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Robert Samuelson

Economic Death Spiral

By Robert J. Samuelson
Wednesday, April 6, 2005; Page A19

The great danger of an aging society is that the rising costs of government retirement programs -- mainly Social Security and Medicare -- increase taxes or budget deficits so much that they reduce economic growth. This could trigger an economic and political death spiral. Our commitments to pay retirement benefits grow while our capacity to meet them shrinks. Workers and retirees battle over a relatively fixed economic pie. The debate we're not having is how to avoid this dismal future. President Bush's vague Social Security proposal, including "personal accounts," sidesteps the critical issues. His noisiest critics are equally silent.

Just recently the trustees of Social Security and Medicare issued their annual reports on the programs' futures. Here's one startling fact that emerges from a close examination of the reports: By 2030 the projected costs of Social Security and Medicare could easily consume -- via higher taxes -- a third of workers' future wage and salary increases. Toss in Medicaid (which covers nursing home care and isn't included in the trustees' reports) and the bite grows. We're mortgaging workers' future pay gains for baby boomers' retirement benefits.

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Social Security

The facts are hiding in plain sight. The trustees' reports project Social Security and Medicare spending. They also estimate future wages and salaries -- the main tax base for Social Security and Medicare. Comparing the two shows how much retirement costs may erode wage increases. The reports should make and highlight this calculation, but they don't. So I asked economists Tom Saving of Texas A&M University and Eugene Steuerle of the Urban Institute to do it. They provided similar results.

Here are the basic numbers, as calculated by Elizabeth Bell, a research assistant to Steuerle. In 2005 Social Security and Medicare are expected to cost $822 billion (that's net of premiums paid by recipients); by 2030 the costs are projected to increase to $4.640 trillion. That's an increase of $3.818 trillion. Over the same period, annual wages and salaries are projected to rise from $5.856 trillion to $17.702 trillion -- an increase of $11.846 trillion. Despite the big numbers, the arithmetic is straightforward: The increases in Social Security and Medicare represent 32 percent of the increases in wages and salaries.

This matters because Social Security and Medicare (and Medicaid, too) are pay-as-you-go programs. Current taxpayers pay current benefits. Future taxpayers -- mainly future workers -- will pay future benefits. Baby boomers' retirement benefits will come mostly from their children and grandchildren, who will be tomorrow's workers. Even if adopted, President Bush's personal accounts for Social Security would hardly alter that. (They wouldn't change Medicare and Medicaid and would only slightly affect boomers' Social Security benefits.)

Consequently, baby boomers' children and grandchildren face massive tax increases. Social Security and Medicare spending now equals 14 percent of wage and salary income, reports Bell. By 2030, using the trustees' various projections, that jumps to 26 percent. Of course, payroll taxes don't cover all the costs of Social Security and Medicare. Still, these figures provide a crude indicator of the economic burden, because costs are imposed heavily on workers via some tax (including the income tax), government borrowing (a.k.a. the deficit) and cuts in other government programs.

It can be argued that the costs are bearable. The wage gains in the trustees' reports could prove too pessimistic. Like all forecasts, they're subject to errors. Even if they come true, they assume that tomorrow's wages will be higher than today's. Productivity increases; wages rise. In 2030, under the trustees' "intermediate" assumptions, workers' before-tax incomes would be about a third higher than now, says Saving. What's the gripe if workers lost -- through steeper taxes -- some of that? Why shouldn't they generously support parents and grandparents? Well, maybe they will. But there are at least two possible flaws in this logic.

The first is that, on a year-to-year basis, wage gains would be tiny -- less than 1 percent. When they've gotten that low before, people have complained that they're "on a treadmill" and that the American dream has been repealed. Even these gains might be diluted by further tax increases to trim today's already swollen budget deficits. The second and more serious threat is that higher taxes would harm the economy. They might dull economic vitality by reducing investment and the rewards for work and risk-taking. Productivity and wage gains might be smaller than predicted. Then we'd flirt with that death spiral: We'd need still-higher taxes to pay benefits, but those taxes might depress economic growth more.

One way or another, workers may get fed up paying so much of their paychecks to support retirees, many of whom (they would notice) were living quite comfortably. Because the dangers are so obvious, we ought to be minimizing them now. We ought to redefine the generational compact to lighten -- somewhat -- the burden of an aging population on workers. The needed steps are clear: to acknowledge longer life expectancies by slowly raising eligibility ages for Social Security and Medicare; to limit future spending by curbing retirement benefits for the better-off; to keep people in the productive economy longer by encouraging jobs that mix "work" and "retirement."

All advanced societies face a similar problem: how to support more retirees with (relatively) fewer workers. But we won't engage it. Politicians, the media and public "intellectuals" of all political stripes refuse to acknowledge generational conflicts and the need to make choices, some possibly unpopular. Let someone else make them, years from now when (of course) they will be much tougher.


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