What Social Security 'crisis'?
PRESIDENT Bush's entire plan for Social Security privatization rests on the premise that the system is in severe crisis. But a careful look at the numbers suggests that the financial crisis is largely a myth.
For years, the Social Security Trustees have used very conservative assumptions about future rates of economic growth, productivity growth, and growth of the labor force. These assumptions, in turn, affect the projected payroll tax collections that will fund Social Security payouts.
Five years ago, in the late 1990s, they estimated the long-term economic growth rate at just 1.7 percent. The reality has been well over 3 percent.
Most economists now believe the economy can do a lot better than 1.7 percent annual growth. In its 1997 report, the trustees projected that the system would no longer be able to meet all its obligations by 2029. Just six years later in 2003, based on their acknowledgement of stronger economic growth, the trustees moved the crisis date back to 2042. So if the system can gain 13 years of life in six years, there's not much of a crisis.
But that's just the beginning. In June, the bipartisan Congressional Budget office used more realistic assumptions about economic growth. CBO puts the first shortfall year at 2052, not 2042, and it projects Social Security's 75-year shortfall at only about four-10ths of one percent of gross domestic product. Currently, that's about $40 billion a year, or one-fifth of the revenues that the Bush administration gave up in tax cuts for the wealthy.
Simply restoring pre-Bush tax rates on the richest one percent of Americans could bring the Social Security system into balance indefinitely, without reducing promised payouts by one penny.
The administration uses far rosier assumptions than the Social Security trustees in claiming high returns for its proposed private accounts. The administration assumes that individual portfolios will appreciate at 6 or 7 percent a year.
But if the economy is only growing at 1.7 percent a year, there is no way the stock market will achieve those results. Conversely, if we apply the Bush administration's rosy assumptions to the present Social Security system, there is no crisis at all.
The administration has also been throwing around a particularly hysterical statistic -- that Social Security faces $10 trillion to $11 trillion in "unfunded liabilities."
That figure is nothing but the total long-term payout that the government expects to pay retirees. But we don't calculate the rest of the budget that way. The Pentagon, for instance, spends about $400 billion a year. The Pentagon's 75-year "unfunded liability," at that rate, is $30 trillion.
The reason that we don't calculate budget that way, of course, is that we know government will keep collecting tax revenues and use them to pay its obligations.
Why haven't you read more about this?
First, the Bush administration casts the Social Security shortfall in the most dire terms possible, to build support for its privatization scheme. In reality, that scheme will make the modest shortfall far worse, by requiring the government to go another $2 trillion into debt. But whether to privatize, and how to make up a small shortfall, are two entirely distinct questions.
Second, some Wall Street leaders and academic economists, who share a dislike of social insurance, also paint a bleak picture of the system bankrupting itself and the country.
All this feeds into media assumptions. Indeed, the typical media account of the privatization debate and simply takes the premise of a system in deep crisis as if it were fact.
Finally, many well-meaning Democrats who the defend the Social Security system want to be absolutely that its funding is rock solid. So Democrats, as well as Republicans, talk of its shortfall and offer different ways to make up the gap. Unfortunately, that tends to play into Republican hands.
Republicans are counting on younger voters to support privatization. Polls show that the young have been so swayed by the talk of endless crisis that many young workers doubt whether they'll ever get anything back from the current system. To them, getting some money in the form of private accounts is at least half a loaf.
In the coming debate, defenders of Social Security need to educate the public on just how solid the existing system is and just how exaggerated is its supposed crisis. If they fail to do that, and get bogged down in a debate about how to "fix" a system that isn't really broken, the privatizers will win, and Social Security will be needlessly pillaged.
Robert Kuttner is co-editor of The American Prospect. His column appears regularly in the Globe.