Econ-Atrocity Bulletins

(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.

(Part one of two)
By Professor Gerald Friedman, University of Massachusetts at Amherst

President Bush is fundamentally wrong about Social Security. His proposal shows he thinks Social Security is a pension plan – a form of individual savings towards retirement. But Social Security is not a pension plan. It is a social insurance program: it provides benefits to individuals according to their situation, rather than strictly according to their contributions.

Social Security is insurance against some of the misfortunes that may afflict us: old age, disability, and death. The Social Security Act of 1935, which created Social Security, also created other social insurance programs – like unemployment insurance and Aid to Families with Dependent Children. Since then, programs have been established to encourage workplace pensions and private savings, like 401K plans and Individual Retirement Accounts. But Social Security has remained apart because it is not a savings or pension plan; it is a program where we all protect one another against the maladies and afflictions of life.

Seen as an insurance program, Social Security should be evaluated according to different criteria than one would use to evaluate a pension plan. Some economists and administration officials have criticized Social Security because of the low rate of return some retirees receive for their lifetime contributions. By the same logic, they might criticize my homeowner’s insurance plan because after 16 years, I have paid over $8,000 into it without receiving any benefits. Have I wasted my money on a bad investment? No – because it’s not an investment, it’s an insurance plan.

The same holds for Social Security. Unlike pensions or savings plans where individuals look to maximize their expected returns, we look for something different from insurance: adequacy and protection. We ask: will the insurance we have provide enough coverage? Will it be there when we need it? And does it come at an excessive premium?
Judged by these criteria, Social Security has been a great success. Consider:

* Social Security protects the elderly from the risk of outliving their means. Unlike savings or many pensions, the elderly cannot outlive their Social Security. Social Security accounts for 40% of the income of the elderly, and the proportion rises with age. Over 90% of elderly Americans receive Social Security benefits; by contrast, only 42% receive pensions and 67% receive investment income.

* Social Security lifts millions of older Americans out of poverty. Unlike pension benefits that depend on past contributions and earnings, Social Security benefits are progressive to favor the poor. For the lowest wage workers, benefits replace 70% of wage income, and for nearly a third of these, Social Security accounts for over 90% of income after retirement. For the highest wage workers, benefits replace just 23% of wage income. Without Social Security, 48% of people over age 65 would be in poverty; Social Security reduces that figure to barely 8%.

* A majority of Social Security recipients are women. Because women live longer than men, have generally earned less than men, and are less likely to have a pension, they are more vulnerable to exhausting their savings – so they depend more on Social Security than do men. Women also benefit from Social Security’s survivor benefits and provisions giving home-makers benefits equal to half the benefits provided to spouses who worked outside the home.

* Social Security also provides disability benefits to over 5 million people, including children and spouses of disabled people. In addition, Social Security provides benefits to 11 million children, spouses, and widows of retired workers. Fewer than two-thirds of recipients are retired workers.

* All of this coverage is provided at very low cost. Because Social Security is a universal system, it operates with extremely low administrative costs. Only 0.7% of the program’s income goes to administrative costs – half the level of the best mutual funds and a small fraction the rate of private insurance. This leaves more money for benefits.

There are problems with Social Security. Too many workers, especially low wage workers in agriculture and domestic service, are not covered. The disability benefit program has sometimes been too slow in providing benefits, and too restrictive in the categories of disabilities covered. Medical benefits, administered in the separate Medicare program, need to be adequately funded and extended to long-term health care. All of these problems require that this successful program be expanded. There is no justification for abandoning what works.

President Bush objects that he and his wealthy supporters get a bad deal from Social Security. They do: for the affluent, a program that pays more to low wage workers is a bad investment – at least if all you consider is the personal return. President Bush and his friends would destroy Social Security because they do not need it. But the rest of us do.

Next: Is there a retirement crisis?

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).

Economic Policy Institute, “Issue Guide: Social Security”

Social Security Administration, Income of the Aged Chartbook 2000 (Washington, D.C., 2002).

(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.