Social Security: Safer Than You Think

Ask twentysomethings about Social Security and they all say the same thing--it will not be there for them when they need it. That's why this generation is drawn to politicians promising partial privatization and tax credits to boost their savings for retirement. It's a perfectly logical position except that its premise is false. With a bit of jiggering, Social Security will almost certainly be there for the twentysomething set, long after their parents have retired.

The truth is that predictions of Social Security insolvency are based on estimates of ever-changing variables stretching out an incredible 75 years. They are simply not reliable. For the third time in as many years, officials just pushed forward the year Social Security will begin scaling back full benefit payments from 2029 to 2037. Minor increases in productivity or economic growth could easily push that out to 2050 or 2060. Our guess is that this is precisely what will occur.

For example, Social Security officials estimate productivity growth at 1.5% over the next 75 years and believe that the growth in gross domestic product over that time will be 2.3%. These figures are significantly below the historical trend for the U.S. They simply project the anomalously low rates of increase for productivity and economic growth of the '70s and '80s far into the future. For most of U.S. history--and certainly for the past five years--the rates of growth for productivity and GDP have been higher. If the economy grows just at the historical trend of about 3% annually, and productivity stays at its historical level of about 2%, Social Security will still be there in full for the next generation. Yes, Social Security will have to tap into the surplus general funds of the federal budget--maybe four or five decades from now. And immigration levels will have to be raised as boomers retire to sustain the ratio of workers to retirees.

Given the solvency of Social Security, the "rescue" proposals by Vice-President Al Gore and Texas Governor George W. Bush should be compared for what they really are. Gore is suggesting a new government-backed savings plan to supplement Social Security, financed in large part by federal money and structured to make the tax system more progressive. The lower the income, the more federal matching money people receive.

The Bush idea of carving out two percentage points of an individual's payroll tax for personal investment appeals to those who want to own and control their own retirement plans. It would chip away at Social Security as we know it. The public would be better served if the terms of the debate between the two were on the merits of these proposals rather than on the phony specter of the current Social Security system going bust.

    Before it's here, it's on the Bloomberg Terminal.