Peterson, Peter G. - Blackstone Group L.P.

Peter G. Peterson
Chairman, The Blackstone Group
The Blackstone Group LP
345 Park Avenue
New York NY 10154
212 935 2626
Clearing the Air of Fictions

Each day Americans are becoming better versed in all the problems, from generational inequity to declining trust in government, that call for big changes in Social Security. Yet many defenders of the status quo still claim there's nothing wrong with Social Security that a few minor changes won't fix. Let's take their fictions from the top one more time.
Fiction: Social Security can pay all promised benefits until the year 2032. This most common of status-quoist fictions contains a kernel of fact: The Trustees now project that Social Security will be "solvent" until the year 2032-meaning that its trust funds will possess sufficient assets, and hence budget authority, to cover benefits until that date.
The problem is that the trust funds are a mere accounting device. Social Security's stored-up assets consist of nothing but a stack of Treasury IOUs that can only be redeemed if Congress raises taxes, cuts other spending, or borrows from the public. Thus, their existence doesn't ease the burden of paying out future benefits. What really matters is the program's operating balance-that is, the annual difference between its outlays and earmarked tax revenues. Social Security's current operating surplus is due to begin falling in 2002 and turn into an operating deficit in 2013. This deficit will widen to an annual cash shortfall of $734 billion by 2031, the last full year the trust funds are projected to be "solvent."
Fiction: A "mere" 2.2 percent of payroll tax hike would solve Social Security's fiscal problems. In theory, 2.2 percent of payroll is the amount that Congress would have to raise taxes or cut benefits, starting today, to bring the trust funds into balance over the next seventy-five years. Status quoists routinely trot out this number as evidence of how small the Social Security problem is. As economist Henry Aaron asks, how can anyone talk about a "crisis" that could be solved by a mere 2.2 percent of payroll tax hike?
Let us explain. The new assets that the trust funds would accumulate due to this tax hike would be no more real than the old assets. All the 2.2 percent solution would accomplish is to postpone Social Security's first operating deficit by seven years-from 2013 to 2020. After that, the trust funds would only remain solvent by cashing in an even larger mountain of paper IOUs.
Fiction: The economy is bound to grow faster than projected- erasing Social Security's deficit. A close reading of the official projections reveals a big disparity between historical rates of real GDP growth (2.6 percent annually since 1980) and the Trustees' long-term assumption (just 1.3 percent annually by the 2020s). With the current expansion still in high gear, some status quoists, including former Labor Secretary Robert Reich, conclude that there must be some kind of mistake. Suppose, they argue, that the economy keeps growing at its historical rate. Wouldn't this be enough to close Social Security's long- term deficit?
But the mistake is theirs, not the Trustees'. When the Trustees project that real GDP growth will eventually slow to 1.3 percent per year, they aren't assuming any decline in the growth rate of product per worker. The entire fall in GDP growth is due to the slowdown in workforce growth as Boomers retire-from 1.5 percent annually since 1980 to just 0.1 percent during the 2020s. The status quoists need to wake up to demographic reality. Maintaining Americas historical rate of GDP growth would require more than doubling productivity growth to 2.5 percent. As for erasing Social Security's long-term deficit, it would require tripling productivity growth to 3.0 percent-a rate never before equaled over an entire business cycle.
Fiction: Social Security alone won't endanger the economy. The rising total cost burden of just the major senior benefit programs-Social Security, both parts of Medicare, and Medicaid for the elderly-is projected to reach 35 percent of payroll by 2040. Clearly this is unsustainable. Yet many senior groups refuse to confront this cost in its totality. Instead, they argue that each program should be regarded as a separate "deal"- regardless of whatever else is going on fiscally and economically. From this perspective, Social Security is "affordable."
This is like telling a homeowner that no single rock matters in the landslide that buries his family. Yes, the status quoists are right that Social Security is not growing as fast as Medicare or Medicaid. But it is the very intractability of health-care cost growth that makes achieving savings in Social Security so urgent. This point is lost on the status quoists, who apparently believe that future workers won't mind paying a stupefying total tax burden so long as many different federal agencies are collecting and spending the money.
Fiction: The official projections are pessimistic. Another frequently heard claim is that the official cost projections are based on unduly pessimistic economic and demographic assumptions-and should therefore be regarded as a worst-case scenario. Columnist Robert Kuttner, for instance, calls the Trustees' projections "too gloomy."
The status quoists have it backwards. Far from being pessimistic, the Trustees' "intermediate" scenario is based on assumptions that are surprisingly optimistic given the trends of the past twenty-five years. According to this scenario, productivity growth will speed up by 20 percent; growth in life expectancy at age sixty-five will slow by 60 percent (shorter life spans brighten Social Security's fiscal outlook); and the annual growth in real per beneficiary health spending will slow from 5 percent to just 1 percent. What happens if the future is more like the past? Take a look at the Trustees' "high-cost" scenario, in which Social Security faces a trust-fund deficit of 5.4 percent of payroll (not 2.2 percent)-and the total cost of the major senior benefit programs rises to 55 percent of payroll (not 35 percent).
Fiction: Even after paying for senior benefits, the next generation will still enjoy a rising living standard. Won't the next generation be better off? And if so, won't they be able to pay taxes at higher rates and still take home more income ? Columnist Michael Kinsley writes of Social Security: "Even if it amounts to... an even larger transfer from future workers to future retirees, so what? The younger generation will still be richer than the older one, even after the transfer takes place."
Let's leave aside the principle implicit in this argument-that we have a right to cash out and pocket our children's economic progress. The argument is factually incorrect if we take into account the total burden of young to old transfers. Raising taxes enough to pay for the growing cost of the major senior benefit programs would, under the Trustees' official scenario, erase all growth in real after-tax worker earnings over the next half century. Under the high-cost scenario, earnings would suffer a large decline. It's easy to say America would never allow this to happen. But that begs the question of how we will change course and when.