Wednesday, March 19, 2008

New paper: "Can Faster Economic Growth Bail Out Our Retirement Programs?"

Former CBO director Rudy Penner, a senior Fellow at the Urban Institute, examines how much economic would reduce the burden of rising entitlement costs. The money paragraph on Social Security:

A 0.5 percent increase in the annual rate of productivity growth reduces the 75-year actuarial deficit from 1.95 percent of payroll to 1.39 percent (or by 0.56 percent of payroll). Roughly speaking, it would be necessary to double today’s 1.9 percent assumed rate of productivity growth to solve Social Security’s long-run actuarial problem with economic growth. Although there have been short periods of such high productivity growth over the past five decades, it is totally implausible to believe that such growth could last over 75 years.
The full text is available here.


Arne said...

Of course, I think the money paragraph is the following one:
"Social Security’s long-run actuarial problem gets more publicity than the overall budget’s more immediate cash flow or deficit problem. This is a bit odd, because without reform, the budget’s cash flow problem is likely to cause a financial crisis well before Social Security’s trust funds are emptied. Huge budget deficits will likely provoke some sort of reform before the long-run actuarial problem becomes relevant."

Andrew G. Biggs said...

What Penner is saying here is that the key date for Social Security isn't 2040, when the trust fund runs out, but (if any) 2017, when the program becomes a net drain on the unified budget.

As I've noted elsewhere, you can argue that while this is a problem, it's not a Social Security problem but an on-budget problem. An any case, though, Penner is pointing out that -- well prior to 2040 -- the federal budget and therefore the taxpayer will face difficulties financing full scheduled Social Security benefits.

Arne said...

How is 2017 more of a key date than 1981 or 2001 - dates when the budget changed from decreasing to increasing?

Arne said...

That should say national debt rather than budget.

Anonymous said...


apparently believes the the government having to repay the money it has borrowed is a crisis.

the fact is that repaying the money borrowed from social security (when the program becomes a net drain on the unified budget) will cost the equivalent of a one dollar per week raise in the tax per worker per year, during that time the average wage is rising ten dollars per week per year.

the social security "deficit" is only a problem for people who don't believe in paying their debts.

meanwhile, aside from the Trust Fund, and you need to remember that Social Security is NOT the Trust Fund... Social Security can pay for itself forever, pay as you go, with a moderate "tax" that is really an insured saving plan. Forever.

a very simple way for workers to provide a floor to their retirement.

but which the "nonpartisan experts" want to replace with one dazzling idea after another, offered in a desperate effort to find one that sells.

Anonymous said...

anonymous above is me, coberly

it bears repeating that " the taxpayer will face difficulties financing full scheduled Social Security benefits."

really means that after 2040, if the taxpayer - worker is going to be living an average of six years longer than he does today, he will have to pay an extra twenty dollars per week payroll tax out of an income than is 300 dollars more per week than it is today.

doesn't look too difficult to me. moreover it's pretty simple and easy to understand.

Bruce Webb said...

Ultimate productivity under Intermediate cost is not 1.9% it is 1.7% (2007 Report). Low Cost shows a balanced Trust Fund at 2.0% and not 3.8% productivity. Can we agree to use one data set at a time?

I am not some high powered academic economist, in fact I am not an economist at all, I am just a guy that takes the Annual Reports of the Trustees of Social Security at face value. They tell me 2.0% productivity saves the day, if they were so off base should not the newly installed Deputy Commissioner pointed them at studies that proved them horribly wrong?

I am fond of saying I am not a number cruncher, instead I am a number pointer. The Trustees of Social Security signed off on a Report prepared by the Office of the Chief Actuary. Sue me for taking this official analysis as being definitive.

Bruce Webb said...

Penney's conclusion (starting on page ten) essentially concedes the case in so far as it relates to Social Security. My iPhone doesn't allow cut and paste so this will be piece-meal.

