Tuesday, March 2, 2004

Education

System isn’t broken, EWU professor says
Social Security needs pragmatism, not panic, Bert Caldwell says.

Bert Caldwell
The Spokesman-Review

The Social Security system is not doomed. The formula used to calculate annual increases in benefits does not have to be adjusted. The ages at which retirees qualify for benefits need not be increased.

Could it be that Alan Greenspan has got it all wrong?

The chairman of the Federal Reserve Board told the House Budget Committee last week some changes in Social Security will be necessary to assure the system stays sound. With the Baby Boom generation on the threshold of retirement,
the countdown to the supposed exhaustion of Social Security's reserves has begun. Remember, the system will be broke by 2030.

Or is it 2035? Or 2042?

Or never?

Eastern Washington University Professor Doug Orr says the correct answer is never. Warnings that Social Security will hit the wall just as the needs of Baby Boom retirees reach their maximum are based on absurdly low projections for economic growth in the United States, he says.

Using what he says are more realistic numbers, the system remains solidly in the black far into the future. In fact, he says, benefits could conceivably be increased. How's that?

Orr, who teaches economics at Eastern, says the warnings about the vulnerability of Social Security are the bayings of conservative Washington, D.C., think tanks that have always been hostile to the system, and want it replaced with individual retirement savings plans like those advocated by President Bush. Undermining confidence in the system's financial underpinnings is their way of getting their way, he says.

The receding timeline for the system's supposed demise shows up those interests, Orr says.

The 2030 date was the first projected in the 1995 annual report prepared by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Trust Funds, which oversees the Social Security system. By 1999, the expiration date had slipped to 2035. The trustees' last calculation, released last year, pushed the date into the mid-2040s. In other words, the system's prospects have improved, not worsened.

And that's not all. The trustees make not one, but three projections for the system using different assumptions about the 75-year rate of growth in Gross Domestic Product, the value of all goods and services produced each year. The most pessimistic assumes a rate of 1.3 percent, the most optimistic 2.2 percent. The middle estimate for GDP growth, 1.6 percent, is the one that results in a 2040-ish exhaust of the Social Security trust fund.

But, Orr notes, over the last 75 years the U.S. economy has grown at an average annual rate of 3.6 percent, more than twice the value used by the trustees. Maintaining that historic rate would keep the trust fund in surplus far into the future, as even the 2.2 percent optimistic projection published by the trustees shows.

What about the “demographic imperative” that shows that in 2030 each Social Security recipient will be supported only by 2.2 workers, not the 3.4 workers of 1998, or the 15 workers of 1960? Orr says the more germane ratio is that of workers to dependents, which will be less by 2030 than it is today.

And, finally, he notes the U.S. is in far better shape than Western European nations and Japan, which have old-age dependency ratios up to twice ours.

What, then, explains Greenspan's words to Congress? Orr says the Fed chief was expressing the concerns of his primary constituency, the nation's bankers, who understand that ever more borrowing by the federal government to finance deficits will eventually create inflation. Inflation will erode the value of financial assets, as was the case in the early 1980s, when long-term bonds lost value. If the Congress and White House cannot constrain spending, so forcing more borrowing, the alternative is to slow the liquidation of the Social Security systems assets by extending retirement age past 67, or using a different multiplier for inflation.

Neither is necessary, says Orr, who adds that Greenspan at least has put the situation bluntly to a Congress that has written more bad checks than any other in history. He recommends officials wait five years to see if subsequent trustee calculations again push the day the Social Security surplus vanishes further into the future, as it has the last two times the numbers were run. “Five years from now there isn't going to be a problem,” he predicts.

Delay, of course, will create a bigger mess if Orr's analysis proves wrong. But the trustees were far from alarmist in the conclusions they made last year. The projected deficit out to 2077 could be cured by raising the Social Security payroll tax from 12.4 percent to 14.32 percent, split 50-50 between employers and employees. Or benefits could be cut by 13 percent. If no action is taken, when 2042 rolls around benefits would have to be cut 27 percent, or the payroll tax hiked to 16.94 percent.

Unpalatable choices, certainly, but not panic-level numbers. When this Congress and this president stop their irresponsible spending, the nation can take a studied look at the options for Social Security.


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