Social Security Safe For Boomers, Busters
RELAX, Baby Boomers and Generation Xers. Normal Social Security pensions will be available when you retire in the next century.
That's the message of Dean Baker, an economist at the Economic Policy Institute in Washington. ''So many people believe Social Security won't be there when they retire,'' he says. ''There is no reason for that to happen. It is a very sound program. It will need some adjustment, but really quite minor.''
Many Americans figure that large budget deficits, rising health-care costs, and the aging United States population will make financing the Social Security system unaffordable for the working population by around 2030 or 2040.
Not so, Mr. Baker says.
One key reason is the power of compounding. Real wages have tended to rise about 1.1 percent or 1.2 percent a year on average as productivity has improved. That means, Baker says, that in 30 or 40 years, real wages should rise 60 or 70 percent.
A tiny portion of those extra wages will be taxed away to pay Social Security pensions and Medicare costs. Baker suggests that in 2010, the government should raise Social Security taxes by 1/20th of 1 percent on both the employer and employee. A similar tax hike would be added each year for 30 years. So by 2040, the extra tax would raise the combined Social Security tax level from 15.3 percent now to 18.3 percent.
Then the system would have ''a positive balance forever,'' Baker says. Real wages after each tax hike would still rise by about 0.9 percent a year. ''It hardly sounds to me like we are impoverishing our children or grandchildren,'' he adds.
Baker is especially critical of work on ''generational accounting'' by two economists, Laurence Kotlikoff of Boston University, and Alan Auerbach, of the University of California, Berkeley. Their work has been taken up by Indiana's Sen. Richard Lugar, who is seeking the Republican nomination for the presidency.
''It kills me how serious people are taking it,'' Baker says.
In February the two professors examined the new Clinton administration budget and concluded that to cover the costs of current and projected fiscal policies, future generations would face ''an 84 percent lifetime net tax rate,'' an amount 3.5 times that borne by those born in 1900 and 2.5 times that borne by those born in 1993. They called this impact ''unconscionable'' and ''economically unfeasible,'' forecasting fiscal adjustments.
Baker attacks assumptions in this analysis regarding interest rates, education expenses, and health-care costs. Under the Kotlikoff/Auerbach assumption, for example, a median-income family of three would pay 75 percent of its income on health-care costs in 2030. ''This is an absurd scenario,'' he says. Recalculating with different assumptions, Baker comes up with a modest 24.8 percent lifetime net tax rate for future generations.
Alan Greenspan, chairman of the Federal Reserve, last month suggested a remedy for the perceived financial plight of the Social Security system and the federal budget. He said the Consumer Price Index (CPI) may overstate inflation by between 0.5 percent and 1.5 percent a year. If that was corrected, the annual upward adjustment of pensions and income tax deductions to take account of inflation would be smaller. Over time, that adjustment would do much to end the federal deficit.
The Republicans in Congress jumped at what looked like a painless solution. Both houses of Congress held hearings on the price index. One Senate Finance Committee hearing April 9 featured four economists, two saying the CPI overstated inflation, one taking an ambiguous position, and one getting into a side issue, says Baker, who attended. Baker himself has just come out with a paper holding the Greenspan CPI thesis is ''ill-founded.''
In Congress, the Republicans in both houses have decided to bite the bullet and abandon any attempt to incorporate a systemic change in the CPI in working out plans for a balanced budget by 2002. They are just starting work on the fiscal 1996 budget.
Meanwhile, the nonpartisan Bureau of Labor Statistics plans to issue by the end of the year a ''test'' CPI using different statistical methods. The statistical disputes are complex. Katharine Abraham, BLS commissioner, reminded Congress recently that it is in ''no one's interest'' to have the agency politicized.