Social Security shortfalls are suspect
"Seriously underfunded and financially unsustainable in the long run." That's how US Treasury Secretary John Snow described the nation's Social Security system last week.
To New York actuary David Langer, Mr. Snow's statement paints the finances of the nation's public pension system as "more dire than it is" in order to scare the public into approving the Bush administration's advocacy of partial privatization of Social Security.
Actually, Social Security finances are in good shape, argues Mr. Langer. He's become something of a pest to top Social Security officials with his finding that, in the past, the most optimistic of three annual projections of the financial future of Social Security for the next 75 years has proved the most accurate. Social Security might work fine unchanged for the next 75 years, able to provide pensioners their full monthly checks, the disabled their disability payments, and widows and orphans their needed funds.
What started this discussion was the annual report of the Social Security Trust Fund. It moved up the date the fund will be depleted by one year, to 2040. That's the projected time by which payroll taxes would finance only 74 percent of scheduled benefits. The problem with the Trust Fund report is twofold:
1. No one can make accurate economic predictions 75 years into the future. Long-term forecasts are notoriously inaccurate.
2. The assumptions used by the Social Security actuaries in their 75-year financial projections are set by administration politicians, in effect. Within certain bounds, Bush-appointed officials get the predictions they probably want - in the 2006 report, a modest deterioration of Social Security's finances.
The trustees of the Fund are Snow, two other members of the Bush Cabinet, the Social Security commissioner, and two "independent" trustees. These two were recently reappointed by President Bush while the Senate was in recess. Lawmakers had balked at their reconfirmation, preferring to keep a tradition of appointing new trustees each term.
One of them, Thomas Saving, is in favor of privatization, says Social Security gadfly Langer.
Social Security's chief actuary, Stephen Goss, admitted at a meeting six or so years ago with the staff of Sen. Tom Harkin (D) of Iowa that the politically appointed trustees set the assumptions for Social Security projections, recalls economist Dean Baker, who attended the session. "It is such a secretive process," Mr. Baker complains.
That, combined with widespread suspicion that the Bush administration is not above slanting statistics in politically sensitive areas (the budget, Medicare), has prompted Social Security experts to take a hard look at the assumptions in the trustees' annual report.
It took Alicia Munnell, director of the Center for Retirement Research at Boston College, seven pages of analysis to conclude that switching to the more cheery assumptions in the Trust Fund's low-cost scenario "closes only part of the gap" in the long-term financing of Social Security. She's more pessimistic than Langer is.
The long term forecast by the trustees assumes that annual productivity growth in the US will average 1.7 percent over the 75-year planning period. [Editor's note: The original version cited a 2.1 percent growth rate forecast by the Congressional Budget Office which was for a 10 year period. It also cited an Office of Management and Budget figure that could not be verified.]
Your grandchildren may know if that forecast is correct.
Even with the weak economy assumed by the trustees, before-tax wages are likely to be far higher for future generations of workers, notes Baker, codirector of the Center for Economic and Policy Research, a Washington think tank.
By 2040, when the trustees forecast a revenue shortfall, they also see the average hourly wage as almost 50 percent higher after inflation than it is now. If Social Security taxes were raised by a total of 4 percentage points to cover the projected revenue-benefit gap, workers would still earn wages nearly 40 percent higher than today's - even with higher payroll taxes, notes Baker. Workers could afford higher taxes to provide full pensions for their elders.
Another way to examine the issue, says Baker, is to note that the revenues lost by the Bush tax cuts are equivalent to 2 percent of the nation's gross domestic product. Without those cuts, projected revenues would be five times greater than needed to cover the $4.6 trillion Social Security revenue gap after 2040 forecast in the 2006 report. "I'm hard-pressed to see what the problem is," he says.
Baker suspects that the Bush administration will not overcome political obstacles to win partial privatization of Social Security. But if Sen. Hilary Clinton (D) of New York were to succeed Bush, she might try for it. Her husband was considering pushing for legislation that would have put 2 percentage points of payroll taxes into a private account system, Baker says. But his affair with an intern blocked any decision.