I’ve written only one piece for the New York Times editorial page, along with several others for their website. They fact-checked the articles, as they should have, and I responded with revisions where needed. All in all, a very normal experience. It’s strange, then, that today’s op-ed “Get Radical: Raise Social Security” by labor lawyer Thomas Geoghegan contains a dubious assertion in almost every paragraph. Was anybody checking this stuff?
Geoghegan writes that “right now Social Security pays out 39 percent of the average worker’s preretirement earnings.” Financial advisors recommend a total retirement income “replacement rate” of 70 percent to 80 percent of pre-retirement earnings. Geoghegan wants to raise benefits to hit a 50 percent average replacement rate.
But as I showed in this paper with Glenn Springstead of the Social Security Administration, SSA measures replacement rates differently than financial advisors, comparing benefits to “wage-indexed” average lifetime earnings rather than earnings immediately preceding retirement. Compared to final earnings, the median beneficiary has a Social Security replacement rate of 69 percent and a total income replacement rate of 185 percent. Do some people need help? Sure, but this isn’t exactly a situation crying out for a broad-based benefit increase.
Geoghegan mocks those who say we can’t afford higher benefits. “Oh, come on: We have a federal tax rate equal to nearly 15 percent of our G.D.P. — far below the take in most wealthy countries.” But tax revenues aren’t low because we cut taxes. They’re low because we’ve run the economy into the ground. When people’s incomes drop or they lose their jobs, tax revenues fall too. Once the economy recovers, tax revenues are slated to rise—to around 20 percent of GDP under President Obama’s budget, a level that is above the historical average and which does nothing to fully fund the Social Security program Geoghegan wants to expand by over 25 percent.
Geoghegan then states, “the labor economist Richard B. Freeman points out that the hourly earnings of workers dropped by 8 percent from 1973 to 2005 while productivity shot up 55 percent or more. The United States is one of the few developed countries where workers are routinely cheated of a share in higher productivity.” Actually, as Harvard’s Martin Feldstein has pointed out, this is an almost entirely bogus statistic. Productivity growth over time is calculated using a different measure of inflation (the GDP deflator) than income growth (the Consumer Price Index). Moreover, wage growth is less important than compensation growth, which accounts for the increasing role of benefits. Feldstein shows that “total employee compensation as a share of national income was 66 percent of national income in 1970 and 64 percent in 2006. This measure of the labor compensation share has been remarkably stable since the 1970s.”
Geoghegan’s statement that employers “have had a windfall on pensions” is also dodgy. Department of Labor data indicates that total employer pension contributions in 1975 equaled around 2.3 percent of GDP; in 2008, pension contributions totaled 2.9 percent of GDP. Did pensions shift from a defined benefit to a defined contribution structure? Sure, but a windfall comes when you contribute less, not when you contribute more.
So what we end up with is a plea to increase by 25 percent the largest domestic government program, which happens to be already underfunded by around 21 percent, supported by an array of facts nearly all of which are either irrelevant or false. I’m less puzzled about how this piece got written—after all, there’s a ton of bad stuff written every day—than how it came to occupy what is still one of the most coveted pieces of newspaper real estate.
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Emily, good point. We don’t really have good data on individual compensation rather than wages, so we stick to that. However, because health coverage is a fixed cost, rising costs would tend to take a bigger chunk out of low earners’ salaries, which would affect inequality. Also, check out Scott Winship’s blog on how the 1986 tax reforms may have affected reported income; high earners reported a big increase in incomes immediately following the reforms, which may indicate that a good chunk of our higher in equality today is driven by tax issues rather than by changes in true compensation. http://www.scottwinship.com/1/post/2011/03/what-would-it-mean-for-theories-of-us-income-inequality-growth-if-the-us-experience-has-been-similar-to-that-everywhere-else.html
Andrew – thanks for responding and that’s a really interesting blog post.
Emily, I did a quick follow-up post on the main page looking at how rising health costs could affect income inequality and the growth of median incomes; more than I’d initially thought, so this may be worth some more research.
To nitpick: I think when people talk about wage growth/wage fall, they’re not talking about labor compensation share, they’re talking about something closer to median hourly wage. And given that much of the wage growth has been at the top, that the labor compensation share has stayed relatively constant certainly suggests that median wages have not kept up with productivity. (Whether they should have I guess depends on where the productivity increase has come from, and I don’t have that answer.)