The Phony Social Security 'Crisis'
by John Atlee, 11/20/96

The 1996 Social Security Trustees' Report forecasts that the combined OASI and DI Trust Fund will be essentially bankrupt by 2029. This scary "crisis" is the main basis for the cynical belief of many young people that their FICA payroll tax/contributions are, for them, merely burdensome "inter-generational transfers" and that there won't be any benefits for their generation when they retire. By calling Social Security a mere "ponzi scheme," this attitude is being assiduously cultivated by leading Republicans and right-wing think tanks -- and by the Wall Street financial firms that expect a huge increase in mutual fund profits from its "privatization." (cf. good articles on this in the Nov/Dec issues of The American Prospect (TAP) and Mother Jones [1].)

But the Trustee's own charts (Figs. 1-3) show clearly that the alleged "crisis" is caused not by the actuarial relationships but by the pessimistic assumption of continued historically-high unemployment.

These charts show three hypothetical projections based on 7%, 6% and 5% unemployment. But the Trustees focused their analytical attention and publicity only on the 6% projection, which does indeed go bankrupt in 2029. They apparently accept the "conventional wisdom" that 6% unemployment is the most "plausible" assumption for the next 75 years -- presumably because of the now-highly-controversial NAIRU (Non-Accelerating Inflation Rate of Inflation) analysis which implies that full employment and stable prices are incompatible.

But with 5% unemployment Social Security is financially sound for the foreseeable future -- no problems all the way to 2070 in either the Trust Fund (Fig. 1) or the cost/income relationship (Fig. 2), and only a moderate increase in the beneficiary/worker ratio (Fig. 3). With 4% unemployment even this ratio would return to its present level after the Baby-Boom years.

Unemployment is already down almost to this 5% rate, and there is no valid economic reason why it should be allowed to go back up to 6% and higher. Moreover, a 4% rate, which is legally mandated as a policy target by the Humphrey-Hawkins "Full Employment and Balanced Growth Act of 1978," used to be considered normal. During the 28 years from 1945 to 1973 unemployment was below 4% in ten years, close to 3% in four years, and above 6% in only two years. It was only after the OPEC oil cartel's huge "oil tax" increases in 1974 and 1979 that world economic policy lost control of inflation and central bankers started using high unemployment as the only anti-inflation tool.

As Robert Kuttner pointed out so well in his 11/4 Business Week article [2] there are plenty of examples even now which demonstrate that low unemployment does not necessarily lead to wage inflation, and that with current competitive pressures even 2% unemployment should not be considered unrealistic if we have the political will to set that as a high enough national priority. (cf. also, Robert Eisner, TAP Spring 1995 [3].)

Since the Trustees apparently didn't have the political vision or courage to include even a 4% unemployment projection in their charts, I have added dashed lines for my guess (based on the progressions from 7% to 6% and from 6% to 5%) as to what the 4% projection would look like. This would not only assure continued financial soundness but also bring the beneficiary/worker ratio back to the present level after 2060 (when post-Baby-Boom demographic relationships return to long-run normal). In fact, lower unemployment would probably even permit a responsible reduction in the FICA contribution/tax rate.

Low unemployment improves Social Security finances in several ways. It reduces OASDI costs because it reduces the number of partially disabled who can't find paying jobs and the number involuntarily forced into early retirement -- thus reducing opposition to raising the minimum full-benefits retirement age. In a full-employment economic environment, employers have more incentive to hold onto or attract older and partially disabled workers by providing more "worker-tailored" working conditions (lighter work, shorter hours, job-sharing, more vacation time, specially-designed work-place arrangements), and more incentive to hold onto experienced workers during corporate restructurings.

On the income side, just as it's easier to balance family budgets when the breadwinner has a good job, low unemployment increases FICA receipts by increasing both the number of workers and the growth rate of real wages (which tends to reflect the GDP productivity growth rate). In the Report's table of Ultimate Economic and Demographic Assumptions (p.12), 7% unemployment corresponds with 0.5% real wage growth, 6% with 1.0% wage growth, and 5% with 1.5% wage growth. Probably 4% unemployment would correspond with 2% wage growth, as it did before 1970. In terms of real living standards, these half-percent growth differentials represents huge differences -- far greater, proportionately, than the difference in unemployment rates -- with crucial relevance to the public anger over real wage stagnation. Since it's now obvious that "America needs a raise," we badly need to continue reducing unemployment -- which means more focus on improving macroeconomic management. (cf. Lester Thurow and James Galbraith, TAP March/April 1996 [4)

To talk about a Social Security "crisis," and need for "privatization," without also focusing attention on its unemployment assumptions -- and the potential solution through continued economic recovery -- is to perpetrate a blatant fraud on the American public!

