- The Washington Times - Friday, September 7, 2001

Is there truly a crisis in Social Security? Yes, but contrary to the conventional wisdom, the key issue may not be looming bankruptcy of this federal retirement system.

Everyone has heard the dire predictions about the Social Security system becoming insolvent sometime over the next few decades. The latest estimates, courtesy of the "2001 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds," show Social Security running annual deficits starting in 2016 and the so-called trust funds exhausting their assets in 2038. After that, it is projected that payroll taxes will cover about 73 percent of Social Security expenditures.

Social Security, of course, has never been a trust fund. Instead, it is an income-transfer program, whereby current workers are taxed to pay benefits to current retirees.

Interestingly, though, the Social Security trustees annual report actually offers three different sets of demographic and economic assumptions optimistic, intermediate and pessimistic and therefore, three different projections about the long-term future of the system.

Few analysts and reporters note what the trustees say under the "more optimistic" scenario: "Under the low cost assumptions, both the OASI and the DI Trust Funds are projected to be adequately financed throughout the 75-year projection period." That's because the trustees declare the intermediate set of assumptions to be their "best estimates," so these are the assumptions and projections that seemingly all politicians and policy-makers rely upon and cite when talking of looming insolvency. However, when you scratch a bit beneath the surface, some of the key intermediate economic assumptions are wildly pessimistic.

Most strikingly, the Social Security trustees project that the United States, currently the world's leading economy, is heading for a drastic and dangerous long-term slowdown in economic growth (as measured by real gross domestic product or GDP). If the report is correct, then the United States faces decade after decade of plodding and pathetic economic performance during the entrepreneurial, high-tech 21st century. In particular, under the trustees' intermediate best- estimate scenario, the United States will eventually experience real average economic growth rates of less than half of what we have experienced, for example, over the past four decades.

During the coming decade, the trustees assume a 2.4 percent real GDP growth rate on average. Afterward, real economic growth is assumed to average between a lowly 1.6 percent and 1.8 percent through 2045, while averaging 1.6 percent thereafter. These projections rely heavily upon assumed dramatic slowdowns in labor force participation and job growth.

Even the trustees' optimistic assumptions turn out to be quite grim, with annual real GDP growth projected to average 2.9 percent over the coming decade, then slowing to between 2.2 percent and 2.3 percent until 2030, and subsequently averaging 2.4 percent out to 2075. Again, this is mislabeled as the optimistic scenario.

However, the U.S. economy has never grown at such anemic rates over such long periods of time, and there is no reason to believe the United States will perform so poorly in the future. Over the past four decades, for example, real GDP growth in the United States has averaged 3.5 percent annually.

Yet, the intermediate-range estimates from the Social Security trustees are treated like gospel, when in fact they rest upon some unrealistic, grossly misleading economic assumptions that do not serve as a reasonable foundation upon which the Social Security debate should proceed.

However, all of this does not mean reform is not needed. There still are the very real matters involving the lack of property rights and dismal rates of return in Social Security.

As pointed out in President Bush's proposed budget, someone born in 1925 has experienced an average inflation-adjusted rate of return of 4.8 percent annually, vs. an estimated 2.2 percent for someone born in 1950, 1.9 percent if born in 1975 and 1.7 percent if born in 2000. Mr. Bush's proposal for partial Social Security privatization, by giving younger workers the choice of depositing part of their payroll taxes in individually owned and controlled retirement accounts, makes sense. With private accounts, individuals get a far better rate of return, even if they choose to invest in extremely safe government bonds rather than stocks. They also would own the assets in their accounts and be able to pass them on to children or grandchildren.

In the end, the Social Security debate should move forward recognizing the grim and deeply flawed assumptions about our nation's economic future being made by the Social Security system's trustees, as well as the miserable rates of return and lack of property rights being experienced in the Social Security system.




Raymond J. Keating is chief economist for the Small Business Survival Committee and co-author of "U.S. by the Numbers: Figuring What's Left, Right, and Wrong with America State by State."


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