Peterson Hits Social Security Myths

September 27, 2000

Peter Peterson, former Commerce Secretary and founder of the Concord Coalition, lamented in the New York Times this week that in the coming election "what poses for debate on entitlements may be worse than no debate at all. The bidding and one-upmanship on the campaign trail could easily lock the new president into indefensible positions that block genuine and badly needed reforms."

"Why is there so little understanding of the long-term challenge? Two big myths are anesthetizing our judgment: Myth No. 1: Social Security is in good shape because it has a trust fund. We are often told that the trust fund will keep the system solvent until 2037 if we do nothing and, if we make some minor tweaks, it will last until 2075. Who could get excited over such a distant danger?

"What we are rarely told is that the trust fund is fiscally and economically meaningless, an accounting fiction; this money has already been spent. Its so-called assets are nothing but a stack of IOU's from the Treasury. By 2015, Social Security's annual costs will start to exceed its tax revenues by ever ballooning margins.

"Because this is a pay-as-you-go system, Congress would then have to raise taxes, cut other spending or borrow from the public to redeem the IOU's -- precisely as if there were no trust fund -- or else take a heavy hatchet to Social Security and Medicare at the very moment the huge boomer generation is moving into its elder years.

"Some argue that we can use the projected budget surpluses to pay off the IOU's. Alas, this isn't possible. The surpluses themselves may not materialize. For one thing, an economic downturn could easily turn the surpluses into deficits in just a few years. For another, the budget projections assume, implausibly, that discretionary spending will not grow faster than inflation -- in spite of major new commitments to defense and education.

"If the surpluses do materialize, much of the money is likely to be spent. Gluttons don't often turn down a free lunch. Presidential candidates and members of Congress rarely withstand the temptation to give away surpluses by increasing spending or cutting taxes. There's much talk of putting a "lock box" on the surpluses. But no one has yet designed a lock box that Congress couldn't pick. Even if the lock box works, the money in the trust fund is but a small down payment on future obligations.

"Myth No. 2: The New Economy will allow us to grow our way out of the problem. According to this myth, official projections, which point to a gradual slowdown in economic growth, are too pessimistic. The critics confuse pessimism with arithmetic. Economic growth depends not just on growth in productivity, that is, output per worker, but also on rising numbers of workers. By the 2020's, the labor force will be growing only about one-tenth as fast as in the last quarter century. Given the demographics, it would fly against all logic if economic growth did not slow.

"A better question is whether the official projections are too pessimistic about the growth in productivity. But keep in mind that even a huge boost in productivity won't do much to reduce Social Security's burden. According to Alan Greenspan, the Federal Reserve chairman, eliminating Social Security's long-term deficit would require a 200 percent increase in long-term productivity, a leap that few economists, even new economy enthusiasts, believe is possible.

"Our leaders face a choice. They can address the question of entitlements for the elderly while the economy is still booming and the budget is in the black, and before most baby boomers retire. Or they can delay until the window of opportunity closes. Either way, America will change course. If we act now, everyone, young and old, will have time to adjust and prepare."

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