How the NW Plan Eliminates Unfunded Liabilities-Forever

by Bruce Webb

In comments Andrew Biggs claims that the NW Plan does not actually eliminate $15.4 trillion in unfunded Social Security liability but instead leaves a 1% payroll gap over the Infinite Future. I have no reason to suspect his math but do suspect he doesn’t fully understand the mechanism.

The Northwest Plan ultimately is a response to long term uncertainty in the projections. Under CBO’s most recent projections the payroll gap for Social Security is about half of that projected by SSA (1.06% to 2.00%). If the schedule of tax increases set forth in the spreadsheet was set in stone this would mean that if actual economic performance came in in line with CBO then Social Security would over the long term be overfunded, which oddly enough would be a very, very bad thing for Social Security, something I pointed out in installment ten of the AB Soc Sec Series The Danger of Low Cost. The NW Plan avoids this by monitoring the tail of the valuation period. For example under 2009 OASDI Trigger the projected Trust Fund ratio remains remarkable steady from around 2062 to 2080 but then takes a mild but noticeable dip to the end of the projection period. If this trend persists as we change valuation periods with the 2010, 2011, and 2012 Reports it might trigger another increase in the mid 2090s. On the other hand if it reverses we might have to push the 2074 increase forward a bit. If it turns out that CBO is more right than SSA this might mean canceling one of the intermediate year cuts and stretching the rest out some, or alternately reduce the amount of the increase in one or more of the scheduled.

In any event we can always adjust the schedule so that the TF ratio result in the new year 75 always remains between 100 and 300 and as such eliminating unfunded liability over that period and so for some extended period beyond.

I suppose someone could take 2009 OASDI Trigger and extend it from 2082 to 2109 and so capture all the potential costs for ‘past and current participants’ and so show that the pace of needed increases after 2082 is such that the people of 2062 should consider changing the benefit formula. On the other hand our bigger policy need in the 2060′s might be planning how to relocate NYC and the whole state of Florida to higher ground. The very uncertainly inherent in future outcomes mitigates against too much prior planning.

The NW Plan eliminates unfunded liabilities because it sets up a mechanism similar to that under which the Fed predicts inflation, with the advantage that SSA will always have a 75 year planning window. If unfunded liability starts creeping back into the picture 20, 30, or 40 years from now the Dales, Bruces and Arnes of that era can deal with it. There is no reason to assume a priori that they will be more feckless than we are and that events occurring decades after our own deaths are our responsibility. This plan if adopted gives us quite powerful assurance that the Social Security car will still have plenty of life left in it 76 years from now. Good enough for me.

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