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Commentary: Social Security: Is The Sky Really Falling?


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COMMENTARY: SOCIAL SECURITY: IS THE SKY REALLY FALLING?

The Advisory Council on Social Security may have split into three factions over how to fix the nation's retirement plan. But all 13 members agree that Social Security will run a deficit over the next 75 years if nothing is done. Even most of the council's critics agreed with that conclusion. Their only argument was over how difficult it will be to solve the problem.

But the consensus that a deficit is inevitable rests on a shaky foundation. The projections used by the council, which are based on calculations by the Social Security Board of Trustees, a government oversight body, rest on gloomy assumptions about population and labor force growth that aren't shared by other government forecasters. They're also difficult to square with historical trends. "The trustees are paid to be pessimistic, but the effect is to make people believe that Social Security isn't viable," says Howard Fullerton, an economist in charge of long-term forecasting at the Bureau of Labor Statistics.

Of course, no one can forecast 75 years out, and the trustees may well turn out to be right. But the shortfall they predict doesn't actually show up until 33 years from now. So instead of taking drastic action like raising payroll taxes, shouldn't we be more prudent and wait a decade or so? By then, long-term economic trends may be clearer. What's more, the BLS and Census Dept. groups reviewing the consumer price index will be done with their studies. If the CPI overstates inflation, as the Boskin Commission and others suspect, any Social Security deficit will shrink after the statistical corrections are made.

Underlying the whole debate is the trustees' view that the U.S. economy will to grind to a virtual halt in the next century. That will happen, they say, because population growth will plunge to a quarter of its historic rate. The birthrate will slip to 1.9 children per woman, which is below the 2.1 rate needed to prevent a population from shrinking.

By contrast, the Census Bureau projects a 2.2 birthrate. That's because the bureau breaks down fertility rates by race, and minorities and immigrants are a fast-growing share of the population and also have more children per family. So Census analysts see a higher total birthrate. The trustees, on the other hand, calculate birthrates assuming one cultural norm. "We see a real difference in attitudes toward having children today," says Stephen C. Goss, the trustees' deputy chief actuary.

The trustees' view of labor-force growth presents the biggest incongruity. If birthrates fall, immigrants will be a prime source of new workers. But the trustees say immigration will remain at its current 900,000 a year. If so, the labor force will grow at just one-fifth of its historic pace.

At the same time, they calculate unemployment as averaging 6% a year over the 75 years. If new workers remain scarce, today's labor shortages would continue. In that case, something would have to give on the supply side. The political pressure to curb immigration would abate, and immigrants would pour in. Or older workers might stop leaving the workforce, says the BLS's Fullerton, who thinks labor-force growth won't sink as dramatically as the trustees foresee. Even if no new supply of workers materialized, unemployment would remain in today's 5% range, says Fullerton. That would drive up wages, once again eliminating the Social Security shortfall.

A SURPLUS. The trustees themselves charted an alternative course for the future (table). Their moderate-growth scenario shows a birthrate of 2.2, annual immigration of 1,150,000, unemployment at 5%, and wages growing slightly faster. And Social Security? It runs a surplus.

If the pessimistic view does turn out to be right, it casts doubt on the Council's remedy of investing some Social Security funds in stocks. Council members cited the stock market's historic 7% real annual return as reason to do so. But this return depends on healthy economic growth. If real GDP slows to a mere 1.5% a year, stock returns will likely slow, too. In that case, they probably wouldn't suffice to warrant the extra risk employees would shoulder in stocks. The better route: adopt smaller steps and wait to see if the economy really slows down.By Aaron BernsteinReturn to top


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