In the renewed debate about Social Security which will undoubtedly follow the impending report of the Social Security Advisory Commission, this attempted fraud should be forced to the front of public attention the same way Republican plans for cutting other aspects of our social safety net were forced to the front during the battle over the Gingrich-Republican "Contract." Once these facts are understood, there is no way the public will accept dismantling the Social Security system. To facilitate this understanding, the Social Security account (including its Trust Fund!) should be taken completely out of the regular federal budget and its main actuarial projections should be estimated -- and publicized -- on the basis of 4% unemployment. The financial soundness of Social Security should not be held hostage to economic policy mismanagement!

Since Social Security is designed to provide a secure floor under retirement income, it should also not be hostage to stock market fluctuations. Therefore, the proposed stock market index fund (TAP, Nov-Dec,'96) should be a recommended-but-voluntary Supplementary Social Security Account, rather than carved out of present FICA contributions.

Major policy reforms are clearly needed to systematically coordinate our monetary, fiscal and other policy tools to achieve below-4% unemployment by 2000 without inflation. But these would have much less drastic effects on ordinary people than those currently being proposed for welfare and Social Security reform. And if we are able to focus public and political attention on the basic economic assumptions of the Social Security problem this will provide a powerful lever to also focus attention on overall economic management and the role of the Federal Reserve in keeping unemployment high.

Because high unemployment also causes or exacerbates most of our other serious national problems and hinders their solutions, President Clinton needs to recognize that the strongest support for all the other aspects of his visionary "bridge to the 21st century" -- both politically and budget-wise -- would be a firm commitment to develop the policy tools needed to actually maintain stable full-employment economic growth with stable low interest rates, low inflation and a balanced full-employment federal budget (which emphasizes the responsibility of the Federal Reserve for the budget effects of high unemployment). This would be the most effective and inspiring focus for his January State of the Union speech!

The 1996 Social Security Trustees' Report forecasts that the combined OASI and DI Trust Fund will be essentially bankrupt by 2029. This scary "crisis" is the main basis for the cynical belief of many young people that their FICA payroll tax/contributions are, for them, merely burdensome "inter-generational transfers" and that there won't be any benefits for their generation when they retire. By calling Social Security a mere "ponzi scheme," this attitude is being assiduously cultivated by leading Republicans and right-wing think tanks -- and by the Wall Street financial firms that expect a huge increase in mutual fund profits from its "privatization." (cf. good articles on this in the Nov/Dec issues of The American Prospect (TAP) and Mother Jones [1].)

But the Trustee's own charts (Figs. 1-3) show clearly that the alleged "crisis" is caused not by the actuarial relationships but by the pessimistic assumption of continued historically-high unemployment.

These charts show three hypothetical projections based on 7%, 6% and 5% unemployment. But the Trustees focused their analytical attention and publicity only on the 6% projection, which does indeed go bankrupt in 2029. They apparently accept the "conventional wisdom" that 6% unemployment is the most "plausible" assumption for the next 75 years -- presumably because of the now-highly-controversial NAIRU (Non-Accelerating Inflation Rate of Inflation) analysis which implies that full employment and stable prices are incompatible.

But with 5% unemployment Social Security is financially sound for the foreseeable future -- no problems all the way to 2070 in either the Trust Fund (Fig. 1) or the cost/income relationship (Fig. 2), and only a moderate increase in the beneficiary/worker ratio (Fig. 3). With 4% unemployment even this ratio would return to its present level after the Baby-Boom years.

Unemployment is already down almost to this 5% rate, and there is no valid economic reason why it should be allowed to go back up to 6% and higher. Moreover, a 4% rate, which is legally mandated as a policy target by the Humphrey-Hawkins "Full Employment and Balanced Growth Act of 1978," used to be considered normal. During the 28 years from 1945 to 1973 unemployment was below 4% in ten years, close to 3% in four years, and above 6% in only two years. It was only after the OPEC oil cartel's huge "oil tax" increases in 1974 and 1979 that world economic policy lost control of inflation and central bankers started using high unemployment as the only anti-inflation tool.

As Robert Kuttner pointed out so well in his 11/4 Business Week article [2] there are plenty of examples even now which demonstrate that low unemployment does not necessarily lead to wage inflation, and that with current competitive pressures even 2% unemployment should not be considered unrealistic if we have the political will to set that as a high enough national priority. (cf. also, Robert Eisner, TAP Spring 1995 [3].)

