BW on Soc Sec II: The Shape of Low Cost

This figure shows in graphic form the outcomes of Intermediate Cost (II) vs High Cost (III) vs Low Cost (I)

Outcome II shows the standard narrative. A Trust Fund Ratio rising to a peak in 2017 then a more or less rapid falloff to zero as the first the interest is tapped and then the principal is redeemed with the result of total Trust Fund Depletion in 2041.
Outcome III or High Cost shows the same process only accelerated.
But Outcome I or Low Cost shows a much different picture. The Trust Fund ratio peaks at about 450 about 2020 then dips to 390 by around 2040 as a portion of the interest is tapped but after a period of plateau sharply increases through the remainder of the 75 year actuarial window. This is quite literally the picture of a potentially overfunded Social Security system. Is a Low Cost outcome guaranteed? Well no. Is it possible? Certainly the numbers are not at all outlandish and perfectly in line with economic performance over the last fifteen years.
Can we at least talk about the implications of this?

Well I just copied this over from the Bruce Web in response to a comment from Jim A on the previous post. Some explanation of terminology is in order here. First the three curves represent the three different alternatives supplied by the Trustees. The only one generally reported in outcome II or Intermediate Cost, with the other two (High Cost and Low Cost) supposedly representing the outward bounds. In point of fact for the years 1997 to 2004 the deviation from Intermediate Cost was always in the direction of Low Cost and often exceeded its numbers.

Social Security solvency is measured in two ways. One is by payroll gap which is to say the amount that the payroll tax would have to be raised immediately or contrawise at Trust Fund Depletion to fully fund the current schedule of benefits. Per the 2008 Report those figures are 1.7% and 3.54% respectively, numbers that have trended down significantly since the 1997 Report. The second measure is Trust Fund Ratio which is to say Trust Fund assets measured as a function of time with 1 year = 100. Under current law (or perhaps simply practice) Actuarial Balance is defined as having a Trust Fund Ratio of 100 for each of the next 10 years (Short Term Actuarial Balance) or the next 75 years (Long Term Actuarial Balance). In 2003 a new measure was added which would have us evaluate actuarial balance over the ‘Infinite Future Horizon’. This was in my opinion a simple gimmick to allow opponents of Social Security to use really scary numbers rather than focus on the traditional and reasonable 75 year planning window, a window that pretty much covers the interests of most peoples children and grandchildren.

Now in examining the graph we can see Low Cost (outcome I) we see a sharp acceleration of the TF Ratio after 2060 with it exiting the 75 year window at 650. This is dangerously high, that is if we consider the Trust Fund and more significantly the interest it earns as being a real asset. And we should because otherwise we would be arguing for what pgl calls a backdoor employment tax that called on one sub-set of Americans to subsidize General Fund spending. And theoretically there is an argument to be had there but it sure puts ‘paid’ to the ‘poor people don’t pay taxes’ narrative the Right is so fond of. But in point of fact flattening the tail down to where the Trust Fund is at its nominal target of 100 is difficult, the only way of doing that is to starve the beast by cutting payroll tax rates and using General Fund dollars now rather than later to pay down the Trust Fund. Because the longer you wait the higher the proportion of Cost has to be born by the General Fund as opposed to FICA to keep interest on interest from bloating the TF. This is incidentally why cutting benefits or increasing revenues by such measures as raising the cap are counterproductive, they simply increase the amount of accrued interest without actually benefitting anyone today.

Of course this whole discussion is moot if we actually get outcome II or Intermediate Cost. Our choice of policy going forward is entirely dependent on whether future outcomes are closer to II or I which in turn requires an examination of the assumptions underlying Intermediate Cost and Low Cost in light of the fact that most of the bias over the last 12 years has been strongly to the upside. Yet all of the policy discussion to date simply clings to Intermediate Cost assumptions and considers the problem to be one of deficit in 2041 when it is not clear that is at all the most likely outcome.

Next post or so we’ll stick in some actual projected growth numbers. In the meanwhile you can ponder the implications of a $117 trillion Trust Fund in 2085 (Low Cost projection) Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions]