Social Security Insolvency Debate and Poll
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FACT 1 3-30-99
The Social Security trustees reaffirmed that Social Security does not face a near-term crisis. Payroll tax revenues currently exceed benefit payments and are resulting in the accumulation of a steadily growing surplus that will allow benefits to be paid in full for the next 35 years. In the long term, however, the system will face an imbalance. The 1999 trustees' report includes three important dates related to the imbalance.
There has been confusion and misunderstanding about the third key date. It sometimes is portrayed as the date on which Social Security runs out of money. Many Americans mistakenly think this means there will be no benefits for them after 2034.
This is not the case. As the trustees have said, Social Security will not be out of money when the trust fund surplus is exhausted in 2034. The trust funds will continue after that to receive large sums from payroll tax collections. The problem is that, according to the trustees' calculations, the incoming revenues after that date will be sufficient to cover about 70 percent of benefit payments, rather than 100 percent. That is what is meant when the term "insolvency" is used to describe the condition of the trust funds after the third key date.
The trustees' reports regularly provide three sets of projections due to the uncertainty of making estimates over a period as long as 75 years. One set of projections incorporates fairly optimistic economic and demographic assumptions. A second set is based on pessimistic assumptions. The third set consists of intermediate estimates, regarded by the trustees as the "best estimates." The dates referred to above are the best estimates (i.e., the intermediate assumptions).
The trustees' intermediate estimates are conservative. These estimates assume that growth in the national economy, as measured by change in the real gross domestic product, will average 1.5 percent per year over the next 75 years. This rate is about half the average rate of growth over the past 75 years. Given the projected decline in the rate of growth of the labor force in the future, the trustees' estimate of future economic growth is understandably cautious. Should this cautious projection prove too conservative, as could be the case, the long-term financial status of Social Security could be better than the trustees project.
Almost no one bothers to investigate the claim of Social Security's coming insolvency, which is based on projections in the annual report of the system's trustees. I did (Left Business Observer, 12/22/95), and discovered that the projections assume the economy will grow an average of 1.5 percent a year (after inflation) for the next 75 years--half the rate of the previous 75, and matched in only one decade this century, from 1910-20. Even the 1930s, the decade of the Great Depression, saw a faster growth rate.
What would happen if the economy grew at a peppier 2.2 percent rate? The trustees provide alternative projections based on that as well, and, gosh, the system remains solvent indefinitely. At 2.5 percent--still slower than the 75-year average--it runs a surplus. About the only other journalist to question the dire predictions for Social Security's future was Robert Kuttner, in his Business Week column (2/20/95). By Doug Henwood www.fair.org
There will be just 1.8 workers for every retiree in 2075, compared with 3.4 today.
Yes, it's a fact that the population will age, and the number of retirees per worker will rise. Pointing just to those numbers, though, is a selective rendition of history, since the history of capitalism has been to bring an ever-larger share of the population into working for pay. If you look instead at nonworkers vs worker you get a different picture. In 1900, there were almost four nonworkers for every paid worker; as women came to draw paychecks, that number fell steadily to just over one today. The boomer retirement will raise this number a bit, but not by much in the scheme of things. And these, it should be emphasized, are fairly conservative projections. In 2050 there should be a larger share of the population working for pay than in 1950, when mom was at home and the earliest boomers were in kindergarten.
At every turn there's a bearish assumption in the Trustees' numbers. At 0.4% a year, the projected population growth through 2075 represents quite a deceleration from the 1.2% average of the last 75, and well under the Census Bureau's 0.7% projection for the next 50 years. The workforce is slated to grow even less by just 0.2%. Not only is the youthful share of the population expected to decline, the Trustees project that fewer of them will be working: the share of the population aged 20-64 at work is projected to decline, a violation of all historical precedent.
Rerun the projections with more reasonable -- though still conservative -- projections and the "crisis" largely or fully disappears. If the employment-population ratio for those aged 20-64 remains constant, a third of the projected shortfall for 2020 disappears; if it rises, because the share of women employed approaches that of men, then two-thirds of the projected deficit disappears. If the economy grows at a modest 2.5% rate, red ink will turn to black. And even if the official bearish projections turn out to be true, the shortfall could be made up easily by subjecting investment income to Social Security taxes, and by eliminating the cap that exempts wage income above a certain maximum ($68,400 in 1998). The reason for sparing such income from Social Security tax is that the program is supposed to be financed solely by labor, with no contribution from capital, capital already being so burdened. The "crisis" of Social Security is a political one, not an economic one.
There's pressure to privatize. When financiers who usually have difficulty seeing past the next quarter's earnings release start worrying about your long-term future, only those who believe in Santa Claus think that they have the public welfare at heart. These are not people who you normally see scouring the streets with alms for the indigent. To overcome public skepticism, they resort to scare tactics, incessantly talking about the impending collapse of the Social Security system. But the privatizers' predictions about Social Security's "bankruptcy" presume zero population growth and sluggish economic growth. They then compare the results with the rosiest estimates of stock-market growth, based on recent boom years, and assume this will continue indefinitely. To the extent there are concerns about Social Security's long-term viability, there are some simple fixes, like lifting the present $72,000 earnings cap on contributions, so that some of the fastest growing and most inflated incomes pay a bigger share. Funny how the doomsday reformers never mention that fact, even though that's the reform that voters back in opinion polls.
Earlier this month a panel of experts charged with advising the trustees of Social Security on economic and demographic projections presented its recommendations. The panel was headed by a former Reagan administration official who has made no secret of his desire to cut entitlements for the elderly. The newspaper accounts, including a Dec. 7 Post editorial, highlighted the panel's recommendation to raise projected life expectancy, which would make the program's finances appear much worse. Meanwhile, little attention was paid to a more important and curious recommendation: The panel lowered its estimate -- as compared with its forecast four years ago -- for growth of wages and productivity. This is startling, given that for the past four years the U.S. economy has seen exceptionally strong economic growth. Productivity and wage growth have shot up. One could ignore these years as a fluke, but nothing in the record warrants lowering economic projections. In the four years since the last panel met, real wages have increased at more than twice the rate that the panel projected. If real wages continue to grow at the pace of the past four years, the Social Security system will be solvent for 60 years without any changes. If the Social Security trustees just used the same wage projections advocated by the 1995 panel, adjusted for some measurement changes by statistical agencies, the system would be solvent for 40 years, even assuming greater longevity. Further, with higher wage growth, the modest changes needed to support the system into the indefinite future would be affordable. In short, using any remotely realistic projection for the growth of wages and the economy, the Social Security system will be solvent into the stratosphere of America's science-fiction future. The panel's report showed other anomalies too. For example, the productivity growth it forecast is slow compared with the rates of other industrialized nations. If we are to believe these projections, 21st-century America is going to be a fairly poor country compared with the nations of Western Europe. Nonetheless, without serious public dissent, the panel's recommendations probably will be accepted. Politicians and lobbyists then will use the new numbers to tell people that we have to raise the retirement age, cut Social Security benefits or privatize the system. From the Washington Post