Econ-Atrocity: Social Security: A Mythical Crisis

(Part two of two. See part one.)
Professor Gerald Friedman, University of Massachusetts at Amherst

There is no Social Security crisis. President Bush warns that we face a “˜crisis’ in Social Security to justify transforming the system. Hoping to rally the young for an inter-generational civil war, President Bush admonishes young Americans that they have nothing to lose from Social Security reform, or even repeal, because they will never receive benefits from a Social Security system that is bankrupt under the weight of eleven trillion dollars in unfunded liabilities.

Were there a serious crisis, we would be irresponsibly careless to reject necessary action. But, first we should carefully review whether there is a crisis.

“Thirteen years from now, in 2018, Social Security will be paying out more than it takes in,” declared President Bush in his State of the Union address. In 2018, the Social Security Administration (SSA) predicts that Social Security will pay out about $16 billion more in benefits than it receives in payroll taxes. But this is irrelevant. By that year, the Social Security system will have accumulated a Trust Fund amounting to $3.6 trillion that will generate $206 billion annually in interest income, and the Trust Fund will continue to grow after 2018 because interest income and payroll taxes will together exceed benefits paid out.

Social Security will run out of money by 2042, or is it 2052? Using rather pessimistic assumptions, the SSA estimates that benefits paid will exceed interest income plus payroll taxes after 2020, and some benefits will then be paid from the accumulated Trust Fund. The SSA predicts that benefits will continue to be paid in this way until 2042, when the accumulated fund will be exhausted and ongoing payroll taxes will cover about 73% of benefits. This date is in question; the Congressional Budget Office (CBO), appointed by Congress’s Republican leadership, predicts that the fund will last another ten years, until 2052.

If there is any substance to the President’s warnings of crisis, it is in 2042 (or 2052), when Social Security will no longer be able to pay all its promised benefits from established revenue sources. But this dispute over whether the Social Security Trust Fund will last another 37 or 47 years, a dispute between two conservative bodies appointed by our nation’s Republican leaders, is a sign of just how tenuous are these arguments that Social Security faces a crisis. The SSA makes its more pessimistic estimates by assuming that economic growth will slow dramatically over the next 40 years and wages will rise by only 1.1% a year. The CBO adds 10 years to the system’s financial stability by assuming that wages will rise by 1.2% a year. But this is still well below the 1.7% rate of increase in real wages for most of American history. If wages rose at this historical rate, then the trust fund would never be exhausted.

Even if the Trust Fund is exhausted in 2042, or 2052, there will be no crisis. The crisis-mongers base their arguments on a fundamental misconception about Social Security. A private pension must accumulate enough reserves during people’s working lives to pay benefits when they retire. But Social Security is not a private pension, it is social insurance guaranteed by the faith and credit of the United States government including its ability to tax. The real test of Social Security’s sustainability is the ability of the United States to raise revenues sufficient to pay benefits.

The real test of our ability to sustain Social Security is the strength of our economy. Rather than answering this straight-forward sustainability question, crisis-mongers prefer to throw around large and scary numbers pulled out of context. Consider the frequently repeated warning that the elderly population will double by 2060, to 80 million. Or, there’s the warning that there will be just two workers per retiree in 2030, as opposed to the three workers per retiree today. True, but the population of all age groups is growing, and the decrease in the ratio of workers to retirees will be slower than what we have already experienced since 1950. Moreover, the increase in the retiree population will occur at the same time that the population of other dependents ““ children under 18 ““ will be shrinking; this means that the overall dependency ratio will barely increase.

The real failure of the crisis-mongers is their peculiar loss of faith in the American economy. In even the most pessimistic estimates of the SSA and the CBO, the increase in the size of the elderly population will be considerably less than the increase in labor productivity. Over the next 55 years, productivity will more than double, allowing a relatively smaller labor force to support a growing population of retirees ““ in the same way that a shrinking farm labor force allows us to be fed by only 1% of the population.

The ultimate test for the sustainability of Social Security is the same as the test we always face: Can our economy grow enough to support our population? It is ironic that our conservative Republican leaders show so little faith in American capitalism. It would be worse than ironic if we let their loss of faith lead us to adopt policies that undermine one of our most successful social programs.

Next: Social Security privatization: a bogus cure for an illusory problem

Sources:

Dean Baker and Mark Weisbrot, Social Security: The Phony Crisis (Chicago, 1999).

Peter A. Diamond and Peter R. Orszag, Saving Social Security: A Balanced Approach (Washington, D. C., 2004).

Robert Kuttner, “What Social Security Crisis?” The American Prospect: Online Edition (Dec. 23, 2004).

Mark Weisbrot, 2018, Center for Economic and Policy Research, February 3, 2005

Economic Policy Institute, Social Security Issues Guide

The Social Security Network

(c) 2005 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.