12/17/2012 07:19 pm ET Updated Feb 16, 2013

Social Security Sustainable: Productivity Improvements Enlarge the Pie, Facilitate Funding Boomer Benefits and Beyond

Attempts to undo or diminish Social Security began upon the program's enactment; they continue unabated. Early charges of unconstitutionality foundered when the Supreme Court upheld the law. The Bush push for "privatization" shocked but did not awe. Participants and the public know that work and contributions earn the program's benefits. The recession tailspin of 401(k)s and Individual Retirement Accounts (IRAs) demonstrated anew the unreliability of private, individual accounts; emerging news of their hidden fees further weakened their reputation.

The latest bumper-sticker slogan that "Social Security is unsustainable" doesn't stand up under scrutiny. "The Moment of Truth," the 2010 report of banker Erskine Bowles and long-time program detractor Sen. Alan Simpson, co-chairs of the Commission on Fiscal Responsibility, summarized it this way:

In 1950, there were 16 workers per [Social Security] beneficiary; in 1960 there were 5 workers per beneficiary. Today [December 2010] the ratio is 3:1 - and by 2025 there will be just 2.3 workers "paying in" per beneficiary Unless we act, these immense demographic changes will bring the Social Security program to its knees" ("Moment of Truth," Part V. "Social Security")

Although labeled "Report of the National Commission on Fiscal Responsibility and Reform," it was the draft proposal by the commission co-chairs and did not receive the number of votes required to forward it to Congress for an up-or-down vote.

This "analysis" led them to urge significant benefits cuts, chiefly by raising the statutory "retirement age," and watering down the cost-of-living adjustment (COLA) formula. Some attempt to use the projected ratios to persuade young people that, when their time comes, Social Security will not be there for them.

Although many find the ratios alarming, they prove nothing. Nineteen-fifty does not provide any significant benchmark; by then, the program had barely begun. During World War II, millions of the usual work force were in the armed services, then not covered by Social Security. By war's end, comparatively few people had worked under Social Security long enough to qualify for benefits. Naturally, with the passage of time, the ratio of beneficiaries to those at work (called the "dependency ratio") changes, with more and more people in beneficiary status -- as expected and planned. The current ratio has been essentially the case for the last 40 years. It had generated huge surpluses. That tells us that it is more than ample. Its changes do not foretell bad times ahead but, rather, how much leeway it has. Drawing down the surplus does not indicate weakness but, rather, that the program is being used its planned reserve as it was meant to be used.

Technological Change Makes the Employed More Productive, Offsetting the Relatively Reduced Size of the Working Population

The claimed inexorable failure of funding depends on two unwarranted assumptions: First, that the "dependency ratio" of working people to beneficiaries determines the sufficiency of program revenue. But many other powerful variables, such as how much they work and earn, the formula for contributions, other sources of program income and the benefit formula determine whether income and outgo match. So, looking solely at the assumed size of the work force grossly oversimplifies the adequacy of program funding. Monique Morrisey, the Economic Policy Institute economist, cautions that the worker: beneficiary ratio is the pertinent metric rather than the "aged dependency ratio," which does not measure the relationship of beneficiaries to actual or even estimated working people to beneficiaries.

The claimed adverse impact of a relatively smaller working population on Social Security funding results only if people working after 1950 produce no more goods and services than their predecessors and earn no more. Nobel Laureate Robert M. Solow notes that improved productivity "offsets the reduction in living standards' resulting from" a lower [employee] participation rate." See "On Golden Pond," his review of Peter G. Peterson's Gray Dawn (The New York Review of Books, May 6, 1999)

After World War II, the economy grew as never before. Productivity entered a new phase of expansion -- no, explosion. Dramatic improvements in per capita productivity resulted in larger quantities of goods and services to share. Earnings grew and, in consequence, so did Social Security program revenues. Bottom line, as reported in the 2005 Commonwealth Fund study "Demography Is NOT Destiny":

Since 1960, the population aged 65 and older has doubled while the overall population has only grown 57 percent. However, since 1960 the nation's income (as measured by gross domestic product) has nearly quadrupled. (Page 2)

As the 2012 Statistical Abstract of the United States shows, productivity just about doubled from 1980 to 2010 (Table 642) and average per capita employee compensation grew from $47,059 in 2000 to $64,552 in 2009. (These dates were those offered in the table, not cherry-picked by us.)

Bottom line: Despite a dependency ratio that earlier had been 15 to one and had become three working people to one beneficiary, the economy prospered. Indeed, from 1984 onward, Social Security generated a huge surplus. So, the claim that the projected dependency ratio changes are deadly simply doesn't hold up. Productivity gains can trump and have trumped such changes. See also OECD: "Looking to 2060: Long-term global growth prospects" (2012). It found that aging of the work force would dampen economic growth, but that improved education will sustain growth and that technological advances will enhance productivity making it "the most powerful driver of growth."

Future improvements will likely flow powerfully in the emerging era of nano-technology and advances in quantum mechanics. So, policy should be directed at bolstering productivity and translating its gains fairly into work income subject to FICA. But market forces will push in that direction. If there is a labor shortage for producing products for which there is demand, entrepreneurs will increase their investment in capital to counter the shortage.

Bowles and Simpson Claim, Falsely, That Program Outlays Exceed Revenues

The co-chairs seek to buttress their fallacious assertion about the import of the worker: beneficiary ratio with the false statement that "Today [2010] the program is spending more on beneficiaries than it is collecting in revenues." But that is untrue. The trustees' 2010 annual report clearly shows that income substantially exceeded expenditures -- income: $807.5 billion; expenditures $685.8. The 2011 annual report shows a similar surplus of income over expenditures: $805.1 billion income; $736 billion expenditures.

