Readers, economist discuss Social Security on Web

In his State of the Union address, President Bush outlined his plan for changes to Social Security that would cut future benefits in exchange for allowing younger workers to invest some of their retirement funds in private accounts.

Some have said the “Social Security crisis” is overstated. But President Bush maintains the changes are needed to avert a crisis a generation from now.

Doug Orr, an economics professor at Eastern Washington University who researches labor economics, answered reader questions in an online forum Friday at www.spokesmanreview.com.

Below is an edited transcript of the forum.

Sue H.: How can you possibly claim that Social Security is not going to go bankrupt? Everybody knows it’s a fact that the trust fund is going to go broke in 2042.

Doug Orr: It is an interesting thing about this “fact.” It keeps changing. When some politicians were claiming there was a crisis in Social Security in the early 1990s, the trust fund was supposed to go to zero in 2029. By 1998, it was 2034 and today it is 2042. We have to ask why the year keeps moving further into the future.

The answer is very simple. By law, the trustees of the system must project the balance in the trust fund 75 years into the future. To do this they must make some assumptions about how fast the economy will grow, what the unemployment rate will be, how fast inflation will be, how many immigrants will be allowed into the country and many more variables. They cannot know any of these with certainty, so they make three separate projections using different assumptions.

The president and the media only report one of these, the middle projection. The assumptions used in the middle projection are very pessimistic, to the point of being unrealistic. For example, they assume that immigration will be limited to only 500,000 a year, one of the lowest levels in the past 20 years. … Another assumption is that the economy will grow at a rate of only 1.8 percent for the next 75 years. For the past 75 years, the economy has grown at a rate of 3.5 percent. In fact, there is no 15-year period in U.S. history, including a period including the Great Depression, in which the economy has grown at only 1.8 percent.

Steve Faust: Some feel any cut in Social Security benefits is unfair because it deprives retirees of money they contributed to the system. Assuming a person retires at age 67 today, how many years does it take for that person to receive in benefits all of the money the person paid into the system?

Doug Orr: I agree, cutting benefits would be unfair. If you had been paying for fire insurance on your house that would pay the full replacement cost, and suddenly the benefit were reduced to just half of the home’s value, that would be unfair. But that is what is being proposed.

Your second question indicates that you have been influenced in your thinking about Social Security in exactly the way that Bush would want. He wants you to look at Social Security as an investment, when in fact, it is a form of insurance.

Social Security guarantees a retiree a constant stream of income, adjusted to protect against inflation, for as long as they live, and after they die, a payment of half that amount to their surviving spouse. If you live for 40 years in retirement, that income stream will last for 40 years. If you only live 20 years, you would get the income for only 20 years. You are not getting “your money” back. You are getting an insurance benefit.

Lynne: One of President Bush’s arguments seems to be pretty convincing. In 1950 there were 16 workers paying in for every retiree, in 2000 there were three and by 2030 there will only be two. Won’t this create a breakdown in the system?

Doug Orr: On the surface this argument seems to be convincing, but it ignores one of the greatest strengths of a market economy. Productivity tends to rise over time. A worker in 2000 produces more than twice as much real physical output each hour as a worker did in 1960. That is why our standard of living is so much higher today than back then.

Since productivity tends to double every 30 years, workers in 2030 will be able to produce twice as much as workers in 2000. This is how it will affect retirement: Let’s say we have three workers and one retiree today. Each worker produces $1,000 of output per week, so total output is $3,000. Let’s also assume that we give the retiree half of what he used to produce as his retirement benefit. So the retiree gets $500 and the workers each get one-third of the remaining $2,500. So each worker gets $833.

Now, fast forward to 2030. Each worker now produces twice as much, but there are fewer workers. Does this cause a problem? No. Each of the two workers now produces $2,000 of output per week. We now give the retiree half of his final salary, or $1,000. That leaves $3,000 to be split two ways, so each worker gets $1,500. So the standard of living of workers will be higher and the standard of living of retirees will be higher.

The argument that we have to cut benefits to future retirees because the number of workers per retiree is going down is simply wrong.

Keith Johnson: The president insists Social Security is “in crisis.” You argue persuasively that his claim is drastically misleading, probably for purely political reasons. Other economic writers, such as Newsweek’s Robert Samuelson, believe the system does need revision, and suggests reforms such as raising the age of eligibility and lowering benefits to wealthy people. What, if any, changes do you think need to be implemented?

Doug Orr: I do not think any changes need to be implemented. Samuelson might be trying to prevent the disaster that private accounts would create by offering up a less-severe alternative.

If wealthy people have paid for their insurance, why should we limit how much they can collect from the insurance system? It would not be fair if someone paid to insure their Honda Accord, but we said they had to replace it with a Civic.

But if they haven’t paid their full insurance premium, then we could limit their benefits. The incomes on which Social Security taxes are paid are capped at $90,000 right now. Eliminating the cap and subjecting high income salaried workers to the same tax as lower paid workers would make the system more “fair.”