A Social Security Ditty: "If Privatization is Necessary—"
I came up with this around ten years ago to put a point on the logical trap Social Security privatizers (often unwittingly) find themselves in. It goes like this:
To understand the trap we need to do some parsing on ‘privatization’ and ‘crisis’. Now traditionally ‘Social Security crisis’ was equated to ‘Trust Fund Depletion’, which is the point in the future when the Social Security Trust Fund balance projects to go to zero. Over the last twenty years of Social Security reporting the date of Depletion has been projected by the Trustees at various points between 2019 and 2042 (and the reasons for the variation are interesting) but are in recent Report years put in the mid to late 2030s. ‘Depletion’ has often been sold in terms of ‘Social Security won’t be there’ in the sense of ‘no check for me’, particularly to the under 40s but a few seconds of thought shows that ‘no check’ is not a possible outcome as long as payroll tax is being collected, that is benefits can be paid out right up to the amount allowed by then current income. Instead we are talking about a benefit cut, and one relative to the current law baseline (and examining that baseline is interesting as well-subject for later posts). The amount of that benefit cut has been projected variously between 22% and 25% of the ‘scheduled benefit’ or to flip it around a payout of between 75-78%.
So in our first sum-up we have ‘Social Security crisis’ = ‘Trust Fund Depletion’ = ‘25% benefit cut’. In these straightforward terms the solution to ‘crisis’ is to prevent ‘benefit cuts’ and this can be done only with some combination of the following three methods: a direct increase in contributions (i.e. tax increase), an improvement in those economic numbers that contribute to solvency (mostly employment and Real Wage), or a better return on contributions than the current combination of Pay/Go and Trust Fund investments provide.
And it is here that the jaws of the logic trap start to close on privatizers. Detailed discussion below the fold.
The annual Reports of the Trustees of Social Security define ‘crisis’ in terms of ‘actuarial deficit’, or the gap between ‘scheduled benefits’ and ‘payable benefits’ and express that gap alternately as percentage of payroll, or of GDP, or in ‘present value’ dollar terms. Taking ‘percentage of payroll’ first, this is given in terms of the amount of tax increase that would be needed immediately to backfill the actuarial deficit over the 75 year projection period or in terms of the amount needed at the point of Trust Fund Depletion. And these alternatives are spelled out in the Conclusion of the Report Summary, or the first section of the Social Security Report itself: http://www.ssa.gov/oact/tr/2012/II_E_conclu.html
Short version: immediate increase of 2.61% of payroll vs increase in 2033 starting at 4.3% and ultimately reaching 4.7% or a total of 17.1% combined compared to today’s 12.4%. What Social Security doesn’t do, but CBO does (using slightly different assumptions), is to score intermediate approaches that would phase in these increases, which would split the difference with an ultimate increase of around 3.5%.
If an immediate increase of 2.61% is the bitter medicine what then would sweeten it somewhat? Well one approach, that of phased increases has just been referenced and is also the methodology of the Northwest Plan for a Real Social Security Fix (the work product of three Angry Bear reader/commenters led by Dale Coberly).
It turns out there are two different possible sweetening agents, one being economic growth and the other pursuing better returns on investment (ROI). To understand how growth alone can save the day we need to back up and examine the three different economic models used by the Trustees to project solvency or actuarial deficit. These three ‘Alternatives’ are ‘Intermediate Cost (IC)’, ‘Low Cost (LC)’ and ‘High Cost (HC)’.
Intermediate Cost represents the mid-point of economic expectations and is backed up in the Reports by a variety of probability studies designed to prove it is a good faith effort. As such almost all economic reporting and most policy analysis simply assumes IC as their point of departure. For example the Northwest Plan explicitly assumes IC numbers even though some of the authors have private doubts about either the economic or demographic assumptions, doubts that by the way would drive the gap in different directions. Meaning that for this particular planning purpose it is perfectly reasonable to accept IC as a baseline set of assumptions.
