Collision Course: Social Security and a Slow-Growing Economy

Conventional wisdom holds that the Social Security program will soon become insolvent because the number of people collecting benefits has grown exponentially relative to the number of people paying into the system. That is largely true. But it is not the only challenge to the federal retirement program.

In an address at the 2014 SVIA Fall Forum, Jim Kessler, senior vice president for policy and co-founder of the Washington, D.C.-based think tank Third Way, argued that a slower-growth U.S. economy also is contributing to Social Security’s poor finances.

From 1950 through 2000, Kessler noted, the U.S. economy grew at an average rate of 3.7 percent. Since then, it’s grown at an average rate of 1.8 percent. “I think it’s fair to say that the U.S. is now a perpetually slow-growth nation,” he said. That’s important for Social Security, he said, because wages follow growth. Wages, in turn, are important not only for how they impact the amount of money flowing into the Social Security system but also for how they impact the economy and the financial security of working Americans. From 2001 through 2013, the median household income in the U.S. fell by nearly $5,000, Kessler said. That left household income about $12,000 below where it would have been if the upward trend in income established between 1980 and 2000 had continued.

At the same time that household income is declining, the number of Americans over the normal retirement age of 65 is increasing. Between 2010 and 2030, Kessler said, the number of Americans ages 65 and older will increase by about 80 percent, while the number of people of prime working age—ages 25 to 64—will increase by only 7 percent. Because Social Security is a pay-as-you-go system, the number of Americans paying into the program will be growing more slowly than the number taking money out of the program. That will continue to put pressure on the system’s solvency. According to the latest report from the Social Security and Medicare Boards of Trustees, the Social Security trust fund is projected to become insolvent in 2033. The trust fund backing its disability insurance program is expected to be tapped out even sooner, in 2016. All this comes at a time when the federal government’s finances are none too pretty, either. In the early 1960s, Kessler said, the federal government was spending about $3 on public investments—space exploration, roads and bridges and so forth—for every $1 on entitlement programs such as Social Security and Medicare. By 2013 it was spending $3 on entitlements for every $1 on public investments, and in another 10 years it will be $6 on entitlements for every $1 on public investments. Similar trends are playing out at the state level, he added.

Kessler said he doesn’t believe politicians would ever get rid of Social Security because their constituents would notstand for it. Nor does he believe the government can simply raise Social Security taxes enough to put the program on a path to long-term solvency. He seemed to suggest that the program could be saved by a mix of tax increases and benefits adjustments, which he thinks the American people might support. After all, one recent survey showed that 75 percent of Americans agree that doing what’s best for the country may mean doing things they don’t like. “It’s controversial, but not so controversial that politicians can’t survive it,” he concluded.