Bush's Secret Plan to Save Social Security

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Is the Social Security solvency "crisis" really not a crisis at all? Maybe not, if Edward Lazear, chairman of President Bush's Council of Economic Advisers, has his numbers correct. Yesterday, Lazear held a media briefing about the 2007 Economic Report of the President. During the press conference, Lazear said the following about the future rate of productivity growth:

I wouldn't necessarily say 3 percent. But I would expect that we could expect to see high rates, perhaps not quite at the 3 percent level, but somewhere higher than 2 percent. I would expect somewhere closer to 3 percent ... If I'm thinking about long-term productivity growth and asking, "Do the fundamentals exist for persistent high productivity growth in the upper 2 percent range?" I think we can still be there, again as long as we continue to maintain policies that are consistent with an open economy.

Last year, productivity grew at 2.1 percent, 3 percent in the fourth quarter. But in the five previous years, it grew at 3.4 percent and rose at 2.7 percent from 1995 through 2000. That performance is well above the historical average. From 1966 through 2000, productivity rose by 1.6 percent. Now here is why Lazear's prediction is important: Higher productivity growth–and the stronger economy and higher wages that it implies–would completely solve Social Security budget woes for the next 75 years. Right now, the Social Security Administration is assuming that long-term productivity growth is 1.7 percent. An alternative, rosier forecast has it at 2 percent. If the rosier forecast were correct, the 75-year shortfall would be 25 percent less. But if Lazear's even more optimistic prediction is right, the 75-year shortfall would be eliminated.

Here is what economist Brad DeLong, a professor of economics at the University of California–Berkeley and a former deputy assistant treasury secretary during the Clinton administration, wrote in his popular blog on the topic: "Each 0.1 percentage point increase in the growth rate of productivity reduces the long-horizon Social Security deficit by approximately 0.1 percent of taxable payroll. Elementary. Obvious to everyone who has even a surface knowledge of how our current system works. Real wage and productivity growth of 3 percent per year ... would wipe out the 75-year deficit."

Now DeLong doubts such growth is possible. But Lazear thinks it is doable with the right policies: "And I think we do have that kind of an economy, because, again we have a relatively low-tax economy, we have an economy that's open to trade for the most part, we've encouraged foreign investment, all of which have been important and instrumental in creating our economic growth."

Those on the left might also add other factors that they think are necessary for growth, such as greater public investment in basic scientific research or a modified social insurance system–improved healthcare, wage insurance–to make worried workers more willing to take entrepreneurial risks like starting their own business. But whoever is right, faster growth would not only save Social Security but would, of course, make us all much wealthier in the long run.

Blogger Feedback. About my posting yesterday–

"Should Uncle Sam Take Oil Company Profits?"–North Carolina State University economist Craig Newmark of Newmark's Door reminds me of the 1991 tax on luxury goods, which tanked the yacht-building industry. "You missed the opportunity to remind your readers of perhaps the stupidest targeted tax of all time," he writes. And economist Dean Baker, codirector of the Center for Economic and Policy Research, concludes in his Beat the Press blog, "The industry will probably invest less in finding new oil with a windfall profit tax, but if we want to move to cleaner sources of energy, and conservation, this may not be a bad thing." The Best of Blogosphere. 1) "Five Big Health Care Questions" by Arnold Kling at EconLog.

2) The economics of global warming at the Becker-Posner blog.

3) How protectionism unfairly helps drugs companies at Beat the Press.

Questions and/or comments can be sent to me at jpethokoukis@usnews.com.