The Schizophrenia of Social Security Reporting
by Bruce Webb
When I first started paying serious attention to Social Security reporting back in 1997 I was struck by its curious mix of precision and fluidity and how that mix moved from the latter to the former as you went from the data tables to the top line numbers and then on to whatever coverage the Report received by the media. That is by the time the numbers hit the New York Times everything was in declarative mode “The Trustees project the Trust Fund WILL go to Depletion in year X unless taxes are increased by 2.xy%”. But when you examine the actual Report in detail you find that ‘year X’ and ‘2.xy%’ are simply mid-points of a probability distribution. Worse when you examine the Reports on a year over year basis you find that that mid-point changes in ways that can whip the long-term probability tail significantly. Yet in the reporting there is always the unstated assumption that THIS year’s data set is closer to projecting the next 75 years than last year’s set. And there are pragmatic reasons for that, for one thing we have that extra year of historical data to work with and for another you have to start with something but the downside is that it installs a certain sense of fatalism, that the numbers are what they are and that we are all more or less helpless victims of them. Well the truth is a little different, there are reasons why the mid-point number falls where it does each year and why it changes year over year, and some of those reasons are subject to intervention, we can and do make changes in the present that move those future numbers.
So between changes in policy and variations in the economic inputs the uncertainty going forward simply gets wider and wider both within OAS and DI projections and between them, by the time you get thirty and forty years out you are talking very wide probability bands. Yet the rules of the game are set in a way that we are more or less forced to work with the 75 year projection. Which is frankly a little silly particularly in the case of Social Security where the danger of a fix that is too big is actually greater than one which is too small, something I discussed in number 10 of the original Angry Bear SS series The Danger of Low Cost
The first step towards curing this schizophrenia is in recognizing that it is mostly induced. The economists who fuel the studies that drive the apparent need for Social Security ‘reform’ are fully aware of the uncertainties but choose to ignore them because the longer time frames allow them to use scarier numbers to urge more drastic solutions. But we don’t have to be bound by that, instead we can sit down, examine the models and determine pragmatically when they begin to diverge enough to call for different initial policy choices. If I had to pick a number it would be fifteen years out. By that point each of the three models deployed by the Trustees has reached its ultimate numbers when expressed in percentage form, the Office of the Actuary not deceiving themselves into thinking they can model precise changes to things like productivity on a year to year basis after even year eight or nine. And the Reports give us enough numbers that we could choose 2025 as our planning horizon, but since after ten years the data is only reported at five year intervals going fifteen years out from 2011 or 2012 gets more problematic. On the other hand the Trustees do supply a convenient moving 25 year number, and one where there is already enough variation between the top and bottom of the models to justify drawing the line for planning purposes. See Table IV.B4 below the fold.
I think it is apparent why I would prefer fifteen year planning windows, already by 2034 the distribution is from -1.86% of payroll for High Cost to +1.12% for Low Cost. Also worth noting is that OAS in isolation is under Intermediate Cost in almost perfect balance over 25 years at +0.05%, additional evidence that a solid short to medium term plan of ‘Nothing’ is still ideal for OAS. On the other hand even under the most optimistic model entertained by the Trustees DI barely would inch into positive territory, the chance of a 0.30% fix now sending it into overfunded territory before we could rebalance things being pretty remote indeed.
But in any event it is pretty crucial to get analysts and reporters to grasp that these models are not static and that successive Report years don’t necessarily get us closer to a full understanding, instead the inherent uncertainty of future economic developments will always swamp refinements of the methodology. While we can expect the Office of the Chief Actuary to do their best, we have to keep in mind that every pronouncement about the future outlook of Social Security needs to have a whole set of “if and only if”‘s attached to it and the best we can do is to lob solutions somewhere near the center of the spread.
If raising the cap increased Medicare and Social Security taxes, why don’t they allow that to do it’s magic as more workers go back to work?
and I differ a bit in this regard:
Bruce takes the projections seriously enough to argue with them.
I take them seriously enough to point out that even when you take them seriously and examine what they mean, the NEVER mean the “crisis” everyone is shouting about.
Taking the more or less constant predictions over the past ten years you end up with a likely need to raise the payroll tax an amount near twenty cents per week per year to take care of the longer life expectancy of the people paying the tax. Could be a little less, or it could be a little more, or it could be sooner, or it coud be later. Doesn’t amount to a hill of beans… unless you get an accountant to massage the numbers, report the aggregate (add up 100 million taxayers and 75 years or an infinite number of years in “present value” and you can get some pretty impressive meaningless numbers), and get the reporters and columnists who cover the issue to run around screaming the sky is falling, the sky is falling…
Some people I know well have proposed an answer to this: Agree to raise, or lower, the payroll tax by one tenth of one percent whenever the Trustees report that it looks today like ten years from now the Tust Fund will fall short of a full year’s reserves… or exceed three full years reserves.
The current 75 year projection suggests that that will happen about 17 times over the next 75 years. That amounts to eighty cents per week, in today’s terms, in any given year, or an average of twenty cents per week per year.
This not only closes the projected 75 year shortfall, it “funds” Social Security over the infinite horizon, and it stops all the hysteria about unfunded looming deficits.
Until the Petersons think up another Lie.
no need to raise the cap. and doing so would tend to turn Social Security into welfare. Social Security is supposed to be the workers paying for their own retirement insurance. There is no reason why they can’t continue to do so forever.
Ya know, as far as sovereign wealth funds go, the SSTF is right up there. . .
Bigger than the top 5 SWFs added together, actually 🙂
Sadly, it has only $20,000 per household, 1/10th Norway’s and 1/6th the sneaky socialists up in Alaska’s.
Well that may be, the number of times that supposedly informed observes fail to maintain the distinction between ‘nominal’ and ‘real’ is staggering.
But I follow this issue VERY closely and NOBODY seems to question the changes. Between 1997 and 2002 the date of Trust Fund Depletion was receding at a rate of more than two years per year, from 2029 to its best number of 2042. Yet no one in the media asked the two key questions: “Why is the date moving?” and “Can this trend continue?” They just recalibrated to the new payroll tax number and depletion year and soldiered on. I didn’t and don’t see this same kind of laziness in other budget area. I mean obviously there is plenty of laziness, but not this particular kind of selective vision.
oh, hell, Bruce
the date of the Death of the Trust Fund kept getting set back, and not only did no one notice, but they managed to headline every year “Social Security Going Broke!” Then they’d run the same story they ran the year before with only the dates changed to protect the innocent.
The fact is the Death of the Trust Fund doesn’t matter. Certainly the date of death doesn’t matter.
The Trust Fund is simply a bridge fund to pay the bills when income lags for whatever reason. It is doing that just fine. When and if we reach a point where the projected income falls below the projected outgo for a longer time than the Trust Fund can bridge, then it will be time to adjust the tax rate. The needed adjustment will be small, and if taken with a few years lead time… the value of short term projections… will not even be felt.
The trust funds’ balances, approximate date of death, etc. are merely camoflauges that hide their true substance.
Ffrom a paper entitled “Social Security and the Federal Budget: The Necessity of Maintaining a Comprehensive Long-Range perspective, published by the CBO, it states “A full understanding of the government’s looming fiscal strains requires that all governemnt functions be considered together. It is the federal government’s total claims on the nation’s resources that affect the economy. – not the individual components that make up those claims.
Go to: http://www.cbo.gov/ftpdocs/36xx/doc3650/No3August.pdf.
From the paper entitled “Federal Debt and the Commitments of Federal Trust Funds,” published by the CBO, it states, “Although the trust funds may be viewed as assets for the individual programs, they are not assets for the governmensat as a whole, What is in the trust funds is simply the government’s promise to pay itself back at sometime imn the future.
When trust fund balances are drawn down, the government will not be using resources saved for a rainy day. It will be using resources generated either by running a surplus or by borrowing from the public.”
it remains to be seen how many times you can say this without understanding the answer.
The Trust Fund is not supposed to be a resource the government saved for a rainy day. The Trust Fund keeps track of the money the government borrowed from Social Security so it can pay the money back to Social Security when the time comes. The resources that will be used to pay back Social Security are the same as the resources the country uses to pay all of its bills: the taxes the American people pay in order to have a government that does the things they need a government to do that private enterprise cannot do.
The government is not paying itself back. It is paying back the people who lent it the money… that is the people who contributed it to Social Security in the expectation of being paid back when they retire.
As for the CBO paper, of course the government needs to be reminded that it will have to find the mone to repay its debt to Social Security. That’s all it was saying. It needed to be said because so many Congressmen have gotten used to thinking of the money they borrow from Social Security as “revenue.” It’s not. It never was. It was always “borrowed money,” that is, debt.
Actually, the money borrowed was revenue and debt, at the same time!
It was an asset to the trust fund and a liability for the Treasury.
And, it was considered revenue for the money borrowed lowered the unified deficit.
In fact, it was that very revenue which produced surpluses in 3 years of the Clinton administration.
You wrote :
The trust fund keeps track of the money the gpovernment borrowed from SS so it can pay back to SS when the time comes.
Exactl;y correct. That is why it is a bookkeeping device, and not a store of wealth.
The resources used to pay back SS are the same as the resources the country uses to pay all of its bills: taxes.
Right, so just because the trust fund exists doesn’t make it any easier for the government to draw down from it, for it pays for the Treasuries just like it pays for all mandatory or discretionary spending – through taxes.
Unfortunately, some of those taxes will be deferred as debt held by the public increases to redeem the Treasuries.
I think you are exactly right. so what are we arguing about?
oops. forget i asked that.
The Trust Fund does NOT make it any easier for the governmen to pay its debts. The Trust Fund IS its debt to Social Security. The government still needs to pay its debt.
The people paying the taxes to pay the debt are in general not the same people who paid the Social Security taxes that were borrowed. So you won’t be paying yourself.
And if you are in the income bracket where you pay both Social Security tax and a significant income tax, you will NOT be paying twice for your Social Security. You paid for your SS once. When the government borrowed the SS money, it effectively gave you a tax break. When you pay the taxes that go to pay back the SS fund, you will be effectively paying the first time for whatever it was the government bought with the money it borrowed from you.
I hope that is not too confusing… but it is very similar to what happens if you borrow against your home equity. You do not end up paying for your house twice. You paid for the house once, and you pay for whatever you bought with the money you borrowed once… by paying back the money you borrowed. Of course there are some interest charges involved, but that you have to chalk off to the time value of money. You borrowed the money because having it at that time was worth more to you than having to pay it back plus interest a few years later.
All very standard money and banking stuff. Just that the Big LIars have been trying to confuse everyone about it for years. And succeeding.
I’m having a Yogi Berra moment. Don seems to have that effect on a conversation. How many times do you suppose that the very same thing has been said in response to Don’s unique interpretation of a set of simple facts in an attempt to explain to him that his interpretation demonstrates a profound misunderstanding of the Social Security program and especially the role of the Trust Fund? I have to admire your persistence trying to explain these simple facts, but I have to admire even more so Don’s ability to ignore everything that is explained to him.
two things, maybe three
by answering Don, I may (MAY) reach some innocent person who has the same confusion but can learn with a little help.
second: an angel has infinite patience. i try to be an angel. fail miserably, but then i try again.
third: i do run out of patience. we’ll say where this round gets us.
You said one would be a fool to trust the market and the government is not your friend.
So, are we to choose the lesser of 2 evils?
I would appreciate learning of your ideas of how Social Security is supposed to operate.
It may be helpful to contrast that with how it actually operates.
In my opinion, SS is very different than what Roosevelt intended it to be.
Why do you say that stealing the trust fund is the least harm government could do?