Ways to Limit Social Security’s Drag on Economic Growth

Ways to Limit Social Security’s Drag on Economic Growth
November 7, 2012

Despite the lack of action, most policymakers understand the urgency of the federal entitlement crisis, and specifically, of the need to reform the largest entitlements—Medicare, Social Security, and Medicaid—to constrain cost growth.

Less frequently discussed, however, is the importance of reforming these programs in a way that ensures their future operation doesn’t unnecessarily constrain broader economic growth, labor participation, and savings.

A new Mercatus Center at George Mason University study finds in order to foster economic growth, entitlement reform must do more than rein in unsustainable cost growth. It must also remove the barriers to labor force participation and disincentives to personal savings currently embedded in the largest entitlement programs generally, and Social Security in particular. 

“Limiting Social Security’s Drag on Economic Growth: Program Reforms to Facilitate Labor and Savings Formation” stresses several key points, including:

Entitlement reform must constrain costs and correct economic disincentives.

The primary driver of unsustainable federal spending growth is federal entitlement spending. Without effective reform, unchecked growth in the largest entitlement programs will create an insupportable burden of federal taxation and indebtedness that limits the nation’s potential for economic growth.

Economically sustainable entitlement reform must focus on the following:

(1) reining in unsustainable program costs, and

(2) correcting economic disincentives currently embedded in the programs—Social Security being a key case in point.

There can be no ‘fix’ to the entitlement crisis without meaningful spending reform.

Attempting to fund currently projected entitlement spending growth through increased borrowing or higher taxes would be an ineffective and economically crippling approach to reform.

The Congressional Budget Office estimates federal tax rates would have to more than double to address currently projected spending increases.

A Harvard study of other nations’ fiscal adjustments shows that attempts to close deficits with tax increases, rather than spending reductions, were far less successful and more likely to lead to recession.

Relying on borrowing to fund entitlement programs is shortsighted and would severely harm the economy in the long run. International studies find high levels of government debt relative to GDP significantly cut economic growth rates.

Social Security must be reformed to remain solvent. Further delaying reform will severely limit our ability to sustain the program without drastic benefit cuts, massive tax increases, or some combination of the two.

Social Security’s reform must focus on reducing program costs. Funding shortfalls cannot be closed mainly by raising taxes, as the level of taxes required would have devastating economic effects.

Economically sustainable Social Security reform promotes work and savings.

Several design features of Social Security undercut our national economic growth potential. These include disincentives for work, savings, investment, and caring for dependent children.

To ensure Social Security is economically sustainable in the future, these flaws must be corrected as a part of comprehensive reform to control costs.

Various reforms to encourage work—such as adequately compensating those in early  and middle age who extend their working years—would benefit both Social Security’s specific financing and general economic growth.

Studies of other nations show increased levels of personal savings and investment (including private accounts) have led to increased economic growth.

Charles Blahous (info@economics21.org) is a public trustee for Social Security and Medicare, a senior research fellow with the Mercatus Center at George Mason University, and author of Social Security: The Unfinished Work. Jason Fichtner (jfichtner@gmu.edu) is a senior research fellow at the Mercatus Center. Previously, he served in several positions at the Social Security Administration, including as Deputy Commissioner of Social Security (Acting), Chief Economist, and Associate Commissioner for Retirement Policy.

 

Internet Info

 

“Limiting Social Security’s Drag on Economic Growth,” Charles Blahous and Jason J. Fichtner, Mercatus Center: https://heartland.org/policy-documents/limiting-social-securitys-drag-economic-growth-program-reforms-facilitate-labor-and