Since the Trustees apparently didn't have the political vision or courage to include even a 4% unemployment projection in their charts, I have added dashed lines for my guess (based on the progressions from 7% to 6% and from 6% to 5%) as to what the 4% projection would look like. This would not only assure continued financial soundness but also bring the beneficiary/worker ratio back to the present level after 2060 (when post-Baby-Boom demographic relationships return to long-run normal). In fact, lower unemployment would probably even permit a responsible reduction in the FICA contribution/tax rate.

Low unemployment improves Social Security finances in several ways. It reduces OASDI costs because it reduces the number of partially disabled who can't find paying jobs and the number involuntarily forced into early retirement -- thus reducing opposition to raising the minimum full-benefits retirement age. In a full-employment economic environment, employers have more incentive to hold onto or attract older and partially disabled workers by providing more "worker-tailored" working conditions (lighter work, shorter hours, job-sharing, more vacation time, specially-designed work-place arrangements), and more incentive to hold onto experienced workers during corporate restructurings.

On the income side, just as it's easier to balance family budgets when the breadwinner has a good job, low unemployment increases FICA receipts by increasing both the number of workers and the growth rate of real wages (which tends to reflect the GDP productivity growth rate). In the Report's table of Ultimate Economic and Demographic Assumptions (p.12), 7% unemployment corresponds with 0.5% real wage growth, 6% with 1.0% wage growth, and 5% with 1.5% wage growth. Probably 4% unemployment would correspond with 2% wage growth, as it did before 1970. In terms of real living standards, these half-percent growth differentials represents huge differences -- far greater, proportionately, than the difference in unemployment rates -- with crucial relevance to the public anger over real wage stagnation. Since it's now obvious that "America needs a raise," we badly need to continue reducing unemployment -- which means more focus on improving macroeconomic management. (cf. Lester Thurow and James Galbraith, TAP March/April 1996 [4)

To talk about a Social Security "crisis," and need for "privatization," without also focusing attention on its unemployment assumptions -- and the potential solution through continued economic recovery -- is to perpetrate a blatant fraud on the American public!

In the renewed debate about Social Security which will undoubtedly follow the impending report of the Social Security Advisory Commission, this attempted fraud should be forced to the front of public attention the same way Republican plans for cutting other aspects of our social safety net were forced to the front during the battle over the Gingrich-Republican "Contract." Once these facts are understood, there is no way the public will accept dismantling the Social Security system. To facilitate this understanding, the Social Security account (including its Trust Fund!) should be taken completely out of the regular federal budget and its main actuarial projections should be estimated -- and publicized -- on the basis of 4% unemployment. The financial soundness of Social Security should not be held hostage to economic policy mismanagement!

Since Social Security is designed to provide a secure floor under retirement income, it should also not be hostage to stock market fluctuations. Therefore, the proposed stock market index fund (TAP, Nov-Dec,'96) should be a recommended-but-voluntary Supplementary Social Security Account, rather than carved out of present FICA contributions.

Major policy reforms are clearly needed to systematically coordinate our monetary, fiscal and other policy tools to achieve below-4% unemployment by 2000 without inflation. But these would have much less drastic effects on ordinary people than those currently being proposed for welfare and Social Security reform. And if we are able to focus public and political attention on the basic economic assumptions of the Social Security problem this will provide a powerful lever to also focus attention on overall economic management and the role of the Federal Reserve in keeping unemployment high.

Because high unemployment also causes or exacerbates most of our other serious national problems and hinders their solutions, President Clinton needs to recognize that the strongest support for all the other aspects of his visionary "bridge to the 21st century" -- both politically and budget-wise -- would be a firm commitment to develop the policy tools needed to actually maintain stable full-employment economic growth with stable low interest rates, low inflation and a balanced full-employment federal budget (which emphasizes the responsibility of the Federal Reserve for the budget effects of high unemployment). This would be the most effective and inspiring focus for his January State of the Union speech!


Notes
  1. The American Prospect (November 1, 1996): Mother Jones (November/December 1996): (back to ref 1)
  2.  
  3. There's Nothing Natural About 5% Unemployment, by Robert Kuttner
    Business Week, November 4, 1996
    (back to ref 2)
  4.  
  5. Our NAIRU Limit: The Governing Myth of Economic Policy, Robert Eisner
    The American Prospect, March 21, 1995
    It's now a familiar story: The Fed raises interest rates to slow the economy. But new research suggests that we are needlessly sacrificing prosperity on the altar of false economic assumptions.
    (back to ref 3)
  6.  
  7. The American Prospect (March 1, 1996): (back to ref 4)


Written: November 20, 1996
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