Why ‘Nothing’ is STILL the 2nd Best Plan for Social Security: and Why YOUR Plan Probably Sucks

by Bruce Webb

A curious feature of the battle over Social Security is that it is almost always a battle of adjectives and adverbs and not numbers, In particular almost everyone agrees that ‘Nothing’ is not a plan, People are not always clear on the consequences of ‘Nothing’ whether that be ‘massive’ benefit cuts or ‘devastating’ program cuts or just the Invisible Bond Vigilantes burning down our fiscal house but everyone just assumes its going to be bad. Real bad. Horribly really bad. Because only morons don’t understand that Something has to be done: benefit cuts or retirement age changes or cap increases or means testing but Something!!

Well call me Moron. Or maybe Guy That Has Read the Report and Wonders What the Shouting is About. Maybe that still adds up to Moron, but can we at least start with official numbers and methodology?

The 2010 Report of the Trustees of Social Security was released on August 5th, a little over four months late from the normal release date of Mar. 31. Is that late release important? Well no, there is probably a back story but in light of the actual reporting it is not of much significance, because the bottom line is as follows:

For the short range (2010-2019), the Trustees measure financial adequacy by comparing projected assets at the beginning of each year to projected program cost for that year under the intermediate set of assumptions. A trust fund ratio of 100 percent or more — that is, assets at the beginning of each year at least equal to projected cost for the year — is a good indication of a trust fund’s ability to cover most short-term contingencies. The projected trust fund ratios for OASI alone, and for OASI and DI combined, under the intermediate assumptions exceed 100 percent throughout the short-range period and therefore OASI and OASDI satisfy the Trustees’ short-term test of financial adequacy. However

We’ll get back to that ‘however’ but the fact is that Social Security passes the ten year test for solvency, the same ten year test used by OMB and CBO and Congress to measure just about every other aspect of federal spending. So if the issue isn’t solvency of Social Security itself maybe it is the projected damage to the overall deficit. Well no, under the rules that govern Social Security any year in which Trust Fund balances are positive scores as equally positive for deficit calculations and if we examine the appropriate table Table IV.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Years 2005-19 we can see that the combined Trust Funds are scheduled to increase from $2.6 trillion to $3.3 trillion in 2015 (the target date for the Obama Deficit Commission) to $3.9 trillion in 2019 and the end of the projection period. Now opinions vary on whether we are in imminent risk of attack by the Invisible Bond Banshees, but offhand you wouldn’t think a ten year surplus of $1.3 trillion was actual banshee bait, so you can’t explain this away as deficit hysteria, using the standard window for judging these matters Social Security is doing just fine. So why are conservatives demanding that we impose cost controls NOW, NOW, NOW while progressives are countering with RAISE THE CAP. A LOT. YESTERDAY. Well unfortunately the answer is easy. The former crowed is studiously ignoring the numbers and most of the latter never actually looked at them to start with. Because once you engage with the numbers you too will see why ‘Nothing’ is a perfectly fine plan for Social Security is the short run while our plan (natch) is perfect for the medium to long term. Which no doubt sounds like pure arrogance on our part. Well maybe, but it is informed arrogance, and I’ll try to share some of that information under the fold.

So we have a situation where combined OASDI satisfies the Trustees test for ‘Short Term Actuarial Balance’ and is projected to have a ten year surplus of $1.3 trillion so clearly we can exhale a little, the sky is not falling, not if you use official numbers, and whatever threat there may be is somewhere over that ten year horizon. Which brings us to our first important dividing point. Is a $3.9 trillion 2019 Trust Fund Balance in real terms an asset? Or a liability? Is it a fund we can draw on, or a debt we have to redeem? And the answer to all four questions is “Yes”. Which ones you would emphasize depends on where you sit.

(Okay first thing out of the box. The Special Treasuries that make up the Social Security Trust Funds are real as real, there is nothing phony about them, and if you think different YOU are the moron. Or a liar. Or worse. See you in comments because all the arguments to the contrary are just Cato and AEI bullshit. Full stop.)

Having settled that point for the moment, we can see that the projected $3.9 trillion in the 2019 Trust Fund is an asset from the prospective of current and future retirees, but a liability from the perspective of current workers and taxpayers (not the same thing), and that there is some substantial overlap. But not total overlap because the asset has been built up from one income stream, that of FICA payroll taxes while the payback has to come from another, that of income tax or borrowing from the public and the incidence of those taxes all inequally. For example returns on capital are not subject to FICA and so contributed nothing to the build up but are exposed to income tax and so are liable for some of the payback. Which fact frankly is the source of much of the tension here. And ultimately will raise the question of whether this whole kerfluffle is really about solvency? Or servicing costs? For the moment I want to keep the focus on solvency.

