Social Security: The ENRON of the Economics Profession?

Abstract

In 1995, one of the nation’s most distinguished economists told the Senate Finance Committee that Social Security benefits were 10 percent higher than Congress had intended. The problem, said the Ivy League professor, was that the program’s benefits are linked to the consumer price index (CPI), a measure of inflation that had been incorrectly calculated in the midand late 1970s. He urged the committee to gradually reduce benefits to correct the effects of this mistake.But the economist was wrong. Social Security benefits are only indexed to the CPI after retirement. That means excess benefits were not going to the vast majority of recipients, people who started collecting Social Security checks after the late 1970s: the total overpayment problem was about one tenth as large as the professor estimated. Further, because those gaining from this benefits mistake were mostly in their eighties and nineties by 1995, the amount to be saved from correcting the error would dwindle rapidly in the following years.I witnessed that economist’s presentation. After learning that members of the committee were preparing a bill to reduce Social Security benefits based on his testimony, I wrote to him twice. Each letter explained the problem and offered documentation on every point; a research assistant could have easily checked the facts. But the professor admitted his error only after a Treasury Department study pointed out the trouble with his analysis.The incident just described is not an isolated one. When it comes to Social Security, economists have often made misleading or unsupportable claims. And many continue to make the same claims even after being confronted with the facts. The most blatant of their unjustified assertions is that Social Security funds should be invested in the stock market. This could lead to one of the most costly policy blunders in the nation’s history. Today the name “Enron” calls to mind an unfounded faith in experts, one that is ultimately revealed but not before it discredits the experts and inflicts considerable economic pain on many unsuspecting people. Social Security reform may be the Enron of the economics profession.