Stop Sweating Social Security -- the End Is Not Near

I used to be a Social Security doom-monger. Like everyone else my age, I knew the familiar drill: Social Security is a demographic time bomb. Life expectancies are increasing. The baby boom generation is getting ready to retire. Every year we have a smaller number of workers supporting a larger number of retirees.

Politicians were eager to feed my fears. Bill Clinton urged us to “take action now to avert a crisis in the Social Security system.” Al Gore made the Social Security “lockbox” a centerpiece of his presidential campaign. And George W. Bush insisted earlier this month that Social Security was “headed toward bankruptcy down the road.” As a result, most young people today are convinced that Social Security will be gone by the time they retire.

But what if something that “everybody knows” turns out to be a political myth? What if Social Security isn’t in trouble at all?

Ten years ago Social Security trustees predicted that the system would become insolvent in 35 years, meaning 2029. Five years later they were still predicting that insolvency was 35 years away -- doomsday had been postponed to 2034. Today, they’re predicting that insolvency is 38 years away, in 2042.

What happened? Why does the insolvency date keep getting further away? How could the trustees have been so continually wrong?

The answer is all in the numbers. For instance, the future of Social Security is highly sensitive to predictions of economic growth, and the trustees assume a very conservative growth rate of 1.8% per year. That compares with expected growth of 3.9% this year, a fairly average year for the U.S. economy.

Another example: Because young people are the ones who support the system, Social Security projections are also sensitive to immigration rates. Immigrants tend to be young, so the more immigrants, the stronger the system. But despite the fact that immigration to the U.S. has been steadily increasing for more than half a century, the trustees assume not just that it will stop growing -- itself a conservative estimate -- but that it will actually decline.

What this means is that every few years, as reality outpaces the previous year’s predictions, the trustees move the insolvency date forward. What’s more, there’s every reason to think they’re still making the same mistake.

Robert Gordon, a respected economist at Northwestern University, recently took a fresh look at long-term economic trends. His conclusion? The trustees are continuing to be far more pessimistic than the evidence warrants. His projections, based on recent increases in national productivity as well as more reasonable estimates of immigration, show an economic growth rate for the next two decades that’s nearly a percentage point per year higher than the trustees’ projections.

If you plug Gordon’s more realistic numbers into the model that the trustees use to project the health of Social Security, it turns out that the program is solvent for the rest of the century. In other words, Social Security needs no changes at all. Everyone alive today, young and old, will be covered in full when they retire. Surprised?

But if that’s the case, what accounts for the persistent and widespread Social Security doom-mongering? In the case of the Social Security trustees, the answer is easy: Their projections are made by professional actuaries, and actuaries are conservative by nature.

And politicians? Each has his or her reason. Clinton, for instance, recommended using budget surpluses to “save” Social Security because he wanted to fend off Republican attempts to eliminate the surplus by cutting taxes. President Bush, for his part, has long been a fan of private accounts as a replacement for government guarantees of retirement income -- but the only way to convince the public that it’s worth risking their retirement income on the stock market is to claim that Social Security is in crisis and requires radical changes.

It’s true that Social Security is going to cost more in the future than it does today. We are living longer and there are more retirees than in the past. But reforms crafted by Alan Greenspan and signed into law by Ronald Reagan in 1983 included a phased series of modest Social Security benefit cuts and modest tax hikes to take care of that. So far, their plan is working flawlessly.

Still, you might be wondering what happens if the gloomy predictions of the Social Security trustees turn out to be right. Here’s another thing you probably don’t know. Even in the worst case, even if we do absolutely nothing for the next 38 years, Social Security won’t go bankrupt.

On the contrary, benefits will continue to be paid forever. They won’t be as generous as we’d like, but they’ll still be higher than they are today.

For now then, making drastic and risky changes to Social Security is like performing major surgery before you even know the results of a biopsy. A more prudent course is to wait and see -- act only if problems really develop down the road.

In the meantime, I’ve stopped being a Social Security doom-monger. On the list of things to worry about, it shouldn’t even be in the top 10.