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Action on Social Security: The Urgent Need for Delay

by Dean Baker

Center for Economic and Policy Research

November 2010

http://www.cepr.net/documents/publications/ss-2010-11-1.pdf
[Note: All references to tables and graphs can be found in the original document:
http://www.cepr.net/documents/publications/ss-2010-11-1.pdf]


Introduction

Many policymakers and analysts are arguing that there is an
urgent need to make changes to Social Security. They point
out that the projections from the Congressional Budget
Office and the Social Security Trustees show the program to
be out of balance in the long-term, therefore we would be
best advised to make changes as soon as possible. It is
argued that this will both make the necessary changes easier
and also will provide confidence to financial markets that
the country can deal with major problems.

While it is understandable that those seeking to cut Social
Security benefits and/or privatize the program would push
for quick action, it is difficult to understand why
supporters of the existing Social Security system would take
this view. There is enormous public confusion (much of it
deliberately cultivated) about the extent of the program's
projected shortfall. This makes it far more likely that any
changes to the program in the current environment will
involve more cuts than would take place among a better-
informed electorate.

This paper argues that supporters of the existing Social
Security system should try to ensure that no major changes
to the core program are implemented in the immediate future.
It points out that:

1) There is good reason for believing that the public will
be better informed about the financial state of Social
Security in the future, in part because of the weakening of
some of the main sources of misinformation;

2) Many more people will be directly dependent on Social
Security in the near future. These people and their families
will likely be strong defenders of the program;

3) The group of near retirees, who may be the victims of
early action, will desperately need their Social Security
since they have seen much of their wealth eliminated with
the collapse of the housing bubble; and

4) The concern over "maintaining the confidence of financial
markets" is an empty claim that can be used to justify
almost any policy.

Keeping Fear Alive: The Effort to Undermine Confidence in
Social Security

Polls consistently show that a large majority of working age
people does not expect to be able to collect Social Security
benefits.1 They have been led to believe that the program is
hugely out of balance and will soon run out of money. Of
course this is clearly not the case. The projections that
are derived from the Social Security Trustees' intermediate
assumptions show that the program could pay all scheduled
benefits for the next 27 years even if nothing is done.
After 2037, the projections show that Social Security would
still be able pay a benefit that is larger in real terms
than what current retirees receive, even though it would be
just 75 percent of the scheduled benefit. The payable
benefit would continue to rise through time, so that even if
nothing is ever done to change the program, a retiree in
2100 could anticipate a benefit that is more than twice as
high as what current retirees receive today.

Presumably Congress will not allow the payable benefit to
fall below the scheduled benefit. If a shortfall really was
imminent, it is likely that Congress would make the
necessary adjustments to keep the program paying full
benefits. This is exactly what happened in 1982-83, when the
program literally did run out of money. Congress took steps
to ensure that benefits were paid each month. It then
established the Greenspan Commission whose reforms laid the
basis for another 54 years of solvency. Adjustments of the
size put in place in 1983 could keep Social Security fully
solvent into the 22nd century even if we waited until 2030
to act.

These are the basic facts about the state of the program,
yet only a small share of the public knows them. This
matters hugely in terms of the willingness to accept cuts in
the Social Security. People are far more likely to accept
cuts in the program if they never expected to see their
benefits anyhow. On the other hand, if there were widespread
awareness of the fact that the program was fully funded for
the near-term future and largely funded for the indefinite
future then there would likely be more objections to
proposals that substantially reduce benefits.

The public's ignorance of Social Security only matters if
there is reason to believe that it will be better informed
in the future. This is the case, primarily because of recent
trends in the media.

Traditional news outlets are mostly owned and controlled by
individuals who are deeply hostile to Social Security. The
best example of such an outlet is the Washington Post, which
regularly uses both its opinion and news pages to promote
the view that the program is in crisis, that benefits are
far too generous, and that large cuts are essential. As a
result of having one of the largest circulations in the
country and also being located in Washington, the Post is
enormously influential in public debate.

However, the Post's circulation is falling rapidly. Figure 1
shows data on the Washington Post's average daily
circulation from 2002 through 2010 and projects it forward
until 2040. Daily circulation has already fallen from close
to 800,000 in 2002 to less than 600,000 in 2010. If the
Post's circulation continues its 3.7 percent annual rate of
decline, then it will be under 400,000 by 2020 and less than
300,000 by 2030. It can be assumed that the paper's
influence in national debates will experience a
corresponding decline.

