The conservative call for Social Security privatization has been drowned out by that crashing noise from Wall Street, but fear-mongering over long-term solvency continues. Should we believe the hype?
Published online at the American Prospect, February 24, 2009
There's a time-tested way to curry favor with the permanent Washington establishment. That is, having David Broder praise you for being "responsible" and being considered a Very Serious Person by the Sunday shows. All you need to do is proclaim ominously that entitlements are a ticking time bomb, a looming storm on the horizon, a hungry beast ready to devour our nation's finances, or whatever metaphor you find most frightening. The more unpleasant the solution you propose -- tax increases are good, but benefit cuts are even better -- the more the Beltway Brahmins will approve.
So yesterday's White House entitlement's summit, which appeared, when announced, to repeat the conventional doomsday wisdom, wasn't too much of a surprise. And indeed, at various times over the past couple of years, President Obama has seemed to suggest that he will be addressing this thorny long-term problem, leading to no end of heartburn among progressives who view Social Security as one of the cornerstones of the American social contract.
But as he has made clear, Obama is not unsheathing his blade to begin hacking away at our government pensions. Nonetheless, because conservatives will continue to conflate issues that should be separate and to further the assault on Social Security launched at the program's enactment in 1935, it's an opportune time to get a few things straight. The most important is this: There is no Social Security crisis.
If there is an "entitlement crisis," it's a crisis in Medicare. But as Ezra Klein explains so well, there really isn't a Medicare crisis, either. Medicare's funding problem is a problem of the ballooning cost of health care in general; fix that, and you've fixed the Medicare problem.
The myth of the "Social Security crisis" is so pervasive and so pernicious that it's necessary for those of us who actually believe in the program to respond to the crisis-mongers whenever we can. And they've got muscle -- witness the recent round of full-page newspaper ads featuring a looming iceberg and screaming headlines about the $56 TRILLION!!! we're supposedly in the red (these are funded by hedge-fund billionaire Pete Peterson, the Daddy Warbucks of the entitlement fear factory). So let's examine what the crisis-mongers say, and what the truth is.
For years, we've been told that Social Security is "going broke." It is also often said that at some future point, the program will "run out of money." Just last week, The Washington Post said matter-of-factly that "Social Security is projected to run out of money by 2041." This implies that at some future date, elderly recipients of Social Security will receive checks in the amount of $0, all the money having disappeared.
This is simply bogus. The truth is that the system is quite healthy and can meet all its future obligations with only minor adjustments or perhaps no adjustments at all, depending on what happens to the economy over the coming decades.
Before we get to that, let's remember how Social Security works. The payroll tax on today's workers is used to pay out benefits to today's retirees. When you retire, your benefits will be paid by people working then. (Of course, to many conservatives, a system built on this kind of mutual obligation is redder than Joe Stalin's underwear.) For some time now, the taxes being paid in have exceeded the benefits being paid out. What's left over goes into that famous "Social Security trust fund," also known as the Social Security surplus. The trust fund is still growing; in 2007, $179.3 billion was added to the fund, bringing its total to over $2 trillion.
If we weren't concerned about the future of the program, we could just take every bit of the collected Social Security taxes and pay them out in (extremely generous) benefits. That wouldn't be very smart, though, because that would leave us with nothing left over for the day when we start collecting less in taxes than we need to pay in benefits.
Enter the baby boomers, that endlessly self-absorbed, blood-sucking leech of a generation (I kid). Boomers have just begun to retire; in a few years, their numbers will cause the system to pay out more than it pays in. According to the Social Security trustees, who are responsible for overseeing the system, this will happen in 2017.
The prophets of doom believe that this date -- 2017, remember it, because they'll always bring it up -- is when the sky will tear loose from its moorings and begin hurtling toward our heads. But here's the thing: The period of benefits exceeding tax payments that is supposed to begin that year is exactly the reason why the Social Security surplus exists in the first place. We keep adding to the surplus every year precisely so that it will be there to draw on when we need it. And the baby boomers' retirement is when we'll need it.
But ah, you say, what happens when the trust fund is exhausted? Isn't that when all hell breaks loose, as the system truly "goes broke"?
No. The system will never "go broke." If you listen to the most commonly used estimate (we'll get to its inherent problems in a moment), the trust fund will run out in 2041, 32 years from now. "Even if a trust fund's assets are exhausted, however," the trustees write, "tax income will continue to flow into the fund. Present tax rates are projected to be sufficient to pay 78 percent of scheduled benefits after trust fund exhaustion in 2041 and 75 percent of scheduled benefits in 2082."
