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Projections

Kevin Drum emailed me a link to this in-depth discussion (PDF) of future economic growth projections. The stuff at the beginning about technical modeling is incredibly dense and far beyond me. Later in the article, however, he gets into the core relevant areas -- projected productivity growth, projected falls in mortality for people over 65, and projected immigration and makes a compelling case that the SSA figures for all three topics are biased toward bad news for Social Security. He concludes on page 270 that futue GDP growth will likely be 3.28 percent per year versus SSA projectiosn of 2.4 percent.

December 19, 2004 | Permalink

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Comments

It's obvious where this aspect of the debate is heading, isn't it?

"Only with Social Security reform will we get the investor risk-taking and the tidal wave of unleashed fresh capital needed to push our long-run growth potential from a meager 2.4% per annum to 3.28%."

That, plus the incremental output of millions of baby-boomers obliged to work well past retirement age.

Posted by: Dave L | Dec 19, 2004 1:07:06 PM

That's actually a really interesting question -- what would happen to output if the retirement age were raised by a year?

We know that not all the boomers would actually keep working, so it wouldn't be easy to calculate. But we also know that it is most likely that older workers are on average most prodctive because the highest paying jobs are more likely to be occupied by older workers (even though those are the people for whom the change in retirement age would have the least effect).

It would also be changing the ratio of workers to retirees.

There's a paper in there somewhere for somebody. Especially with all the natural experiments from past changes in the retirement age.

Posted by: Ian Dew-Becker | Dec 19, 2004 2:59:47 PM

Where did you get the idea that the SS trustees posit a 2.4% real GDP growth? Look into the report. They base their case on 34 years of 1.8 and 1.9 GDP growth. They also have a projection in the same 2004 report which includes a real GDP growth of 2.7% -- and in this case, the trust fund would never be drawn upon, revenues from the present payroll tax would exceed the payments forever & by 2042, when the trustees predict insolvency, the trust fund would reach over 15 trillion dollars (well, only 8 trillion in 2004 dollars). And 2.7 GDP is still far less than the 3.28 forseen by Gordon, far less than any experience of recent history. If our economy should sink into a decades long period of less than 2% growth, Social Security would be the least of our worries. Incidentally, how would the promises of sharing in the "historic gains of the stock matrket" hold up when the economy is in a decades long slump th likes of which we have never seen?

Posted by: Richard Rymer | Dec 19, 2004 10:31:27 PM

Matt --

remember that he was only projecting for 20 years, rather than the 75 of the SSA. It's possible that even just 20 years at the higher number, then back down to 2.8% or whatever would still leave the trust fund solvent, but either way, he was making no claim to have any method for predicting over such a long period.

Posted by: Ian D-B | Dec 20, 2004 10:08:22 AM

I've been thinking based on the idea that Social Security was in for a bit of a rough period, and that conservaives were using this forthcoming trouble to find ways of destroying it. What if this is all wrong?

What if conservatives are not acting out of a sense of opportunity, but out of a sense of fear? Face it, the Social Security surplus has been a supplemental Federal Tax for years now. Without it, our "Big Government" would not be possible. If it is not in trouble, but in fact has increasing surplusses out to an indefinite horizon, then "Big Government" is good, easy and sustainable. Essentially, the next 30 years or so is the last chance to kill big government. The best shot at doing so is to cripple social security.

Posted by: Njorl | Dec 20, 2004 11:31:01 AM

I'm not sure the interpretation is correct. Social Security depends on wage increases, not GDP. There has been SSA senstivity analysis based on average wage growth from 3.4% to 4.4%.

This work lead to the simulated probability distributions of the annual trust fund ratios as well as stochastic annual costs. We see that the Social Security income deficit could happen as early as 2010 or as late as 2025.

Keep in mind that the Medicare Prescription Drug benefit has lead to Medicare having a $16.6 trillion unfunded liability. A percent of GDP here (deadweight loss of Social Security payroll taxes) and a percent of GDP there start to add up over time...soon we'll have "Eurozone growth" of under 2%...

