The Social Security Crisis—Solved!

A Democratic economist’s miraculous plan.

This is the fantasy of every Washington politician: You wake up one morning, and the Social Security crisis has vanished. Who knows where it went? Maybe a kind old wizard made it disappear. Who cares? It’s gone! The magic solution—a Social Security fix with no tax increases and no benefit cuts—is the dream that will not die.

Last year, it was the Republicans who thought they had made the dream come true. In early 2003, Michael Boskin, head of the Council of Economic Advisers under President Bush the Elder, released a paper that hit upon a potential solution. Once the baby boomers start withdrawing funds from IRAs and 401(k)s and pay tax on that income, he suggested, it would send a $12 trillion gusher into federal coffers. And that would help cover any short-term shortfalls in entitlement programs. The tentative conclusion seemed too good to be true. In relatively short order, the Boskin thesis was debunked and withdrawn.

Now a moderate economist in the Democratic camp may have forged the magic bullet. Northwestern University economist Robert J. Gordon, in this paper issued under the auspices of the Brookings Institution, says the trustees of Social Security, whose most recent report can be seen here, are low-balling the economy’s capacity for productivity and population growth over the next several decades. Tweak the numbers a little bit, Gordon suggests, and the Social Security picture doesn’t look bleak.

Gordon’s theory rests on two pillars—productivity and immigration. Economists are busy debating whether the higher productivity growth the economy enjoyed in the 1990s represented a temporary blip or a longer-lasting trend. Peering a few decades ahead, Gordon forecasts that productivity, instead of dropping to the historical post-World War II mean of about 1.8 percent, will settle down to a long-term rate of about 2.5 percent. The Social Security trustees, by contrast, see productivity falling to a long-term rate of about 1.6 percent. Higher productivity means higher economic growth and hence more revenues to fund retirement programs.

Gordon projects—as do the Social Security trustees—that Americans will continue to procreate at a higher rate than Europeans and Japanese. Flexible labor markets mean “women in the United States are better able to combine work and childbearing.” And thanks to immigration, the U.S. population is continually fortified by immigrants with higher birth rates. That’s also good news, as it means a constant supply of younger Americans who will be working when “Moneybox” and his 30-something cohort are playing shuffleboard in Boca Raton.

Indeed, Gordon believes immigrants—who tend to be young workers, tend to start paying into Social Security right away, and often return to their homelands before receiving benefits—will likely prove the saving grace of the Social Security system. The Social Security trustees forecast that annual immigration will level off at about 900,000 in about 20 years and remain at that level—even as the overall U.S. population continues to grow. Gordon finds that “ludicrously low.” The projections “assume not just zero growth in the future, but an absolute decline from 1.4 million total immigrants in 2002.” While the recent pace is unsustainable—immigration has been rising at a 3.75-percent clip—”to project negative growth implies a discontinuity that is without any basis.” By assuming that both the supply of potential immigrants will continue to rise (as the global population rises) and that the demand for potential immigrants will continue to rise (as Americans grow wealthier and consume more services), Gordon foresees the addition of tens of millions more workers than the government does.

Add it all up, and Gordon believes the economy can grow at a 3.28-percent rate for the next two decades. That may sound high, but it’s hardly out of bounds. (James K. Glassman, the smart J.P. Morgan economist—who is not to be confused with James Glassman, the credulous stock-picker cum New Economy lobbyist—believes the economy can grow at 4 percent over the long term.) Gordon’s 3.28 percent is enough to make Social Security shortfalls shrink in significance.

One can understand why the Social Security Administration might be somewhat timid in its predictions. As a profession, actuaries aren’t exactly known for going out on a limb. For the millions of Americans who will rely on Social Security for a minimum income in the future, the price of being overly optimistic could be devastating. What’s more, when dealing with very large numbers over very long time periods, tweaking a number here and there leads to large swings. Ratcheting down productivity and immigration projections would make the problem seem far worse.

But today, the balance of risks seems to favor higher productivity growth rather than lower productivity growth and more immigration rather than less. Far more likely to throw these projections off kilter is one factor the data ignores: politics. There’s a growing backlash against the two most significant factors that feed Gordon’s projections. Productivity and the trends that fuel it—outsourcing and off-shoring—have become dirty words in Washington. Immigration isn’t too popular either. Samuel Huntington argues in the current Foreign Policythat more Hispanic immigration would undermine the social and economic factors that have set America apart from its slower-growing European rivals.

Gordon’s paper has not yet received the once-over that Boskin’s did. When it does, his optimistic conclusion may not seem so solid. But for the moment, what a pleasant dream it is for Washington!