Commentary

Wishful Thinking on Social Security

By Andrew G. Biggs
October 10, 2000
Until recently, all sides in the debate over Social Security reform agreed that this moment of economic prosperity is the right time to fix the nation’s ailing retirement system—that we should “fix the roof while the sun is shining,” as President Clinton put it. But now an increasingly vocal minority is denying that the roof even needs fixing and questioning whether the rain will ever come.

To these “crisis deniers,” Social Security’s problems are simply the product of pessimistic economic assumptions. If the economy grows faster in coming years than the 1.7 percent projected by the program’s trustees, Social Security becomes “a crisis that doesn’t exist,” according to Rep. Jerrold Nadler (D-N.Y.). Even Vice President Gore got on board, saying “If Social Security ain’t broke, why fix it?” Gore offers a plan that does just that: doesn’t fix it. But this is all wishful thinking. The Social Security storm is gathering strength, and the longer we put off preparation the worse the damage will eventually be.

Politicians aren’t the only ones doubting the Social Security crisis. Financial columnist Jane Bryant Quinn went from saying in 1998 that “we can’t drag our feet any longer on Social Security reform” to today calling herself “the only kid in the village who’s not crying wolf.” In an editorial, Business Week said the Social Security trustees’ “ridiculously low” economic projections make the reform debate a “phony conflict over a phony problem.”

But two expert panels found just the opposite. Accounting giant PricewaterhouseCoopers examined the Trustees’ projections at the request of Rep. Nadler and concluded that the “methods used in preparing the long-rage … projections of the Social Security trust funds were sound [and] the assumptions used in preparing the projections in the Trustees’ report were individually reasonable.”

A nonpartisan panel of government-appointed economists and demographers went further, finding the trustees, if anything, optimistic about Social Security’s future. The trustees greatly underestimate increases in life expectancy. If people live as long as expert demographers predict they will, the retiree population will swell and Social Security’s $20 trillion long-term deficit would increase by one quarter.

Even so, Dean Baker and Mark Weisbrot, authors of “Social Security: The Phony Crisis,” claim that “using any remotely realistic projection for the growth of wages and the economy, the Social Security system will be solvent into the stratosphere of America’s science-fiction future.” Well, let’s look at the numbers. For Social Security to stay technically solvent until 2075, wages would have to grow 2.9 percent annually above inflation. That is 3.7 times faster than over the past 30 years, and 41 percent faster than during the booming 1960s. And “technically” solvent means little, since the Social Security trust fund is not a true savings vehicle but a mere bookkeeping account full of IOUs—something even the Clinton administration, in a moment of candor, was forced to admit.

Then there’s the fact that the more workers earn and pay in taxes, the more they are owed in retirement benefits. So it’s almost impossible to use economic growth to get ahead of the game. Social Security solvency into the “science-fiction future” demands truly science-fiction levels of economic growth.

Back on Earth, how do we prepare for a future with fewer workers and more retirees? The key is saving, and the best way is through personal retirement accounts: Let workers invest a portion of their payroll taxes in accounts similar to IRAs and 401(k)s, where money will rapidly accumulate to help pay future benefits.

Social Security’s problems are not, as Mark Twain said of his reported death, “greatly exaggerated.” In fact, independent analyses show precisely the opposite to be true. If tomorrow’s retirees hope to enjoy a secure retirement, Social Security must stop simply redistributing wealth and start creating it.

As for the crisis deniers, too bad we can’t send them the bill for a new roof.

Andrew Biggs is a Social Security analyst at the Cato Institute.