Economic growth is unlikely to solve America’s social security crisis

One school of thought claims that economic growth can rescue Social Security. Higher wages, advocates contend, will generate greater revenues for the system and thus avoid eventual bankruptcy.

But Cato Institute Social Security specialist Andrew Biggs points to some serious flaws in this theory.

To accept the critics' argument that faster growth will ensure Social Security's solvency for 75 years, he says, you have to believe that real wages will grow at 2.9 percent per year – 3.7 times faster than during the past 30 years.

Moreover, higher wages increase the benefits the programme must pay out in the long run – in other words, increasing payroll tax revenues must be counted against corresponding increases in benefit liabilities.

Biggs believes that advocates of the growth theory are using the argument to undermine the case for allowing personal retirement accounts (PRAs).

Opponents of PRAs contend that if the economy cools, stocks can't deliver higher returns than the current system.

But Biggs shows that even if stock-market returns dropped to half their 7.2 percent historical average, private accounts would still outperform Social Security.

Source: Andrew Biggs, "Social Security: Is It 'A Crisis that Doesn't Exist?" Cato Project on Social Security Privatization, SSP No. 21, October 5, 2000, Cato Institute, 1000 Massachusetts Avenue, N.W., Washington, D.C. 20001.

For Cato study http://www.socialsecurity.org/pubs/ssps/ssp-21es.html

For more on Long-Term Crisis http://www.www.mysocialsecurity.org/indexb.html