10/29/2010 12:26 pm ET Updated May 25, 2011

Beware of Financial Firms Bearing Advice on Social Security

Just in time for Halloween, the financial services firm Standard and Poor's offers a "study" designed to scare us into raising the Social Security retirement age. "Global Aging 2010: An Irreversible Truth", warns that age-related public spending is "Unsustainable without policy change." The report declares that "No other force is likely to shape the future of national economic health, public finance and policymaking as the irreversible rate at which the world's population is aging . . . By the middle of the century, about 1 billion over 65s will join the ranks of those classified as of non-working age." The ratio of that group to "those classified as of working age" (18-54) produces the "aged dependency ratio" that panics so many.

Almost everyone has heard the litany of worsening ratios: in 1950, 16 people at work for each person drawing benefits declining to the current (2010) 3.3 at work for each one drawing benefits with the prospect of 2.2 to one by 2020. That decline persuades many that Social Security cannot survive. But in the real world, the crucial factors for Social Security funding are the number of people at work, what they earn and how much of those wages are taxed. Since World War II, we have seen repeatedly that in a tight labor market, employers put aside prejudice and hire more women, minorities and older people to fill their needs and offer higher wages and arrangements, like child care, to make work more feasible.

And, very importantly, robust investment in technological advances improve worker productivity per hour which results from more capital investment rather than more effort. Further technological advances will enhance the production of goods and services, increase work incomes and thereby enlarge Social Security funding. In addition, greater support for education fosters technological innovation and provides more people able to perform at higher skill levels; think the GI Bill.

So, the aged dependency ratio is not the crucial determinant it is often made out to be. Rather what the economy will produce and the payroll taxes it will generate depend upon myriad variables affected by policy decisions rather than outcomes simply fated by demographic change.

Advocates of raising the retirement age contend that doing so will induce people to work longer. Tellingly, the system actuaries project that such an effect would be small. Absent from the raise-retirement-age proposals are concrete ways to promote, let alone assure, the availability of jobs for older people. Nor do such proposals suggest reductions in the tax breaks for private pension plans which add hundreds of billions of dollars to the federal deficit. Private plans often enable retirement as early as age 55 and even permit tax reductions for early retirement incentive programs (ERIPs). In the raise-retirement-age universe only public plan benefits produce undesirable incentives and unsupportable costs. And even applying the study's dubious metrics, several tables show the United States performing better than the average of advanced economies.

The S&P report takes scant account of the damage trimming social insurance benefits and the purchasing power they provide would inflict on national economies. The report only addresses costs, not the beneficent results of social insurance. And the study omits mention of tax breaks, in addition to those for private pensions, which lard up the deficit.

Many of us who see the advantages of private enterprise and profit incentives also see the need to ameliorate some of their harsh results -- unemployment, uninsured illness, the financial hardships imposed on family members by the death, disablement and retirement of breadwinners. There is more to life than profits. Standard and Poor's and other advocates of free enterprise would serve it better by recognizing the indispensable ameliorating role of social insurance.