While this may seem a bit of budgetary legerdemain, Edward Lazear, chairman of the Council on Economic Advisers, isn’t wrong in pointing out that the current assumptions may be too low, and increasing them would lower the funding gap. Of course, so would increasing the retirement age, a reasonable proposal given increased lifespans and healthier old age.
Is the Social Security solvency “crisis” really not a crisis at all? Maybe not, if Edward Lazear, chairman of President Bush’s Council of Economic Advisers, has his numbers correct. Yesterday, Lazear held a media briefing about the 2007 Economic Report of the President. During the press conference, Lazear said the following about the future rate of productivity growth:
I wouldn’t necessarily say 3 percent. But I would expect that we could expect to see high rates, perhaps not quite at the 3 percent level, but somewhere higher than 2 percent. I would expect somewhere closer to 3 percent … If I’m thinking about long-term productivity growth and asking, “Do the fundamentals exist for persistent high productivity growth in the upper 2 percent range?” I think we can still be there, again as long as we continue to maintain policies that are consistent with an open economy.
Last year, productivity grew at 2.1 percent, 3 percent in the fourth quarter. But in the five previous years, it grew at 3.4 percent and rose at 2.7 percent from 1995 through 2000. That performance is well above the historical average. From 1966 through 2000, productivity rose by 1.6 percent. Now here is why Lazear’s prediction is important: Higher productivity growth–and the stronger economy and higher wages that it implies–would completely solve Social Security budget woes for the next 75 years. Right now, the Social Security Administration is assuming that long-term productivity growth is 1.7 percent. An alternative, rosier forecast has it at 2 percent. If the rosier forecast were correct, the 75-year shortfall would be 25 percent less. But if Lazear’s even more optimistic prediction is right, the 75-year shortfall would be eliminated.
Here is what economist Brad DeLong, a professor of economics at the University of California–Berkeley and a former deputy assistant treasury secretary during the Clinton administration, wrote in his popular blog on the topic: “Each 0.1 percentage point increase in the growth rate of productivity reduces the long-horizon Social Security deficit by approximately 0.1 percent of taxable payroll. Elementary. Obvious to everyone who has even a surface knowledge of how our current system works. Real wage and productivity growth of 3 percent per year … would wipe out the 75-year deficit.”
Now DeLong doubts such growth is possible. But Lazear thinks it is doable with the right policies: “And I think we do have that kind of an economy, because, again we have a relatively low-tax economy, we have an economy that’s open to trade for the most part, we’ve encouraged foreign investment, all of which have been important and instrumental in creating our economic growth.”….