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Bush Contradicts Bush in Debate on Social Security's
Solvency
``What are you going to do about that chart?'' he urged the crowd to ask their senators and representatives.
What Bush didn't tell his audience was that if the forecast is correct, the U.S. will have its worst economic performance since the Great Depression. He also didn't say that his own White House economists disagree with some of the basic assumptions of the chart, which was drawn up by the Social Security Administration.
The experts who advise the agency, which reports to the president, have underestimated U.S. economic growth for seven of the last eight years; they have also underestimated worker productivity. Using projections from Bush's Office of Management and Budget, Social Security's trust fund would have cash for years beyond 2042.
The differing forecasts may make it more difficult for the president to convince Congress and the public that the seven- decade-old pension system needs an immediate fix. ``The drop-dead date keeps shifting around,'' says James Glassman, senior U.S. economist at J.P. Morgan Securities Inc., in New York. ``Economic assumptions are everything in these forecasts. You've got to take some of this with a grain of salt.''
Moving Target
The Social Security Administration's projections have missed before. In four consecutive years, from 1989 to 1992, its growth forecasts were too optimistic. The agency's 1988 trustees report estimated the trust fund would run out of money by 2048; by the time of the 1994 report, that date had moved to 2029.
Lately, the estimates have been moving in the opposite direction. In six of the last seven years when the agency has underestimated growth, it missed the mark by at least a full percentage point. As a result, the agency's crisis point for the program has already been pushed back by 13 years since the 1997 estimate.
Bush, who says overhauling the system is his top domestic policy goal, has so far traveled to nine states across the U.S. trying to rally support for a plan to allow workers to invest part of their Social Security payroll tax in stocks and bonds. Those funds are likely to beat the returns the system gets now for its investments in Treasury bonds, he says.
An Aging Population
Bush has stressed that the number of workers per retiree -- at 40-1 when Social Security became law in 1935 -- is 3-1 now and may be 2-1 by 2042. Steve Goss, the chief actuary of the Social Security Administration, argues that the aging and slower growth of the U.S. population will crimp economic growth in coming decades.
At the same time, some of the long-term assumptions in the president's budget for the fiscal year beginning in October are more optimistic than those found in the sunniest scenario envisioned by Social Security's actuaries.
On productivity, the White House's long-term forecast is for 2.3 percent average annual growth, a projection it called ``cautious'' -- meaning the number could be higher. The Social Security Administration, in the forecast Bush cited in his Florida speech, says long-range productivity growth will average from 2.0 to 2.1 percent a year starting in 2010.
A change of three-tenths of a percentage point in average annual productivity growth during the next four decades adds six years to the life of the Social Security trust fund, according to numbers compiled by Goss, a 32-year veteran of the agency who was appointed chief actuary in 2000.
Higher Productivity
Higher productivity -- output per worker per hour -- means employees earn more and pay more taxes. That boosts revenue going into Social Security. Because each worker is producing more, it also makes goods cheaper. Productivity has grown an average 2.3 percent a year since 1948. Last year, it rose 4.1 percent after rising 4.4 percent in 2003.
``That's the magic of compounding,'' says Ethan Harris, chief U.S. economist for Lehman Brothers Inc. in New York. ``If you have higher productivity growth, you have year after year of higher tax revenue.''
By the Social Security Administration's figures, U.S. economic growth, which averaged 3.3 percent a year from 1962 through 2002, is projected to fall to 2.2 percent in 2010 before averaging 1.8 percent a year from 2015 through 2080.
Worst Since the 1930s
Sustained annual gross domestic product growth that low would be the worst economic performance since the 1930s -- a period that ushered in four decades of Democratic political dominance and Republican struggles. Some critics suggest that the Republicans themselves don't really believe things will be that bad.
``That's a number being used to engender panic,'' says Joseph Stiglitz, a Nobel Prize-winning Columbia University economist. ``What we're talking about is growth in the range of 3 to 4 percent, or even a little higher as a reasonable forecast. If you want to shave some to be conservative, fine. But I don't come down to 1.8 percent.''
Trent Duffy, a White House spokesman, says that ``obviously, the president wants a very robust economy. We just felt that the actuaries' numbers have the Good Housekeeping seal of approval, and that's what we would use.''
Goss says Social Security forecasts are based on a consensus of economists such as Dale Jorgenson, the former chairman of Harvard University's economics department, who stress the effects of slower population growth on the economy.
``In the country that we are all living in, including Joe Stiglitz, we are projecting that the growth rate of the population will be much slower,'' limiting the economy's expansion, Goss says.
Treasury Secretary John Snow says even gains in productivity won't help bail out the system, since Social Security benefits are indexed to wages, which rise as workers' output grows. That means the government would just have to pay more benefits to retirees, he says.
No Difference
``If the economy is more productive, if it grows faster than the Social Security actuary assumptions, it doesn't make a lot of difference,'' Snow said in an interview. ``The payout from Social Security will rise proportionately to the improvement in productivity and GDP as wages increase. So this is a case where we can't grow our way out of the problem.''
Federal Reserve Chairman Alan Greenspan says productivity is unlikely to accelerate enough to solve the entire shortfall facing the system. Greenspan said in congressional testimony on Feb. 16 that the number of people over 65 will rise by more than 30 million by 2030.
``That's an inexorable move as we all age and retire,'' he said. ``Unless productivity growth increases significantly, the per capita GDP must very significantly slow,'' leading to a decline in living standards for workers or retirees or both.
Five-Year Forecasts
OMB only publishes forecasts for the next five years. In each year starting in 2006, its growth forecasts exceed the Social Security Administration's. OMB spokesman Noam Neusner says Bush's economic advisers won't make public their forecasts for GDP growth beyond 2010.
The differences matter: In 1997 the Social Security Administration said it would have $1.2 trillion in its trust fund by 2003. The actual number: $1.5 trillion. The $300 billion windfall is equivalent to $8,356 for each of the 35.9 million people in the U.S. over the age of 65.
``They're talking about a crisis as if those numbers are real,'' Stiglitz says of the Bush administration. ``They are made- up numbers. Totally artificial.''
The following table compares the Social Security Administration's economic growth forecasts made in 1997 with the actual growth numbers.
Estimate Actual Growth
1997 2.5% 4.4%
1998 2.0% 4.3%
1999 2.0% 4.1%
2000 2.0% 3.8%
2001 2.0% 0.3%
2002 2.0% 2.4%
2003 2.0% 3.1%
2004 2.0% 4.4%
Source: 1997 and 2004 Social Security Administration Trustees Report.
Overall source for article by Alison Fitzgerald and Michal Forsythe: www.bloomberg.com/apps/news?pid=10000103&sid=ayot3tuG3yqQ&refer=us
Related issues:
New York Times - Deficits and Deceit by Paul
Krugman
query.nytimes.com/gst/abstract.html?res=FB0815F73B590C778CDDAA0894DD404482
10 myths about SOCIAL Security by Greg Anrig, Jr www.socsec.org/publications.asp?pubid=507
12 Reasons Why Privatizing Social Security is a Bad Idea by Greg Anrig Jr, www.socsec.org/publications.asp?pubid=503
By the time we've made it, we've had it. - Malcolm Forbes
(Editor: Or been had.)
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