On the other hand it is true that ‘Low Cost is Out There’. In operational terms Low Cost is rather simply defined: it is precisely that set of economic and demographic assumptions that would produce a fully funded Trust Fund through the 75 year actuarial period. Mind you this is not how the Trustees define it, instead they present it as a best case scenario hovering at the outside of the probability bound. But whether you accept that or not the numbers produce the outcome they do as seen in the following Figure in the 2012 Report where ‘I’ represents Low Cost:
Figure II.D6.—Long-Range OASDI Trust Fund Ratios Under Alternative Scenarios
Under Low Cost the Trust Fund Ratio dips perilously close to zero around 2075 but shows as slowly rising through the end of the projection period. As it turns out this result DOES NOT meet the Trustees’ test for ‘Long Term Actuarial Balance’ or ‘Sustainable Solvency’, that would require TF ratios never dropping below 100. On the other hand Low Cost WOULD deliver 100% of scheduled benefits with no changes in FICA tax rates.
The differences between Intermediate Cost and Low Cost (and the more pessimistic High Cost) Alternatives are set out in a series of six Tables from V.A1 to V.B2 showing selected demographic and economic assumptions for all three models. 2012 Report List of Tables The interactions between these numbers are complex and to some extent produce contradictory results, or example improvements in Real Wage serve to boost future income but also increase future cost in nominal terms. On the other those improvements also move the baseline, so that benefit cuts might be more or less in percentage terms but still produce a better result. But these complications can be hashed out in comments and future posts. I want to return to the Ditty and the Logic Trap.
If Low Cost numbers happen (they are by definition WITHIN the probability bound) then there will be no Trust Fund Depletion and so by the terms used here no Social Security Crisis. Meaning that neither a tax based fix or privatization would be necessary, we would have dodged the bullet.
But that bullet may have ended up lodged in the heart of privatization. Because Privatizers explicitly assume Intermediate Cost in their projections of ‘Crisis’, every single scary number they produce whether that be in terms of benefit cuts at depletion or ‘unfunded liability’ over 75 years or over the ‘Infinite Horizon’ derives directly from the specific economic and demographic numbers deployed by that particular model. Meaning that any different economic assumptions they insert arithmetically move those ultimate numbers away from IC projections. And to the precise point of this post the closer that any such numbers get to the supposedly improbable ones in Low Cost the less necessary privatization becomes as a means of solving ‘crisis’ AS DEFINED.
My contention here, and asserted in bare form so as to invite specific responses using real numbers is that privatizers can’t deliver. Not without using numbers that would fix Social Security along the way. So to parse the ditty:
“If Privatization is Necessary” meaning needed to avert ‘crisis’ and so benefit cuts at Depletion it has explicitly (although silently) endorsed Intermediate Cost economic assumptions. My assertion is that no privatization solution based on the spread between equities and bonds and any ancillary effects will work under the employment and wage assumptions of Intermediate Cost. Meaning “Privatization Won’t be Possible”.
On the other hand “If Privatization is Possible” meaning among other things requiring historical rates of return on equities, “It Won’t be Necessary”. Because any rate of GDP growth and wage and employment improvements needed to fund what is in the end worker funded retirement accounts starts bumping up against Low Cost numbers which as the Figures and Tables in the Reports show deliver 100% of scheduled benefits anyway.
Economist Dean Baker posed this question is slightly different form in Nov 2004 under the title ‘No Economist/Policy Analyst Left Behind’ Challenge (NELB) and was backed in that by Paul Krugman, all of which I blogged about right here back in 2008 with this AB post Double books and the ‘No Economist Left Behind’ Challenge
To my knowledge no one has met this challenge and few have tried. Those that have tend to rely on models that produce better ROI by suppressing Real Wage growth going forward and/or relying on returns from overseas investment. Which ignores the fact that worker funded retirement accounts have to be funded by workers, proving that the 1% can make out like bandits doesn’t translate to a privatization solution to the CRISIS AS DEFINED. And of course neither do current attempts to simply slash benefits starting immediately, not if we equate ‘crisis’ with ‘benefit cuts at TF depletion’.
