That’s the question CNBC’s Larry Kudlow asked House Budget Chairman Paul Ryan yesterday, which resulted in a fascinating exchange:
KUDLOW: But what do you say to supply siders and others who argue–regarding Social Security, not health care–if you grow the economy in the next 50 years at 3 1/2 percent per year, which is the long-term growth since World War II, then Social Security will fix itself?
Rep. RYAN: No, it doesn’t.
KUDLOW: Now that doesn’t mean we shouldn’t have a personal account option and so forth, but that’s what they argue. If you grow the economy, growth, growth, growth, then we don’t have to slash benefits and the Republican Party will look better, not worse.
Rep. RYAN: Except, first of all, nobody is talking about slashing benefits. We’re not even talking about touching benefits for people in and near retirement. But we’ve run those numbers on growth and Social Security and they don’t catch up, because when you have more growth and you have more Social Security contributions, you have more expenses. The more you pay in, the more you get out. So growth, you cannot grow yourself out of our Social Security solvency problem. I’ve run those numbers with the actuaries. You do need to make some changes in Social Security benefit for the future generations to make this program solvent.
KUDLOW: But the actuaries say you can only grow at 2 percent for the next 50 years.
Rep. RYAN: No. But even if you run bigger growth numbers through the system, you still don’t fix the problem. I’ve run those numbers. I’ve run the 3 and 3 1/2 percent growth numbers through the system. We are kidding ourselves if we think we can simply grow ourselves out of our entitlement problems. We can’t. We have an $88.6 trillion unfunded liability with our entitlement programs, according to the GAO. Last year that was a $76.4 trillion problem. Every year we delay fixing these entitlement programs. We go about $10 trillion deeper into our unfunded liabilities.
Me: This is actually a tricky issue. As the CBO forecasts it, America’s debt-to-GDP ratio could top 700 percent by 2080. But drill down into that prediction and you find that the CBO has plugged in a rather dismal long-term forecast of U.S. economic growth, just 2 percent or so. That’s only two-thirds of the average U.S. growth rate since 1970. But what if (a) government spending tracks current projections over the next 70 years, (b) government revenue as a percentage of GDP stays at its historic average of 18 percent, and (c) the economy were somehow to grow a bit faster than its 20th-century average, about 3.5 percent.
Under those conditions, according to a recent study by JPMorgan Chase, a much wealthier America (generating $100 trillion in tax revenue rather than $50 trillion) would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.
So Kudlow is correct — if you could find a way to meet those conditions.
But here is the problem with that math:
1) It, as Ryan alludes to, ignores that Social Security benefits are linked to income growth. So higher growth equals higher benefits, though a quirk in how benefits are figured means faster growth could reduce the program’s short-fall by 25 percent or so.
2) Healthcare costs continue to increase at a rate faster than GDP growth. So you have to find a way to bring down spending, or healthcare will consume an ever bigger part of the pie and continually boost government spending (unless you reduce Uncle Sam’s role). This chart from the CBO tells is all: