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University of Chicago Press, 2000

Review by Edward Herman

This fine book contends, and demonstrates compellingly, that the only “crisis” Social Security faces is posed by its enemies, who have created a phony one to provide the moral and intellectual basis for weakening and destroying a highly successful and completely viable system. It is Social Security’s very success that upsets ideologues of the market and their corporate backers, as an efficient and effective government-managed poverty reduction program suggests that marketization of everything may not be in the public interest and that the government can serve ordinary citizens well. If acknowledged, Social Security’s success might justify its extension to a program to universalize medical insurance and control medical costs by a national medical budget policy, highly desirable—even urgent—and widely used elsewhere, but threatening to powerful insurance and medical profession interests. Of course privatization of Social Security would be a huge bonanza to the securities industry, which has pumped money into the Cato Institute and elsewhere to foster claims of a crisis.

These powerful interests threatened by, or hoping to plunder, Social Security have dominated the political and media treatment of the subject. It is now an established truth that, as the great trimmer has declared, “nearly everybody knows that something substantial, really substantial, has to be done to reform the Social Security system to accommodate the baby boomer generation and then, subsequent, the generations after that” (Clinton), and those espousing such truths have been free to make their case repeatedly and misleadingly, with only weak rebuttals usually permitted. This was nicely illustrated when the New York Times once again gave significant op-ed space to Republican investment banker Peter Peterson’s demagogic piece “Our Graying Budget Priorities” (September 18, 2000), one of whose key frights was an alleged $21 trillion Social Security deficit 75 years out. A letter by Dean Baker noting that Peterson had failed to mention that the projected GDP at that distant time was $2,100 trillion, making the projected deficit “a much less scary one penny on the dollar,” was refused publication. Peterson, using his Concord Coalition and affiliates like Third Millenium, has made a profession of Social Security bashing over the past decade or so, and his media access and friendly treatment have been exceptional. With both parties and the mainstream media in agreement that there is a desperate Social Security system crisis, a majority of young adults has been convinced that Social Security will not be there when they become old. It therefore clearly needs “reform.” The debate is skewed accordingly.

As Baker and Weisbrot note, the phony crisis is built around the Social Security Fund Trustee’s legal obligation to provide each year a 75-year forecast of the system’s financial position. The Trustees give a range of forecasts based on various assumptions regarding productivity growth, employment rates, longevity, and other variables. The median forecast usually cited, which has assumed that the productivity growth rate for the next 75 years will be well under the rate for the past 75 years (1.5 versus 2.5), and that the unemployment rate will be a high 5.5 percent, concludes most recently that the Social Security system will have exhausted its reserves by 2037, and dependent thereafter only on Social Security tax revenues would have to cut benefits if no further changes were made.

Baker and Weisbrot note first that 37 years—not to speak of 75 years—is quite a distance into the future, and that it is unusual for the establishment to be worrying intensely about an alleged crisis so remote. They point out that if we extrapolate the rate of prison population growth over the past several decades out to 2037, some 11 million people would be in jail. That is a more genuine crisis than Social Security, as they demonstrate (and I describe below), but Clinton, Peterson, and company have not proclaimed a prison crisis demanding urgent action.

They also note that the Social Security fiscal problems of the future are based on assumptions about the distant future that are hardly more than guesses. And they are conservative. If we assume a productivity growth rate that matches that of the prior 75 years, the Social Security fund would be virtually in balance and the “crisis” would disappear even at the distant 75 year target date. Given the establishment’s optimism about the great effects of the information technology revolution, and the assumption that the stock market will continue to do well, which rests on an assumed high rate of productivity growth, one would think that spokespersons for the Social Security crisis and need for privatization would be highly optimistic on future productivity growth. If they are pessimists this suggests a hidden agenda that demands proof of a crisis, at whatever cost to intellectual consistency.

The mythical crisis also rests on the assumption that taxes are fixed and that for some reason funds for Social Security can’t be obtained from general revenues; and it assumes that any needed increases in Social Security taxes would somehow crush the workers of the future. Peterson says that as Social Security is a pay-as-you-go system, Congress “would have to raise taxes, cut other spending, or borrow from the public,” which he rules out a priori for serving Social Security interests, although he would never do the same for a priority item like “defense.” But the restoration of the corporate income tax and capital gains tax rate to 1976 levels would easily pay for any Social Security deficit, and funds released by a cutback in military spending to reasonable post-Cold War levels would do the same. Even eliminating the $76,200 ceiling on Social Security tax payments would allow the system to preserve benefit levels for a number of years after 2037. But Peterson is protecting his elite friends, whereas the cutbacks in Social Security benefits that he makes out to be the only proper solution would be at the expense of the workers and poor people whose interests he pretends to be concerned about. (Baker and Weisbrot have solid details on how the already implemented and proposed future cutbacks of Social Security benefits increase poverty and hurt blacks and women disproportionately.)

Peterson has stated elsewhere that the Social Security system has $8 trillion in “unfunded liabilities,” a scare number that he avoids in his NYT op-ed piece where he prefers to stress its de facto pay-as-you-go financing. But in both cases he skirts around the fact that Social Security is a social insurance system, not a “funded” pension system. It covers disability and the care of survivors of direct beneficiaries; its 44 million beneficiaries today include 5.5 million people with disability benefits and 7 million survivors of deceased workers. The system provides about $12 trillion worth of life insurance, and its “unfunded liabilities” are no more threatening than the multi-trillion national debt as both rest ultimately on the federal government’s tax power.

The Social Security System trustees have also noted that an increase in the Social Security payroll tax of only 1.89 percent would by itself keep the system solvent for the next 75 years. That would be a burden on workers of the future, but as Baker and Weisbrot point out, if wages rise in accord with the growth in productivity wages would be some 40 percent higher in 2037, so that worker real incomes net of the Social Security tax increase would be far larger than real wages today. This tells us that the claim of “generational warfare” is completely fraudulent, and that young people who believe they are being taken for a ride by greedy geezers today are being bamboozled.

Baker and Weisbrot examine some of the side tricks that support the claim of generational warfare. One is the rise in the ratio of oldsters to workers that will supposedly burden later workers—and Peterson refers to the prospective slower growth of the labor force in the future as a demographic fact that will slow up economic growth. But this is taken into account in the Social Security Trustees estimates of future needs, which yields their finding that only the modest 1.89 percent increase in the payroll tax will keep the system solvent. (Baker and Weisbrot also show that it is not mainly the bulge in retiring baby boomers that will put pressure on the Social Security system’s finances but rather the greater longevity of the aging.) Peterson and the other generational warriors neglect the partially offsetting fall in ratio of young dependents to workers, but more importantly underplay the effects of the steady rise in productivity that reflects the contribution of past and present workers to the welfare of workers tomorrow. They note that the percentage of the labor force in agriculture has fallen from 5.1 to 1.1 percent over the past 40 years, so we must be suffering an overall serious shortage of food.

Another side trick in producing a “crisis” in Social Security is conflating it with Medicare, which Peterson does by using the rubric “entitlements” to keep both together. Medicare will definitely present very serious fiscal problems in the future if current trends continue, but Baker and Weisbrot stress that this is a function of the mismanagement of the healthcare system and the transfer of the double-digit inflation in private medical costs to Medicare. It is unconnected to Social Security and fusing them as Peterson does is dishonest. Furthermore, a genuine cure requires that we take a direction exactly the reverse of that pushed by Peterson and the privatizers. The financial threat to Medicare arises “as this relatively more efficient system—its administrative costs are less than one-fourth those of the private system—is subjected to increasing ‘marketization’.”