Editore"s Note
Tilting at Windmills

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March 13, 2004
By: Kevin Drum

THE SOCIAL SECURITY NON-CRISIS....At my soon-to-be new home, Phillip Longman argues this month that Social Security is in big trouble due to the aging of America. It's a familiar argument, and one that provokes a lot of peculiar thinking among otherwise rational people. Over on the political right, for example, Larry Lindsey suggests a "free lunch" approach that assumes that big returns on stock market investments can fix things up. On the left, Robert Gordon says that if we assume higher economic growth the problem magically disappears.

Of course, lots of problems go away if you simply make convenient growth assumptions, a favorite tactic of forecasters everywhere. On other fronts, private accounts are all the rage, or perhaps swinging cuts in benefits. After all, we all know that Social Security is going bankrupt soon, right? Gotta do something fast.

This is a tiresome refrain. The numbers are actually pretty straightforward and the facts are simple: Social Security is not in crisis, and fixing it isn't really that hard or that painful.

The chart on the right, adapted from this report from the Social Security trustees, shows plainly what's happening. Right now Social Security is in fine shape. In 2010 costs begin to rise sharply due to the baby boomers retiring. In 2018 the system begins running deficits. The sharp rise in costs ends around 2035, followed by very modest increases for the next 50 years.

The chart shows income and outgo as a percentage of national income, and as you can see, the shortfall is just under five percentage points in 2050. So starting in 2018 we need to phase in a combination of revenue increases and cost decreases that add up to about five percentage points. This document from the Social Security Advisory Board shows how to do it:

  1. Today, the payroll tax applies only to earnings up to $87,000. If you phase in a removal of this cap beginning in 2018 and make the payroll tax into a flat tax, revenues increase by 2.13 percentage points.

  2. Under current law, you can retire at age 62, 65, or 67 (the longer you wait, the higher your benefits). If you phase in a change to 65, 67, and 70, costs are reduced by .59 percentage points.

  3. Means testing, which reduces retirement benefits for high earners, reduces costs by 1.65 percentage points.

These three reforms pretty much fix the problem. "Pretty much" because there's too much uncertainty in long-term financial estimates to allow us to solve this problem with perfect precision 50 years in the future. Economic growth might be slightly higher or lower than we think, demographic changes might not match our predictions, and technological changes could make the whole thing moot. Social Security is an issue that needs to be revisited every 20 or 30 years, not one that can be solved permanently.

Note that my point here is not to suggest that these three reforms are the only way to go. You may have a different basket of changes you prefer check out the table on page 25 of the SSAB document if you want to put together your own plan. Nor is it to fire up the endless debate about the Social Security trust fund and whether it's "real" or not. All I'm demonstrating here is that even if you assume the trust fund is meaningless, Social Security can still be fixed with relatively minor and fairly painless adjustments.

Bottom line: Social Security is not going to crumble away before our children retire. It is not only possible to keep Social Security solvent for the rest of the century, it's not even that hard. If legislators were willing to get together like adults and simply address the problem, it could be solved quickly and easily. The numbers don't lie.

Kevin Drum 9:09 AM Permalink | Trackbacks

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