- The Washington Times - Tuesday, March 1, 2005

Throughout American history, the work force has demonstrated a dynamic flexibility. A century ago, a flood of immigrants came to our shores to work. During the Second World War, women took jobs in larger numbers. Farmers followed jobs from the country to the city.

As we were taught in Economics 101, supply responds to demand — when workers are needed, the labor supply increases to satisfy the demand.

Will future history be any different? Yes, if you heed the Social Security trustees’ projections for the next 75 years.

It has been well publicized we face a Social Security funding problem. Estimates of the problem’s size depend on some sophisticated guesswork, namely projecting a host of demographic and economic variables into the distant future. Variables include mortality, fertility, disability, immigration, the real interest rate, productivity, inflation, earnings and employment, among others.

For any one variable, the more distant the projection, the greater the uncertainty. When there is a host of variables to project, the combined uncertainty becomes too wide to provide a fully meaningful policy guide. But it must be done, so we attempt the impossible, though with far too little humility.

Let’s look at just three of the projected variables in the trustees’ central projection: employment, immigration and productivity, since they are notoriously difficult to forecast and even a small change in their expected values can have quite different policy implications.

Since Social Security is financed by payroll taxes, the more workers relative to retirees, the smaller the future funding problem. (An increase in workers later this century could create a funding problem in the next, but that’s an unknown.)

We do know the already-born working-age population will decline relative to longer-living seniors. The Social Security trustees’ central projection assumes, as Baby Boomers retire, employment growth will slow along with the working-age population, with little offsetting increase in labor force participation rates. But is that realistic?

As history has shown, a shortage of workers can be compensated for. People outside the labor force and immigrants can be expected to come forward to take available jobs. A labor scarcity would boost wage rates. A more attractive job market would tempt some elderly to postpone retirement and some retirees to re-enter the work force.

Net immigration has averaged well more than a million annually in recent years, but the trustees’ preferred estimate has it slowing to 900,000 a year from 2024 onward, unresponsive to job market demands. In a thin labor market, employers could be expected to exert pressure on the government to relax immigration policy, if necessary.

In the last half-century, labor force participation has varied dramatically, both cyclically and over the long run. Although the total labor force participation has declined in recent years of below-average job growth, the rate for those 65 and older has been rising. The Labor Department projects it will continue to rise. With improved longevity and health, the elderly choose to work longer, live better and save for when they do retire.

A worker shortage in the years ahead also probably would encourage more outsourcing of jobs to other countries. Hiring foreign workers abroad would not boost U.S. payroll taxes. However, that would be offset to the extent that outsourcing creates complimentary jobs within the United States.

American companies might also choose to relocate more operations abroad where labor is more abundant. As profits improve, American owners of personal investment accounts would benefit from the rising value of equity shares.

A labor shortage also would encourage business investment in labor-saving capital, which would improve productivity and in the long run raise real wages and living standards.

The Social Security trustees assume annual economywide productivity growth will fall below its 2 percent long-term trend to 1.6 percent by 2012 and remain there for the next 68 years. This is hard for most economists to digest.

For the last decade, productivity growth has exceeded its long-term trend, reflecting the revolution in computers and information technology. Recent experience aside, projecting a slowdown in the long-term trend in productivity growth not only bends history but implies a lack of confidence in American technology and invention.

It would be entirely reasonable to assume a pickup in productivity growth, which in the long run translates into increased employment and real earnings and enhanced Social Security net revenue.

A major shortcoming of the trustees’ projection is its static nature. The method used does not take into account the interactions and feedbacks in the real economy, though it’s not clear how a dynamic model would affect the projections.

Though the Social Security funding problem may not prove as large as the trustees’ central projection, the idea of voluntary personal retirement accounts still has merit. Turning more workers into capitalists can only increase savings and investment, income and wealth, which in turn will go a long way toward preventing recurrent financial stress on future retirees.

Alfred Tella is former Georgetown University research professor of economics.


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