Like anyone else, I'd much prefer getting 100 percent of my benefits, rather than 75 percent of my benefits. But a "broke" system would give you zero percent, so if 75 percent is what the system can pay, I'll take it. A system that pays 75 percent of benefits isn't great, but it's not a disaster either.
Now we get to the reason why the system may actually be able to pay all its benefits. If you're going to make a prediction about tax revenues coming in over the next 75 years, as the Social Security Trustees must, you're going to have to make some assumptions about the economy. The stronger the economy is, the more people will be employed and the more they'll be earning, so the more tax revenue we'll have. The weaker the economy is, the less revenue we'll have. So what do the trustees assume about the strength of the economy? It turns out that their assumptions are remarkably pessimistic.
The trustees actually make three sets of predictions: a "high cost" prediction (the pessimistic one), a "low cost" prediction, and an "intermediate" prediction. The intermediate prediction is the one that gives us the 2041 date for the exhaustion of the trust fund. But it isn't just the "high cost" prediction that is pessimistic -- all three are.
As bad as things are right now, it's important to remember that the economy is going to recover from our current crisis. And after it does, we'll experience up periods and down periods, just as we have before. Although nobody can say what the economy is going to be like 30 or 40 years from now, the best tool we have to predict long-term economic growth is past performance.
But for some reason, the trustees are of the opinion that in the upcoming decades, the economy is going to grow at a far slower rate than it has. Although gross domestic product growth averaged 3.1 percent from 1966 to 2006, all three of the trustees' projections assume GDP growth lower than that. Even the optimistic "low cost" projection assumes that GDP will average 3.1 percent only until 2017, after which it predicts that growth will slow, averaging 2.9 percent for the rest of the 75-year window they're projecting. The "intermediate" projection assumes that economic growth will average 2.1 percent after 2017.
That's a prediction of pretty anemic growth, but that's the "intermediate" projection which everyone uses when talking about the future of Social Security. And perhaps it will prove true. But it seems that it wouldn't be too radical to assume that the "low cost" projection -- the one in which the economy over the next 75 years looks a lot like it has in recent decades -- is the one that will be closer to reality.
And what happens if you accept that low-cost projection? When does the Social Security trust fund run out in that case? Never. It never runs out (here's the graph, if you're interested).
The Social Security trustees aren't the only ones who have tried to crunch these numbers; the Congressional Budget Office estimates that the trust fund will be exhausted in 2049, not 2041, and that at that point tax revenues will cover 84 percent of benefits, not 78 percent. But looking at all the various projections, one has to conclude the following:
At some point, somewhere between 30 and 70 years in the future, the Social Security trust fund may be exhausted. If it is exhausted and taxes are not raised, beneficiaries will see a reduction in benefits that will be meaningful, though not catastrophic.
If that's how you understand the issue, it suggests that a fix to ensure that benefits end up where they're supposed to needn't be anything radical. You could raise the cap on Social Security taxes, for instance (the tax is only paid on the first $106,800 of income, meaning most people pay it on 100 percent of their salaries, while Alex Rodriguez pays it on less than 4 percent of his salary). If, on the other hand, you think the system is in crisis and is going broke, you're going to favor much more painful solutions.
Thankfully, President Obama seems to understand the difference between a manageable problem and a looming calamity. "Social Security, we can solve," he recently told The Washington Post with a dismissive wave of his hand. But we know that the conservatives will continue to harp on the myth of the Social Security crisis. One positive result of the economic meltdown is that they've been deprived of the main weapon they had in their arsenal on this issue: an alternative proposal. Until last year they had an analysis of the problem (the program is going broke) and a solution (privatize it). They could claim, however disingenuously, that they were offering a painless alternative: Put Social Security funds in the stock market, and everyone will get rich.
No one's going to say that now, of course, and probably not for a long time to come. Former President Bush's 2005 attempt to partially privatize Social Security was a spectacular flameout, and that was when the stock market was riding high. So all the Social Security Chicken Littles have to offer now is tax increases (unpopular) and benefit cuts (really unpopular).
The real problem is not that their solution to the crisis is unpalatable. It's that there is no crisis. Don't let them tell you otherwise.
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