Investor’s Business Daily: Some call it the USS Titanic of government programs. Social Security is facing major problems. As baby boomers retire, there’ll be more people collecting benefits and fewer workers to support the system. Without major cuts in benefits or big tax hikes, the system will run trillions of dollars of red ink over the next 75 years. But some say this is just hogwash, including Vice President Al Gore and former Labor Secretary Robert Reich. Social Security is just fine, they say, and any talk of crisis is a myth. IBD spoke to Andrew G. Biggs, an analyst at the Cato Institute, a libertarian think tank in Washington, D.C., about the debate over Social Security’s future.
IBD: How sound are Social Security’s finances?
Biggs: The latest report from the system’s board of trustees says it will start to run deficits in 2015, and over the next 75 years will run up $ 20 trillion in red ink.
IBD: Are those projections widely agreed upon?
Biggs: Until quite recently they were.
IBD: What has happened recently?
Biggs: Some people say those estimates are too pessimistic. They say that Social Security is fine, or at worst, it just needs some minor reform. Vice President Al Gore, for instance, has declared: “If it ain’t broke, don’t fix it.”
IBD: Yet just last year, President Clinton put forth a plan to deal with these shortfalls.
Biggs: That’s right. He said there’s a “demographic crisis” looming that will bankrupt the system.
IBD: More people will collect more benefits over a longer period of time, with fewer workers paying taxes to support them?
Biggs: That’s right.
IBD: Why do some deny that’s a problem?
Biggs: They say that the trustees’ report is based on economic assumptions that are too pessimistic and unrealistic. Former Labor Secretary Robert Reich says the projections are based on the assumption that the economy will grow just 1.8% a year over the next three decades. Crank up growth to just 2.2%, and the trust fund is almost solvent for the next 75 years.
IBD: We’ve been growing at much more than 2.2% over the last few years, so maybe 1.8% growth is pessimistic.
Biggs: Well, the last few years have seen a big increase in economic growth. The trustees’ report assumes that growth will tend to fall back to longer-term levels.
IBD: Why do forecasters differ over how fast the economy will grow?
Biggs: One of the biggest reasons is a different view of productivity growth (the growth of output per hour per worker). The trustees say productivity will grow 1.5% per year. That’s much lower than it has been growing over the last couple of years. But it’s just a bit higher than the 1.4% growth rate from 1979 to 1998.
IBD: So the trustees believe the big gains we’ve seen in productivity lately are just temporary?
IBD: Even if productivity falls, couldn’t we still jack up economic growth by adding more workers?
Biggs: Yes. One of the main reasons the system hasn’t gone bankrupt sooner is that women have entered the work force. But there are so many women in the work force now that we likely aren’t going to get any more big gains. We could boost the work force through immigration, but it would take huge numbers to get the economic growth rates we need.
IBD: The trustees assume growth over the next 75 years will be close to the long-term trend. How good are their forecasts?
Biggs: The General Accounting Office asked PricewaterhouseCoopers to look at how the trustees do their forecasts. That report found the forecasts were done with generally accepted actuarial methods and similar to the forecasts done in Canada and Great Britain. It also said the forecasts’ assumptions were sound. Another study was done by an independent government-appointed board. It found that, if anything, the trustees are too optimistic. In particular, it found that the trustees may be underestimating the growth of life expectancy.
IBD: If people live longer than the trustees assume, they’ll collect more benefits. Biggs: That’s right, and the system’s red ink will be even greater.
IBD: Some critics charge that the trustees are deliberately using pessimistic assumptions to make the system’s finances look shaky.
Biggs: The belief is that there’s a conspiracy to make Social Security look bad so that privatization will look more attractive. But you’ve got to remember that the trustees are the secretaries of labor, the Treasury, and Health and Human Services, the commissioner of Social Security and two other trustees appointed by the president. To believe the conspiracy theory, you’ve got to believe that Donna Shalala and Alexis Herman are conspiring to privatize one of the crown jewels of the New Deal.