February 24, 2000
Irrational Exuberance Won't Save Social Security
by Andrew G. Biggs
Andrew G. Biggs is a Social Security analyst at the Cato Institute.
Federal Reserve Board Chairman Alan Greenspan warned against letting "irrational exuberance" cause us to ignore stock market fundamentals, and we should be also careful that today's booming economy doesn't make us ignore the fundamentals of Social Security and wishfully conclude that the system does not face a crisis after all. Some commentators have gotten great publicity by doing just that. The status quo faithful, led by Dean Baker and Mark Weisbrot of the Economic Policy Institute, claim that "any shortfall that Social Security may have in the future can result only from a dismal economic performance." If economic growth exceeds the low 1.7 percent annual rate projected by Social Security's Board of Trustees, they say, "the Social Security system will be solvent into the stratosphere of America's science-fiction future." But close examination shows how irrational this exuberance is.
Social Security's trustees predict low economic growth not because American workers will suddenly become unproductive -- in fact, the trustees actually predict that future wages will grow at twice the 1975-95 rate -- but because low birth rates and retiring Baby Boomers will slow the growth of the labor force. Not enough workers equals not enough economic growth. But Baker and Weisbrot, authors of Social Security: The Phony Crisis, believe the economy will grow faster. Faster growth means higher wages, and higher wages generate more tax revenue to pay benefits. Voila! Crisis averted.
The truth is that, regardless of economic growth, Social Security promises more than it can pay. Here's why. Social Security pays benefits with money it collects from a payroll tax of 12.4 percent on wages up to a ceiling of $76,200. But income tax return data collected by the Congressional Budget Office show that 79 percent of income growth from 1993 to 1996 went to individuals earning more than the payroll tax ceiling. In other words, most of the economic growth in recent years hasn't added a red cent to Social Security -- it simply passes it by. (cont)
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