Opinion Fix Social Security, yes -- but do it right
By TERESA GHILARDUCCI and
MARTIN WOLFSON
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
Center. Martin Wolfson is also an associate professor of economics at Notre
Dame.
National Catholic Reporter, August 28,
1998
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