Time to knock this one down before it gets started.
Over at Andrew Bigg’s blog he has a post up called Academy of Actuaries: Raise the Retirement Age. I am not particularly concerned with the text quoted which actually amounts to some AP guy’s take on an advance copy of what the Academy will actually release. ‘Bankrupt’ is as likely to have just come out of reporter Holland’s head than the actual text. What I am concerned about is a number and a concept that popped up in comments there.
First we have commenter Jim Glass defining the overall problem as follows:
I’d for once like to see some group come out and specify the problems to be fixed first. Then relate its fix to those problems.
There are a bunch of problems, e.g.:
* Long term actuarial balance.
* Cash flow problems in the 2020s, when cash needed for the trust fund on top of all that for Medicare, Medicaid, etc., is very likley to cause program re-writes that make today’s long-term actuarial projections (and fixes) irrelevant.
* The economic loss forced on the young by the $17t “backward transfer”, that protends loss of future political support for SS.
* Spreading that loss to the young (inevitable as it is) equitably among generations.
* The decline in the “progressive social insurance” nature of SS due to the just-above points.
Then Biggs comes along and states in part:
Regarding whether it’s fair, as strange as it sounds, in one sense fairness isn’t really the issue. The future Social Security shortfall is a function of over-generosity to past participants and unfavorable demographic projections going forward
. Note that Biggs does not dispute the $17 trillion “backward transfer” but instead implicitly allows it to be equated with “over-generosity to past particpants”. But I think I want to cry ‘bullshit’ on the whole notion. A copy of my comment to that thread appears under the fold.
Jim Glass could you clarify some of your comments? For example when I look at the following table I just don’t see any major “cash flow problem in the 2020s”. Table VI.F7.—Operations of the Combined OASI and DI Trust Funds, in Constant 2008 Dollars, Calendar Years 2008-85 [In billions]. Instead I see a gap in 2025 of about $170 billion in 2008 dollars or not much more than the cost of the current stimulus package. The notion that a similar borrowing need in 2025 will bring the bond market to its knees could use some explication.
Plus I am a little confused about the “$17 t “backward transfer””. First I have no idea where the $17 trillion figure comes from. Oops full stop.
I now see that the $17.4 trillion comes from Table IV.B7. But the methodology seems odd.
“The first line of table IV.B7 shows that the present value of future cost less future taxes over the next 100 years for all current participants equals $17.4 trillion. For this purpose, current participants are defined as individuals who attain age 15 or older in 2008.”
What? Why 100 years rather than the standard 75 years or alternately Infinite Future? Using the former we would be capturing all “current participants” whose life expectancies are 90 years or less which is to say almost everyone. But that would give us a PV of future cost over future tax of $6.5 trillion which if reduced by the 2007 year end value of the TF would give us a total unfunded liability of $4.3 trillion (per Table IV.B4). On the other hand if we extended this to Infinite Future we end up with PV of future cost over future tax of $15.8 trillion which reduced by the current TF balance gives a unfunded liability of $13.6 trillion. Instead we seem to have an arbitrary figure of 100 years which manages to tack $10.9 trillion in excess costs during the period 2083 to 2108. No ‘current participant’ as defined will be contributing taxes in that period and the youngest person drawing benefits at its inception will be 90 years old. To call this a ‘backward transfer’ is kind of bizaare. It is fair to say that no current beneficiary will be drawing a check in 2083 (62 plus 75 = 137). As for current contributers the youngest Boomer will be 119 in that year (2083-1964), the youngest Gen-X 101 (2083-1982). Sticking us for a near $11 trillion extra tab that doesn’t start coming due for 75 years seems kind of a stretch.
And Andrew seems to share this with his “over-generorisity to past participants”. Given that the Trust Funds never actually went to zero and are sitting at $2.3 trillion today clearly there was no over-generosity for those past participants who are now deceased, they paid their way and then some. And considering that SS income and the principal in the TF are currently scheduled to fund full benefits until 2041 it is hard to blame any current beneficiaries, the youngest (early retirement in 2008 at age 62) of them will be 100 in 2041.
So I am not buying into the premise. Plus I find it interesting that per Table IV.B7 the PV of cost less taxes for all future participants is actually a negative $1.5 trillion. Making it look like $17.4 trillion was simply picked as representing the scariest number possible. I’ll accept some responsibility for the $6.5 trillion gap between projected future cost over future income between now and 2082 (but I do want credit for the $2.3 trillion in the Trust Funds). And this even though I don’t expect to be around after 2041. But I simply see no reason to accept any responsibility for contingent outcomes over the period 2082 to 2108.
It is bad enough that they were able to slip Infinite Future Horizon into this debate. To deliberately single out a particular 25 year period starting 75 years from now and taking its projected imbalance between income and cost as somehow being the responsibility of ‘past participants’ is preposterous special pleading. Or someone can convince me otherwise in comments.
But in any event you can expect this ‘$17 trillion backward transfer’ to start popping up everywhere and I wanted to give everyone a heads up.