February 7, 2000

February 7, 2000 | News Releases on Social Security

Faster Economic Growth Won't Save Social Security, Analyst Says

WASHINGTON, FEB. 7, 2000-Critics of Social Security reform claim that faster economic growth will keep the system solvent well into the next century, but a Heritage Foundation study released today shows that even the most optimistic economic forecast will do little to improve Social Security's finances-and may even make them worse.

In its most recent estimate of the program's finances, the Social Security Administration (SSA) provides three economic scenarios-one pessimistic, one optimistic, and one intermediate or "best guess." Under the "best guess" estimate, which assumes wages for U.S. workers will rise by an average of 0.9 percent a year, Social Security starts running deficits by 2014. Critics of reform consider this projection too pessimistic, arguing that wages-and therefore the payroll-tax revenue that finances Social Security-will rise much faster.

But even if wages rose at the blistering 1.4 percent annual rate assumed under SSA's optimistic projection-a rate 50 percent higher than any the United States has seen during the past three decades-the date that Social Security begins running deficits would be pushed back only two years, to 2016, says Heritage Policy Analyst Gareth Davis.

In fact, Davis says, if the economy grew as fast as some reform critics seem to think it will, Social Security's long-term financial picture could get even worse. Under the SSA's "best guess" estimate of 0.9 percent wage growth, for example, Social Security would run an annual deficit of $562 billion in 2075. But if wages grew at 1.4 percent, the deficit would be $630 billion-$68 billion higher.

The reason, Davis says, is because SSA bases the size of monthly benefit checks on the average wage of all U.S. workers. While faster wage growth boosts the payroll-tax revenue that Social Security collects, over time it boosts the benefits Social Security must pay out by even more.

"Regrettably, claims that Social Security can be saved by faster economic growth are wrong," Davis says. "If anything, the projections underlying the Social Security Administration's forecasts are likely to be overly optimistic. And even if the SSA massively underestimates the future rate of economic growth, higher growth will have little impact on the system's solvency. By some measures, faster growth could even add to Social Security's problems."

In a related study also released today, Heritage economist Daniel Mitchell reviews all the objections to reforming Social Security by creating personal retirement accounts-and finds them lacking. For example, critics claim there's no crisis because the program's trust fund has a large cash reserve. In fact, the "trust fund" is a fiction, filled with nothing more than government-issued IOUs.

Which helps explain why another assertion made by many politicians-that putting even more money into the trust fund will save the program-is without merit. The same goes for the notion that "transition costs" to a private system will be prohibitively expensive. On the contrary, Mitchell says, reform will actually save the taxpayers money because shifting to personal accounts would cost far less than the $19.8 trillion needed to bail out the current system.

As for the claim that individual accounts would be more costly to administer than the current system, Mitchell points out that the larger returns from private investment more than compensate for the small amount paid in administrative costs. Likewise, fears of a stock-market plunge wiping out retirement funds are baseless, since long-term investing is "certainly more prudent and rewarding than being trapped in an unstable pay-as-you-go system that is subject to political manipulation," Mitchell writes.

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