The much-discussed Washington Post op-ed column on Social Security is not my favorite--it makes much of the meaningless actuarial solvency of the social security system, rather than the relevant changes to the inflows and outflows of tax revenue. But it does make one good point:
Social Security isn't a big deal because the trustees' projections are based on unduly pessimistic assumptions, including anticipated economic growth that is slower than has been the case for the past several decades.The projected slowdown in economic growth is based largely on the slower growth of the workforce, which is inevitable unless fertility rates or immigration soar beyond all predictions. Better-than-expected growth cuts both ways: It increases the amount of payroll taxes coming into the system but also the amount of benefits owed. Even if the economy were to grow significantly faster than predicted, that growth would push insolvency back by only six years. Weighing in the opposite direction: The trustees' projections on life expectancy may be too low -- good news overall, bad for Social Security.
Yes, the trustees' optimistic scenario shows Social Security solvent for more than 75 years, but that is so unlikely (fertility would have to return to pre-1970s levels, for one) that Social Security puts the chances at less than 2.5 percent.
Furthermore, Social Security's intermediate projections are in line with those of other experts. "There is a greater than 99 percent probability that total outlays over 100 years will exceed total revenues," the Congressional Budget Office found last year.
This is a pretty frequent theme among the more sophisticated opponents of social security reform, and it's wrong. First of all, because the changes in the SSA's predictions are only very partly based on economic growth; they're mostly based on things like longevity and birthrates. Demographic change is not a fast-moving disaster; aside from a few million immigrants, we now have pretty much all of the workers we're going to have in 2020. Indeed, it is much more likely that the SSA is being too conservative in forecasting future lifespans than that it is being too pessimistic about future fertility--which means that the pension forecasts are more likely to be too optimistic than too pessimistic.
Meanwhile, the current birth dearth means the labor force is going to grow a lot less slowly. And since economic growth is a function of labor force growth and productivity growth, that means that unless productivity takes off, the economy is going to grow more slowly in the future than in the past.
In addition, ceteris paribus, the retirement of the boomers means that national savings will fall. We currently have a very big generation in their peak savings years, and a much smaller generation drawing down retirement savings. When the boomers retire, this happy circumstance will reverse itself. So it's hard to see where this amazing productivity revolution is going to come from--especially since we're currently bearish on trade, which is one major place we'd look for productivity enhancements.
Then there are the higher taxes which will be needed to pay for social security and healthcare; they are very likely to be a drag on growth.
Finally, to the extent that we mitigate the labor force problem by either keeping seniors in longer, or importing more immigrants, we will be putting downward pressure on productivity. Immigrants are much more productive here than they are in their home countries; but they are less productive than the average American worker. Likewise, the dislocations of dealing with an elderly workforce will be a drag on productivity. At the same time, the elderly will be consuming a lot more low-productivity services such as home health care aides.
The upshot is, we are very, very unlikely to grow our way out of our demographic problem.
Actually, as the relative size of the labor force gets smaller, I can see labor productivity going up somewhat. Not proportionately to the decline in the size of the labor force, but a bit.
When it becomes harder to find workers, it won't be the good, productive jobs that go first, it will be the "McJobs." So, after the marginal jobs are destroyed, the good ones will be left, raising productivity numbers for what's left.
That still leaves us with an economy that will grow slower, just maybe not quite as slow as a very pessimistic forecast with no productivity gains would predict.
My somewhat dark solution to both the social security funding problem and the illegal immigration problem is to grant anyone (who's not a convict or a suspected terrorist) that wants to work here a green card. Tax them the same as a citizen, including payroll taxes, but grant them none of the retirement benefits. If they later become a citizen only the payroll taxes paid after that event would count towards their retirement benefits.
@Nelson,
So they "won't" get retirement, they will still get free schooling for their children, access to US emergency rooms and a host of other social services (especially once they have US born children), thats a pretty big incentive for most of the worlds poor. And in the end, do you really think we would let US citizens/residents suffer in their old age, and deny them full benefits, especially when the eventual means testing starts and they are poor, because they came to this country with a late start, no education, and little or no English speaking ability?
First off, Megan is right about the rate of rise of life expectancy. We are somewhere on an S curve on advances in biotechnology where the rate of advance starts accelerating. So people will live longer than actuarial tables predict.
The problem is that we are going to be able to rejuvenate bodies before minds. So we will see a bigger increase in life expectancy than extension in peak intellectual performance. We will have lots of younger bodies but older and tired minds. That's bad for productivity.
The other problem we face is from immigration: the lower skilled and lower intellectual capability people are growing as a fraction of the total population. This will definitely lower productivity a great deal.
Lower productivity from immigration? How can more people lower productivity? It does not make sense. Maybe productivity per person, but our total ability to produce will be greater with heavy immigration.
China isn't one of the most popular places to invest because of its Capitalistic foundations or exceptionally bright population. Its potential comes from having 1.3 billion people.
There is strength in numbers. This is a lesson the ancients knew well, but many Americans seem to have forgotten it lately. We wouldn't be the superpower we are now if we had kept the same population that existed in the original 13 states.
Nelson,
Productivity is a rate of production per person. It is not total production.
India has about as many people as China and yet has a much slower growth rate. India has a much lower average IQ. So it is not growing as quickly. Bright Chinese are making a huge difference. That's why Singapore and Taiwan have high productivity. They didn't need huge populations to achieve high productivity. They just needed high IQs.
Lots of high population countries are poor. Where is the strength in numbers in Nigeria? Not happening. Why not? IQ, IQ, and IQ. Brain power counts most of all in determining the wealth of nations.
Re: First off, Megan is right about the rate of rise of life expectancy.
I rather doubt it-- unless something very radical happens in biotech (not medicine-- biotech). We have picked all the low hanging fruit in increasing life expectancy-- and most of the increase in that figure has been about young and middle aged people not dying before they reach old age, not old people living to be super-old. Sure, a few advanaces on, say, the cancer front will bump the numbers up a few years. So too would healthier lifestyles but don't hold your breath there. We're only go to see a really big increase in life expectancy if some very exotic research bears fruit-- in which case seniors will cease to be "seniors" and instead become middle aged people who can keep working until they finally grow old and need to retire at, say, 90 or 120 or whatever. By the way I disagree on your point about "old" minds. Assuming we defeat physical forms of neural degeneration like Alzheimers I fail to see why older people with "young" bodies should have dysfunctional or incompetent minds. The idea smacks of stereotyping. Absent actual neural injury, old minds slow down because they lack stimulation and are dealing with the physical and social stresses of aging. Take those factors away and the elderly will be no more "stupid" than the rest of us.
JonF,
Something radical is happening in biotech: miniaturization of instrumentation. Microfluidics is the key.
Old minds: We will gain the ability to replace internal organs but not the brain. We will have a smaller toolset for doing brain rejuvenation than for doing rejuv on the rest of the body. So brain rejuvenation will come more slowly.