"Economic growth leads to higher wages, and the extra payroll tax revenues would allow for a greater increase in Social Security benefits above today's level, even though they may have to be reduced from promised levels"

Thank you. Growth at trend gives a better real return. Per Pender.

Andrew G. Biggs said...

Bruce said: "Low Cost shows a balanced Trust Fund at 2.0% and not 3.8% productivity. Can we agree to use one data set at a time?"

Bruce, I've often wondered in reading your posts, do you understand that the Low Cost scenario isn't JUST better productivity but better everything -- immigration, fertility, mortality, interest rates, inflation, you-name-it?

In other words, higher productivity ALONE reduces the actuarial deficit on roughly a 1-for-1 basis, so Penner's numbers are correct.

Re your other post, yes higher economic growth helps Social Security pay higher returns, which I'm not sure people have denied. I remember writing back in 2000 or so that the internal rate of return on a paygo program is equal to the rate of aggregate wage growth -- that is, the growth of individual wages (which derives from productivity) plus the growth of the labor force (which derives from fertility and immigration). (This finding isn't mind, it's basically Paul Samuelson and Henry Aaron's.) So we agree that we'd love to see higher economic growth, just that realistic levels aren't enough to fix the problem. Thanks.

Arne said...


Here is the point that you and I sometimes talk at cross-purposes. Penney is asking whether increased productivity - by itself - can 'fix' SS. Low Cost also contains demogrphics, such as higher immigration, lower life spans, higher fertility, etc. as well other economics such as inflation, unemployment, etc. which also help get to fully funded. If the IC demographics are correct, even a good economy cannot lead to funded.

Anonymous said...


i think Bruce is saying "low cost is out there" not because he doesn't know "low cost is ... better everything" but because his analysis shows the economy has been performing at "low cost" for some time.

me, i don't pretend to know. but i do know there is no problem to fix. when and if benefit costs exceed tax income, raise the tax. it won't be a big raise, and it will go to pay the very same people who pay the tax their benefits in turn.

or you could lower the benefits if conditions warrant... but keep in mind that it takes 4 dollars of benefits to equal one dollar of tax. and the benefits come at a time when the person has few if any other resources, while the tax comes at a time when he does have options.... not the least of which is the other 98% of his pay (and yes i know some of that goes to pay taxes).


no. you can't get funded just by refusing to even think about raising the tax and hoping the economy will take care of paying for a 50% increase in post retirement life expectancy.

on the other hand, you can raise the payroll tax by 2% and fund it just fine. (4% if you insist, but it's still only 2% of the before tax check the employee sees. and its money the economy is going to have to come up with anyway. and there is NO evidence or even credible argument that any of the various rube goldberg proposals on the table will result in less cost to taxpayers if you look at all the places that costs hide out in the economy.

Bruce Webb said...

Oddly I am in fact aware that there is more than one column between the three tables' V.A1 V.B1 & V.B2 and often comment on how ridiculous the immigration figures are. I don't discuss' the other demographic because one they don't vary much from Report to Report and two don't diverge in significant ways over the short term and it is the next four to ten years that will settle this question.

I focus on productivity and /or Real GDP because they are the single most varying elements between Reports. If you look at the run of Reports from 1997 to 2000 a period when Depletion was pushed back by eight years (from 2029 to 2037) and look to see what changed the answer jumps from the tables, those changes are not due to tinkering with long range demographic assumptions but instead by short term growth assumptions turning out to be underestimated.

I came to this topic bases on a random observation made in 1993. Trust Fund Depletion was not an event fixed in time, its date could and did change. Which raised two questions in my mind. Why is the date moving? And Can this process continue? Starting with ordering the 1997 Report I set out to answer those questions. Over the next few years I found out that the answer was better than projected current year growth.

If we were having a stand alone discussion based on a single Report your objection would have weight, as it we are looking at a series of eleven Reports and picking up what varies between them. Particularly over the first two thirds of the series the answer is obvious-better than projected productivity.

I realize growth is not the only variable but it is by far the most dynamic over the short to medium run.