I picked up an interesting rumor the other day out on the Internets from Berkeley economist Brad DeLong. As you may have heard, the Bush administration would like to eliminate or sharply curtail Social Security's guaranteed benefit program and transform it into a program of forced savings. Instead of paying a certain amount of your paycheck to the government, which, in turn, the government pays to retirees (with the promise that when you retire, younger workers' taxes will pay for your pension), President George W. Bush wants to force you to save a portion of your regular paycheck. You'd rely on that for your retirement.
The reasoning, ostensibly, is that individuals would invest a reasonably large portion in the stock market, which gets relatively high returns. And that this would allow people to, on average, have as much retirement money as is promised under the current system without any need to raise taxes. The underlying assumption here is that future stock market performance will resemble past stock market performance, with investments seeing gains of between 6 percent and 7 percent per year over the long term.
That seems like a reasonable assumption. There's no guarantee that future stock market performance will resemble past performance, but, if I had to take a guess, this seems better than making up a new number. But underlying that assumption, of course, is the assumption that the economy will perform about the same in the future as it has in the past. This way, profits will grow at a roughly equal rate to the past profit-growth that's historically driven the stock market's relatively high returns. If the future economy is worse than the past economy, then future profits will be worse than past profits, and future stock investments will be worse than past stock investments.
If it's true that the future economy is as strong as the past economy, we can therefore expect the future stock market to solve our Social Security problems. As a result, there is no Social Security problem. The thinking is not as follows: The problem is small compared with the Medicare problem. Or as follows: The problem is small compared with the general fund deficit created by the Bush tax cuts. Nor is the thinking: The problem is real but easily solved by more mild measures. Instead, the problem just doesn't exist.
That's right. The $11 trillion long-term Social Security deficit we've been hearing so much about lately -- and that pundits have been screaming about since, quite literally, I was one year old -- are based on a prediction that the economy will do significantly worse in the future than it has in the past. If this is right -- which it may be -- then the stock market will do worse, too, and solve nothing. Changing the underlying assumptions, which is what the privatizers are really doing, solves the problem on its own without any changes to policy.
Part of the Social Security Trustees' pessimism is warranted andbased on the idea that population growth will slow down in the future. Demographic projections are never perfect, but demographers have gotten pretty good at making estimates, so this probably will happen.
Much less reasonable are the Trustees' assumptions about productivity growth. They say that after growing 3.8 percent in 2002, 3.4 percent in 2003, and 2.7 percent in 2004, productivity growth will crash to 1.8 percent in 2005 and then slowly decelerate to 1.6 percent by 2012. After that, growth will average 1.6 percent until the end of time. The historical table at the top of the Web page on which this prediction is to be found shows that productivity growth averaged 1.7625 percent from 1960 to 2000. Since 2000, annual productivity growth has averaged 2.75 percent. The postwar years up to 1960, not included on the chart, saw faster growth than did the 1960-2000 period.
The important thing to note is not that the Trustees are necessarily wrong but, simply, that it's silly to pretend to think a panel of government accountants can predict economic events in the year 2037, much less offer a full 75 projection of the future course of the American economy. The trustees might be right: An aging society might prove less innovative and less productive than the America we've come to know. If this is true, Social Security is going to have a problem. So will the stock market. So will the Defense Department. So will just about every aspect of the American government and economy. And if that happens, we'll have to figure out how to respond, ideally by coming up with policies that will boost productivity and get us out of the jam. If we can't do that, we're all going to need to tighten our collective belts -- not just on retirement security, but on all aspects of our lives -- compared with the rapid growth we've learned to expect.
In the meanwhile, we can focus on problems that we do have: a war on terrorism, a large general fund deficit, an inefficient health care system, and a decaying infrastructure. This is how we deal with other areas of public policy. We don't look at the growth in defense spending over the past few years, project it forward, compare it with the tax revenue we can expect under dubious economic assumption, and worry that we may go bankrupt in 2043. Instead, we ask if the size of our military is suited to our present defense needs, and we see if we can't mobilize the resources we need. If we can get by with spending less in the future, we'll spend less. If the economy is too weak to afford what we think we need, we'll have to revise our grand strategy to suit our means.
In the context of a media outcry for politicians to show "courage" about tackling entitlements, "wait and see" sounds cowardly and timid. But it works for everything else, and it's not as if we have no current problems to worry about in place of how to cope with a hypothetical decades-long economic slump that doesn't begin until 2012.
Matthew Yglesias is a Prospect staff writer.