SS Actuary’s "Bombshell" Fizzles: Krasting Lays Egg

by Bruce Webb

Regular readers of Angry Bear will be familiar with bond trader turned blogger Bruce Krasting and his, can we say non-standard conclusions about Social Security solvency. Well he is at it again today under the provocative title of SSTF – Steve Goss’s Bombshell – What Could it Mean?. SSTF means Social Security Trust Fund, Steve Goss is the Chief Actuary of Social Security, and I am going to tell you what it could mean. Below the fold (because the answer is ‘not much’ and I hate to waste the screen space.

Those who choose can start with Krasting’s piece then return, or you can start with my deconstruction of the back story.

My version. Edward Schumacher-Matos, an Op-Ed columnist for the WaPo penned a column called How illegal immigrants are helping Social Security. An interesting piece well worth reading, I have no bone to pick with Mr. Schumacher-Matos. He sets up the story with this in paragraphs 2 and 3.

In response to a research inquiry for a book I am writing on the economics of immigration, Stephen C. Goss, the chief actuary of the Social Security Administration and someone who enjoys bipartisan support for his straightforwardness, said that by 2007, the Social Security trust fund had received a net benefit of somewhere between $120 billion and $240 billion from unauthorized immigrants.

That represented an astounding 5.4 percent to 10.7 percent of the trust fund’s total assets of $2.24 trillion that year. The cumulative contribution is surely higher now. Unauthorized immigrants paid a net contribution of $12 billion in 2007 alone, Goss said.

First thing to note is that the initiative in on the part of the columnist who in the process of research asked a question of the Office of the Chief Actuary which has the final word on such things. And Steve answered using 2007 numbers. Why 2007? Well because the last time that Social Security took a deep look at this subject was during the preparation of the 2008 Report. And they found that the positive impact on long-term solvency from ‘other immigrants’ (i.e. illegals) was much larger than previously estimated, enough to move the actuarial gap a positive 0.30%, a VERY big change in the Social Security context and enough to offset other changes so that the overall gap dropped from 1.95% in 2007 to 1.70% in 2008, good news for those of us who were bracing for bad news in 2009 and 2010. The technical discussion from the Report can be found here: 2008 Report Sec IV.7: 7. Reasons for Change in Actuarial Balance From Last Report. What was the import of this finding? Well it significantly altered the cost of a long-term fix. And as Schumacher-Matos points out might have this think a little deeper about the actual economic effects of illegals who are more often thought of as drags on social spending rather than subsidizers of middle class retirement. But it didn’t really have any impact on the Trust Funds in the short run, FICA taxes were collected on illegals performing work that in their absense would have largely been done by legal immigrants or citizens who themselves were paying taxes (and because of the wage suppression enabled by hiring illegals probably at a higher rate).

Well as far as I can see the story could stop there. Columnist asks question of Chief Actuary, Chief Actuary supplies publicly available data mostly from the 2008 Social Security Report, columnist writes story pointing out the positive impact of immigration in this relatively narrow area of policy.

But that is not what Krasting sees. Oh no this is a “bombshell” dropped by Goss at the instigation of the Obama WH to advance the latter’s immigration agenda.

SS has been collecting money from illegal aliens for years. They will keep the money they have collected and they will not pay out any benefits (except fraud) in the future. So this money is “free”. I have often wondered how big the numbers on this are. Now we know. The numbers are enormous. Without the Free Money coming in from illegal aliens SS would look much different than we “think” it does.

Krasting maybe you should have asked. It is called the ‘Earnings Suspense File’ and while I didn’t know the number off the top of my head reader Nancy Ortiz certainly did when asked awhile ago, and this thing called ‘Google’ turns up all kinds of relevant results. This wasn’t the big secret you imply and its release was not remotely in the realm of a bombshell. But no matter, our hero presses on.

The WaPo had an article on this today. They had hard numbers (sort of) in the article. I was absolutely stunned that the source of this information was Steve Goss, the chief actuary of the SSTF. Some thoughts/numbers:

-Steve Goss does not reveal information of this significance unless he has a political agenda of his own, or he was told to.

Or unless he is asked by a columnist for a national newspaper of record for freely available public information for the purposes of writing a book. These aren’t state secrets, I have copies of the 2008 Report lying around somewhere and on my hard drive. Finding the resultant totals in the Trust Fund is not difficult. And this is where Krasting goes right off the rails.

-This information is an unmitigated disaster for SS. It comes a month after the release to Congress of their annual report that suggested that things had actually improved for SS over the past 12 months. The report did not highlight the fact that over $300b of assets held by the Fund were in fact contributions from illegal aliens. As much as 13% of the Funds holdings are tainted. Without this funny money the Fund would today be running substantial deficits. That red ink would force major changes in both payouts and taxes.

In what way is this money ‘tainted’? At least from Social Security’s standpoint. Social Security collects taxes from all kinds of people it knows will never qualify for benefits, just about everyone that works for wages pays FICA, and if you are a Briton who over the course of your career only worked 32 quarters or the equivalent of eight years in America, well then we take your money and say ‘Thanks’. Same if you are a stay-at-home spouse who only occassionally have taken employment outside the house, that five years you worked before the kids started coming along? Well that’s FICA under the bridge. If the case of illegals most if not all of the work would have been performed by legals or citizens, many of whom might equally not compile 40 quarters of eligibility. Would that money have been equally ‘tainted’?

Look we know that American employers have been exploiting illegals for their own financial benefit for decades. Now it turns out that that exploitation is also good for the bottom line for Social Security solvency and delays the time when income tax payers are going to have to start paying back the money they borrowed from the Trust Fund. And citizens and legal immigrants bear the cost in current wages not earned and future benefit reductions due to the crowding out of the labor market due to illegals. And for the long term health of labor maybe we need to press forward in an effort to transform illegals into legals either by naturalization or replacement so that every American worker gets every dime of Social Security they worked for. And yeah that might cost the system a few hundred billion over the next century or so. But somehow Krasting makes the jump from the inequity, if such it is, of retaining this income to claim that it is actually not income at all.

-Goss provided a range of the cumulative impact to SS of $120-240b (as of 2007). He said that the overstatement was $12b in 2007. Those numbers do no not add up in my opinion.

Danger Wil Robinson! Danger! Krasting math ahead. So BK does his own calculations and dismisses the opinion of the Chief Actuary in favor of his own calculated number of $350 bn.

I won’t (now) go into the longer-term impacts to SS of having overstated its surplus by $350b. That number is 13.5% of the assets of the Fund. I will say that this is a sea change event for how we look at SS. All prior analysis and all future expectations must now be revisited. I assure you that the results after excluding the illegal taxes will be will prove to be a major blow to the solvency of the Fund. It will change the debate on SS. It is that significant.

In Krasting’s mind. But how is this even an ‘overstatement’? Whether you peg the total at $120 bn or $350 bn, it exists and is legally available to pay benefits going forwards.

-We know that the actuaries at the Fund have been aware of the magnitude of this issue for a very long time. The question I have is, “What did they do about it?” We need to understand what this means in terms of anticipated future benefit payments. There are two possibilities:

(1) The Fund knew the money was from illegal workers but chose to close their eyes. For the purposes of calculating future liabilities they assumed that everyone, including the illegal workers, would someday get benefits. But they won’t. This would imply that the future liabilities of the Fund are much smaller than has been projected. This “good” news would have to be offset with the reality that the “true” assets of the fund are significantly overstated.

(2) The Fund knew all along that the benefits that are associated with these illegal receipts are never going to be paid and therefore it has reduced the liabilities associated with this to some degree. This would essentially make a fraud of all of the SS accounting. I doubt (hope) that this is not the case. To restate both assets and liabilities would create a very big credibility gap for SS.

“What did they do about it?” Well they publicly reported the results of their new analysis in the 2008 Trustees Report and then adjusted the projected actuarial gap by a massive (in context) 0.30% of payroll. The combined change of 0.25% of payroll (1.95% to 1.70%) dwarfed adjustments in previous Reports, (though matched in the other direction by the initial impact of ongoing recession with the 2009 Report). To equate the 2008 restatement with “chose to close their eyes” is ridiculous, instead everything happened in the light of day. At least if you were paying attention all along. Krasting then finishes up by proposing a couple of scenarios about how the “$350 billion” over-statement could be handled, ignoring only two things:

One the $350 bn is his number and not anyone elses. And two it would see that the ‘restatement’ was already done in 2008 with the adjustment in actuarial gap due to this new finding being 0.30% of payroll, which is a big number indeed when projected over the 75 year actuarial window. Sorry BK, those horses got out of the barn two and a half years ago.