What Social Security Crisis?
May 12, 2011
A lot of nonsense is being spewed forth about Social Security. The public is bombarded with apocalyptic warnings that the system will go bankrupt before it can pay out all the retirement benefits due the baby-boom generation. To avoid that, the argument goes, we have to do something now. Most frequently that something turns out to be an open or disguised cut in benefits to the elderly. Other, less painful solutions entail some form of privatization to enable retirees to realize the higher returns associated with stock market investments. The facts are that there is no crisis in Social Security now and there is none looming in the future. There is no need or justification for demanding sacrifice of the elderly of today or tomorrow. And whatever the merits--and there can be substantial demerits--of privatization, it is utterly unnecessary to ``save'' our retirement benefits. A Trivial Problem The issue of Social Security may only be understood by recognizing two separate problems: first, the use and financing of the Old Age and Survivors and Disability Insurance trust funds and, second, the real support of those not working--the dependent population, young and old--by those working. The problem with the trust funds, if there is one, is utterly trivial. Many act as if these ``funds'' contain piles of $100 bills that we replenish with our contributions. At the risk of frightening innocent readers more, I must point out that not only is there no ``money'' in the trust funds, but their assets are Treasury obligations, as good as money yet essentially just computer entries. These indicate what the Treasury has credited the funds to correspond to our payroll taxes and the interest ``payments'' that the Treasury must make under current law. Since our Social Security checks come from the Treasury in any event, there is no good reason we have to go through the accounting procedure of building up the trust funds' computer balances and then drawing them down. The trust funds could be abolished and the Treasury ordered to go on paying the benefits, borrowing to finance these expenditures if necessary, just as it does now to finance anything else. In response to the argument that retirees would be less secure without the funds, it may be observed that the integrity of our commitments to the elderly depends ultimately on our political will to meet them and our real economic ability to do so. Neither of these should be in doubt. As to the alleged future problems of the funds' solvency under current law: These stem from what is known as the ``intermediate'' projections of the funds' trustees (and their actuaries and economists). These indicate that by 2029 the funds' assets--which will have grown enormously in the intervening years, exceeding $1.3 trillion in 2015--will be exhausted and current receipts will be insufficient to finance expenditures. What most alarmists fail to mention is the observation, in the trustees' report, that an increase in taxes of a mere 2.19% of taxable payroll would, by these intermediate projections, keep the funds fully solvent through 2070. And I have an even easier solution that entails no increase in taxes on anybody. Simply credit the funds with, first, the income taxes now paid on the Social Security payroll ``contributions'' that are not deductible in computing taxable incomes and, second, higher interest returns on the fund balances. The nondeductible Social Security contributions, attacked by some as entailing a double taxation, include all employee payroll taxes and half the payroll taxes paid by the self-employed. Their total is now running about $200 billion a year. Making them deductible against income taxes would balloon the federal deficit--still of great, if unjustifiable, concern to many--and would be a boon to those in the 39.6% income tax bracket. It would offer only modest tax benefits to middle-income households, and no benefits at all to millions of Social Security contributors who do not earn enough to pay income taxes. But with income tax rates averaging about 17%, crediting the trust funds with the income taxes on these payroll taxes would give them this year an additional $35 billion, about half of the 2.19% of taxable payroll that the intermediate projections indicate would be adequate for long-term solvency. Crediting the funds with returns on their assets two percentage points more than current law provides, about 9.8% now instead of 7.8%, would easily make up the rest of the gap. Crediting the trust funds with the income taxes on the payroll contributions is entirely reasonable and would make no difference whatsoever to government financing, taxpayers or the economy. The Treasury, after all, would be collecting these taxes as before and spending as before. Instead of the taxes going into a general account, however, they would be credited to the trust funds. And those worried about fund solvency might breathe easier. Crediting the fund balances with higher returns is amply justified. It would bring them closer to the market equity return that privatization advocates promise. Payroll contributions to the funds have saved the Treasury from public borrowing that would have substituted for private investment. It is only appropriate that Social Security contributors' funds be credited with the higher returns to private investors that their contributions made possible. And again, this additional credit to the funds would make no difference to any real magnitude; it would not even add to the relevant figure for the federal debt, which is the gross federal debt held by the public, currently some $3.7 trillion, not the ``debt'' of one part of the government to another. Not often noticed are the fund trustees' ``low cost'' projections. These differ from the somber intermediate projections partly in assuming a long-run unemployment rate of 5%, instead of 6%, and a 21st-century annual GDP growth rate of about 2.2%, instead of 1.3%. They also assume higher fertility and mortality rates and greater immigration. With the low-cost projections, fund balances reach a temporary low in 2040 of four times annual expenditures, then grow indefinitely thereafter. If even some of the more ``optimistic'' assumptions underlying the low-cost projections are realized, the funds will remain solvent indefinitely. The only meaningful problem there could be with Social Security is that of the working population producing the goods and services to be acquired by those not working. In regard to this we are told that there are now almost five people of working age--20 to 64--for every potential dependent aged 65 and over, and by 2030 that ratio will fall to less than 3 to 1. The relevant numbers, though, relate to all potential dependents, those below as well as above working age. Currently, for every 1,000 of working age there are 709 young and old potential dependents. The intermediate projection puts the number in 2030 at 788. That means that each 1,000 people of working age would have to support 1,788 people--themselves and their dependents--instead of 1,709, only a 4.62% increase in their burden. But if productivity per worker grows at a modest 1% per year, well within historical experience, the growth in total output per worker will come to more than 40% by 2030. That would easily accommodate the increased number of people the working population will have to support. Indeed, it would be sufficient for a one-third increase in output and income per capita, ample to improve vastly the lot of all--the elderly, the young and those in their working primes. Greater Human Capital Of course, if our rate of growth is greater, those in the future will live still better. We can promote that greater growth by getting our policy makers out of the game of slowing the economy in dubious efforts to fight an imagined danger of inflation. Over the long run we can promote greater growth by bringing about more productive investment of all kinds. And most important in this regard, as economists have been increasingly recognizing, is investment in human capital--in jobs and in the skills and health of our people. But cutting the retirement benefits or other ``entitlements'' that a rich and great economy has been able to provide has no part in that picture. Our Social Security system ain't broke. There is no excuse for emasculating it in the guise of fixing it. Mr. Lowrey, professor emeritus at Northwestern University and a past president of the American Economic Association, is author of ``The Misunderstood Economy: What Counts and How to Count It'' (Harvard Business School Press, 1994).
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