Fix Social Security, yes -- but do it right
By TERESA GHILARDUCCI
Social Security is becoming more important to the average retiree. The proportion of income that retired workers get from private pensions is eroding, so the significance of Social Security benefits looms larger. Yet the Social Security system is said to be in a crisis. Many young people feel that Social Security will not be there for them when they are ready to retire.
Surprisingly though, we currently are generating a surplus in the Social Security Trust Fund. According to the recently released 1998 report of the trustees of the fund, Social Security taxes plus interest on fund assets exceeded retiree benefits by nearly $90 billion in 1997. Moreover, the trustees expect surpluses to continue through 2021.
Why, then, the alarm? Although the short-term finances of the fund are solid, the trustees predict that baby boomer retirement, beginning in about 2010, will eventually exhaust trust assets by 2032. The trustees are required to alert the public if the finances of the fund are not in close actuarial balance over a long-term time frame extending 75 years into the future.
Such long-term predictions, however, are notoriously difficult to make. They depend not only on relatively stable demographic projections, such as baby boomer retirement, but also on much less stable and unpredictable economic projections. The future state of the economy is very important because a strongly growing economy generating wage gains will produce more Social Security tax revenue than will a slow-growth economy.
The trustees, though, predict that the economy will grow slowly in the future. Their assumption for real GDP -- gross domestic product -- growth is slightly less than 2 percent per year through 2010, and approximately 1.3 percent per year thereafter. Their long-term unemployment assumption is 6 percent, and real wage growth is assumed to be .9 percent per year. Using these assumptions, the trustees find that the trust fund will be in deficit by 2072.
However, the trustees also consider a slightly more optimistic forecast that includes the following: real GDP growth of 2.4 percent per year through 2007 and 2.2 percent in the long-term, a 5 percent unemployment rate, and 1.4 percent real wage growth. Using these assumptions, the trust fund stays in surplus through 2072, and the Social Security crisis disappears!
Which forecast is right? Its probably impossible to say. About events stretching 75 years into the future, economist John Maynard Keynes wisely observed that we simply do not know. Currently we are doing much better than even the optimistic forecast: 4.8 percent real GDP growth in the first quarter of 1998, an unemployment rate of 4.3 percent in April and May, wage growth up 4.3 percent from a year ago and inflation under 2 percent. In the 25 years after World War II, the economy grew strongly with solid wage growth, but in the 1980s and early 1990s economic growth slowed, unemployment rose and real wages fell for many workers.
Given this uncertainty, how should we fix social security? The wrong way would be to assume that the system is broken and either reduce retiree benefits or raise the payroll tax or both. That would guarantee a reduction in the standard of living for retirees and/or workers.
An even worse approach would be to seize upon the current crisis mentality to dismantle the basic structures of Social Security. Proposals to invest Social Security funds in the stock market or to create individual accounts would force retirees into taking higher risks and destroy the basic principle of Social Security as social, rather than individual, insurance. These proposals are too radical. They risk tampering with a program that, arguably, has been the most successful in U.S. history.
The right way to fix Social Security would be to make the optimistic scenario more likely. Although economic outcomes are less predictable than demographic ones, they are also more susceptible to control by public policy. Surely we are capable of using economic policy to achieve growth rates of more than 1.3 percent over the long term. It would be useful to have a public debate to reorient the Federal Reserve away from slow-growth policies and toward policies that would speed up the economy and benefit the Social Security Trust Fund.
But what about the most important element, wage growth? Although stronger economic growth, by creating a greater demand for workers, would tend to boost wages, wage determination has a great deal to do with the orientation of corporations and their power versus labor. Is it therefore beyond the reach of public policy?
Actually, the slowing of wages over the past 15 years (and the consequent crisis for Social Security, which was supposedly fixed by the Greenspan Commission in 1983), was very much related to public policy. The best thing that Congress and the president could do for Social Security would be to roll back the policies that have hindered workers from bargaining for higher wages in the past 15 years, such as outlawing the use of permanent replacement workers; making it more difficult for corporations to close plants, abandon workers and communities, and move overseas; restoring the real value of the minimum wage; and putting some teeth into the enforcement of unfair labor practices by the National Labor Relations Board.
It makes no sense to try to fix Social Security by reducing peoples standard of living when it is possible to fix Social Security by improving the standard of living. It is the smart thing to do. It is also the right thing to do.
Teresa Ghilarducci is an associate professor of economics at
the University of Notre Dame and director of the Higgins Labor Research
National Catholic Reporter, August 28, 1998