorably in a recent poll — because it covers everyone.
• It would be more expensive to run. Social Security’s administrative costs have been less than 1% since 1989 because it’s easy to calculate how much each recipient gets.
• It could create perverse incentives. There’s some evidence that the small amount of means testing in place now causes some recipients to scale back on work to avoid hitting the thresholds.
That’s not to say that Galloway is entirely wrong. From an economic standpoint, funding retirement benefits by taxing current workers isn’t ideal, and payroll taxes in general aren’t great. (From an economic standpoint, you should tax things you want less of, like pollution or cigarettes, not things you want more of, like paychecks.) But politics is often about finding the second-best solution. Because workers pay into the Social Security system, it’s considered an earned benefit, which helps keep it from the political danger that food stamps and other welfare programs face from voters who are angry about how their taxpayer money is being spent. Those payments also give it political security, as retirees see protecting Social Security as keeping a promise. While it’s theoretically possible to come up with a Social Security reform that would make more sense to a business school professor, those changes might leave it less effective and more vulnerable to future cuts, leaving everyone worse off — including the young workers Galloway says he wants to help. Subscribe here to receive weekly updates on and expert insight into the key issues and figures defining Trump’s second term.
Ryan Teague Beckwith is a newsletter editor for MS NOW.
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