By contrast, many of the new media outlets that are growing
have a more informed and nuanced view of the program. For
example, the Huffington Post, one of the largest of the
exclusively webbased news sources, has many reporters and
columnists who take a more balanced view of Social
Security's finances.2 While circulation at the Washington
Post has been shrinking, the number of web viewers of the
Huffington Post has been growing rapidly. The number of
viewers of the Huffington Post first began to regularly
exceed the viewers of the Washington Post in the second half
of 2009. By the second half of 2010 the Huffington Post was
drawing almost twice as many viewers as the Washington Post,
as shown in Figure 2.

These two news outlets are representative of a larger trend
of new media sources supplanting the traditional media
outlets. While not all new media outlets can be expected to
give the same treatment to Social Security as the Huffington
Post, and not all traditional news outlets are as hostile as
the Washington Post, it is likely that the mix of rising new
media outlets will be substantially more balanced in their
treatment than the declining old media outlets. For this
reason, it is likely that the public will be much more
knowledgeable about the true state of Social Security in 10
or 20 years than it is today.

The Growing Dependency on Social Security

The baby boom generation is now reaching the age of
eligibility for Social Security. As a result, the number of
people who are receiving benefits is projected to rise
rapidly over the next two decades. The strongest supporters
of Social Security are the people who are dependent on the
program. This is not only out of self-interest.
Beneficiaries appreciate the program more than the rest of
the population. They know how important it is for sustaining
their standard of living and they also know that Social
Security is there for them, as opposed to the tens of
millions of younger people who think that the program is
about to evaporate.

Seniors consistently oppose cuts not just to their own
benefits, but also to benefits for their children and
grandchildren. They want future generations to be able to
benefit from the program just as they have. For this reason,
the greater the share of the population that is actually
dependent on Social Security, the harder it will be for
politicians to implement large cuts.

Figure 3 shows the percentage of the adult population that
is projected to be dependent on Social Security. The
percentage of beneficiaries rises from 23.5 percent in 2010,
to 27.8 percent in 2020, and to 31.0 percent in 2030. By
2030, the share of the voting age population that will
actually be receiving benefits from Social Security will be
nearly one-third higher than it is today. Given the age
skewing among actual voters (the elderly turn out in higher
percentages), the growth in the share of beneficiaries among
voters may be even larger. This will mean that it will be
far more difficult for politicians to support benefit cuts
in 2020 or 2030 than in 2010.

Protecting the Victims of the Housing Crash from Another
Attack

One of the main arguments of proponents of early action on
Social Security is that eliminating the shortfall will be
easier if we move quickly. This usually means that if we
make the current generation of near retirees receive lower
benefits, then the future tax increases and/or benefit cuts
that will be required to balance the program's funding will
be less. While this is logically true, it raises the
question of whether it is desirable to make near retirees
accept lower benefits.

The current cohort of near retirees (people between the ages
of 50 and 65 in 2010) has been the victim of a uniquely bad
period in American economic history. Most of the members of
this age cohort saw little by way of wage gains during their
working lifetime as a hugely disproportionate share of the
benefits of productivity growth went to those at the top of
the income scale.

In addition, the limited wealth that they were able to
accumulate during their working years was largely destroyed
by the collapse of the housing bubble. As a result, the vast
majority of these workers are approaching retirement with
little other than their Social Security to support them. The
median net worth (including home equity) of older baby
boomers (between the ages of 55 and 64) is just $170,000.3
This would leave the median household with roughly enough
money to pay off the mortgage on the median house and then
be entirely dependent on Social Security for all their
expenses. The median late baby boomer has roughly $80,000 in
net worth including their home equity, roughly enough to pay
off half the mortgage on the median house.

Figure 4 shows the median real hourly wage for 1979 and
2009. As can be seen, the median hourly wage rose by just
14.6 percent over this 30-year period even though
productivity grew by more than 50 percent. By contrast,
median wages rose more or less in step with the rapid
productivity growth that the U.S. economy experienced over
the years 1947 to 1973. By 1973, the median real wage was
almost twice as high as it was at the end of World War II
The Social Security trustees projections assume that there
will be little increase in inequality in future years. If
this is the case, then median wages will rise pretty much in
step with average wages. Figures 5 show projections for the
real median hourly wage over the next four decades under
this assumption.

In this scenario, median wages will be more than 25 percent
higher in 2030 than they are today and more than 60 percent
higher in 2050. There is no guarantee that the Trustees'
projections will prove accurate on either wage growth or
distribution, but if they are, then they imply that young
workers just entering the labor force will see substantial
improvements in living standards over their working
lifetime. Such gains will far outpace the gains of their
parents' or grandparents' generations. This would suggest
that an approach to Social Security that was concerned with
generational equity would more likely turn to these younger
generations for tax increases and/or benefit cuts rather
than imposing a further burden on the cohort than has been
the primary victim of the economic policy and mismanagement
of the last three decades.4

The Con Game: Reassuring Financial Markets

One of the arguments often given for cutting Social Security
benefits is that - even though we know the economy can
easily bear the additional costs that Social Security will
impose in coming decade - it is necessary to make cuts to
the program to reassure financial markets. This is perhaps
the most cynical rationale of all.