So privatizers can use scare tactics based on benefit cuts or ‘no check for me’ but in order to avoid charges of being big, fricking liars they need to show that they can produce better results than IC at lower increased costs to workers than a simple payroll tax increase along NW Plan lines would require OR produce better returns than IC without resorting to economic assumptions that trend towards LC. Can’t be done. Or else prove it CAN be done.
If there were going to be benefit cuts privatization would only make them bigger. When you include administration cost private investment return growth has been 20-25% less than total wage growth. Furthermore after privitization in the UK, and Chili benefits fell by 20%
Bruce is right.
Where I would differ from his presentation is that the numbers, intermediate cost, low cost, and high cost don’t really mean anything over 75 years or “infinite horizon.” You just can’t predict anything meaningful that far in advance.
Moreover, ALL the cost projections show that SS can pay for itself… that is the workers can continue to pay for their own retirement through the payroll tax… whatever happens. Maybe a little richer, maybe a little poorer, but ALWAYS the workers can set aside enough for their future retirement… by the clever trick of paying for those presently retired… to have “enough” to retire on when they need to.
And still more: there is no alternative. Whatever you do, you are still going to have to pay for your retirement, “we” are still going to have to pay back the old people who gave us their money to hold on the promise that we would give it back to them when they needed it.
The difference between SS and “privatization” is that the pay back is written into the law. And there is an insurance factor that means you may get more than you paid in if your circumstances turn out to be less than you hoped and strived for. With the market, some people will get lucky and do very well, and other will get unlucky and do very badly, and most people won’t even get started… they just can’t save enough to generate that “compound interest” that is going to make them all millionaires.
And if they did, the economy is not going to be able to support 75 million millionaires, no matter how much money they have.
The privatizers never tell you what is going to happen to those who don’t save/”earn” “enough.” A vague wave of the hand… well, means tested welfare. They don’t say that means “means testing” a hundred and fifty million people every year, who will have adequate motivation to cheat. And paying the taxes to pay for their welfare.”
With Social Security even the poorest workers will have paid for most of their SS themselves.
What the Northwest Plan really shows is that with all of the screaming about how Social Security is going to bankrupt us, it turns out we can have it forever… under the same assumptions the Big Liars claim to be using… by raising our own tax rate about one half of one tenth of one percent per year.
This means that after forty years, the average worker would be paying a 2% higher SS tax. But if he is not self employed or have enormous leverage over his boss, he would only be paying half of that… or 1% more than he is today. And since it goes up gradually over that time, his AVERAGE increase over forty years is about 1/2 of one percent.
Now, you can play games with the numbers and come out with a different answer… and the economy may fool us and come out with another answer entirely, but that answer… if it is honest… won’t be very different from this one…. the difference between 20 cents per week and one dollar per week is not something we are going to notice. And moreover, there is no way to avoid it: If you are going to live longer, you will need to save more. You can do it straightforward with the payroll tax, or you can fool yourself with “investments.” But at the end of the day the money all comes out of the same economy. Whether through taxes, or interest, or lower wages or higher costs (to support the stock prices), it is going to take exactly the same amount of money to keep those too old to work out of dire poverty.
and the lovely thing about SS as it currently is, is that after about 40 years you will have paid enough for your own retirement that you can retire even if you are not “too old.” After all, it’s your money. You paid for it.
If it ain’t broke, don’t fix it.
It ain’t broke.
Good observation and thanks for the link to the old AB posting. Next year marks he 30th anniversary of the Greenspan Commission report. Is it too early to ask how their projections to date have fared? Or how their 75-year projections compare to today’s 45-year projections? The American worker has had three rather lousy decades–let’s hope (not expect) we can do better.
