Or so Eddie implicitly says. Ampersand writes:
Alas, a blog » Blog Archive » Bush’s Chief Economist Predicts Social Security “Crisis” Will Never Happen: Capital Commerce1 quotes Edward Lazear, the Chair of Bush’s Council of Economic Advisers, answering a question about 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.
If Bush’s chief economist is right, then there’s no Social Security shortfall [over the next 75 years].... Predicting the future isn’t simple; the Trustees have to make certain assumptions. One of their assumptions is that productivity increases for the next 75 years will be, on average, 1.7% a year. If they’re right, then the next 75 years will feature the lowest productivity gains in American history....
But what if the next 75 years aren’t actually the worst 75 years in US economic history?... That brings us back to Edward Lazear’s prediction of near-3% growth in productivity. If he’s right, then maybe there won’t be any Social Security shortfall. Higher productivity means, at least in theory, that workers earn more; workers earning more means that, without raising taxes, payroll tax revenues go up...
And he cites me from January 11, 2005:
Brad DeLong's Semi-Daily Journal: A Weblog: Why Oh Why Can't We Have a Better Press Corps? (Why Haven't National Review's Funders Pulled the Plug? Edition): [C]onsider two alternative worlds--one with zero and one with two percent per year productivity growth--and look at the situation halfway through her retirement, when she reaches 73. And let's suppose that in alternative world 1, the world with zero percent productivity growth, her share of the taxes that Social Security collects cover only 90% of her benefits: with zero percent productivity growth, the Social Security system is running a deficit.
Now let's look at what happens in alternative world 2, the world with two percent per year productivity growth. The economy has been growing 2% faster for 11 years. That means that wages and the Social Security tax base are 22% (actually 24%--compound interest you know) higher than in alternative world 1. Instead of collecting revenues that cover only 90% of her benefits, the Social Security system collects revenues that cover 112% of her benefits: no Social Security deficit. No Social Security problem.
Faster productivity growth affects the cost of Social Security (initial benefits go up faster the faster is productivity growth). And it affects the revenues of Social Security (a richer economy pays more in Social Security taxes). But it affects revenues more.
The key is that the indexation of benefits after retirement to the price level, not the wage level, adds a wedge between Social Security's costs and its resources roughly equal to half of life expectancy at retirement times the trend productivity growth rate. Each 0.1 percentage point increase in the growth rate of productivity reduces the long-horizon Social Security deficit by approximately 0.1% of taxable payroll.... Real wage and productivity growth of 3.0% per year (as opposed to the 1.1% per year assumed by SSA) would wipe out the 75-year deficit.
Of course, after 2082 there is still in all likelihood a Social Security problem. And before 2082 there is a chance there will be a problem of Eddie's productivity forecasts (and mine!) turn out to be too high. And there is the question of whether pay-as-you-go is the right way to fund social insurance for retirement (I think probably not). And there is the question of the implications of a pay-as-you-go system for the rest of the government given our current political institutions and the overwhelming fecklessness of politicians, primarily Republican politicians. So that the fact that Social Security is not in crisis does not mean that all is for the best in this the best of all possible worlds.
But it is interesting to note that the crisis is, in Eddie Lazear's judgment as well as in mine, more likely than not to be postponed until the next century.