Social Security: a contrarian view

February 26, 2007

David Langer presents what journalists call a "man bites dog" story. The United States, he says, should expand Social Security, not shrink it.

The New York actuary's opinion runs contrary to the standard view in Washington. Both conservatives and liberals tend to talk about how to "reform" the system by trimming its long-term costs. Otherwise, it's argued, the cost of benefit payments from Social Security and Medicare will become overwhelming as baby boomers retire.

By contrast, Mr. Langer urges making Social Security benefits much more generous to provide safe and adequate pensions, even if payroll taxes must rise.

As it is, the proportion of Americans covered by corporate defined-benefit plans – plans that promise a specific pension amount throughout an employee's retirement years – is declining as many companies try to shed their costs. Many employees now have defined contribution plans, such as 401(k)s, that allow employers and employees to make payments to an investment account for retirement. These plans are generally less generous and face the risk of ups and downs of financial markets.

For employees fortunate enough to have both of these plans, Langer sees Social Security as "the best leg" of a "three-legged stool."

To Social Security administration actuaries, Langer is probably an unwelcome critic. Each year, these actuaries provide the trustees of the Social Security Trust Fund with three projections on the adequacy of that fund to pay all promised benefits over a 75-year period. One uses relatively optimistic assumptions, another more pessimistic assumptions. And the third one, somewhere between the other two, receives the most attention.

Because of their long-term nature, these forecasts are shaky. They hang on assumptions of interest rates, human longevity, economic growth, immigration, population, etc., that can't really be known with precision today.

Langer figures the optimistic projection is most likely to be true. It shows a small surplus in the trust fund at the end of 75 years. After looking at the annual trustees' reports from 1992 to 2002, he finds this cheery forecast the most accurate in predicting – so far – the future level of the fund's assets.

The intermediate projection in the trustees' report of last spring forecasts that the trust fund reserves will be exhausted in 2040. At that point, payroll taxes and the partial taxation of Social Security benefits given to higher-income beneficiaries would provide enough revenue to pay 74 percent of promised benefits, falling gradually to 70 percent by 2080. In real terms, unless the US economy tanks and productivity falls, that 74 percent will buy a lot more goods and services than Social Security benefits do today.

As it is, promised Social Security benefits have already been cut about 25 percent since 1981, says Langer. That's the result of the gradual increase in the retirement age to 67 by 2020, a reduction in benefits for children of parents who die, and increased taxes on benefits paid to upper-income beneficiaries.

"[It's a] kind of a melancholy picture for the future," says Langer. But he pooh-poohs claims that Social Security faces a financial crisis and will eventually go bankrupt. This view has been pushed for many years by conservatives and libertarian groups, such as the Cato Institute, as a way to promote privatization of Social Security, he charges.

Richard Kogan agrees Social Security doesn't face a crisis. An economist at the Center for Budget and Policy Priorities, a liberal think tank, he suspects growing income inequality in the United States, stimulating payroll tax revenues, may account for the greater accuracy of the optimistic 75-year projection.

Nonetheless, Mr. Kogan prefers the intermediate projection because Americans may live longer on average than the actuaries forecast. That means they'd receive Social Security benefits for longer.

Prospects for changes in the system under President George W. Bush are slim. Dean Baker, codirector of the Center for Economic and Policy Research, another liberal Washington think tank, doubts that Republicans and Democrats could agree on a necessary compromise.

After the past fall election, Democrats and many Republicans in Congress are unlikely to go along with the partial privatization advocated by Mr. Bush. His new budget allocates $29.3 billion to establish private accounts in 2012.

It's unclear if Bush would accept a favorite Democratic proposal to help plug the assumed shortfall in the retirement program: raising sizably the present $97,500 income cap on Social Security taxes.

Kogan wants to make clear that there is no general "entitlement crisis." Medicare and Medicaid costs are growing rapidly as healthcare costs escalate. These programs are genuine financial threats. But other entitlement programs such as food stamps, civil service retirement, earned income and child tax credits, and family support programs will not grow as fast as the nation's gross domestic product, he says.