Economic Snapshot | Retirement

Low balling Social Security’s future

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Snapshot for April 4, 2001.

Low balling Social Security’s future
On March 19, 2001, the trustees of the Old-Age and Survivors and Disability Insurance (OASDI) program, or Social Security, released their annual report. They predict that Social Security will be able to cover promised benefit payments through tax income until 2016, with interest off of its assets until 2025, and then via the selling off of those assets until 2038. After 2038, Social Security’s income will still cover about two-thirds of the promised benefit payments.

This year’s trustees report came at a time when others — the Congressional Budget Office, President Bush, and Fed chairman Alan Greenspan — seem optimistic about the economy’s future. The Social Security trustees, though, saw the future as substantially less bright. For example, the trustees assumed average productivity growth of 1.7% for the period between 2001 and 2011, whereas CBO assumed productivity growth of 2.4% for the same period. After accounting for differences in other assumptions related to prices and employment, the difference in GDP growth rate was also substantial. CBO’s average GDP growth rate between 2001 and 2011 comes out to 3.0%, whereas the trustee’s average — after correcting for differences in assumptions — amounts to 2.6%. After 10 years, real GDP would be 5% lower with the pessimistic forecast than with the more optimistic one.

The underlying assumptions in the trustee’s forecasts account for some of this pessimism. In particular, its productivity growth assumptions are well below anything that the economy has experienced for prolonged periods of time. Using different assumptions, the predictions for Social Security change substantially. In fact, the Social Security trustees provide such an alternative scenario. Instead of assuming that productivity grows at only 1.4% annually, the trustees assume that it grows at 1.8%. Rather than an average inflation rate of 3.3%, it assumes 2.3%. Instead of a fertility rate of 1.95%, it assumes 2.2%. Finally, it also assumes slower growth of fringe benefit costs and less of a reduction in hours worked. As a result, the trust fund assets of Social Security never deplete. Its assets will total more than $83 trillion by the end of 2075 (see figure below). Small differences in assumptions can make for large differences in outcomes over a long enough time horizon. This is of particular importance when considering that Social Security’s intermediate assumptions are rather pessimistic with respect to productivity, wage, and GDP growth. Even the low cost assumptions are not overly optimistic since they assume productivity growth to equal 1.8%, which is still below its historic average of 2%.

This week’s Snapshot by EPI economist Christian E. Weller.

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