This post is interesting, but the point made seems like a nit as compared to much more fundamental problems with privatization. One basic one is that the scale of the OASDI obligations in relation to private resources does not permit privatization.
If I read it correctly, line E in Table IV.B5, shows a “Cost” of $56.477 Trillion for OASDI benefits. I assume that this is the pv of future OASDI benefits.
Imagine, for a moment, that FDR had established a fully privatized Social Security system and that, notwithstanding the demands of the Depression, WWII, and multiple recessions, etc., full funding had continued down to today. Those assumptions imply that Social Security beneficiaries would have to have accumulated roughly the same amount of $56.477 Trillion in their privatized accounts.
According to this graphic from Wickipedia, the total 2009 net worth of ALL US households, including billionaires, was only about $54 Trillion, much of which represented the value of personal residences. http://en.wikipedia.org/wiki/File:Graphic.png
Anon at 7:30.
True enough. But I woud want a clear explanation why lines D and F seem to discount Trust Fund interest to zero.
Makes some sense on cash flow terms but maybe less on Solvency measures. Personally I think that interest earnings do figure in to the bottom line totals but am at a loss as to how they do so.
BTW discounting interest earnings to zero makes a lot more sense under IC projections than LC, meaning that any privatization scheme would need to offset ROI on their equities vs the same interest earning if assets were left in Special Treasury Issues under identical growth numbers.
And Dale while I admit that the projections of IC, LC, and HC are in some sense meaningless given the probability spread,the reality is that for working purposes the NW
Plan assumes IC. Now in its more advanced forms the NW Plan explicitly allows for variations away from IC, but I doubt that many beyond you, me and Arne grasp the built in contingent flexibility.
As they say “Nobody expects the Rosser-Webb Inquisition”. Except the authors of the NW Plan who include R-W in footnotes.
And yes that is Inside (NW) Baseball.
i think the TF interest “discounts to zero” because we are talking about “present value” which means “what you’d have to have in the bank today, at the assumed rate of interest, to have what you want “then.” Since the TF is what we have in the bank today and it is earning the assumed interest it’s PV is the same as its value today.
I think there are more fundamental problems with using PV for most of us.
Mostly, we don’t have 30 Trillion dollars to put in the bank today, and there is no bank to put it in that can pay the “assumed” interest… even if you discount the risks, there just isn’t anyone out there who wants to borrow that much money. Not even the government.
and that’s the hell of it. we are forced to talk in terms of nonsense, because that’s what everyone else is talking in terms of.
i was in no way criticizing you. We need your observations as well as me over here grumbling in the corner… “but it doesn’t mean anything.”
i think you may be right, but i think slowly. could you make your point more clearly?
I am guessing for the moment that 50T would mean an average of 300,000 per taxpayer. Assuming that is acquired over time, it might mean about 600 k over 30 years. if i remember (and my memory is terrible) at a reasonable rate of compound interest (3% real?) you can just about triple your money over 30 or 40 years.
so lets say the worker has to “invest” about 100k over 40 years or about 2500 per year, or about 200 per month… about the same as SS taxes on a 2000 per month pay.
admittedly this is rough and probably wrong. but it looks doable. and that 400k after forty years might get you an annuity of about 30 k per year which might or might not be about what you can expect from SS… given that SS benefits are inflation adjusted.
this doesn’t mean i favor privatization. you won’t necessarily get that “reasonable roi” from private accounts. but i’d be surprised if what you can do on private accounts is much different from what you can do with SS…. except for the guarantee.
after all, what SS amounts to is putting 12% of your income into an “investment” that pays inflation plus the growth in the economy.
Predicting what might happen over 75 years is a fools game. No one can see the future clearly. What matters now is what happens over the next five years.
Webb seems to favor the optimistic side, and thinks the outcome for SS could be the low cost (favorable) outcome. I see no reason for his optimism. The key variables to me are prevailing GDP and interest rates.
What are the assumption used by SS to come up with their Intermediate Case results?
