Every year the Social Security trustees issue their report on the financial condition of the program. In the past this release was generally accompanied by some serious deep breathing as reporters warned of multi-trillion dollar shortfalls and the impending bankruptcy of the program. This could be accompanied by appeals on behalf of our children by politicians and advocates of cuts to Social Security.
The hysteria was largely absent from the reporting this year. There was a modest improvement in the program's finances with the new projections now showing the combined Old Age and Disability programs would first face a shortfall in 2034, one year later than in the prior year's report.
But the modest difference in projections can't explain the change in coverage. It is more likely that the reporters and editors responsible for the coverage have become a bit more sophisticated in dealing with the topic over the years.
For more than two decades there have been well-funded efforts to try to scare the public into supporting cuts in Social Security and/or privatizing the program. The most visible person in this effort has been private equity billionaire Peter Peterson, but many other wealthy individuals have signed up for the cause.
The basic story was that demographics would make Social Security unaffordable. The retirement of the baby boomer generation would decrease the ratio of workers to retirees imposing an impossible burden on our children. This nightmare was pressed home with the talk of shortfalls in the "trillions" of dollars, which is scary, since that is a lot of money.
The scare story could easily be dismantled for anyone willing to take the time to think it through. Yes, the ratio of workers to retirees will fall in the decades ahead, but it has also fallen over the last five decades. That has not prevented both workers and retirees from enjoying large gains in living standards over this period.
Furthermore, while the multi-trillion dollar shortfalls may be lots of money, they are not especially large relative to the size of our economy. In fact, the projected shortfall for Social Security is well under of 1.0 percent of future GDP, a considerably smaller burden than the cost of the wars in Iraq and Afghanistan.
A remarkably under-reported aspect of this story is the sharp falloff in the projection of the combined Social Security and Medicare shortfall. Back in 2008, the combined shortfall for these programs was projected at 2.2 percent of future GDP. In the most recent projections the 75-year shortfall in these programs was projected at less than 1.3 percent of GDP. The main reason is a sharp slowing in health care costs, which translates into large savings for Medicare.
Insofar as there is a basis for concern about the living standards of our children and grandchildren it has nothing to do with Social Security and Medicare. A far more important issue will be whether the upward redistribution of income that we have seen in the last 35 years continues into the future. The trustees project that real wages will on average increase by more than 34 percent over the next two decades. This projected wage increase dwarfs any plausible increase in taxes that might be needed to pay for Social Security and Medicare. However the problem since 1980 has been that most workers have not shared in wage growth, with the overwhelming majority of pay increases going to those at the top of the income distribution.
This has been the result of trade, labor, and employment policies that have been designed to benefit the high end of the income distribution at the expense of ordinary workers. For example, our trade policy is designed to put our manufacturing workers in direct competition with low-paid workers from the developing world. This has the predicted and actual effect of lowering their wages along with the wages of the non-college educated work force more generally. Meanwhile, we deliberately protect doctors, lawyers, and other highly paid professionals from the same sort of competition.
Similarly, the Federal Reserve Board has a policy of raising interest rates to slow job growth when unemployment falls low enough to give workers enough bargaining power to get pay increases. The only period in the last four decades where workers saw real wage gains was when the Fed relaxed this policy in the late 1990s and allowed the unemployment rate to fall below 4.0 percent.
If we allow these upwardly redistributive policies to remain in place, we will have to apologize to our children and grandchildren, since the rich will continue to get most of the gains from economic growth. Cutting Social Security benefits, which will mostly affect our children's retirement (almost no one suggests large cuts in benefits for current retirees), is not a way to make up for this enormous failure.