Fed chief Ben Bernanke strolled up to Capitol Hill yesterday and scared the pants off Congress and the American public. His message? An over hyped, doom and gloom forecast about an entitlement bankruptcy tidal wave slamming American shores.
Unfortunately, Mr. Bernanke and all the other pessimists are using low-ball economic estimates to make their alarmist case.
As far as Social Security is concerned, a set of optimistic (yet eminently reasonable and realistic) economic assumptions exist which lead to no bankruptcy and no trust fund exhaustion.
This scenario—one rarely discussed by most—includes slightly less than 3 percent real economic growth, and 2 percent productivity per year. Over the next seventy-five years, this solid growth forecast keeps the Social Security funds alive and well.
(Bear in mind, real GDP growth over the last fifty years has averaged 3.3 percent annually. Why would people assume the future will be the worse than the past?)
Bernanke’s gloomy bankruptcy assumptions—where the trust fund is expected to exhaust in 2040—rely on a rather uninspiring economic outlook of around 2 percent growth. This is rubbish. With low tax rates, high productivity and low inflation, our technology based economy is poised for a long cycle of prosperity.
These doom and gloom Social Security scenarios aren’t worth the paper they’re printed on.
The real problem with Social Security is not bankruptcy. It’s the dreadful investment return (barely 1 percent) that future retirees have to look forward to.
If Americans had the chance to purchase S&P 500 SPDR contracts, and were able to hold them for fifty years, they would receive a real return of at least 7 percent compounded annually based on the history of the stock market. That's a lot of Benjamins. Heck, even if workers were given a lousy bank deposit option, federally insured by Uncle Sam, they could still count on squeezing out at least 3 percent compound returns.
The real reason we need to reform Social Security is to give American workers a far better retirement nest egg than the current system is capable of providing—not because of some phony bankruptcy driven deficit scenario.
Did someone say personal savings accounts?
Let’s remember that more savings means more investment. This in turn leads to productivity-fueled growth. The end result is we have more revenues to pay off Social Security liabilities over the next seventy-five years and vastly more wealth for retirees.
Think of it.