NJFAC Reprint Series 3
Helen Lachs Ginsburg
Adapted from testimony to the New York City Council, Subcommittee on Federal Affairs, Â© April 29, 1998.
Before Social Security was enacted, organized business and Republicans bitterly opposed it. For example, Congressman John Taber, R-NY, said in 1935: “Never in the history of the world has any measure been brought in here so insidiously designed as to prevent business recovery, enslave workers, and to prevent any possibility of the employers providing work for the people.” But due to fear of reprisals at the polls, most Republican opposition collapsed.
Because of Social Security’s popularity, current critics are not as blunt, so they invented a crisis.
Before Social Security, nearly every county in the United States had a poor house. If you were old, and without income or family to take you in, thatâ€™s where you would land. Today, without Social Security, about half of seniors would be poor. But Social Security is not just a retirement system. Of the 45 million Americans receiving benefits, more than 14 million are children, disabled adults, or the spouses of deceased workers. So Social Security provides a measure of basic income security to most Americans and their families.
It is important to realize that output produced decades from now is what retirees alive then will consume. The milk we drink, the medical care we get and everything else we buy except antiques must come from current production. So to prepare for a future economy that can support Social Security we need to invest–in our environment, technology, infrastructure, and in the education of young people, who will be our workers. Thus it makes good sense to finance payments to seniors on a pa y-as-you-go basis from future taxes on that higher income (paid into the Social Security Trust Fund).
However, the deficits projected in 1998 by the Fund’s Trustees to start in 2032 are based on what former Labor Secretary Robert Reich, once a Trustee himself, calls “wildly pessimistic” assumptions. Underlying these predictions of disaster are projections to the year 2075. In them, the Trustees assume the annual growth rate of output (Gross Domestic Product) will average 2 percent for nearly a decade and then settle down to a range of 1.3 to 1.4 percent though 2075. These rates are well below historic norms. For example, from 1920 to 1995, a 75-year period that includes the Great Depression, growth averaged 3.5 percent. Even in the sluggish 1973-1995 era, it averaged 2.5 percent. Unemployment is assumed to rise within a few years to 6 percent and remain at that level until 2075.
But when the Trustees use different, more realistic assumptions, future deficits disappear. The Trustees “low cost” estimate assumes the annual growth rate will average 2.5 percent for a decade but thereafter, through 2075, only around 2.1 percent. These rates are still far lower than for most of this century. Unemployment is assumed to rise to 5 percent within a few years and remain at that level through 2075. But using these assumptions, there are no deficits at all during the entire 75 year period. (Unfortunately, these projections are not used in the public debate.) Recent lower unemployment has increased the Trust Fund so much that the insolvency date of 2029, projected in 1996, has been delayed by three years. Lower unemployment means that fewer people are forced to retire early and more people pay into Social Security; it means that employers are paying in more, too. So fight for federal policies for jobs for all at decent wages and youâ€™re fighting for a secure Social Security system.
Incidentally, even if the deficits predicted in the worst case assumptions occur and the Trust Funds are emptied, this means only a modest shortfall. Why? Because Social Security payroll taxes paid at that time would cover 75 percent of the payments. To cover the rest, there are many options other than the drastic ones being proposed. To get an idea of the relatively small magnitude of this gap, it could be closed by raising the Social Security tax by just over one percentage point on the worker and the employer. But that would be a regressive way to finance a shortfall and is not recommended. A more progressive way would be for Congress to partially fund Social Security from general revenues. President Jimmy Carter made a similar recommendation. More recently, the noted economist Robert Eisner, a past president of the American Economic Association and a Coalition Advisory Board member, made such a proposal. Other approaches are also possible. As long as Congress exercises its constitutional power to tax, it can make good on Social Security and any other federal obligations.
Too many elderly? Will there be too many elderly for the working age population to support, so that “boomers” canâ€™t rely on Social Security? No. It is true that the proportion of those 65 and over relative to those 20 to 64 is likely to rise after 2030. However, the country also has to support children. So the proportion of all who need support–children plus elderly–by the working age population will be considerably lower than in the years 1960 to 1975. The country supported baby boomers in their childhood. We had to feed them and build schools. It didnâ€™t bankrupt the country. We can afford their retirement, especially as we can expect output produced by each worker to increase over time. The economy as a whole will be able to afford their retirement, although their support may require slight financing from general revenues.
Privatize? Privatization of Social Security now being urged is a serious threat to the income of elderly Americans. Wall Street, which is pushing the idea, stands to make a fortune from managing accounts and many vulnerable seniors will be the losers. Social Security is not a trip to Las Vegas. It is the basic income guarantee for a large part of America’s elderly. It guarantees payments adjusted for inflation that last as long as they live. You cannot outlive Social Security checks even if you make it to 100 years. Social Security’s administrative costs are low–1 percent, compared to the 12 to 14 percent for private insurance. But what about the high returns from stocks? There is no lifetime guarantee of income from stock ownership, nor is there a predictable income. Furthermore, if predictions of a slow growth underlying projected Social Security shortfall should come true, past stock market returns cannot continue. And, if the economy performs well enough to support stock gains at these past rates, there cannot be a shortfall in Social Security.
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Helen Lachs Ginsburg is Professor Emerita of Economics, Brooklyn College, City University of New York and a member of the Executive Committee, National Jobs for All Coalition.
See also Dean Baker “Nine Misconceptions About Social Security,” Atlantic Monthly, July, 1998.