Social security really <i>is</i> in trouble

Matt writes about Social Security:

What's at issue here is whether McCain wants to just cut Social Security benefits or combine cuts with a stab at privatization. Neither is, in my view, a good idea at all. It's conceivable that at some future point reductions in the benefits growth rate will be necessary, but then again that might not happen.

I've seen this meme frequently on liberal blogs, and it just isn't true. The claim originated, as far as I can tell, with Kevin Drum, and it seems to rest on two things:

1) The Social Security Administration originally misforecast revenue growth, resulting in fairly large fluctuations in its projections of insolvency in the late nineties; the date of trust fund exhaustion was repeatedly pushed back.

2) The fact that the Social Security Administration is allegedly projecting a lower-than-average rate of economic growth in the future.

The first is due to a number of idiosyncratic factors, including the fact that the decline of defined-benefit pensions has slightly boosted the labor force participation rate of older Americans. But the corrections that the SSA made to its modeling around the turn of the millenium have so far proven fairly good; estimates now fluctuate within a very narrow band centered roughly on 2040 or 2041. Liberal blogs report it every time the date is moved backwards, but they fail to note that the next year it's usually moved forward again.

The second is only good and right. Economic growth is attributable to two factors: labor force, and productivity. Labor force growth is going to shrink sharply unless something changes--and one of the factors pushing it downward is social security benefits. Demographics is not a fast-moving catastrophe; you can see it coming for decades. We already have pretty much all the workers we're going to have in 2040; they've been born either here or abroad. Something could change, like a much more generous immigration policy, or rocket-like acceleration of productivity growth. But this isn't at all likely, and in both cases the current trend is downward, not upward.

The supporters of the system are right that Social Security is not quite the catastrophe that conservatives claim--but they're wrong when they aver that the system doesn't have deep structural problems. It does, and those problems are going to become big political problems over the next decade.