Can We Outgrow Our Social Security Problem?

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Are slashing benefits or raising taxes really the only ways to keep Social Security in the black in the 21st century? During a recent appearance before Congress, Federal Reserve Chairman Ben Bernanke warned that stronger economic growth won't do the trick. As Bernanke put it then:

To some extent, strong economic growth can help to mitigate budgetary pressures. ... Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems. Economic growth leads to higher wages and profits and thus increases tax receipts, but higher wages also imply increased Social Security benefits, as those benefits are tied to wages.

According to the Social Security Administration–specifically, the trustees' report–Social Security will be able to pay just 73 percent of scheduled benefits by 2042–and that assumes the IOUs in the trust fund are made good. There are a variety of demographic (birthrate, immigration) and economic (wages, productivity) variables and assumptions embedded in that forecast. Change the assumptions, change the forecast.

Let's assume that the demographic assumptions are right–fertility rates slip a bit, for instance–and focus on the economic ones. So what if productivity growth is 2.0 percent instead of the assumed 1.7 percent? And what if wage growth outpaces inflation by 1.6 percentage points instead of 1.1 percentage points?

In other words, what if the economy is stronger than expected over the coming decades? Well, according to the SSA, the projected 75-year shortfall–the way long-term solvency is figured–would be 25 percent less than expected if that scenario happens. Now Stephen Goss, the SSA's chief actuary, cautions in a chat with U.S. News that such a scenario is "possible but the likelihood is very, very low."

Yet there have been periods when the economy has been even stronger than the SSA's most bullish forecasts, such as 1960 to 1965, for instance. And productivity from 2000 to 2005 was much faster, 2.6 percent, than the SSA's most optimistic forecast.

So while speedier economic growth alone might not make Social Security solvent for the long term, it does make other solutions less draconian. Combined with fixes such as (1) indexing initial benefits for middle- and upper-class workers to inflation rather than to wages (wage indexing only started in the late 1970s) and (2) slowly raising the retirement age, faster growth helps prevent huge tax hikes–which would hurt growth–and massive across-the-board benefit cuts.

And don't forget that slower economic growth makes the problem worse. Huge benefit cuts would start around 2030 rather than 2042. That's one reason apparent slowing productivity growth in 2006 would be disastrous if it turns into a long-term trend.