Posted by: Mr. Econotarian | Dec 20, 2004 12:24:50 PM

Here is the actual quote from the 2004 OASDI Trustees Report. You will see that there have been low cost and high cost scenarios investigated, with GDP growth ranges from 3.4% to models that include recessions (these never happen, right?). Again, I should mention, that the real variable in Social Security is wage growth, and unless you think that wage growth is going to be way above 4%, I think the OASDI Trustees have the spread covered.

The real growth rate in gross domestic product (GDP) equals the combined growth rates for total employment, productivity, and average hours worked. Total employment is the sum of the U.S. Armed Forces and total civilian employment, which is based on the projected total civilian labor force and unemployment rates. For the 40-year period from 1962 to 2002, the average growth rate in real GDP was 3.3 percent, combining the approximate growth rates of 1.7, 1.7, and -0.2 percent for its components--total employment, productivity, and average hours worked, respectively.

For the intermediate assumptions, the average annual growth in real GDP is projected to be 2.9 percent over the short-range projection period (2004-13), a slower rate than the 3.3 percent average observed over the historical 40-year period (1962-2002). This slowdown is primarily due to slower projected growth in total employment. For the low cost assumptions, annual growth in real GDP is projected to average 3.4 percent over the decade ending in 2013. The relatively faster growth is due mostly to a higher assumed rate of growth in worker productivity. For the high cost assumptions, real GDP is assumed to fall in the first and second quarters of 2004, resulting in a total decline in real GDP of 0.8 percent. After 11 quarters of recovery, a second recession, with a total decline in real GDP of 1.6 percent, is assumed to begin in the second quarter of 2007 and last 3 quarters. After the second recession, a moderate economic recovery is assumed through 2010, with continued modest economic growth thereafter. For the high cost assumptions, annual growth in real GDP is projected to average 2.2 percent for the decade ending in 2013.

After 2013, no economic cycles are assumed for the three alternatives. Thus, projected rates of growth in real GDP are determined by the projected full-employment rate of growth for total employment, and the assumed full-employment rates of growth for total U.S. economy productivity and average hours worked. For the intermediate assumptions, the projected rate of growth for real GDP falls toward the assumed productivity growth rate because of the projected decline in labor force growth over the period. By 2080, the growth in real GDP slows to about 1.8 percent, due to the assumed ultimate percent changes of 0.2, 1.6, and 0.0 for total employment, productivity, and average hours worked, respectively. These projected growth rates are the same as those assumed for the 2003 report.

Posted by: Mr. Econotarian | Dec 20, 2004 12:33:03 PM

"And 2.7 GDP is still far less than the 3.28 forseen by Gordon, far less than any experience of recent history. If our economy should sink into a decades long period of less than 2% growth, Social Security would be the least of our worries. "

That's all false. The reason for the projected drop in GDP growth is demographics. The working population always grew in the past, but in the future it is going to near stop growing.

With the rate of growth of the working population so markedly slowing, GDP growth slows too, other things equal, as a matter of simple arithmetic.

And there's nothing in it at all to indicate that this would be a problem for the larger economy -- e.g., firms' profits and returns on investment result from productivity per worker, not the number of workers.

And retirees with adequate savings in real market investments in global markets can of course liquidate them to benefit from the production of all the workers of the world.

Although, if the welfare of one growing class of people is artificially tied to a payroll tax on another diminishing class of people, there could be a problem there, of course.

Posted by: Jim Glass | Dec 20, 2004 6:59:53 PM

Gordon didn't project anything for 75 years. He attempted to make a projection for the next 20 or 25 years. Nobody should make any claim to know what will happen in 75 years because there are simply too many variables and too much time. We can try to plan ahead and make good decisions, but we can't possibly know with any accuracy what the economy will be like in even 20 years.

Posted by: Ian D-B | Dec 20, 2004 9:39:14 PM

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