Soc Sec XXXVII: Backwards Transfers: Biggs Responds

Soc Sec XXXVI: $17 Trillion Backward Transfer was a response to a comment by Jim Glass (scrivener.net) to a post by Andrew Biggs. Andrew responded with a new post attempting to rebut my argument. You can see the whole thing at Responding to Angry Bear: Where does $17 trillion come from including my response to Biggs as well as one to Patrick R. Sullivan (if you were wondering where PRS was (and I wasn’t) the answer seems to be over at scrivener.net). But I want to put up the core of Andrew’s argument and my response.

Ordinarily, we think about Social Security’s finances in cross-section – e.g., how do all taxes paid by all workers in a given year compare to all benefits owed to all retirees or disabled in that year? That’s obviously very relevant.

But another way of measuring things is by birth cohort: how did all the taxes paid by individuals born in a given year compare to all the benefits they have or will receive? This approach, best known as “generational accounting,” was first proposed by Gokhale, Auerbach and Kotlikoff (see this backgrounder by the Tax Policy Center) and has become a standard way of analyzing how the program treats individuals in different birth cohorts. It’s through a generational accounting approach that we can see where the long-term shortfall comes from.

So for each birth cohort taking part in Social Security, we can calculate (or, for future beneficiaries, project) how their total taxes will compare to their total benefits. If we discount all these values to 2008, add them up and then subtract the current value of the Social Security trust fund, we get the total infinite horizon shortfall for the program. Currently, that amount is projected at $13.6 trillion in present value.

He then follows up with an argument from rate of return (for my counter see the comments there) and then concludes with the following:

Now think about future retirees: even if we could pay full scheduled benefits – that is, even if the Low Cost projections came true and we had no solvency problem – future retirees will receive less in benefits than they paid in taxes.

I can sum up the argument in this way:

1.the infinite horizon shortfall is the sum of the net taxes or benefits paid by each cohort, from 1935 through the infinite future; and
2.the infinite horizon shortfall is calculated under scheduled benefits; and
3.we know that early cohorts received more in (benefits) than they paid in (taxes), and current/future retirees will receive less in benefits than they pay in taxes; therefore we can conclude:
4.that the infinite horizon shortfall is entirely attributable to the fact that early cohorts of retirees received far more in benefits than they paid in taxes.

Well no. First of all he is making a jump from ‘rate of return’ to ‘total return’ that is not logically valid, that is 10% interest on a $1000 account gives you $100 whereas 4.5% interest on a $100,000 account gets you $4,500. But the confusion doesn’t stop there, we don’t ‘know’ that three is true at all. Biggs simply has not yet made the case though he may think he has. But the real answer is to be found (as usual) in the numbers. My response, complete with juicy data is to be found under the fold.

{I edited Biggs’ no. 3 to correct a clear error. His original had people receiving taxes and paying benefits, something he clearly didn’t intend}

I spent some time this morning with the Historical Tables (IV.A2 and IV.A4 specifically) and did the simple exercise of adding up actual benefits paid out.
OAS 1941-1956 $25.6 billion
OASDI 1957-1968 $181 billion
OASDI 1969-1980 $793.1 billion
OASDI 1981-1992 $2.476.5 trillion
OASDI 1993-2000 $2.829.3 trillion
OASDI 2001-2007 $6.330,9 trillion

For a grand total of $12.636.4 trillion. For Glass to state openly as he did here {at Biggs’} and at his website that
“If you look at this table {IV.B7} you’ll see that past/present participants have received $17.4 trillion more in benefits than they paid in taxes.” is simply not true, and the problem goes far beyond the tense problem in “have received”. Instead he simply skipped over the relevant Trustees’ definition of ‘current participant’ and ignored the 100 year time frame for costs that generate that $17.1 trillion. Of that amount fully $10.4 trillion falls in the period 2083 to 2108. Trying either to blame this on past beneficiaries or scaring current workers into thinking they actually have to come up with this amount above and beyond what they will actually receive in benefits is just nonsense, and if deliberate pernicious nonsense. No worker scheduled to retire by 2041 (interestingly almost exactly 67 years after the 1983 reform) is likely to collect benefits after 2083, meaning no one born before 1974 is going to be making a claim on that $10.4 trillion. Moreover no one born before 2016, which is to say no one currently born, is going to have to make any part of that post 2082 claim good. That $10 billion plus time shifts away. It is a simple matter of using a long term calender.

So while the following is a perfectly good way of framing the problem:
“But another way of measuring things is by birth cohort: how did all the taxes paid by individuals born in a given year compare to all the benefits they have or will receive?” The answer is not to be found in Table IV.B7 and only in a limited way in IV.B6. Instead the answer is to take those birth cohorts seperately, and if you do you will see that each cohort from the Boomers on back to program inception left or is projected to leave the Trust Fund with a positive TF ratio. Given that it is hard to see where the inequity comes from, all of the unfunded liability and all of the revenue needed to backfill it or contrawise the benefit cuts fall on Gen-X and beyond. To project this future gap backwards approaches dishonesty.

As to the graph {seen via link to Biggs} I am not particularly impressed. A 21 year old in 1936 would not be eligible for full benefits until 1980 at which point everyone would be phased into the system. Almost all of the drop before that would seem to be attributable to people becoming eligible for retirement even though they had some to many years of non-contribution. The graph properly interpreted just shows what happens when the program is fully phased in, an event that didn’t happen until 44 years from program inception.

Too you would need to correct some of those earlier ROI to reflect the cost of paying Title 1 benefits out of the General Fund. The dollar value of taxes needed to pay those benefits should be added to actual contributions from payroll to get a real idea of what the real ratio of tax to benefits was. As Title 1 phased out current workers got a silent tax cut, all things being equal the cost of supplying benefits to then current beneficiaries got that much cheaper. (Of course that silent tax cut may have been totally offset by increases in payroll tax over the time period.)

But even after making those corrections I don’t think the following is correct:
“3. we know that early cohorts received more in (benefits) than they paid in (taxes), and current/future retirees will receive less in benefits than they pay in taxes; therefore we can conclude:
4. that the infinite horizon shortfall is entirely attributable to the fact that early cohorts of retirees received far more in benefits than they paid in taxes.”

Well no. 4 does not follow from 3. Total benefits paid out from program inception to 1980 were only $999.6 billion. Even now the total of benefits paid out does not equal projected unfunded liability and was funded to boot. The unfunded liability to Infinite Future is entirely due to a gap in projected cost via projected revenue starting in 2041 and not due to past benefit payments at all. I am afraid I am still not able to accept the Biggs/Glass formulation.