Soc Sec XLIII: Solvency: Demographics or Productivity?

I don’t want to pile on but I did think the new actuarial note was important enough to justify the XLII post.

I want here to front a discussion from the comments on XLI: Why not assume Low Cost? where I think people are talking past each other. There seems to be some confusion between the concepts of ‘Solvency’ and ‘predictions of solvency’.

If we use a starting point of the current year it is pretty clear that the range of outcome from Low Cost to High Cost is overwhelmingly determined by assumed demographics. This is shown pretty clearly in Table IV.B1.—Estimated Annual Income Rates, Cost Rates, and Balances, Calendar Years 1990-2085 [As a percentage of taxable payroll] where the difference in Income rate (the product of real wage/productivity) between Intermediate and Low Cost in 2040 is 11.38 to 11.27 or .11% of payroll while the difference in Cost rate is 14.71 to 12.79 or 1.98% of payroll. And it seems obvious that Cost is primarily driven by the demographics something we can confirm by consulting Table VI.D2.—Sensitivity to Varying Death-Rate Assumptions[As a percentage of taxable payroll] as opposed to the other component of Cost Table VI.D5.—Sensitivity to Varying CPI-Increase Assumptions[As a percentage of taxable payroll] where we can see clearly that mortality assumptions have twice the impact on outcomes than inflation assumptions do. So given that the range of outcomes shows that cost is more important than income and that cost is largely if not entirely driven by mortality one could conclude that game, set and match belong to Coberly.

Well not so fast. Though it appears that the range of outcomes is driven by demographics it is not at all clear that the mid-point is. In the Sensitivity tables the mid-point is defined by date of Trust Fund depletion. And year over year changes in this date simply cannot be explained by demography, we don’t typically get changes in outcomes or predictions big enough to move the needle. And we don’t have to guess at this, the Trustees supply us with a table that explains exactly what factors change to projected gap in payroll. For example 1999 showed a rather dramatic drop in payroll gap to 2.07% from 2.19% and a change in projected depletion from 2032 to 2034. Table I.B1 on page 5 of 1999 Report in PDF shows us that changes in demographic assumptions resulted in a +.03 change in actuarial balance while the change due to economic assumptions swamped that five-fold with a +.15 change.

So it seems that the date of Trust Fund depletion is largely driven by productivity and GDP while the range of outcomes is determined mostly by demography. It all depends on whether your definition of ‘solvency’ is focused on actual outcome or by timing. My particular focus is on timing, Coberly’s on outcome. It all boils down to potato vs potatoe. (And we don’t have to call the whole thing off).