Back when Social Security was widely regarded as a rock-solid and faultless institution, reform advocates used to phrase their critique in terms of "myths." The idea was to expose as fictions what defenders of the status quo were passing off as facts.
Perhaps it's a sign of the public's growing skepticism that the status quoists are now talking about myths too. What myths? The arguments made by reform advocates, which have persuaded a majority of Americans that the current Social Security system is neither economically sustainable nor generationally equitable.
Yet even recast as a myth-busting exposÃ©, the views of the status quoists are just as fictional as before. A case in point is the recent Atlantic Monthly article by Economic Policy Institute economist Dean Baker. Here are nine myths that Baker claims reform advocates have concocted--and why they aren't myths at all:
* One: The Social Security trust fund is an accounting fiction. Indeed it is--a fact long recognized by most economists, including the Social Security Administration's former research director John Hambor, who has written in the Social Security Bulletin that "the trust fund more accurately represents a stack of IOUs to be presented to future generations for payment, rather than a build-up of resources to fund future benefits." Baker does not dispute that the Social Security trust fund contains nothing but Treasury IOUs. What he seems to argue is that running up the public debt to pay back these IOUs will not be a burden. Why? Because the extra public debt that Treasury will incur tomorrow is debt that, thanks to the trust fund, it isn't incurring today.
Although this is an interesting argument, there is no evidence to support it. (See our alert of January 10, 1997.) Far from reducing the federal deficit, today's trust-fund surpluses have simply allowed Congress to tax less and spend more. This is why Senator Daniel Patrick Moynihan, who in 1983 helped legislate the trust-fund build-up, concludes that trust-fund accounting is "thievery"--and has disowned his own handiwork.
* Two: The government uses overly optimistic numbers to convince people that Social Security will be there for them. The fiscal optimism of the Trustees' cost projections seems incontestable. The Trustees assume that productivity, which determines the payroll tax base, will grow 20 percent faster in the future than it has averaged over the past quarter-century. And they assume that longevity at age sixty-five, which determines the number of beneficiaries, will grow 60 percent slower--meaning that Americans fifty years from now would have a life expectancy no greater than Japanese today.
It's true that the Trustees project that real GDP growth will slow substantially in the next century. But this is due entirely to the projected slowdown in workforce growth as Boomers retire, from 1.6 percent annually since 1973 to just 0.1 percent annually by the 2020s. Unless soaring productivity growth makes up the difference--or immigration surges massively--slower GDP growth is inevitable. (See our alert of March 18, 1998.) This is not pessimism, but simple arithmetic.
* Three: The demographics of the Baby Boom will place an unbearable burden on the Social Security system. Baker's objection is that paying off Boomers isn't the only challenge. He's right: It's worse than that. Rising life spans and lower birth rates mean that America will permanently shift to a much older age structure. This is why--as Baker himself stresses--Social Security's operating deficits are due to keep rising throughout the next century, even after the Boomers pass on.
Even so, Baker reassures us that the extra cost of supporting more elders will be "largely offset" by a relative decline in the number of children. This is nonsense. For one thing, Baker ignores the vastly greater public cost of supporting each elder. (See our alert of May 2, 1996.) For another, he makes no distinction between rewarding the past and investing in the future. By Baker's logic, we could entirely solve America's aging challenge by having no children at all.
* Four: Future generations will experience declining living standards because of the government debt and the burden created by Social Security. To our knowledge, no one claims this. But if we take into account all senior benefit programs, it is plausible. According to a study by the National Taxpayers Union Foundation, raising taxes enough to pay for the growth in Social Security, Medicare, and Medicaid long-term care would, under the official Trustees' scenario, erase all growth in after-tax worker earnings over the next forty years. Under an alternative "high-cost" scenario, whose demographic and economic assumptions more closely reflect historical experience, real after-tax earnings would suffer a catastrophic decline.
* Five: By 2030 federal spending on entitlement programs for the elderly will consume all the revenue collected by the government. This finding was first widely publicized by the Kerrey-Danforth Entitlement Commission in 1994. Subsequent official projections by the Congressional Budget Office and the General Accounting Office came to a similar conclusion.
Baker does not try to refute any of this. Instead he complains that it's "very deceptive" to total up the costs of Social Security with senior health-benefit programs, which, he points out, account for most of the projected growth in entitlement spending. We disagree. These programs tax the same people (working taxpayers) to pay benefits to the same people (nonworking pensioners). To the extent that cost growth in health-benefit programs is intractable, moreover, it simply makes achieving cost savings in Social Security all the more important. These points are lost on Baker, who apparently believes that future workers won't mind paying a stupefying total tax burden so long as many different federal agencies are collecting and spending the money.
* Six: If Social Security were privatized, it would lead to a higher national saving rate and more growth. "Privatization" is a strawman: No one seriously proposes turning Social Security into a private institution. By privatization, Baker apparently means any plan to introduce mandatory and personally owned savings accounts. Such a reform might or might not raise savings. It probably wouldn't if it did nothing but divert current payroll tax revenue into personal accounts. But it certainly would if it raised new contributions and reduced current-law benefits to fund the transition.
In the end, Baker agrees that a plan which raises total contributions would raise savings. But, he insists, this is tantamount to raising taxes--and there are plenty of ways to raise taxes without personal accounts. Baker errs here: These extra contributions would not be taxes (or at least would not function like taxes), since they would be put into personally owned accounts. And precisely because they would be personal property, which is constitutionally protected, they would be more likely to raise savings than extra tax revenue, which Congress can always choose to spend at some future date.
* Seven: If people invest their money themselves, they will get a higher return than if they leave it with the government. This is undoubtedly true, since the return on contributions in a mature pay-as-you-go system is equal to the average growth rate of the economy, whereas the return in a funded system is equal to the rate of return on capital, which is typically much higher.
Oddly, Baker ends up admitting as much. After asserting that corporate earnings grow just as fast as the economy, he acknowledges that the total rate of return on stocks is historically about 3 percentage points higher once you add in dividends distributed to stock owners. With the Trustees projecting economic growth at 1.2 percent in the next century, this means, according to his own figures, that the rate of return on a personal investment in stocks would be more than three times greater than on payroll taxes collected by a pay-as-you-go system. The difference is actually larger than this. In fact, the historical dividend payout rate is at least 4 percent. Baker also neglects to point out that all of these numbers refer to the total return to stock holders. He thus ignores the extra 3 or 4 percentage points in the return to corporate equity that is received in taxes by federal, state, and local governments--and this also increases national income and raises living standards.
* Eight: The Consumer Price Index overstates the true rate of increase in the cost of living. The vast majority of economists agree. This is why Concord supports CPI reform, though it is not persuaded that the overstatement is large--and it has always cautioned against big, across-the-board COLA cuts that would inevitably hit the oldest and poorest the hardest.
* Nine: Social Security gives tens of billions of dollars each year to senior citizens who don't need it. This money could be better used to support poor children. Both of these propositions seem beyond debate. Baker's real disagreement is with people who infer from these facts that an affluence test would make sense.
Baker's argument against an affluence test is contradictory. On the one hand, citing self-reported Census income data, he implies that the elderly are so poor that a test would be pointless. On the other, he warns that much elderly asset income is unreported, which might make a test impossible to enforce. It's hard to see how all this adds up. Or why it would be "foolish" to trim the largess of a program whose original purpose, as FDR put it, was to establish a "floor of protection."
FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips
. Last updated: 14 Aug 1998