Jewish World Review Jan. 10, 2005 / 29 Teves, 5765
Let's not count on projections
The 43rd president, even more than the 35th, favors a cap-over-the-wall presidency. Kennedy's cap-tossing was confined to his optional vow in 1961 that America would land a man on the moon before that decade ended. That vow pulled policy. President Bush's even bolder cap-over-the-wall decision is to define his second term by a vow to "transform" Social Security.
This decision, although desirable, was optional. Bush does not need to attempt it. The current estimate it probably will be revised outward, again is that Social Security outlays will not exceed revenue until 2018. So Bush could have kicked this can down the road, which is what democratic governments are wont to do.
Democracies generally do difficult things only under the lash of necessity. The British tardily brought Churchill to power in May 1940 only because Hitler's tanks were heading for the ports of the English Channel. In the 1930s Americans fundamentally changed their relationship to the federal government only because they were afraid that, absent far-reaching changes, they might be consigned to permanent stagnation. In the 1960s the nation addressed its civil rights shortcomings only because they had ignited a crisis, threatening domestic tranquility.
This is why the Democrats' first defense against Social Security reform is to deny that the system faces a serious crisis. They may be right but cannot know that they are: The size of the solvency problem is unknowable. It may be less menacing than as portrayed by Bush administration projections, which peer far beyond 75 years, using what is called "the infinite horizon model."
However, it has been said that economists use decimal points only to prove that they have a sense of humor. The same can be said of a familiar form of political fiction, the 10-year economic projection.
Andrew Balls and James Harding of the Financial Times report that even with the infinite-horizon model as a basis, "the unfunded liability is only 1.2 percent of future gross domestic product." Assuming, which of course we cannot do, that we know the future GDP. And America's future birth and immigration rates, which will influence not only economic growth but also the ratio of workers to retirees.
The Social Security trustees assume that 10 years from now, economic growth will slow to 1.8 percent about half the average growth rate since the Civil War and will remain that low until 2080. How do they know? They don't.
Surely the beginning of wisdom is to begin not with such speculations but with the question asked in a Wall Street Journal essay by Edward C. Prescott, co-winner of the 2004 Nobel Prize in economics: "If we could wipe the slate clean, what kind of government retirement program would we build from scratch today?"
In no 15-year period in the past eight decades has the growth of stocks ever been negative; in no 20-year period has the average growth been less than 3 percent, which is better than the rate of return on Social Security assets. So if we were starting with a clean slate, surely we would consider some use of the market to be prudent rather than risky.
We see next month never mind the next 75 years as through a glass darkly. But surely it is prudent to assume the need, and reasonable to rejoice in the opportunity, to restructure a program that was designed during the Depression, when there was excessive pessimism about the prospects for American capitalism and there were more than 40 workers for every retiree.
The political problem is this: Even if the future were knowable and we knew that the Social Security solvency problem actually is smaller than Bush assumes, he would still favor reform involving personal accounts funded by a portion of payroll taxes. He believes such reform would be conducive to civic virtue, as conservatives understand that individualism, self-reliance, limited government. Unfortunately, it is difficult to get many Democrats to toss their caps over the wall for that.
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