Ten year % rates
Sorry Webb, these things will not happen. Interest rates will be close to zero for at least the next two years (Bernanke has promised they will be). I think it will be another decade.
And as for GDP averaging 4+% for the next five years, well just forget that. It will not happen.
Wake up and smell the coffee. The US is in a protracted slowdown. There is a very high probability of another recession over the next few years, not the highest growth mode in the past 20 years as suggested by the SSA forecasts.
If you’re going to talk about the future of SS you ought to use realistic forecasts. If you did, you would not be the Pollyanna suggesting that all is well. It is not. Face it.
Krasting at no point did I explicitly endorse Low Cost numbers over the short run. You are reading in what you want to see.
And those 2012 numbers were not far from consensus when they came out or even a couple of weeks ago before the 2nd quarter GDP figure came out below expectations.
But you may be right that the sky is falling, heck we might well be on the road to High Cost. In which case Privatization will be even less possible than it is under Intermediate Cost numbers.
The post is about Privatization IN THE FACE of the numbers, including the theoretical ones you are advancing. As a policy measure the fix to Social Security even with your numbers lies with a phased in set of tax increases even as the possibility for having any positive effect via privatization fades. Unwittingly you are supporting the case for the Northwest Plan.
Thanks. I think.
And you persist in thinking that bond yields have some fundamental impact on long term solvency. They don’t. And certainly not as much as the economic factors that produce them, namely a sluggish economy marked by high unemployment and stagnant wages. Plus given that every policy maker from the ‘Sensible’ Center to the loony tune Right insists that the biggest danger longterm is inflation which for their purposes will manifest in sharply higher financing costs, i.e. higher rates on the 10 year, your insistence that rates will stay low is equally a defense of the Krugman/BAKER Keynesian position.
Putting you in the paradoxical position of being a leftie ex-bond trader. Do they still talk to you at the bar at the yacht club?
And nice job of cherry picking GDP numbers. First of all you expect relatively high GDP numbers coming off a recession. At least in percentage terms. Which explains the 3.0% number for 2010, no ones idea of a boom year.
And what if we continue the series beyond your 2018 date? Why did you choose to present 7 years rather than the 10 that would compare with standard OMB and CBO forecasts? Why didn’t you use actual 2012 Report numbers? Perhaps because the numbers look like this?:
2018: 3.0% (against your 3.4%)
Do those numbers REALLY look over optimistic? Do you REALLY endorse the idea that the U.S. will settle into 2.0% GDP growth FOREVER? As a MEDIAN projection?
All I can say is good luck with that personal account based on equities. How do you get the traditional returns on equity needed for every privatization plan ever released with ultimate 2.1% GDP?
You don’t. Which is the point of the ditty.
And for a guy that insists that you have to be crazy to endorse Low Cost you might pay attention to the interest rates that model projects over that same period you cherry picked:
Yeah you are reading those right: Low Cost = More Solvent = Lower Yields on TF Assets
Intermediate Cost = Less Solvent = Higher Yields on TF Assets (as compared to Low Cost).
Which makes your argument pushed here and elsewhere that Bernanke is killing Social Security by suppressing rates more than a little suspect. Lower rates just don’t have the impact your mental model suggests they must. If anything they seem to work the other direction. For example Low Cost puts ultimate nominal interest rates at 5.2% as opposed to IC’s 5.7%. Why would the former project solvency and the latter ‘bankruptcy’ if the effects actually worked in the direction you suggest? Second order effects? Can you identify them?
Webb, the reinvestment rate for SS is 1.37% for 2012. It will be lower still next year and stay at that level for another four years. (the formula insures that)
You are arguing about whether the rate will be 5.7% or 5.2%. You are in the wrong ballpark. Think 75% lower.
Protracted low interest rates will shorten the time period before mandatory cuts become necessary.
You don’t think that is important??
PS I agree with you that privatization will not happen. It’s too late in the game for that to be considered an option.
i don’t pretend to know much about the bond market or “economics”, so when you claim that you do i am always willing to listen. and i am always disappointed.
whatever happens to the bond market, and whatever happens to the economy, social security is still the best…only… way that ordinary workers have to save their own money for at least a basic retirement.
the “fix” to Social Security’s projected “actuarial insolvency” that i have advocated is a simple, small increase in the payroll tax… so the workers continue to pay for their own future retirement.
others propose raising YOUR taxes (income over the cap) to pay for increased benefits.
and others… the conventional wisdom… propose just cutting Social Security and somehow the old, and the future old (aka “the young”) will make up the difference.
this last is somewhere between insanity, complete stupidity, and evil. you take away the worker’s ability to save their own money, protected from inflation and market losses, and just don’t even bother to think about what will happen to them.
Krasting you begin to worry me here.
The 5.2% and 5.7% numbers are ULTIMATE ones for the Low Cost and High Cost alternatives respectively. And in practice ‘ultimate’ here means average numbers for years 11-75 and beyond. As the Trustees explain:
“Readers should interpret with care the estimates based on the three sets of alternative assumptions. These estimates are not specific predictions of the future financial status of the OASDI program, but rather a reasonable range of future income and cost under a variety of plausible demographic and economic conditions.
The Trustees assume that values for each of the demographic, economic, and program-specific factors change toward long-range ultimate values from recent levels or trends within the next 25 years. For extrapolations beyond the 75‑year long-range period, the ultimate levels or trends reached by the end of the 75‑year period remain unchanged. The assumed ultimate values represent average annual experience or growth rates. Actual future values will exhibit fluctuations or cyclical patterns, as in the past.”
Whether or not you are correct about numbers over the next four years has no direct impact on ultimate numbers. The only reason I would discount those 5.2% or 5.7% numbers by 75% is if I believed that interest rates would in real terms remain right at the zero bound for the next 75 years and beyond. Which translates to perma-depression. To which I guess the logical response is “Buy Gold”.
But quite beyond your confusion between short term rates and ultimate rates is the fact that higher rates don’t translate to better solvency. And the fact that since I don’t have a day job as Chief Actuary of Social Security the responsibility for setting those short and long term numbers and the probability ranges assigned to them is not mine to begin with. That is if you are right it is Steve Goss that needs to wake up and smell the coffee you are brewing.
“Protracted low interest rates will shorten the time period before mandatory cuts become necessary.”
“Nothing in the Social Security Reports supports that conclusion”
I understand that YOU believe in your models. Well so do Birthers and Flat Earthers. The question is whether you have any evidence beyond personal intuition to back up either your projections or the arithmetic conclusions you draw from them. Because even the charitable would have to admit that your methodology is murky. While some unkind folk like me just see back of the envelope numbers written on an envelope invisible to anyone but you.
Okay Webb, what are your forecasts for 10 year interest rates for the next six years?
Do you want to bet on the outcome? Do you want to use those forecasts contained in the 2012 report? If so, I’ll take the “under”.
CBO will take down the SS numbers, SSTF will take their outlook down (again) in April of 2013.
You think I’m a flat earther? I’ve been right for the past four years. I will be right for the next four too. After that, it’s too late for the fixes you advocate.
LC,IC,HC…I am still working on Actuarial Study #121. But it appears that we are not too close to LC. Right now maybe we’re between IC and HC? I know Dale’s response is “who cares? This is paygo!” But if CBO and the NWPlan are based on IC then maybe a few tweaks are in order? I guess the next few years will really tell us how these assumptions will play out in the short-term. But it seems to me that the elephant in the room is the payroll tax cuts of the past few years. Reminds me of cactus’ post about Nixon going to China! Who will the Social Security Defenders vote for in November?
From coberly who is having technical issues with blogger:
you are missing my point.
it is as if “we” were the captain of a ship, and every time the wind
blew from the north we screamed, oh, god, if this keeps up the ocean
is going to freeze. we need to lighten ship. throw the passengers
SS can take care of whatever comes up, once we understand what SS
does for us.
and this SS supporter won’t be voting for Obama. or the psychopath
running against him.
