The Social Security System had no role in contributing to the national debt, and yet negotiators seeking to address the nation's fiscal problems always seem to want to cut Social Security benefits. Even President Barack Obama dangles cuts in benefits to entice Republicans to the deficit-reduction bargaining table. • Social Security is lumped in with deficit reduction because of the frequently heard falsehood that the system will impose undue burdens on future workers. • The trustees of the Social Security Administration report that currently there are 2.8 workers for each retiree, and that this ratio will fall to 2.0 workers over the next 25 years, an alarming and seemingly impossible burden for our children and grandchildren to bear. Critics of the system allege that future workers will be enslaved because of their obligation to pay retiree benefits. Such claims, however, are quite unfounded because they fail to account for the rising productivity of those future workers.
Impact of Improved Worker Productivity.
The United States has a history of investing in the abilities of its work force and the assets they have to work with. As a result, worker productivity has been increasing at a rate of 1.5 percent annually. Economist Dean Baker offers the following arithmetic example to show how important it is to adjust for productivity:
Assuming a retiree consumes about 85 percent of the amount a typical worker consumes, today's 2.8 workers must produce enough for 3.65 people. They get to keep 78 percent of their work product (2.8/3.65 = 78 percent), with the rest going to retirees. Based on the projections in the trustee report, workers 25 years from now will get to keep only 70 percent of their production; but if productivity continues to grow at present rates, they will be 45 percent more productive than today's workers. Under this scenario, future workers will receive much larger aftertax incomes.
Of course, sustained productivity growth requires sustained investment in the assets that contribute to worker productivity. If investment slows, the burden on future workers will be increased: The falling ratio of worker to retiree will not be offset by rising productivity. Continued political resistance to spending, both to invest in economic recovery and especially to invest in productivity-enhancing infrastructure investments, is a good way to assure that future workers will indeed be enslaved, not by Social Security but by lowered economic growth.
A Proposal to Link Social Security More Closely to Productivity.
One mistaken plan to cut Social Security benefits currently under consideration is to reduce the adjustment for inflation. The so-called "chain-weighted" CPI provides a smaller inflation adjuster than the conventional CPI. Consequently, replacing the CPI with the chain price index will substantially lessen future benefits, for example, by 9 percent after 30 years. Unlike other proposals to reduce Social Security benefits, those currently over the age of 55 are not exempted. While the Bureau of Labor Statistics does not yet have a definitive study of the impact of inflation on the elderly, they did conduct a preliminary study in the 1990s and found that an accurate index would have to rise faster, not slower, than the conventional CPI.
In addition to the inaccuracy of the chained CPI, there is another vitally important point: The designers of Social Security linked an individual's benefits to lifetime wages as a proxy for lifetime productivity. They reasoned that workers contribute to the economy through their productivity and that their Social Security benefits should reflect that contribution. For decades, wages kept up with productivity growth, and so this proxy formula functioned as intended. However, as early as 1975, this close link began to diverge, with productivity rising significantly above wages. The continued use of the wage index has resulted in retirement benefits lower than originally intended; and, if benefits are to reflect original intentions, a productivity index should be substituted for the wage index.
To sum up: The chained CPI undercompensates the elderly for inflation while the wage index undercompensates them for lifetime productivity. Of course, in today's budget climate a proposal to raise Social Security benefits to reflect lifetime productivity is a non-starter; but a further cut in benefits through the use of the chained CPI should also be viewed as a nonstarter and taken off the negotiators' table.