October 25, 2014

Seven Fictions From the Status Quo Crowd (Updated)

Each day Americans are becoming better versed in all the problems, from generational inequity to declining trust in government, that call for big changes in Social Security. Three-quarters of the public now agree that the program will eventually require reform -- and two-thirds say that it is "in need of major reform now."

The focus of special public concern is Social Security's cost -- which, as a percent of payroll, is scheduled to rise from 11.2 percent today to 18.1 percent (or even 22.7 percent) by 2040. With many official agencies projecting that the total cost of senior entitlements is patently unsustainable, the truth is finally sinking in: Something has to be done to avert fiscal meltdown.

Yet some still claim, against all the facts, that America can hold onto the Social Security status quo. On the eve of the White House Conference on Social Security, they are working hard to get their reassuring message across in the national media. There's nothing wrong with Social Security, they say, that a few minor changes won't fix. In other alerts, we've already handled the many fictions of the status quo crowd.* Let's take it from the top one more time.

Fiction One: Social Security can pay every penny of promised benefits until the year 2032.

This most common of status-quoist fictions contains a kernel of fact: The Trustees now project that Social Security will be "solvent" until the year 2032 -- meaning that its trust funds will possess sufficient assets, and hence budget authority, to cover benefits until that date.

The problem is that the trust funds are a mere accounting device. Social Security's stored-up assets consist of nothing but a stack of Treasury IOUs that can only be redeemed if Congress raises taxes, cuts other spending, or borrows from the public. Thus, their existence doesn't ease the burden of paying out future benefits. What really matters is the program's operating balance -- that is, the annual difference between its outlays and earmarked tax revenues. Social Security's current operating surplus is due to begin falling in 2002 and turn into an operating deficit in 2013. This deficit will widen to an annual cash shortfall of $734 billion by 2031, the last full year the trust funds are projected to be "solvent."

Fiction Two: A "mere" 2.2 percent of payroll tax hike would solve Social Security's fiscal problems.

In theory, 2.2 percent of payroll is the amount that Congress would have to raise taxes or cut benefits, starting today, to bring the trust funds into balance over the next seventy-five years. Status quoists routinely trot out this number as evidence of how small the Social Security problem is. As economist Henry Aaron asks, how can anyone talk about a "crisis" that could be solved by a mere 2.2 percent of payroll tax hike?

Let us explain. The new assets that the trust funds would accumulate due to this tax hike would be no more real than the old assets. All the 2.2 percent solution would accomplish is to postpone Social Security's first operating deficit by seven years -- from 2013 to 2020. After that, the trust funds would only remain solvent by cashing in an even larger mountain of paper IOUs.

Fiction Three: The economy is bound to grow faster than projected -- erasing Social Security's deficit.

A close reading of the official projections reveals a big disparity between historical rates of real GDP growth (2.6 percent annually since 1980) and the Trustees' long-term assumption (just 1.3 percent annually by the 2020s). With the current expansion still in high gear, some status quoists, including former Labor Secretary Robert Reich, conclude that there must be some kind of mistake. Suppose, they argue, that the economy keeps growing at its historical rate. Wouldn't this be enough to close Social Security's long-term deficit?

But the mistake is theirs, not the Trustees'. When the Trustees project that real GDP growth will eventually slow to 1.3 percent per year, they aren't assuming any decline in the growth rate of product per worker. The entire fall in GDP growth is due to the slowdown in workforce growth as Boomers retire -- from 1.5 percent annually since 1980 to just 0.1 percent during the 2020s. The status quoists need to wake up to the demographic reality of an aging society. Maintaining America's historical rate of GDP growth would require more than doubling productivity growth to 2.5 percent. As for erasing Social Security's long-term deficit, it would require tripling productivity growth to 3.0 percent -- a rate never before equaled over an entire business cycle.

Fiction Four: Social Security alone won't endanger the economy.

The rising total cost burden of just the major senior benefit programs -- Social Security, both parts of Medicare, and Medicaid for the elderly -- is projected to reach 35 percent of payroll by 2040. Clearly this is unsustainable. Yet many senior groups refuse to confront this cost in its totality. Instead, they argue that each program should be regarded as a separate "deal" -- regardless of whatever else is going on fiscally and economically. From this perspective, Social Security is "affordable."

This is like telling a homeowner that no single rock matters in the landslide that buries his family. Yes, the status quoists are right that Social Security is not growing as fast as Medicare or Medicaid. But it is the very intractability of health-care cost growth that makes achieving savings in Social Security so urgent. This point is lost on the status quoists, who apparently believe 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.

Fiction Five: The official projections are pessimistic.

Another frequently heard claim is that the official cost projections are based on unduly pessimistic economic and demographic assumptions -- and should therefore be regarded as a worst-case scenario. Columnist Robert Kuttner, for instance, calls the Trustees' projections "too gloomy."

The status quoists have it backwards. Far from being pessimistic, the Trustees' "intermediate" scenario is based on assumptions that are surprisingly optimistic given the trends of the past twenty-five years. According to this scenario, productivity growth will speed up by 20 percent; growth in life expectancy at age sixty-five will slow by 60 percent (shorter life spans brighten Social Security's fiscal outlook); and the annual growth in real per beneficiary health spending will slow from 5 percent to just 1 percent. What happens if the future is more like the past? Take a look at the Trustees' "high-cost" scenario, in which Social Security faces a trust-fund deficit of 5.4 percent of payroll (not 2.2 percent) -- and the total cost of the major senior benefit programs rises to 55 percent of payroll (not 35 percent).

Fiction Six: The declining number of children will neutralize the extra cost burden of more elders.

This argument goes as follows: The ratio of children to workers is projected to fall even as that of elders to workers rises. Thus, the typical worker in the next century will experience only a minor rise in the total number of nonworking dependents he or she must support.

As a purely factual matter, this argument ignores the vastly greater public cost of supporting each senior. At the federal level, the ratio of per capita spending on the elderly to spending on children is nine to one. Even including state and local spending, and hence the nation's entire education budget, the ratio is at least three to one.

There's something else wrong with this argument: the notion that all spending on anyone other than oneself is an equivalent burden. It puzzles Twentieth Century Fund president Richard Leone that Americans are anxious about the coming age wave but didn't consider the 1960s an era of "deprivation," even though the total dependency ratio was higher in 1960 than it will be in 2030. The difference, of course, is that a generation ago adults were sacrificing through families to build the future, while a generation from now they will be sacrificing through government to reward the past.

Fiction Seven: Even after paying for senior benefits, the next generation will still enjoy a rising living standard.

Won't the next generation be better off? And if so, won't they be able to pay taxes at higher rates and still take home more income? Columnist Michael Kinsley writes of Social Security: "Even if it amounts to... an even larger transfer from future workers to future retirees, so what? The younger generation will still be richer than the older one, even after the transfer takes place."

Let's leave aside the principle implicit in this argument -- that we have a right to cash out and pocket our children's economic progress. The argument is factually incorrect if we take into account the total burden of young to old transfers. Raising taxes enough to pay for the growing cost of the major senior benefit programs would, under the Trustees' official scenario, erase all growth in real after-tax worker earnings over the next half century. Under the high-cost scenario, earnings would suffer a large decline. It's easy to say America would never allow this to happen. But that begs the question of how we will change course and when.

FACING FACTS AUTHORS: Neil Howe and Richard Jackson
CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips