October 5, 2000

Study: Faster economic growth won't save Social Security
Higher wages would boost program's revenues, but also its costs

WASHINGTON-It's a lonely crusade, but one being waged with great energy: the effort to claim there's nothing wrong with Social Security that can't be fixed with a little economic growth. If only that were true. In reality, economic growth might actually add to Social Security's financial woes, since higher wages increase the benefits the program must pay out, according to a new Cato Institute study.

Those who deny Social Security is in crisis are adamant that the program's trustees have grossly underestimated future economic growth and, as a result, the ability of Social Security to pay promised benefits. Some have even accused the trustees of harboring a secret wish to undermine support for the existing Social Security system. But as Cato Social Security Analyst Andrew Biggs explains in "Social Security: Is It 'A Crisis That Doesn't Exist'?" most experts think the trustees' projections are reasonable. Indeed, one nonpartisan, government-appointed panel (the 1999 Technical Panel on Assumptions and Methods) concluded that the trustees actually underestimated Social Security's deficit by up to one-quarter. To accept the critics' argument that faster growth will ensure Social Security's solvency for 75 years, Biggs says, you have to believe that real wages will grow at 2.9 percent per year-3.7 times faster than during the past 30 years.

Such spectacular (if unrealistic) growth would indeed boost the payroll taxes flowing into Social Security, Biggs says, but it would also increase the benefits flowing out. Faster growth "would be unqualified good news for Social Security, except that workers who pay more taxes into the system are entitled to more benefits from it," he explains. "Any increase in payroll tax revenues must be counted against corresponding increases in benefit liabilities." Over the long term, he says, Social Security's deficits might actually increase, as the Social Security Administration itself has noted.

The "crisis deniers," as Biggs calls them, say faster economic growth undermines the case for letting workers invest a portion of their Social Security taxes in private retirement accounts. Amazingly, they say the same thing about slower economic growth. If the trustees are right and the economy cools, they argue, stocks can't deliver higher returns than the current system. But Biggs shows that even if stock-market returns dropped to half their 7.2 percent historical average, private accounts would still outperform Social Security.

"Social Security: Is It 'A Crisis That Doesn't Exist'?"