There have been dire warnings about future fiscal shortfalls for years, explains Paul Solman. Photo courtesy of Dave Reede/Getty Images.
In his weekly Social Security Q&A, published earlier Monday, Larry Kotlikoff makes the case that Social Security’s funding gap is much larger than the 75-year shortfall the government projects. Social Security’s fiscal gap for infinity, he argues, more accurately captures the challenges to keeping the system solvent for today’s children. His point, which he’s made on the Making Sen$e Business Desk before, deserved a response.
Ah yes: the long run. No, I’m not going to parry Larry by quoting Keynes: that in the long run, we’re all dead. As Larry rightly points out, there are kids, grandkids, greatgrandkids to think about, as Larry might put it, ad infinitum. Moreover, if you believe Richard (“Selfish Gene”) Dawkins and the basic tenets of evolutionary biology, all that really matters is our progeny, our DNA.
No, I’m simply going to remind Larry, and the many tens of thousands of you who typically read this column, that economic history is littered with predictions of long run doom for governments that spend more than they “earn.” Here’s the fittingly beloved Adam Smith himself, in the fifth “book” of his “Wealth of Nations,” published in 1776: “The progress of the enormous debts which at present oppress, and will in the long-run probably ruin, all the great nations of Europe, has been pretty uniform.”
Uh, not exactly. Not Smith’s own United Kingdom, for example, which did just fine, despite similar laments from many contemporaries who declared the burgeoning English debt of the 18th century unsustainable.
The thing about forever or infinity is that, by definition, it never ends. Britain was famous for issuing its IOUs as bonds called “consols.” They had no maturity at all. That is, they paid an interest rate in perpetuity because it was presumed that even if the sun were to eventually set on the English Empire, it would never set on a borrower known as “England.”
As for the eventual solvency of Social Security in the United States, I will defer to a greater authority than I, Alicia Munnell, the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management, who also serves as the director of the Center for Retirement Research at Boston College.
I recently confronted her with Larry’s dire forecast. I have cited her response here before on this same issue, but it deserves repeating. [Note that the interview was done before the release of the [2013 Social Security Trustees Report.](http://www.ssa.gov/oact/tr/2013/index.html)]
Alicia Munnell: Big numbers happen over a long period of time and other stuff also happens over a long period of time.
Paul Solman: Changes, you mean?
Alicia Munnell: We have benefit commitments, but we also have people earning longer, and payroll taxes being paid for longer and perhaps at a higher rate. I find the most useful way to think about the deficit to Social Security is in terms of the payroll tax. So, how much would the payroll tax have to be raised to solve the problem for 75 years, which is Social Security’s planning horizon, and how much would it have to be raised to solve it for infinity? And for [a] 75-year time horizon, the number is 2.36 percent.
Paul Solman: So right now, the payroll tax for Social Security is 12.5 percent, split between employer and employee. So it would have to [be] up to something like 15 percent?
Alicia Munnell: Yes. Half. Right. So that’s 1.2 percent more from you and 1.2 from the employer. Now think about that number. We recently had a payroll tax cut of 2 percentage points, and I couldn’t even tell. And then they raised it again by those same 2 percentage points, and again I couldn’t tell. I think some low earners felt it, but there wasn’t jubilation when it happened and it wasn’t cataclysmic when it went back. From the employee’s perspective, the change that we’re talking about is half of what we just went through in terms of this payroll tax cut and then increase.
And that’s if you say, I’m going to solve this whole problem just by raising the payroll tax. If you do anything else — raise the taxable wage base or do any number of things — the amount you need to raise from the payroll tax becomes smaller. I think that’s a more sensible way to think about Social Security’s finances than this $200 zillion trillion dollar shortfall.
To be fair, 75 years is only part of the story because we have an increasing ratio of retirees to workers, and so when the 75-year period moves forward, you lose a year of surplus, [and] you pick up a year of deficits.
So if you just solve the problem for 75 years, it’s not enough. To really solve it, you’ve got to have something like a 4 percent increase in taxes, 2 percent for you, 2 percent for the employer. But I think solving it for 75 years would be just fine and all those numbers are manageable.
In other words, a lot can happen from here to eternity. We can grow the economy like mad. We can raise taxes. We can cut expenses. Or, we could just keep owing ourselves and others and borrowing against the future. When will that come to an end? You tell me.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions