2010 Social Security Report: Surprising Drop in 75 yr Actuarial Gap

by Bruce Webb

Well surprising to me anyway. The 2009 Social Security Report projected a 75 year actuarial gap for combined OASDI of 2.00%. Between the structural change involved in changing the valuation period (as 2009 drops off and a new year 75 is added) and the current recession cutting into revenues I fully expected this gap to edge up. Instead it was revised down to 1.92% putting it back to where it was in 2001. Why the change? Well the following table breaks it down. As always, click to enlarge.

Well it wasn’t because they gamed future economic and demographic projections (except one) the OACT left ultimate numbers unchanged. There were some changes in initial numbers due to high unemployment, but those were offset by changes in the Methods and Programmatic Data. Instead the biggest change is the +.14 due to Legislation offset by the -.06 due to the Valuation period to give our net change of +.08.

And what legislation was that? Health Care Reform. The OACT calculates that HCR will result in dollars being shifted from employer paid health insurance to wages after the Exchanges et al are fully in operation. This seems to rest on an argument from economic theory that has employers setting total compensation at some rate established by the underlying fundamentals and then backing out health care costs from that, with the idea that savings in the latter simply means more of the total flowing to wages. Well personally I have never been convinced by that argument, but in that I am in a decided minority, in particular most of the professional economists I know endorse it. So I guess I’ll just let it stand.

What are the policy implications of a steady state or dropping year over year 75 year actuarial gap. Well some thoughts under the fold.

Well the first thing it does is put the “We can’t afford to wait” folk in their place. Take the following table showing actuarial gap by Report year.

This table is found on page 153 and is accompanied by text explaining the specific changes that went into adjusting the number, but if we back up a bit we can see that after a fairly drastic surge between 1993 and 1994 the actuarial gap has, despite any attempt to adopt policy to address it, has stayed remarkable steady fluctuating around a mean of 2.0%. This is a little odd for two reasons, one is that the change in actuarial period represented here should have something like 0.7% to the accumulated total, that instead if anything that the trend has been modestly down suggest there is something in the model which is too pessimistic, and that this factor or factors, whatever they are, is enough to offset the accumulated change due to valuation period.

But even without trying to identify those factors we can come to a clear empirical conclusion: based on these numbers the clearly superior approach to Social Security (and the last entitlements commission-Kerrey-Danforth) in 1994 has been a plan of ‘Nothing’. Addressing Social Security in 1994 by cutting benefits or raising taxes would have been a straight give away by everyone who was either a worker or retiree in those years, instead all beneficiaries received full benefits and all workers got the equivalent of a 2%+ tax cut. And based on the results of the 2010 Report ‘Nothing’ was also a perfectly fine plan for 2009, despite all the hysteria stirred up by “vanishing surplus, YEARS ahead of schedule, we got to act RIGHT NOW” the final numbers just show no support for that at all.

Now for those of us who want to avoid any future cut in benefits there is merit in putting in place a contingency plan that would have us move when the numbers actually support it. But those who want to use some theoretical future cut in benefits to justify cutting benefits even sooner are asking workers for a give-away where there is no evidence they need to sacrifice themselves in the face of something that doesn’t appear to be a crisis at all.

Just as supporters claimed when Bush took a run at Social Security in 2004-2005. Five years later and we are right back at 1.92% of payroll.