There’s a Better Alternative to Cutting Social Security

by: Mark Sunshine

On Sunday morning, I woke up just in time to hear Sen. Lindsey Graham announce on a TV talk show that he isn’t going to vote to increase the U.S. debt limit unless Social Security and Medicare benefits are cut for people who are now under 55 years old. I started listening carefully to the program because if Graham has his way two of the people who will have their benefits cut are my wife and me. While we are both under 55 years old, we have paid into the system for more than 30 years and would feel cheated if the terms under which we paid our taxes for more than three decades was changed; especially since we know that there is a better alternative.

Senator Graham believes that future Social Security and Medicare benefits cost too much and if left unchecked will eventually bankrupt America. He feels so strongly about his position that he is willing to bankrupt America now by refusing to vote to increase the debt limit rather than wait for Social Security and Medicare costs to bankrupt us later. Senator Graham knows that a failure to increase the debt limit will cause a U.S. default and destroy our national economy. But he seems to believe if Social Security and Medicare are fiscal hand grenades that are going to blow us up anyway, 2011 is as good a time as any to pull the pin.

While Senator Graham is correct in his assertion that Social Security and Medicare costs will be an increasingly difficult burden for future generations, his solution doesn’t address the underlying cause of the problem - deteriorating demographics caused by an aging U.S. population. Simply put, unless something changes there will be too many older Americans who want to receive benefits which will be paid for by too few younger Americans.

Demographic problems require demographic solutions and Senator Graham isn’t attempting to deal with the underlying population problem facing the U.S.

Here’s a suggestion for Senator Graham and everyone else who thinks hammering older Americans is the way to fix a future demographic imbalance: Concentrate on getting more young Americans into the economy so that the demographic grenade doesn’t explode.

There are two ways to get more Americans into the economy: Increase the birth rate or allow more immigrants to be admitted into the U.S. Unfortunately, both alternatives have Congressional foes.

Increasing the birth rate means enacting government family friendly policies that encourage American women to have more kids. More often than not Congressional critics label family friendly public policy as an evil exercise in social engineering.

The other way to fix the demographic problem is to have people move to the U.S. to live and work. Unfortunately, immigration reform has been stuck in Congress for more than a decade and last month an attempt at encouraging young and educated immigrants to stay in the United States, the DREAM Act, was voted down.

Right around the same time the DREAM Act was going down in Senatorial flames, the Census Bureau announced that during the last decade the U.S. population grew at the slowest pace since the Great Depression. It’s no coincidence that the economy was terrible both during the last decade and the Great Depression.

Observers on both sides of the immigration issue need to understand that the size, age and competitiveness of the U.S. population is the largest single determinant of our economic welfare. An older, slower growing and less well educated population will always have less economic wealth than a younger, growing and better educated population.

Even the lingering housing crisis is a hostage of deteriorating demographics. If the population of the U.S. had the same growth rate from 2006 to 2010 as it did from 1995 to 2000, the overhang of unsold and unoccupied homes would be dramatically smaller. New household formation drives housing demand and is a derivative of population growth. Slow population growth and an aging population are terrible for housing.

Demographics drive both general economic supply and demand. On the supply side, young and highly educated workers are the seed corn for a productive workforce. Younger workers also push up aggregate demand as they spend money to raise their families and live active lives. Dean Baker recently wrote that retirees consume only 70% of non-retirees.

If anyone wants to see what really bad demographics do to an economy, just look at Japan. In the 1980s Japan had a fast growing and hard working labor force. The conventional wisdom was that it was Japan’s destiny to dominate the global economy.

Conventional wisdom about Japan was wrong and when the Japanese population started to age, birth rates dropped and the economy slowed. There was a populist backlash caused by the economic slowdown that resulted in xenophobic policies that effectively cut off Japanese immigration. Japan even has a sort of second class residence status for children of immigrants, even if these children were born and raised in Japan.

Last week the Japanese government announced that in 2010 the Japanese population shrank by the greatest amount ever (other than during periods of war) and that the trend toward a smaller and older population will continue for the foreseeable future. Since 1993 the Japanese labor force hasn’t grown and demand has remained weak for more than a decade. It’s been a long time since anyone has been worried about Japan dominating the world economy.

Senator Graham and Congressional anti-immigrant advocates are making the same mistakes that Japanese leaders made 20 years ago. Rather than learning from the experiences of other countries and history, Senator Graham is reading from the same playbook that robbed Japan of its future and if continued will have the same effect on the U.S.

Before enacting large scale cuts in retiree benefits the U.S. needs to do everything it can to increase the tax base and fix its demographic problem. Cutting benefits should be the last public policy option, not the first.

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