Soc Sec XLI: Why not assume Low Cost?
I have never gotten a satisfactory answer to this question. I have posed it to very prominant people on both sides of Social Security only to have it dismissed by the privatizer and answered by the SS supporter in a way that went over my head. But it is not crazy talk, between 1997 and 2004 outcomes at or better than Low Cost were routine. But perhaps I am getting ahead of myself. What is Low Cost anyway? Well one answer is that it is outcome I on the following figure:
This figure shows in graphic form the outcomes of Intermediate Cost (II) vs High Cost (III) vs Low Cost (I)
First we need to make clear the difference between Trust Fund ratio and Trust Fund balance. The TF ratio expresses the balance as a function of time, with 100 equalling one year of projected cost. Since cost goes up every year it is possible for the two measures to move in opposite directions with balances increasing even as ratio starts declining. Which is why people are able to play such games with dates. For example if you examine Table IV.B3.—Estimated Trust Fund Ratios, Calendar Years 2008-85[In percent] you will see that under Intermediate Cost the TF ratio peaks in 2014 even as the TF balance keeps increasing until 2023 Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions]. The much cited Shortfall date of 2017 falls in between and simply marks the point where interest starts having to be tapped.
Figure II.D6 graphically presents the story in terms of Trust Fund ratios. Outcome II shows the standard Intermediate Cost narrative with TF ratio stalling around 2014 then dropping fairly rapidly after 2017 enroute to a zero outcome in 2041. Outcome I though shows a much more dramatic picture. Here the TF ratio continues to climb until 2023 then starts a mild decline until the 2040s and then picks up again until it blasts through the 600 level at the end of the 75 year actuarial window. The picture is even more mindblowing when examined in non-inflation adjusted current dollars (Table VI.F8 above). People want to to wring your hands in anxiety because Intermediate Cost has a $4.3 trillion unfunded liability through the next 75 years. Yet should Low Cost come to be that liability translates in a Trust Fund with $110 trillion dollars in assets. That is a bet on Low Cost represents about a $115 trillion swing over Intermediate Cost, the stakes really could not be higher.
So why not just assume Low Cost and call it good, in fact more than good? Well my answer is to be found under the fold, yours I guess will just have to come in comments.
The answer begins with examination of three tables in the Social Security report:
Table V.A1: Principal Demographic Assumptions
Table V.B1: Principal Economic Assumptions
Table V.B2: Additional Economic Factors
My position from 1997 to 2004 was that Intermediate Cost was ridiculously pessimistic particularly on the economic side but also on the demographic side. Its demographic model suggests that in the face of labor shortages going forward that this country will sharply slow not just illegal immigration but legal immigration as well, and not just in absolute numbers but in relative ones as well. If we were to take this seriously we would have to believe that the proportion of foreign born Americans was going to steadily shrink over time. And while I am sure there are xenophobes out there to whom this would come as really good news, it doesn’t make a lot of sense from an economic standpoing. If America needs more workers to maintain a good worker/retiree ratio it can get them where it always has: from overseas. On the other hand Low Cost has immigration in the future at numbers comparable to 2005 in absolute numbers but still shrinking in relative terms. If anything this still seems too cautious (a point brought out by the recent Report on Assumptions by the SSAB Technical Panel-see post XVIII).
One standard response is to point out that Low Cost fertility rates are too optimistic. And this is a fair point though one largely to be explained by the design of the model which has every variable of Low Cost working to the upside (see Technical Panel Report for their recommendation on this point). On the other hand an examination of Table V.A1 shows that the trend over the last decade has been to see small increases in this measure, a trend that seems to have accelerated last year More U.S. babies born, fertility rate up, defying low-birth trend in Europe. So combined with higher immigration (itself associated with higher fertility rates) I am going to just say that the case needs to be made for Intermediate Cost demographic projections.
But it is on the economic side that I see a smoking gun. Take any measure you like whether Productivity or Real Wage (Table V.B1) or Unemployment and Real GDP (Table V.B2) all of them show massive and permanent crashes from 1999 numbers to 2012. For example Real GDP growth is projected under Intermediate Cost to drop by 50% over that time and never recover. On the other hand the ‘optimistic’ Low Cost still produces fully funded Social Security with a 33% drop in Real GDP growth over that same period. Take one final glance at Figure II.D6 above, examine some of the data Tables and then explain if you can why I shouldn’t just assume results closer to Low Cost than Intermediate Cost. {The original post suggested that total GDP would drop. h/t spencer}