EDITOR’S NOTE: This piece appears in the March 14, 2005, issue of National Review.
When it comes to Social Security, Robert Bixby of the Concord Coalition sees too little choice between do-nothing Democrats and free-lunch Republicans. Bixby has a point: If all the future taxpayer-financed benefits promised to millions of aging baby boomers could actually be paid for with impunity, as some Republicans suggest, then do-nothing Democrats could point to such claims to suggest that there are no problems worth fixing. But there are, in fact, big problems with Social Security, and the media continue to misrepresent them.
The unfixable part of the problem is demographic. The population aged 65 or older will increase from 37 million today to 75 million in 2035, when their average life expectancy will be 85. Because future beneficiaries will live longer, they will receive more benefits over their lifetimes. Meanwhile, the number of younger workers who pay for these retirees will barely rise. Economists Jagadeesh Gokhale and Kent Smetters note that today, “there are almost five people of working age (between 20 and 64) for each retiree age 65 and over. By 2030, the number of working-age people per retiree will decline to less than three; by 2080, the ratio will decline to about two.” Any burden shared by half as many taxpayers must, as a matter of simple arithmetic, become twice as heavy.
This demographic time bomb has been compounded by an arbitrary “wage indexing” formula. The level of benefits when people first start collecting Social Security happened, in the late 1970s, to be indexed to average growth of real wages rather than simply adjusted for inflation (as many experts proposed). As a result, benefits for new retirees become more generous by about 1 percent each year in real terms, which adds up fast. “The purchasing power of the average earner’s benefits at retirement is expected to nearly double between now and 2075,” notes the Congressional Budget Office, with the result that “45 percent of the rise in spending is due to a projected increase in the real value of Social Security benefit checks.” As long as initial benefits are indexed the way they are, faster economic growth will not help much–because it would result in faster wage growth and therefore larger Social Security benefits.