The reality is that no one knows exactly what will reassure
financial markets. Furthermore, reassurance is not a yes/no
proposition. The relevant question would be exactly how much
reassurance would be bought with cuts of what magnitude? No
one has attempted to answer this question, probably because
it would expose the absurdity of the whole effort.

Guessing what financial markets will do in response to
various policies and/or events is a difficult task. There
are a small number of people who do this well and are highly
rewarded. None of the people who make the argument that we
need to cut Social Security to reassure financial markets
are prominent members of this group of knowledgeable market
forecasters. (Taking a saying from a different context, this
appears to be a case where those who tell don't know, and
those who know don't tell.)

It is a common political tactic to claim that a policy that
cannot be supported on other grounds must be pursued to
appease financial markets.5 Even if there may be a short-
term movement in financial markets that follows a particular
policy change, it does not follow that this movement will be
lasting. In other words, it could be the case that the stock
market will jump by 10 percent if large cuts to Social
Security are put in place. However, this could just be the
result of the fact that market actors are expecting the
market to rise in response to the cuts. The movement may not
reflect their actual assessment of the economy or future
corporate profits and therefore may not be enduring.

Furthermore, it is not clear that the movement in the market
would even be desirable from the standpoint of the economy
as a whole. Suppose that a cut to Social Security benefits
led to the further inflation of a stock bubble. This would
have the effect of leading to a stock-wealth-induced rise in
consumption and decline in national saving. This would be
undesirable from the perspective of everyone except the
small group of people who hold large amounts of stock. If a
bubble-inflating rise in stock prices is the predicted
effect of a cut in Social Security benefits, then it would
be a strong argument against cutting benefits, not an
argument for cuts.

As a practical matter, anyone wishing to argue that cuts to
Social Security are necessary to assuage financial markets
should be expected to lay out specifically what they expect
the impact of a particular set of cuts to be on markets.
That way, both the validity of the claim and the expected
benefits of the outcome can be assessed. In the absence of
such specifics, arguments for cuts to Social Security based
on their impact on financial markets do not deserve to be
taken seriously.

Conclusion: Social Security Can Wait and So Should We

There is no good reason for rushing forward with changes to
Social Security. The official projections show that the
program will be fully solvent for nearly three decades with
no changes whatsoever. The necessary changes that are
projected to be needed to keep the program fully solvent in
subsequent decades are not especially large compared to
budgetary changes made in prior decades, such as the
military build-up in the 80s or cost of the wars in the last
decade.

Given the extraordinary degree of misinformation surrounding
the program, the country would be well advised to wait until
the public is better informed before making major policy
changes. Recent trends in the media suggest that this is
likely. Similarly, the growing percentage of the population
that receives Social Security will also increase knowledge
of and appreciation for the program. It is understandable
that the proponents of large cuts and/or privatization would
like to rush action in order to take advantage of the
public's ignorance, but it is difficult to see why the
program's supporters would go along.

Notes:

1 For example, a CNN poll conducted in the summer of 2010
found that 60 percent of adults under the age of 60 did not
believe that Social Security would be able to provide them
with any benefit when they retired. Seventy percent of those
under the age of 50 did not believe that Social Security
would be able to provide them a benefit when they retire.
(Results viewed at Pollingreport.com on 11-2-10, "Social
Security," at http://www.pollingreport.com/social.htm.)

2 The author's columns occasionally appear in the Huffington
Post.

3 These estimates are taken from Rosnick, David and Dean
Baker,.2009. "The Wealth of the Baby Boom Cohorts After the
Collapse of the Housing Bubble." Washington, DC: Center for
Economic and Policy Research. Available at
http://www.cepr.net/documents/publications/baby-boomer-wealth-2009-02.pdf.

4 See Schmitt, John. 2009. "Inequality as Policy: The United
States Since 1979." Washington, DC: Center for Economic and
Policy Research. Available at
http://www.cepr.net/documents/publications/inequality-policy-2009-10.pdf.

5 In the fall of 2008, when the TARP was originally voted
down by the House of Representatives, proponents of the
program seized on the plunge in the stock market that day as
evidence of the need for approval of the program. None of
these TARP advocates took the much steeper plunge in the
market that followed the approval of the TARP as a signal
that the program was a failure.

___________________________________________

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