One of the maddening things about the Social Security ‘debate’ is the assumption that Social Security will be ‘insolvent’ in several decades (oddly enough, every year like clockwork, the several decades prediction is renewed….). It won’t be. The Social Security Trustees release three estimates of the long term health of the Social Security program. These three estimates differ in the assumptions of how the economy will perform, and can be described as: mild historical underperformance, sucky, and ‘Oh God, Oh God, we’re all gonna die!’
These estimates are mandated by law. Typically, what’s discussed in news reports is the intermediate, sucky performance (I’ll get more specific in a jiffy!).
But the key thing is that if the economy performs that poorly for that long, we have so many other things to worry about, such as three decades of piss-poor economic growth. And even in that scenario, all we have to do to pay Social Security benefits in full would be to increase the payroll tax by 0.75 – 1.5% (i.e., 6% plus that additional number). Alternatively, we could remove the income cap and the problem also goes away (currently, for married couples, the Social Security tax on income is only applied to the first ~$106,000 of income).
So, what do I mean by my highly technical terms of “mild historical underperformance, sucky, and ‘Oh God, Oh God, we’re all gonna die!'”? Well, here’s what I mean (boldface mine):
The CBO forecasts that if RGDP [Real Gross Domestic Product] grows annually at approximately 2.5 percent, then in 2037 Social Security tax revenue alone will be able to pay 78 percent of promised benefits without any changes to the program. In terms of the goods and services that these 78 percent of benefits can buy, i.e., in what economists call “real” terms, benefits will be greater than 100 percent of those paid in 2011!
RGDP grew at an average annual rate of 3.4 percent over the last 80 years, including the Great Depression of the last century. If annual RGDP grows anywhere near this historic average for the next 27 years, then in 2037 and for long after, Social Security will pay 100 percent of promised benefits, again with no changes whatsoever to the program!
So, if the economy grows for 27 straight years at three quarters of the average rate of growth, we have to make minor adjustments in the program (either in the future or starting now). Do we really think that’s going to happen? As pessimistic as I am, I really don’t. And even if it does, Social Security will be an easy fix.
This is such a non-issue.