Little Johnthe NW Plan explicitly allows for results between IC and HC in the same way as it allows for results between IC and LC or results right in line with IC.
That is the tweaks are carefully built in, even in comparison with CBOs Policy Options 2 or 3 or the one advanced by Virginia Reno when she was at NASI.
The methodology of NW assumes current year IC as being the best available consensus and prepares a multi-year schedule of FICA adjustments based on that and adopting the specific measures of actuarial adequacy in each Report. In practice this would require an immediate adjustment in FICA totaling between 0.3 and perhaps 0.5% of payroll over a three year period followed by a series of 0.2% per year increases about 12 years out. But since under all estimates that 0.3 to 0.5% increase will be needed there is no harm in implementing it over the short term while modifying the medium term schedule of increases up or down as new Report Years come in. If in fact near term results come in on the HC side then small tweaks in timing or amount of scheduled FICA increases 10 years out can be added. On the other hand every year that results end up on the LC side then those future tweaks can be adjusted down or delayed.
In any case after the initial fix of 0.3-0.5% of payroll (which the numbers suggest devoting exclusively to the DI Trust Fund) further changes in FICA would require adjustments to scheduled increases 10+ years in the future, and BTW outside the CBO and OMB scoring windows.
That is the authors of the NW Plan don’t even need to concede IC and still less postulate LC, we just need to adjust tax numbers in years 10 to 35 each year as IC gets officially modified.
Oddly Dale, Arne and me put a lot of thought and numeric analysis into this. Which may not always show up in the barebones of the proposal as presented in a 300 word blog post.
Plus to my own personal knowledge most of the serious policy folk on the defenders of SS side thought the payroll tax holiday a really terrible idea. Even the Keynsians among us said “ick, WTF are the Obama folk thinking”. Plus as implemented so far the holiday has left SS financials and the NW Plan harmless. Although continuation would be a different story.
Krasting you haven’t been ‘right’ the last four years except in the sense that a blind pig finds an acorn.
The adjustments in Social Security depletion dates have eff all to do with changes in rates on 10 year Treasuries and so Special Issues.
Plus you have some serious difficulty understanding that SSA numbers are (and forgive me for shouting) NOT MY WORK PRODUCT. Meaning it matters exactly zero whether I agree with them or not. Over the last 20 years CBO has had more positive projections of SS solvency than SSA OACT, something obscured by the typical six month lag between the Trustees Report and the CBO SS Outlook. On some occasions this means that CBO scoring while more negative than previous SSA Report ends up more positive than the next year SSA numbers.
Which makes your claim that “CBO will take down SSA numbers” nearly meaningless. Because while CBO explicitly adopts certain assumptions of SSA, notably on the demographic side, they use a different set of economic assumptions. Making direct comparisons, whether to the surface detriment of solvency or as in most past years to its benefit not particularly relevant.
Compare SSA to SSA and CBO to CBO if you like, but suggesting one set of numbers “takes down” the other just betrays an unawareness of the varying methodologies being deployed.
I am sorry, I did not read all the ensuing notes, but perhaps there is a simple point. Let us assume that the projected future payouts of Social Security is more or less the same as the present value of our combined assets. Doesn’t that mean that we cannot be rentiers and live on principal? That we actually have to produce something to pay for our future obligations?
Get a job! No, wait, let’s all get jobs! All who are willing and able. What a concept!
Thanks you for the additional comments.
USAToday reports that fertility rates are at 25 year lows well below the IC numbers. How will that affect the projections for the residule payments once the Trust Fund is exhausted.
Joe links are good. Without one I really can’t comment on the USA piece. But a couple of questions/notes off the top of my head.
