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The Boogeyman and Social Security
by Ken Sanders
February 7, 2005

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President Bush devoted a large portion of his State of the Union address to describing the gloomy future of Social Security. Currently, he is gallivanting around the country in something reminiscent of a medicine show, doing his best to scare people into thinking Social Security is in “crisis” and will be “bankrupt” by the time younger workers begin to retire. He preaches before a background of charts and graphs, dripping red ink, showing Social Security in a kamikaze-like nosedive.  He even goes so far as to admonish the young to not look at the charts, fearing the images are too grisly for such tender youth. Then, after scaring everyone out of their wits, Bush declares that the only way to “save” Social Security and prevent future retirees from living on the streets in abject poverty is through personal savings accounts.

Is the future of Social Security really so dire? Economists far more knowledgeable than I don't seem to think so. In fact, according to the folks at Dollars and Sense magazine and the Center for Economic and Policy Research, Social Security, while far from perfect, is in much better condition than Bush would have us believe. As with the Boogeyman lurking under the bed, turn on the lights and things aren't so scary.

First some background. The Old Age Survivors and Disability Insurance Program, commonly known as Social Security, was enacted in the 1930s as part of FDR's New Deal. Social Security is an insurance program that protects workers and their families from the income losses that come with retirement, disability, or death. It is a “pay as you go” system, whereby taxes paid by today's workers are not set aside to pay future benefits, but instead go to pay the benefits of current Social Security recipients.

As originally designed, Social Security supplemented pensions provided by the private sector. Since the 1960s, however, corporations have systematically eliminated pension systems so that today only 16% of all private-sector workers are covered by pensions. Thus, as a direct result of corporate efforts to maximize the bottom line, Social Security is now the primary source of retirement income for nearly two-thirds of America's retirees.  Private-sector pensions have been replaced by defined-contribution savings plans such as 401(k)s and 403(b)s, which provide some retirement income but no protection from “longevity risk” (living too long). Unlike Social Security, which pays retirement benefits until death, once the savings of a defined-contribution pan are exhausted, that's it.

Social Security is not limited to retirement benefits. While 70% of Social Security funds do go to retirees, 15% go to disabled workers, and 15% go to workers’ survivors. Thus, unlike Bush's personal savings accounts, Social Security shares risk across the entire workforce to ensure that all workers and their families are protected from the hardships of retirement, disability, and death. By contrast, Bush's plan would enable high-wage workers to profit from private retirement investment without contributing to the protection of lower-wage workers from their disproportionate risks of disability and death. Furthermore, Social Security, which spends less than 0.6 cents out of every dollar in benefits paid on administrative costs, is far more efficient than personal accounts. Under Bush's proposed system, 5 cents of every dollar would go to administrative costs.

But wait, you say. The Social Security Administration and Congressional Budget Office predict that the Social Security trust fund will be bankrupt by 2042 or 2052, respectively. Numbers don't lie, right? Maybe not. However, flawed assumptions can only lead to flawed conclusions.

For example, the SSA bases its projections on a forecast of only 1.6% annual labor productivity growth. The CBO projects 1.9% growth. However, according to the U.S. Bureau of Labor Statistics, between 1947 and 2003 productivity rates in the non-farm sector improved an average 2.3% annually. After adjusting 0.2% for the difference between productivity growth and the growth of the economy as a whole, economy-wide productivity is still 2.1% since World War II. Indeed, in no 20-year period, including the Great Depression, has the U.S. economy grown as slowly as projected by either the SSA or the CBO. Therefore, each year the economy grows faster than projected, the “zero balance” date moves farther into the future. This fact is borne out by a review of the SSA's past predictions for Social Security's bankruptcy. In 1996, the zero balance date was 2030; in 2000 it was extended to 2036; today that date is 2042. See a pattern?

Additionally, opponents of Social Security obsess over the concept of a “demographic imperative,” to wit: in 1960, there were 5.1 workers per retiree, but in 1998 there were only 3.4 and by 2030 there will only be 2.1. According to opponents, this demographic decline in workers per retiree will result in insufficient funds to pay Social Security retirement benefits. Hard to argue with that. Again, however, the premise is flawed.

Social Security is not limited to retirement benefits but pays disability and death benefits, as well. Thus, it is the overall dependency ratio (the number of workers relative to all non-workers, not just retirees) that determines the future solvency of Social Security. In the 1960s, there were 1.05 workers for each Social Security dependent. In 2030, there will be 1.27 workers per dependent -- more than in the past. Compounding the larger number of workers per dependents is the fact that average worker productivity over the past 50 years has increased approximately 2% annually, adjusted for inflation. Thus, real worker output doubles every 36 years and is projected to continue to do so, meaning that workers in 2040 will be twice as productive as today. Such numbers don't add up to Social Security's bankruptcy.

Speaking of bankruptcy, the term “bankruptcy” implies that Social Security will cease to exist. However, even if the trust fund should be depleted, it will not mean that Social Security will simply turn off the lights and go out of business. Rather, it will merely revert to a purely “pay as you go system,” as it was before 1984, and continue to pay current benefits with current tax revenues. Under such a worst-case scenario, workers’ taxes would need to increase by only about 2%, and not until 2030. 

To meet its unfunded obligations over the next 75 years, the Social Security trust fund needs $3.7 trillion. Equaling about 1.89% of taxable payroll and about 0.7% of GDP over the same period, $3.7 trillion is no small sum. However, it is far less than the 2% of GDP that Bush's 2001 to 2003 tax cuts will cost over the next 75 years if they are made permanent. Indeed, the CBO-projected shortfall for Social Security is only 0.4% of GDP, less than the 0.6% Bush's tax cuts will cost for the richest 1% of taxpayers alone. Indeed, Bush's tax cuts are disturbingly reminiscent of Reagan's cuts in the 1980s. Reagan's cuts created the largest government deficits up to that point, the slowest GDP growth rate aside from the Great Depression, interest rates four times higher than the historic average, and contributed to Congress raising payroll taxes in 1984 to pay for Social Security.

Perhaps this is the real reason Bush is so adamant about “fixing” Social Security with personal accounts: he needs to pay for his tax cuts. That and a near-religious opposition to government assistance to anyone other than the rich and powerful.

Ken Sanders is an attorney based in Tucson, Arizona. Visit his weblog at:  He can be reached at:

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