Can economic growth really fix Social Security?

February 5, 2016

In less than 20 years, according to the latest official projections, Social Security will no longer be able to pay full benefits to retirees and people with disabilities. Yet, presidential candidates aren’t talking much about how they would fix the problem.

Democratic candidates Hillary Clinton and Bernie Sanders want high-salaried workers to pay more Social Security taxes. A few Republicans, like Jeb Bush, Chris Christie, and Marco Rubio, have proposed raising the retirement age and restricting benefits for high-income people to shore up Social Security. But 7 of the 12 Republicans who competed in the Iowa caucuses don’t offer any specific ideas on their websites about how to close the funding gap.

Republican candidate Mike Huckabee dropped out of the race after the Iowa caucuses this week. But during a debate last month, he offered a painless solution for Social Security: “Here's the fact. Four percent economic growth, we fully fund Social Security and Medicare. Our problem is not that Social Security is just too generous to seniors. It isn't. Our problem is that our politicians have not created the kind of policies that would bring economic growth.”

Some left-leaning commentators have made the same argument. Strong economic growth would raise earnings, which would boost payroll tax revenue going to Social Security, eliminating the need to cut benefits or raise taxes.

Is the solution really that easy? Unfortunately, it isn’t.

Four percent growth year after year is unrealistic. It’s been more than 40 years since we last completed even 10 years of 4 percent average annual growth (in inflation-adjusted dollars). And back in the early 1970s, the labor force was growing more than 2 percent a year as the baby boomers were coming of age and many women were entering the workplace. It’s going to be a lot harder to achieve that growth over the coming decades when the labor force is projected to increase only 0.5 percent a year.

But let’s say we could somehow turbocharge worker productivity enough to achieve average real economic growth of 3.4 percent a year indefinitely (and even higher rates in the short-term as we continue to recover from the Great Recession), instead of the 2.1 percent long-term rate that the Social Security trustees assume. This is optimistic, but it did happen between 1995 and 2005 (albeit when the labor force was growing more rapidly than today). Let’s assume that all of this additional growth results from higher productivity, instead of by expanding the labor force through more immigration or higher employment rates, and that it raises earnings uniformly for all workers.  

Crunching the numbers with DYNASIM, Urban Institute’s projection tool, we find that such economic growth would in fact significantly improve Social Security’s long-run balance sheet, pushing back by three decades the date when the system could no longer pay full benefits, from 2035 to 2064.

Impact of Economic Growth on the Social Security Trust Fund Balance, 2020–85

But those financial gains won’t last. Strong economic growth generates a lot of tax revenue for Social Security right away without immediately changing benefits. Over time, however, economic growth puts the system on the hook for much higher benefit payments. As the economy grows faster and people earn more, they eventually receive more Social Security benefits once they retire.

Under the high-growth scenario we considered, those higher benefits start squeezing Social Security by about 2050, when the system permanently begins owing beneficiaries more payments than it collects from taxes. That annual deficit then soars under the high-growth scenario as more retirees begin collecting sizable Social Security checks, growing much more rapidly than under the low-growth scenario. (These estimates compare annual tax receipts to scheduled benefits, not actual benefits, since Social Security would have to cut benefits paid each year to prevent the system from going broke.)

Impact of Economic Growth on Annual Social Security Deficit, 2020–85

Faster economic growth, however implausible, might delay Social Security’s insolvency but won’t permanently solve the system’s financial woes. Instead, we’re going to have to make hard choices about raising taxes and cutting benefits. The presidential campaign is a good time to begin the debate.


Christie cut taxes but mostly vetoed tax increases in New Jersey


December 18, 2015

New Jersey Governor Chris Christie says he would significantly cut tax rates if he were elected president. Among other changes, he would lower the top federal individual income tax rate from 39.6 percent to 28 percent and the top corporate rate from 35 percent to 25 percent. While Christie was not able to enact as many tax cuts as he would have liked as governor, he did prevent tax increases from taking effect several times.

Christie has tried to cut New Jersey’s income and corporate tax since becoming governor in 2010. But his tax record is mostly one of vetoes because Democrats control both houses of the state legislature. In particular, Christie used his veto pen five times (in 2010, 2011, 2012, 2014, and 2015) to nix a so-called “millionaire’s tax”—a hike from 8.97 percent to 10.75 percent on income above $1 million. He also twice vetoed—in 2014 and 2015—a 15-percent surcharge on corporation business tax liabilities.

Christie taxes

But while the legislature ignored his calls for across-the-board state income tax cuts, Christie did sign into law property tax and business tax relief. In 2010, New Jersey reduced its cap on property tax growth from 4 percent to 2 percent. His fiscal year 2013 budget provided $2.35 billion in “targeted” cuts for businesses, including a change in how the portion of multi-state business income taxable in New Jersey is calculated, a lower minimum tax on S-corporations, and a bigger state research and development credit.

During the most recent budget cycle, Christie finally succeeded in cutting individual income taxes for one group of New Jersey residents—low-income workers. The state expanded its earned income tax credit from 20 percent of the federal credit to 30 percent. “The legislature is preventing me from cutting taxes for everyone, but we’re now going to cut taxes for the working poor in this state,” Christie said when announcing the expanded credit. The governor had previous vetoed earned income tax credit expansions because the legislature would not pass broader income tax cuts.

This is one in a series of posts from the Urban Institute’s State and Local Finance Initiative examining the records of current and former governors running for president.


Always zoom out to examine a governor’s economic record


December 11, 2015

The Urban Institute’s new interactive graphics of historical state economic data provide an important tool for analyzing the records of governors running for president: context. A state’s economy depends on a lot more than what the governor does.

As a result, you should always keep (at least) three things in mind when you assess a governor’s economic record:

  1. The national economy
  2. The state’s long-term trends
  3. The governor’s limited ability to affect a state’s economy relative to other economic factors

State unemployment rates offer a good example of why you should always zoom out when considering economic data.

Lesson #1: The New Jersey and Ohio unemployment rates have dropped considerably since Governor Chris Christie and Governor John Kasich took office (in 2010 and 2011, respectively). But so has the national unemployment rate. Both governors’ terms began after the Great Recession, when unemployment was high, and both states followed the nation as the economy improved and unemployment dropped. In fact, the unemployment rate in both states has roughly mirrored the national rate for decades.

Christie Kasich unemployment record

Lesson #2: Maryland’s unemployment rate was below the national rate throughout former governor Martin O’Malley’s time in office—as much as 2.6 percentage points lower (in October 2009). But that was nothing new: the state’s rate was consistently under the national rate well before O’Malley took office.

O'Malley unemployment record

Lesson #3: Former governor Jeb Bush presided over the lowest unemployment rate (3.1 percent) in Florida’s history during March and April 2006. And for most of his second term, Florida’s unemployment rate was at least 1 percentage point below the national rate. But a year after Bush left office, Florida’s rate equaled the national rate, and a year after that it was 1 percentage point above it.

The big changes in unemployment were consequences of the national housing boom and bust, which affected Florida more than most states. In fact, Florida’s dip below and spike above the national unemployment rate closely mirrors its house price rise and crash during the same period.

Bush unemployment record

The takeaway from these three lessons is not that voters should ignore the economic records of governors. But voters should be leery of overhyped claims of success (or failure). Better yet, voters should look into something governors actually can control: policy decisions.

This is one in a series of posts from the Urban Institute’s State and Local Finance Initiative examining the records of current and former governors running for president.