By law, Social Security has three streams of income: Federal Insurance Contributions Act (FICA) contributions, interest on the trust funds (composed of the surplus of revenues over outlays) lent to the U.S. Treasury and used for other governmental activities (such as the Iraq and Afghanistan wars) and income tax on a portion of Social Security benefits received by high earners. The Bowles-Simpson statement ignores the interest income credited to the Social Security trust funds. In all, the trust funds then totaled more than $2.6 trillion and are projected to exceed $3 trillion.

Bowles and Simpson assert: "[Social Security] will begin running deficits again in 2015 if interest from the trust fund is excluded." But, there is no reason to exclude interest payable to the Social Security trust funds. They hold U.S. Treasury obligations that are highly valued by the financial community throughout the world and are a staple of public and private trust funds. After the recent alleged debt "crises," investors bought massive amounts of U.S. Treasury obligations. They will continue to do so because of the United States government's stability and because it is unthinkable that our government will not pay whatever we owe. Such a default would wreck our economy.

Baby Boom Beneficiary Bulge Was Anticipated and Planned For

The Social Security surplus that began to accumulate in 1984 was planned and designed to be drawn down as needed to supplement FICA revenues and high-earner taxes to meet the boomers' projected benefits. So, that expected program development is not a sign of prospective collapse. We are fully capable of winning the battle of the baby boom bulge.

Earnings Growth Above FICA Cap Unexpected But Readily Accommodated

However, it was not expected that so large a portion of improved earnings would occur above the "cap" on earnings subject to FICA. Raising the cap would fix that development. In 2008, candidate Obama proposed doing that. Bowles and Simpson also recommend such a move -- although in different form. Others advocate differing versions. The problem is widely recognized and raising the cap to again cover the percentage of earnings that it did in 1983 is widely supported. Doing so is simply getting program revenues to where they were intended to be. That is hardly what anyone could validly call a tax increase.

Technological Growth; Productivity Expansion

Since World War II, the U.S. economy has grown fabulously due in substantial measure to burgeoning technology. Computers have been just one development, no, a cascade of advances that feed upon one another, not just increasing per capita output, but exploding it. The rule of thumb has been that computer chip capacity doubles every two years. As a result, for example, analysts and engineers now perform computations that used to be impossible. Nor is the end of such progress in sight, as we begin the era of nanotechnology and stunning scientific advances.

No Social Security Crisis; No Sweat To Assure Long-Term Solvency

The 2012 Social Security trustees' report projects that Social Security can pay promised benefits in full until 2033. Thereafter, anticipated program income will suffice to pay about 75 percent of benefits. The amount needed after 2032 to pay full benefits is modest: less than 2.7 percent of payroll. The trustees and program actuaries project that doing so would require adding only 1.4 percent of payroll for both employee and employer. That would not be a net reduction from employee earnings because the same projections show improved employee compensation of 140 percent over the 75 years used to assay the sufficiency of program funding. Those additional earnings would exceed the increased FICA collections, thereby increasing employee real net income.

Growth of Older Population Likely to Increase Social Security's Support

The expected faster growth of the older population probably will increase political support for preserving Social Security benefits, not least because so many older citizens vote. Indeed, support for more adequate benefits is quite likely. So, the demographic changes that cause Bowles and Simpson such apprehension will increase the number of Social Security participants and thus strengthen its political support.

Bowles and Simpson Abandoned Claim That Social Security Causes Deficits

Unreported in stories on the Bowles-Simpson report was their abandonment of the inaccurate claim that Social Security is responsible for federal deficits and debt. Rather, Bowles and Simpson declare in their "Moment," albeit very quietly (and outside the Social Security section), that we should "reform Social Security for its own sake, and not for deficit reduction."

Benefits Are An Entitlement Because They Have Been Earned and Paid For

No term has been more bent out of shape than "entitlement." It is the opposite of "subject to discretion" where the decider has the authority to grant or withhold, a power easily abused. Social Security and Medicare benefits are entitlements because the law specifies that they are legally due when the requisite work and contributions have been made. Those attacking the program seek to inject the quite different notion of "a sense of entitlement." Beneficiaries do not qualify for Social Security or Medicare by lolling about.

Proven Unreliability of Defined Benefit Pension Plans, 401(k)s and IRAs Makes Social Security Benefits More Vital Than Ever

Bowles-Simpson ignore the erosion and demonstrated unreliability of other programs that are supposed to help take the place of lost earnings. Defined pension benefit plans are a disappearing breed and many large employers are hurrying them off the scene. The Pension Benefit/Guaranty Corporation, created to insure a large portion of their promised benefits, is itself seriously underfunded. When the markets catch cold, private pensions, 401(k)s and IRAs (Individual Retirement Accounts) too often contract pneumonia. This article makes clear that there's no "may" about it.

Social Security has proven to be the sole dependable survivor. So the suggested reductions in Social Security benefits provide the wrong prescription. Benefits need strengthening, not reduction and paying for improvements does not require any heavy lifting.

Lincoln's Formula: "The Proper Role of Government Is To Do for People What They Cannot Do or Cannot Do So Well For Themselves"

Private and state and local retirement arrangements have demonstrated their inadequacy and unreliability repeatedly since the 1930s. Social Security and Medicare came into being because of their shortcomings or absence. Social Security and Medicare fit Lincoln's principle. The private enterprise system has many strengths and great utility. But periodically it also has jagged edges. We need social insurance programs like unemployment insurance, Social Security and Medicare to protect all of us against its hazards because none of us is immune.

By Nancy J. Altman and Merton C. Bernstein served as senior staff to the 1982-1983 National Commission on Social Security Reform. Both have written major books and articles on Social Security and pension plans.