The Fake Crisis

To hear George Bush tell it, Social Security is about to go broke. Since his re-election, the president has launched a full-scale campaign to convince the public that the retirement system will run out of money starting in 2018. "The system goes into the red," Bush told reporters on December 20th at a rare press conference. "Many times, legislative bodies will not react unless the crisis is apparent, crisis is upon them. I believe that crisis is." Social Security, he concluded, "can't sustain that which has been promised to the workers."

To save Social Security, Bush wants to destroy it — replacing government-guaranteed retirement benefits with private accounts that will be subject to the whims of the stock market. It's an expensive plan. Allowing workers to divert even a small portion of their payroll taxes into private investments, as Bush is proposing, would require the government to borrow at least $2 trillion to make up the immediate shortfall. It's also completely unnecessary, according to Paul Krugman, a prize-winning professor of economics at Princeton University. In a blistering series of columns in the New York Times, Krugman has marshaled the economic data to show that Social Security is not only solvent, it's in much better financial shape than the rest of the federal government. "The people who hustled America into a tax cut to eliminate an imaginary budget surplus and a war to eliminate imaginary weapons," Krugman wrote recently, "are now trying another bum's rush."

At his tree-shaded home in Princeton, New Jersey, Krugman took a break from working on a new economics textbook to explain why the crisis is phony — and what's wrong with Bush's plan "to convert Social Security into a giant 401(k)."

What would you say to college students and young workers who are convinced they'll never see a dime of the money they put into Social Security?
You've been sold a scare story. Right now Social Security has a large and growing trust fund — a surplus that has been collected to pay for the surge in benefits we'll experience when the baby boomers start to retire. If you're twenty now, you'll be hitting retirement around 2052. That's the year the Congressional Budget Office says the trust fund will run out. In fact, many economists say it may never run out. If the economy continues to grow at an average rate, the trust fund could quite possibly last forever.

But what happens if it doesn't?
Even if the trust fund does run out, Social Security will still be able to pay eighty percent of promised benefits. The actual shortfall would be a pretty small part of the federal budget, quite easily made up from other sources. Once the whole baby-boomer generation is into the retirement pool, Social Security's share of the gross domestic product will only increase by about two percent. Well, President Bush's tax cuts are more than two percent of GDP — and they're happening right now, not fifty years from now. So the idea that there's this Social Security thing that is a huge problem is just wrong.

But if the trust fund does run out, the government would have to raise taxes or cut benefits, or some combination of both, to keep Social Security solvent.
Yes, if the trust fund is ever depleted, then something will have to be done. But you need to have some perspective on the seriousness of this whole thing. On the day the trust fund is exhausted, Social Security revenue will cover about eighty percent of the cost of benefits. Right now — today — if you look at the U.S. government outside of Social Security, revenue covers only about sixty-eight percent of total government spending. So on the day the trust fund is exhausted, forty-seven years from now, Social Security will be in better financial shape than the rest of the U.S. government is today.