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| SSP No. 21 |
October 5, 2000
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Social Security
Is It "A Crisis That Doesn't Exist"?
by Andrew G. Biggs
Andrew G. Biggs is a Social Security analyst at the Cato Institute.
Executive Summary
A consensus has developed across the political spectrum that the Social Security
program faces significant problems and is in need of far-reaching modifications.
Would-be reformers debate vigorously on the best changes for Social Security.
Some argue for transforming the nation's pension program to a defined-contribution
system of personal retirement accounts while others support retaining the current
defined-benefit structure through a series of tax increases and benefits cuts
or through investing a portion of the program's assets in equities.
But some people in politics, the press, and the policy community are questioning
that consensus, calling Social Security's projected funding shortfalls merely
the result of pessimistic economic and demographic projections by the program's
Board of Trustees. If the economy grows faster than projected, as they believe
it surely will, then wages and payroll tax revenues will rise and Social Security
will become, in the words of Rep. Jerrold Nadler (D-N.Y.), "a crisis that doesn't
exist."
However, independent assessments of the Trustees' projections for productivity,
labor force growth, and longevity show the projections to be reasonable and
perhaps even optimistic. For Social Security to remain solvent, even in a bookkeeping
sense, would demand unprecedented levels of economic growth. More important,
even if the economy does grow more quickly, Social Security's benefit liabilities
and its funding shortfalls will eventually rise along with the economy. Even
under assumptions vastly more optimistic than those the crisis deniers put forward,
Social Security still faces trillions of dollars in tax increases or benefit
cuts if the system is to stay in balance.
A possible corollary exists to the argument made by skeptics of the Social
Security crisis. If the economy grows as slowly as the trustees project, can
market investments like stocks and bonds continue to produce returns superior
to those from Social Security? Although future returns from market investments
cannot be guaranteed, the differences in returns between Social Security and
market investments are so great that even under a worst-case scenario personal
retirement accounts invested in stocks and bonds would produce far higher returns
than Social Security.
In short, Social Security's crisis is real and may be even larger than commonly
thought. While debate may continue over the proper course of action, doing nothing
in hopes that the economy will come to the rescue is wishful thinking, at best.
Index of Social Security Choice Papers
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