Social Security: Here We Go Again

Americans have every right to be concerned about Social Security. It is a wildly successful program that has virtually ended poverty for the elderly. But people don't deserve to be scared silly by politicians talking darkly of Social Security's imminent bankruptcy. President Clinton's State of the Union speech opened a debate between Democrats and Republicans over "saving" Social Security. Playing to stereotypes, the Democrats would expand government to do so, the GOP would shrink government by beginning the process of privatizing Social Security to save it. This is a phony conflict over a phony problem and it threatens to throw the highly successful monetary and fiscal policies of the past decade off course. The health of Social Security rests solely on the health of the economy, and policies that increase America's growth rate will necessarily bolster the public retirement system.

Here are the facts. Conventional Washington wisdom holds that Social Security will go bankrupt in 30 years as the baby boomers retire. But this crisis is predicated on the assumption made by Social Security actuaries that the economy will grow by an average of 1.7% over the next three decades. It's a ridiculously low number, well below the 2.2% long-term trend and far below the 3 1/2% rate of the past three years. It assumes a productivity increase of merely 0.7% into the future, instead of the 2% of recent years, and a sharply slowing growth in the labor force. Even accepting the worst-case scenario, starting in 2030, cash flow from payroll taxes will pay for 75% of benefits. Not the end of the world.


Economic growth will almost certainly beat the official estimates. Simply by growing at the long-term trend rate of 2.2%, an additional $5 trillion in 1998 dollars is generated in cumulative tax revenues over the next three decades. Revenues from the Social Security tax are already commingled with general revenues, and constitute a major part of the budget surplus. Using future general revenues to finance Social Security solves most of the "crisis."

President Clinton's plan to use a portion of future budget surpluses for Social Security is therefore sound. Federal Reserve Chairman Alan Greenspan said in testimony before Congress that "the notion that the President brought forth last night to effectively keep a very large part of the unified surplus in place in years ahead is something I have supported in years past." By keeping much of the surplus, the government can pay down debt, lower interest rates and, in effect, increase the nation's net savings. The question is how much to devote to Social Security alone.

Clinton is dead wrong in putting policy in a straitjacket by locking up 62% of the surplus for Social Security and tying most of the rest to specific spending programs. Investment in technology, capacity, and worker training is critical for an information-era economy. So growth may be better served by reshaping the tax code to provide greater incentives to invest.

As Greenspan testified, the strong U.S. economy does not now require any significant tax cut. But Washington must retain some measure of fiscal flexibility. The U.S. is in its 94th month of the longest peacetime expansion in history, and a downturn sometime in the future is inevitable. Cutting taxes and easier monetary policy are the two most effective ways of quickly arresting an economic decline. When the time comes, the GOP proposal to cut marginal rates across the board may make a great deal of sense.

By fostering growth, tax policy can also reduce what economists call the dependency ratio--the number of retired people supported by each active worker. Recent years have shown that tight labor markets draw in men and women who have passed the normal retirement age, people on welfare, unskilled workers, and immigrants. With more of the population working to pay to support the elderly, retirement becomes that much easier for the nation.


What about the government investing Social Security funds in the stock market, as President Clinton suggested? Wall Street appears to like the idea, and theoretically there is merit in diversifying any portfolio. All pension funds, private and public, do so. But given the partisan rancor in Washington, can any thinking person believe that politics would not enter investment policies? "The political process of which we are all aware...makes it very difficult not to try to create some form of direction in the way those funds are invested," says Greenspan. Finally, who, really, is comfortable, with the federal government owning big stakes in major U.S. companies? Government investment in stocks is one bad idea.

Expanding the 401(k) idea to everyone is more sensible. The Clinton proposal is a start, but not a particularly good one. Giving some people tax money to start an account, then matching it with more tax money, is a bureaucratic mess. The U.S. doesn't need yet another IRA, Keogh, or Roth IRA. It does need a single, unified, simple 401(k) that would double the top limit on contributions, currently $10,000, to $20,000. This is what the Administration and Congress should strive for in their efforts to increase savings.

False dichotomies are dangerous things, especially when choices are presented by political parties motivated more by ideology than facts. Policies that generate stronger economic growth will pay for both Social Security and tax cuts. Indeed, for Social Security to be made whole, economic growth must remain robust. Democrats and Republicans may be furious at each other but, in the end, their programs for Social Security are really joined at the hip.