Okay so we have established that by official measures Social Security meets the ten year solvency test so problems on that front if any are somewhere over that horizon. To find out how large that problem might be we need to consult the following table from the 2010 Report. It shows the outlook for OASI (Old Age/Survivors) and DI (Disability) separately and combined into OASDI over a probability range from uniformly optimistic (Low Cost) to uniformly pessimistic (High Cost) economic and demographic projections. Since it is unlikely that all of the relevant variables would move in the same way there is a certain artificiality to Low Cost and High Cost but the Trustees have supplied reasonable tools to measure that uncertainty and we can be reliably certain that the probable outcome will be somewhere in the confidence interval. Those who want to check the analysis can be my guest: 2010 Report: Sec VI.D and E. In the meanwhile we will be looking at these numbers:
Having seen that the Trustees test for short term actuarial balance is measured over ten years, we can see here that the test for long term balance is seventy five years, supplemented since 2003 with another test over the infinite horizon. And under Intermediate Cost (i.e. median) assumptions the actuarial deficit for combined OASDI is 1.92% of payroll. Meaning that an immediate boost in payroll tax of that amount would deliver us to 2084 having been able to pay 100% of scheduled benefits and with a full one year reserve in the Trust Fund. But there are a lot of ‘ifs’ buried in that two decimal point precision, because the actual spread runs from +0.59% to -5.26% of payroll, meaning there is some chance that Social Security left alone would actually be OVER funded going forward with a larger chance of it being even more underfunded than that 1.92% suggests. Gosh darn it, who knew that the future was actually unknowable? So what if we reel it back a bit and look only 50 years out. Hmm a narrower range of +0.55% to -4.00% but still kind of wide. 25 years out? +1.12% to -1.86%.

So what does this blizzard of numbers tell us? Well a number of things. For one thing even under our most optimistic set of assumptions there is a dropoff after 25 years as Social Security drops from a 1.12% of payroll surplus down to 0.55%. That is Boomers do exist and will exert maximum impact on the system in the 2030s as trailing edge 1964’s hit 67 in 2031. Nothing short of product roll-out of Soylent Green is going to forestall that. On the other hand there is a measurable chance that Social Security left unchanged would STILL dodge that bullet and allow full payout of benefits with a small margin to spare, so there is no reason to over react and by the way no reason at all to pay attention to infinite future numbers. Already at 25 years we are look at a +/- 1.35%, subscribing to a package of benefit cuts/tax increases of 3.5% (the infinite future IC gap) being frankly nutty in light of the probability spread.

Adding all of this up is ‘Nothing’ the perfect plan? Well no, there is a better than even chance that the demographic realities of the 2030s and early 2040s demand that ‘Something’ be done. But what that ‘Something’ is depends on how you frame that demand. If the real problem is an inability to deliver full benefits then the answer is to put in place plans to bolster the system if and when. On the other hand if the perceived problem is the DEMAND for full benefits to crowd out other spending priorities then the answer is to find some way to mitigate the shock of Trust Fund depletion and subsequent reset of benefits if and when.

Which brings us to the crux. It seems the main concern of the Catfood Commission is that greedy geezers will demand full benefits no matter what and that the answer is to start transitioning retirees from eating the occasional steak to homemade Beef Stroganoff to Hamburger Helper to Fancy Feast to Kibble so that there is no trouble once the Trust Fund goes to exhaustion, the solution to being electrocuted on the Third Rail of American Politics is just to drain the juice out slowly. Because clearly their concern is not benefit cuts at Depletion as such, I don’t see any plans which aim to deliver some intermediate result BETTER than that you get from ‘Nothing’, all their ‘Somethings’ require retiree give backs over the status quo. Which is why I say that ‘Nothing’ is STILL a better plan than the choices we are being offered, and that is true even if we are thrown some scraps of ‘People Food’ in the form of cap increases, in the end kibble with a little chum salmon on top is still dog and cat food (Alaskan natives keep the chinook/King and coho/Silver for themselves and unless pressed feed the chum/Dog to, well the dogs).

Many progressives out there believe that the answer to Social Security ‘crisis’ is simple enough even a Moran (sic) like me should grasp it-just raise the cap. Which ignores a couple of realities. One there is ZERO chance that you will get any change in the cap that doesn’t come with giveaway’s on the benefit side. Zero, zip, nada. You need four Republican votes from the Deficit Commission for ANY deal and you can bet anything you like that they will extract something. If only because they have no real interest in fixing Social Security in any meaningful way, they don’t want it to be seen as a successful government program delivering real benefits to workers, that doesn’t serve their agenda even the tiniest bit, the right answer to any Social Security offer coming out of this Commission is 99.9% likely to be “No Deal!”, no matter how attractive the bait on the hook. Under the current environment the best plan on the policy table is the tried and true plan: ‘Nothing’.

Which leaves careful readers two objections. “Bruce you said ‘Nothing’ was only the ‘2nd Best Plan’ . And what about that ‘However’ from the Trustees you said we would get back to”. Okay you got me. While ‘Nothing’ is better than almost all the likely ‘Somethings’ out there even the 25 year OASDI numbers suggest a bias towards some action to action even if it doesn’t have to be tomorrow. And if we break out OASI and DI we can see why the Trustees appended that ‘However’. Back to the 2010 Report.

However, the DI Trust Fund fails the Trustees’ short-term test of financial adequacy. Its trust fund ratio is projected to fall below the 100 percent level by the beginning of 2013. After 2013, the DI trust fund ratio continues to decline until the trust fund is exhausted in 2018.

Ouch. DI is currently bleeding and badly, in fact if we consult Table IV.B4 again we can see that its 25 year actuarial deficit is 0.30% and in fact accounts for ALL of the combined 25 year gap of 0.25% plus some. While ‘Nothing’ is a perfectly defensible plan for Old Age/Survivors it just won’t do for Disability, there we need a ‘Something’ and if anything we need it yesterday. Which brings us to a curious fact, there is a near perfect alignment betweeen the 25 year actuarial gap for combined OASDI and DI and the 75 year gap for DI in isolation: 0.25%, 0.30%, 0.30%. Meaning we can install a 75 year fix for DI which will also give us a 25 year fix for combined OASDI. Gosh if only someone had run some numbers and got us a ‘Something’ we can believe in. Paging Mr. Coberly (with assists by Arne and me).

Northwest Plan for a Real Social Security Fix