University of Chicago Press • 1999 • 152 pages • $22.00
Supporters of the current pay-as-you-go Social Security system have long been on the defensive. Social Security will begin running a payroll tax deficit within 15 years. Shortfalls over the years will cut benefits by 30 percent, pushing millions of low-income retirees into poverty. Americans from all political, ethnic, and gender groups favor reform that lets workers invest their payroll taxes in personal accounts holding stocks and corporate bonds.
But to a few old-guard supporters of big government, private investment is heresy. Yet the only alternatives to personal accounts—payroll-tax hikes, benefit cuts, and increasing the retirement age—are flatly rejected by the public. The solution? Simply deny the problem exists at all. Hence, Social Security: The Phony Crisis, by Dean Baker and Mark Weisbrot.
Baker and Weisbrot, co-directors of the Center on Economic and Policy Research, concoct a veritable smoke screen of arguments, all promoting the idea that Social Security is doing just fine. First, they say, there’s no hurry for reform. Without changing a thing, Social Security can pay full benefits until 2037 by drawing on its trust fund. Sadly, not true. As President Clinton’s own budget acknowledges, the Treasury bonds in the trust fund “do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that . . . will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” Where is that money—an average of $120 billion annually between 2015 and 2037—going to come from? On this, Baker and Weisbrot are silent.
Second, the authors claim that projections of Social Security’s insolvency made by its board of trustees are overly pessimistic. If the economy grows faster, as Baker and Weisbrot believe it surely will, wages will increase, payroll tax revenues will rise, and the system will be saved. “Using any remotely realistic projection for the growth of wages and the economy,” Baker and Weisbrot assert, “the Social Security system will be solvent into the stratosphere of America’s science-fiction future.” What Baker and Weisbrot don’t mention is that many analysts, including a government-appointed panel of economists, actuaries, and demographers, conclude the trustees’ projections are actually optimistic. Under more reasonable assumptions, where life expectancies increase and the retiree population grows, Social Security’s long-term deficit of over $20 trillion would increase by almost one-quarter.
Moreover, for Social Security to remain technically solvent over the next 75 years, wages must grow 2.9 percent annually, 41 percent faster than during the 1960s. Even then, in 2076, when today’s children are still alive and well, Social Security would fall off a financial cliff, with an eighth of the federal budget required just to cover the program’s deficit. To keep Social Security solvent in perpetuity—that is, into the “science-fiction future”—requires permanent real wage growth of approximately 6 percent annually. And that assumes the trust fund is a real economic asset, which clearly is not the case. These sorts of numbers are implausible by almost anyone’s standards.
Finally, Baker and Weisbrot argue that even if the Social Security crisis develops, market investment of payroll taxes is no solution. For if economic growth slows, then stock market returns must fall as well. Specifically, Baker and Weisbrot contend that stock returns above 3.5 percent are inconsistent with the trustees’ projections for economic growth. But even if they are correct, a 3.5 percent annual return would dwarf the 1.4 percent projected return from Social Security over the next 75 years. Moreover, equity returns have been correlated not with economic growth per se, but with economic growth per capita. Since the trustees’ projections of slower economic growth are founded almost entirely on slower growth of the labor force, per capita economic growth is unlikely to suffer.
In the end, even without a “crisis,” Social Security is still a lousy deal. The bipartisan 1994-1996 Advisory Council on Social Security estimated that even if Social Security could pay full promised benefits forever without raising taxes by a penny, a typical single worker born in 1973 would receive an annual return of just 1.7 percent. Personal accounts holding only ultra-safe inflation-adjusted Treasury bonds, currently paying 3.9 percent annually, would more than double workers’ retirement incomes.
But the real issue is not about solvency or even rates of return. It is about people’s freedom to control their own savings and plan their own retirements, to have legal right to their own assets and to pass them on to their heirs. Even if there were no Social Security crisis, a system of personal retirement accounts would confer these important benefits.
Before the Berlin Wall fell in 1989, the communists insisted that life on their side of the divide was swell. This led to the obvious question: if everything was so great, what did they need the wall for? The same holds for Social Security. If Social Security is as healthy as Baker and Weisbrot claim, they shouldn’t be afraid to give workers the freedom to choose where to invest their retirement savings.
Andrew Biggs is Social Security analyst at the Cato Institute, Washington, D.C.