The Corner

Productivity

From a Hill-wonk:

Jonah, your analysis on whether or not rising productivity will mitigate the problem of lower birth rates is a bit off. As far as output is concerned – you are completely correct. We can make more with less when productivity increases. With regard to Social Security, however, it’s a problem because the gross amount of taxes paid into Social Security are affected more by the quantity of workers than the quantity of output. At the moment, the cap on payroll taxes prevents the exploitation of the highly compensated (and I don’t think raising taxes is really the best way to face the demographic and fiscal challenges posed by Social Security). While it is unequivocally true that productivity in the long-run increases wages and standard of living, the demographic problem with Social Security independent of productivity is that we just won’t have enough workers paying taxes to support the vast number of retirees drawing money from the system. Outsized increases in productivity may actually serve to exacerbate the problem. This is not to say that productivity is bad – it’s not. It’s the primary means by which we increase our wages and standard of living while keeping inflation low. If anything, it’s yet another reason why Social Security needs to be modernized in the very near future so that we can avoid this kind of fiscal calamity.

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