One I’ll assume you mean this article:
What it seems to report is a two year drop to 1.87 and some notion that this trend “could effect” the trend for future years. But exactly where is the evidence that this is significantly less than the IC model? With emphasis on “significant”. After all IC already projects fertility rates below replacement.
2nd, and as the article notes, falling fertility can be made up via immigration. And while immigration numbers have dropped there is little doubt that it would pick up if employment recovers, especially if real wage is allowed to increase along side. It is faintly amusing (and all to revealing) that some on the economic right are predicting economic disaster in the form of dropping worker/retiree ratios yet demanding ever stricter control over the borders in the interest of protecting jobs. Which on their formulation would go begging. You can’t help but think that (like the Japanese) their concern is not lack of worker supply per se, but lack of workers of the right color and culture (thanks Mittens!).
Anyway between the transitory and contingent nature of the data so far (postponing childbirth during a recession being a rational response) and the lack of any calculations showing the impact in the long term I can’t get too excited.
Plus I don’t understand your question even if I assume ‘residule’ is a typo for ‘residue’ or ‘residual’. Because I can’t tease out the sense of either version.
a history question: when the black death (?) killed off 25% of the population of Europe, didn’t wages go up?
the Trustees are projecting both a decline in the number of workers and a decline in the growth of wages.
in any case… even if it works out that way, Social Security would handle it the way societies have handled bad times over the other infinite horizon. We’d all have a little less, and we’d share that with the old folks. People need to understand that SS is not a guarantee that everyone’s benefits go up all the time no matter what happens to the economy.
also… someone needs to check me on this, but i think the 2012 Trustees Report is reporting lower COSTS to SS, as well as lower income. if this is true, SS cannot be “growing out of control.” On the contrary, what is happening is the economy is failing to grow. That is NOT the fault of SS.
It is the economy that needs to be fixed. not SS.
and if the economy can’t be fixed, SS is still the best way to provide at least “enough” for your retirement.
i am NOT suggesting we cut benefits because the economy is going to be bad twenty years from now.
i don’t think there will be any need to cut benefits, and that the bad economy projected by the Trustees would still be good enough to raise real benefits by raising the payroll tax a small amount, leaving the worker with twice as much after the tax as he has today.
if the economy were to be so desperately bad we had to cut benefits, we could do that “one day at a time.” we still don’t need to cut off our heads today to save the cost of dinner twenty years from now.
Great article. Can you summarize it in a couple of short sentence with one or two syllable words so I can share it with some of my companions at the local bar?
Interestingly in England the response to the demographic crash caused by the Black Death was the passage of the Statute of Labourers which made it illegal for either workers to demand or employers to pay wages higher than those ‘customary’ before the Plague. And then very soon after to decriminalize such violations by employers. Under various renewals and overhauls versions of the Statute of Labourers remained in place right through the 19th century.
That is the legal response to a shortage in labor (decreased supply) even in the face of continued demand was a state enforced suppression of wages persisting for 500 years after 1348 to the Peterloo Massacre.
Now wages did uptick some, because workers will vote with their feet over the long run (hence the arrival of my Irish and German ancestors in this country in the 1820s and 1830s) but the notion that when it came to labor compensation capital ever just deferred to the Invisible Hand of Free Markets as opposed to the Iron Fist of government wage controls could use some demonstration.
Short answer to your question: “No. not where Capital controlled the State. Which in the 14th century as now was pretty much everywhere”
Google Statute of Labourers and Peterloo Massacre for an intro here.
Walt I could summarize it such At the cost of having critics characterize me as an innumerate Marxist crazy.
Because Social Security policy begs the application of the old adage: “Everything is simple if you ignore the complexities”
The bad guys are playing the game in a way that pushback requires starting everything from the ground up. Which makes for tedious reading and following the numbers.
Whereas they have “Bankrupt!! Dead broke! No check for me!! Everyone knows THAT!!!” and if you callit the Big Lie they invoke Godwin.
It’s not easy. Or I would have won the first time I invoked Figure II.D7 12 years ago. Cuz I got numbers.