Social Security may last far longer than supposed

Staying Ahead

May 24, 1999|By JANE BRYANT QUINN

HERE'S SOMETHING that will surprise you, about the supposedly gloom-and-doom outlook for Social Security. By one official estimate, there's no Social Security problem at all.

The forecast you hear most often says the Social Security trust fund will run out of money in 2034. That comes from Social Security's trustees, who make annual projections about the system's health.

But Social Security's trustees make three projections, each based on a different assumption about economic growth.

In public discussion, you always hear the "intermediate" projection, which warns that the trust fund will be used up by 2034. This projection assumes that economic growth will slow from 3.9 percent last year to 1.2 percent in 2075.

The second projection assumes super-slow growth. If that happened, the trust fund would be gone by 2024.

The third projection is the interesting one. It assumes that the economy slows to a growth rate of 2.1 percent in 2075. That's almost a full percentage point better than the growth assumed in the intermediate forecast.

If the economy should reach that higher mark, Social Security's trust fund would be large enough to pay every dime in benefits that has been promised today.

Economic growth in the United States has averaged 3.1 percent annually over the past 75 years. So, one might ask, why are Social Security's trustees forecasting slower growth than that?

The reason is that the nation's population growth is slowing. The smaller the number of workers in the years ahead, the lower the growth in production and consumption.

Even with fewer workers, however, Social Security could remain whole if the economy achieved the highest of the three growth projections above.

To be prudent, the country shouldn't rely on the highest growth the trustees can foresee today. On the other hand, how drastic a change in Social Security do you want to make, knowing how hypothetical the projected outcomes are?

Congress does, indeed, have to prepare for the possibility that the trust fund will run out. That means shaving benefits or approving a tax increase. But maybe these changes should be phased in over the next 25 years, so they can be canceled if it turns out that business does better than anyone thought.

Many young people fear that Social Security won't be around at all when they retire. Their fear is unfounded. The program will still be paying benefits, at some level, unless we vote it out of existence.

Starting around 2014, Social Security will be paying out more in benefits than it receives in payroll taxes. To fill the gap, money will be withdrawn from the trust fund, which is invested in Treasury securities. Every year, some of those securities will have to be converted to cash.

Where will the Treasury get the cash? Maybe from the income-tax surplus that's expected to start appearing in 2001. If Congress cuts taxes and there's no surplus, the money might come from other spending programs. Or maybe the government will borrow.

Here's one plausible situation: Until 2014, the income-tax surplus is used to pay off the national debt. After that, when Social Security needs cash from its trust fund, the Treasury starts to borrow again.

At that point, the national debt would be super-low, relative to the size of the economy. Borrowing wouldn't pose the danger it did when the debt was high.

All this is conjecture. But everyone needs to understand the range of possibilities before charging ahead with a radical change in Social Security's safety net. The most drastic change would be to privatize the system. Instead of being guaranteed lifetime payments, you'd have a private investment fund. The comfort of your retirement would depend on how well your personal investments did.

Originally, those who backed private investment accounts promoted them as a way of digging Social Security out of its hole. As more upbeat facts emerge about the program's viability, they've shifted ground.

Now they say that privatization is a better deal, even if Social Security could survive as is.

Challenging that assertion is John Mueller, chief economist of an Arlington, Va., financial forecasting firm.

Says Mueller: If economic growth is lower over the next 75 years than it was in the past 75 years, returns on investments would be lower, too. That would make Social Security look better yet.

No one knows which forecast is going to be right. But, with everything so iffy, how big a change in the program do you really want to make?

Washington Post Writers Group

Pub Date: 5/24/99

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