Monday, November 15, 2004

Dispelling Social Security Myths

Oh boy, here we go again.

The alarm bells about the long term safety of Social Security have started anew. After basically keeping mum on the subject in the campaign, the Bush Administration is emboldened by their 51% victory to try once again to "fix" Social Security.

Nowhere in political discourse is there more deliberate misinformation than in the Social Security debate. Nowhere is it more obvious that politicians on both sides have a fundamental misunderstanding on the basic facts of the issue. It's more than a little scary. So over time, I'm going to lend my small effort to dispel some of the more important myths about Social Security. After we're done, it should be plain to see what to do about the system: Leave it alone!

Here are the topics I'll be addressing:

Myth #1: Social Security is in trouble and will go bankrupt when all those baby boomers retire. Therefore we must fix it before that happens. (Reality: Social Security won't run out of funds at all -- ever -- if we simply maintain the level of economic growth we are experiencing right now.)

Myth #2: The Social Security Trust Funds don't really exist except as an accounting fiction. (Reality: The Trust Funds are definitely real, with real assets far above the credit quality and safety of any bank or insurance company in the world.)

Myth #3: Politicians often "raid" the Trust Funds to pay for other Federal budget needs. (Reality: The Trust Funds pay for no other programs except what they are charged to do. Not a penny has been spent from their operating budgets for any other program ...ever.)

Myth #4: Social Security is a pension or an insurance plan. (Reality: Social Security is a social program, the only social program that is so well funded and secure that it will not need a dime of additional Federal taxes for decades.)

Myth #5: Medicare is broken and needs to be fixed. (Reality: It is the nation's health care system that needs to be fixed, not Medicare.)

Myth #6: Social Security is a drag on the economy. (Reality: Social Security has been a mighty engine for U.S. economic growth in several different ways.)

And now to begin with #1:

Myth #1: Social Security is in trouble and will go bankrupt when all those baby boomers retire. Therefore we must fix it before that happens.

Here of course, the term "fix" is to be used in the same context as "fixing" your pet. For Social Security does not need to be saved. It is not broken. Why do I say that Social Security isn't in trouble when every talking head and pundit talks about Social Security's crisis 24/7?

You've all heard the argument. The massive number of baby boomers will all retire in a short while, leaving fewer and fewer workers to support more and more retirees in the SS system until it all goes bankrupt in a few decades. In the latest Social Security Trustees Report, the Trustees have crunched their numbers and forecasted when that day will come:

"Despite these cash-flow deficits, beginning in 2018, redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2042, when the trust funds will become exhausted."

How do they arrive at this scenario? The Trustees use computer models simulating the U.S. economy, fertility and immigration rates, inflation, interest rates and so forth. Then they run three simulations based on pessimistic, optimistic and intermediate assumptions of average levels for all of these factors. The intermediate model is the one picked for the press releases, being the Social Security Trustees best estimate of things to come. Sounds reasonable so far.

However, the devil is in the details. Any computer simulation is only as good as the assumptions you enter. In this case however, the assumptions are too pessimistic. Here you can find the assumptions used in 2004's projections.

Now I'm no expert on fertility rates and such, but I can say for sure that the range of total productivity rates assumed by the modeling are too conservative. The best case scenario calls for 1.9% productivity growth. The worst case calls for 1.3% and the intermediate projection is 1.6% per year.

The problem is that average annual productivity growth over the last 50 years is 2.16%. That's right, not even the most optimistic scenario examined by Social Security so much as assumes the same productivity growth rate we've enjoyed for 50 years. (Caveat: I'm using output per hour for non-farm businesses, the standard measure of productivity provided by the Bureau of Labor Statistics. Here's where you can construct the table. The Social Security Trustees explain that they do not use this commonly accepted measure in their projections. Rather they use an unpublished compilation of man/hour statistics provided to them by the BLS. Therefore their work is not easily duplicated.)

This assumption has a huge impact on the health of the trust funds. Less productivity growth means lower economic growth, which means fewer jobs and/or lower salaries paying into the system over the years, meaning the Trust Funds fall short sooner rather than later. And, as noted above, the Trust Funds run out of excess cash in 2042 under their 1.6% growth scenario.

What this also means is that for each year productivity grows more than 1.6%, the Trust Funds will look healthier than they did the year before as additional growth not predicted by the models would be booked in to the new projections. And sure enough, that's exactly what's happened.

Looking at the history of these projections, we see continual readjustments forward as we continue to grow more than the Trustees are calculating.

In 2003, after a lackluster 2002, the Trustees predicted 2042 as well to be the day the Trust Funds run dry: "Despite these cash-flow deficits, trust fund interest earnings and assets will allow continuation of full benefit payments until 2042, when the trust funds will be exhausted."
In 2002's Report, the year was 2041: "...asset redemptions begin to reduce the size of the combined trust funds in 2027, and the assets of the combined OASI and DI Trust Funds are exhausted in 2041."

In 2001's Report, the deadline was set at 2038: "...asset redemptions begin to reduce the size of the combined trust funds in 2025, and the assets of the combined OASI and DI Trust Funds are exhausted in 2038."

In 2000's Report, the deadline was 2037: "The combined OASI and DI Trust Funds would become exhausted in 2037 without corrective legislation."

And in 1999's Report the day of reckoning comes in 2034: "The combined OASI and DI Trust Funds would become exhausted in 2034 without corrective legislation."

In 1998 the Trust Funds were to go broke in 2032: "The combined OASI and DI Trust Funds would become exhausted in 2032 without corrective legislation."

And in 1997 the Trust Funds were to go dry in 2029: "The combined OASI and DI Trust Funds would become exhausted in 2029 without corrective legislation."

So, the Social Security doomsayers were screaming in 1997: "It's going to go broke in 32 years unless we do something!" Today, the doomsayers are screaming "It's going to go broke in 38 years unless we do something!"

Well, we've done nothing in the intervening time. No drastic reform. No overhaul. No additional cash infusion. Simply by growing GDP and productivity at the pace we've been doing for decades grows us out of the problem. Seven years of average growth bought us an additional 13 years before the Trust Funds would go broke.

This then is the fix for Social Security: maintaining a reasonable pro-growth economy which grows productivity. The Trustees Report "optimistic" scenario shows that if we maintain productivity growth of 1.9%, the Trust Funds never run out of money for the entire 75 year period studied. (Caveat #2: Yes there are other factors besides Productivity in the optimistic model, some controllable by legislation. For example, immigration assumptions are a net inflow of 900,000 per year. Yet the INS estimates that 13.5 million immigrants came to this country in the 90's, legal and illegal. Bring them all in the Social Security system and we've expanded the total per year beyond Social Security's most optimistic estimates without changing the actual number of immigrants at all.)

Now some may argue that we should plan for the most pessimistic scenarios and assume the worst will happen - in this case that productivity growth will somehow slow by 25% or more. That's a fine argument, except that if productivity was going to slow down to that drastic a degree, the LAST thing you would want to do is invest in the stock market, which depends on ever increasing productivity. So the notion of privatizing Social Security to cash in on stock market growth makes no sense however you look at it. If we have decent enough growth to make stock market investments look attractive, the Social Security system will be secure and in no need of change. If economic conditions were to be bad enough to endanger Social Security, then stock market investments should fare even worse.

While politicians themselves may be clueless, any professional policy wonk in Washington knows these facts. The political manipulation of the Trust Funds' conservative estimates are well known inside the beltway. The people scaring you into thinking Social Security won't be there for you when you retire, UNLESS they get their way to alter the system in a FUBAR kind of way, are people who know they are lying to you. They are lying to you because they know they can't get rid of the Social Security program in honest debate due to the program's popularity. So they lie to you, saying it's a flawed system bound to fail unless they "rescue" it. Don't let them do it. Don't let them hijack Social Security and destroy the most successful social program in the history of the Republic.

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