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Rx for Social Security
Ronald Lee: Demography of the problem 'is not overwhelming'
Ronald Lee, director of UC Berkeley's Center for the Demography and Economics of Aging, recently sat down with UC Berkeley Media Relations to share his expertise about Social Security reform. He has served on the technical advisory panel for the Social Security Administration and does Social Security projections based on demographics.
Q. How serious is the Social Security problem?
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A. It is important to realize there are two separate issues. One is that there is a long-run imbalance to Social Security finances. The other is whether we want to move toward a privatized system.
The long-run imbalance has to be addressed one way or another. The trust fund won't fall close to zero for another 40 years, maybe 50 years, depending on what projection you're looking at. You might or might not want to call this a crisis, but it is the case that we have to do something sooner or later. The earlier we do it, the easier it will be. On the other hand, it means future generations of participants will bear more of the costs of fixing the problem.
Privatization is not a program for addressing the long-run imbalance; privatization is a program for addressing other goals.
Q: One point of contention in the current debate is that Bush administration officials are using a long-term projection to evaluate the viability of Social Security, as opposed to a 75-year window used by the Social Security actuaries. As a demographer, which method is best?
A. There's been some reporting that suggests the Bush administration has been putting out exaggerated numbers that are much larger than the true deficit in the Social Security system in order to make people afraid for the system – for the future – in order to support privatization.
As a demographer and as someone who has been calculating and doing projects on Social Security finances for quite a number of years, I think those criticisms are mistaken.
I think, in fact, the larger number is the right one, and there's a fundamental problem doing the accounting over the 75-year horizon. Seventy-five years is a very long time, but it's important that the system be left in good shape at the end of the 75-year horizon. That's really what the bigger number is about. If you do it that way, the problem seems to be twice as big as the conventional measure, maybe two and a half to three times as big. But that is the right way to do it.
The usual measures used by the Social Security Administration greatly understate the magnitude of the problem.
A reasonable way to assess the financial soundness of the system is to ask how much we would have to raise taxes in order to make the system sustainable in the long run. Once we have asked that question, then we're doing something like infinite horizon accounting. It sounds mysterious and impossible and artificial, but all we're really saying is we need to make the system sustainable and not just viable over 75 years.
'We can fix the system through incremental steps. We do not require radical reform.'
Q. What is your advice on fixing the problem?
A. We can fix the system through incremental steps. We do not require radical reform.
Now, we might or might not go the route of privatization for other reasons, and there are reasons on both sides of that. But so far as the size of the crisis or imbalance is concerned, I think it can be redressed by changing the rules here and there and keeping it basically the way it is now.
For example, we could raise the normal retirement age. We could raise the threshold at which earnings are no longer taxed. We could index benefit levels in such a way that they are less generous.
Q. How does Social Security in our country compare with similar programs in other industrialized nations?
A. Virtually all the industrial nations are facing the same kind of problem as the United States, with very serious deficits in the public pension and public health care programs. In fact, the U.S. problem is really quite small relative to the typical problem in the industrial world – it's maybe half to one-third the typical problem in terms of the size of the deficit relative to the Gross Domestic Product (GDP).
One reason is that the U.S. has a relatively high fertility rate – about 2 or 2.1 children per woman – whereas most of the industrial world is down around 1.4 to 1.5 children per woman. Some are as low as 1.2 – these are the countries that have really severe demographics problems.
The second reason is that our pension program simply isn't as generous as those in other countries. In many European countries, the public pension will replace something like 80 percent of your earnings or your most recent earnings by the time you retire. In the U.S., it's much lower, say around 40 percent. The third reason is that in the U.S. we retire relatively late. Median age of retirement is about 63 in the U.S.; in Europe and some other countries, it's 61, and that makes the problem more severe as well. So, when you put these things together, the U.S. problem is much smaller.
Q. How do problems with Social Security compare with other issues facing the United States?
A. Almost everyone agrees that the problem with Social Security pales in comparison with problems with Medicare and, in general, health care spending.
Public health care expenditures are rising rapidly, and health care costs are rising rapidly. In the long run, Medicare spending will be growing from current levels of around 2 percent of the GDP to 8 or 9 percent of the GDP. That's a massive increase. Social Security is going to be growing from around 4.4 percent of the GDP to 6.5 percent of the GDP.
So, I would say the health care problem is probably three times as big as the pension problem. And there's far less discussion because no one knows quite what to do about it. With Social Security, there are certain things you can do since it's a finite problem that really is manageable. It's not overwhelming.