Misreading the Social Security Trustee’s Report

I’m a little surprised that the National Review has yet to comment on yesterdays’ release of the Social Security 2006 Trustee Report, but I guess they have outsourced spin manufacturing to Patrick Wetherille of Human Events Online:

The Social Security trustees yesterday released their annual report on the state of the Social Security system. Surprise, surprise, the system is going broke – faster than it was last year, no less – but what is Congress doing about it? Nothing. Most people ask themselves why a system that is running surpluses seems to keep losing money faster and faster every year that goes by. The answer is quite simple: Congress is raiding your retirement. Unfortunately, the surplus money that could be used to help fix the system is being spent on anything but retirement. For years, Social Security’s “Trust Fund” has been poured into the federal government through creative accounting, resulting in a disingenuous representation of the program’s finances. Every year, Congress takes the Social Security surplus and borrows it to itself. It spends those surpluses on federal programs that have nothing to do with your retirement. It then promises to pay the money back to itself – with interest! – at some future date. That’s how Social Security is supposedly solvent for decades to come. According to the bipartisan Social Security trustees (who were appointed by President Clinton), the system has a 97.5% chance that it will face permanent cash deficits starting in 2022. They also report that the total amount of cash needed to fix the system has increased by $2.3 trillion, just since last year’s report. It’s no wonder they have called upon Congress to take “timely and effective action” to fix the system now.

Wetherille simultaneously notes that the Trust Fund is running surpluses and claims it is getting deeper into debt. He claims those of us who wish to keep clear tabs on the General Fund, which is indeed running very large deficits, and the Trust Fund are guilty of “creative accounting”. Rich! But yes, we are running large General Fund deficits to which Human Events Online’s David Limbaugh runs an op-ed entitled Time to Extend the Bush Tax Cuts on the very same page of Wetherille’s spin! Limbaugh is trying to convince his readers that the Bush tax cuts increased tax revenues. Amazing!

I’m glad that Wetherille admits that the Social Security Trust Fund reserves are receiving interest. But I have to wonder if he realizes that the only reason that he can write “the total amount of cash needed to fix the system has increased by $2.3 trillion” is that the Trustee’s arbitrarily lowered their assumed interest rate? And does he not realize that he is talking about cash in the very different future and not cash today? As long as interest rates are positive – this distinction matters a lot.

Update: As I was trying to understand why the Trustees decided on this assumption that real interest rates would average 2.9% versus their 3.0% assumption last year, it struck me (DUH) to actually read what their report said:

In developing a reasonable range of assumed ultimate future real interest rates for the three alternatives, historical experience was examined for the 40 years, 1965-2004, and for each of the 10-year subperiods, 1965-74, 1975-84, 1985-94, and 1995-2004. For the 40-year period, the real interest rate averaged 2.9 percent per year. For the four 10-year subperiods, the real interest rates averaged 0.9, 1.9, 5.2, and 3.5 percent, respectively. The assumed ultimate real interest rates are 3.6 percent, 2.9 percent, and 2.1 percent for the low cost, intermediate, and high cost assumptions, respectively. The ultimate real yields, which are assumed to be reached by the end of the short-range period, are 0.1 percentage point lower than those assumed in the 2005 report. The lower assumed rates reflect recent low realized rates, particularly on Treasury inflation-protected securities (TIPS), and an expectation that low real interest rates will persist.

Is the average of the past 40 years a reasonable means for forecasting the future? Is their expectation that low real interest rates will persist a plausible one?