The debate over the sustainability of Social Security has resurfaced, but it is yet again wrongly framed in financial terms: As the number of workers paying into the fund declines and retirees collecting checks live longer, the Social Security Trust Fund will be depleted. The perceived “crisis” stems from not having enough money to pay the retirees what they were promised.
Those on the right suggest we cut the benefits, raise the retirement age or invest Social Security funds in the stock market to get better returns. Sen. Bernie Sanders (I-Vt.), speaking for the progressive left, has proposed eliminating the cap on wages to raise more payroll tax revenue from higher-income households. Unfortunately, both sides approach the issue of sustainability incorrectly.
To understand why, it is useful to revisit an exchange between then-Rep. Paul Ryan (R-Wis.), who had made it his mission to “reform” Social Security, and Alan Greenspan, the conservative chairman of the Federal Reserve. In a 2005 congressional hearing, Ryan prodded Greenspan to agree with him that privatizing Social Security “can help us achieve solvency for the system.” Instead, Greenspan surprised everyone by stating, “I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.”
With that statement, Greenspan hit the nail right on the head. Nothing prevents the government from continuing to send the retirement checks, even if the Trust Fund is officially depleted. As the issuer of currency, the government can never run out of money; the $5 trillion response to COVID should have laid that matter to rest.
The appropriate question, therefore, is not whether we have enough money raised through tax revenue. Instead, the question is will there be enough workers and will they be productive enough to provide goods and services for themselves and for the elderly. These are the “real assets” that Greenspan is talking about. If the goods and services are not available, we can still financially afford to pay our seniors. But that money would compete for a limited amount of goods and services, causing inflation.
Will the “real assets” be available in the United States 30 years from now? Some back-of-the-envelope calculations show they likely will. In 2020, there were 3.5 workers per retiree. That number is expected to fall to about 2.6 by 2050. At the same time, according to data from the Organisation for Economic Co-Operation and Development in the past 30 years, U.S. worker productivity, as measured by GDP per hour worked, has increased by more than 60 percent. If this trend continues, we will only need 2.2 workers by 2050 to produce what 3.5 workers produce today.
Hence, regardless of the rhetoric, Social Security is sustainable in terms of what matters — real resources and productivity. The “crisis” is not real, but manufactured, since even with the projected decline in the worker/retiree ratio there will be enough real output to go around.
If policymakers really want to strengthen Social Security, the solution lies in investing more in our physical and human capital, and also effectively harnessing technological advances which will sustain and advance worker productivity. Current advancements in artificial intelligence will likely drive this further in unimaginable ways over the next three decades.
Progressive proposals for raising the payroll tax cap have merit on their own — they can tackle income inequality. But if progressives stake the existence of Social Security on their ability to pass tax increases on the wealthy, what happens if they don’t succeed? The payroll tax cap solution, while politically expedient in the short-term, is not a winning proposition in the long term since it rests on a fictitious narrative about government finances.
Surprisingly, to design truly progressive reforms of Social Security we need to follow Alan Greenspan’s logic. Financially, that means no longer earmarking payroll taxes to purportedly “pay for” Social Security, and eliminating the fiction that is the Social Security Trust Fund. All the federal government needs to do to make Social Security financially sustainable is to fund it the way it funds any other standing program.
We don’t earmark particular taxes to pay for the military. Nor do we project how much it is going to cost 50 years from now, forecasting shortfalls in the military’s funding many years into the future. The only reason politicians can speak of a shortfall in Social Security’s funding is because of the idiosyncratic way it is set up.
Instead of playing the game of “how are we going to pay for it?” progressives should strive to redefine the “sustainability” of Social Security in terms of real resources rather than finance.
Yeva Nersisyan is an economics professor at Franklin & Marshall College and the Levy Economics Institute at Bard College