Social Security: the Shape of Solvency
Well lets try again (two hours of draft having just disappeared)/
The above figure is II.D6 from the 2011 Social Security Report. The reasons why I didn’t use the 2013 version will become clear later, short version is it doesn’t show ‘The Shape of Solvency’ while the longer version is, well, long.
This figure shows the projections of three different economic and demographic models for Social Security expressed in terms of Trust Fund Ratio where 100 = next year’s projected cost. Now Trust Fund Ratio is in some ways an odd beast because it is to some extent after the fact yet also prospective. This is because it reports Trust Fund balances AFTER the calculation of current revenue minus current cost and does so in terms of NEXT year’s cost. For example it is possible for Trust Fund balances to increase in a given year and have Trust Fund Ratio decline, that is SS can be in surplus and yet weakening by the metric deployed by the Trustees. And we can discuss the arithmetic of this in comments, for now let me just assert that there is a good reason to measure Solvency in terms of Trust Fund ratios even in a system that operates on a Pay-Go basis.
The Trustees measure ‘solvency’ in terms of ‘actuarial balance’ over periods of time including ‘short term’ (10 years), ‘long term’ (75 years) and ‘infinite future’. Figure II.D6 shows a combination of a prospective ‘long term’ 75 years and twenty retrospective years for 95 years total. This 95 year period also happens to cover the entire lifespan of nearly everyone in the workforce today. The three graphed lines going forward represent three different economic and demographic models where I represents the projection of ‘Low Cost’, III the projection of ‘High Cost’, and II the projection of ‘Intermediate Cost’.
In this figure from the 2011 Report both High Cost and Intermediate Cost project to intersect the bottom line representing a Trust Fund Ratio of 0%. Which is to say a Trust Fund with no remaining principal. Now under a Pay-Go system where all or most benefits are paid from current revenue, or in SS terms where ‘revenue’ entirely or mostly meets ‘cost’, a Trust Fund with a zero balance/Trust Fund ratio doesn’t equate to “No check for you”. But it DOES mean no reserve funds to maintain Scheduled Benefits. Instead under current law the intersection of the graphed line of II and III would require a reset from Scheduled Benefits to Payable Benefits of greater or lesser severity. On the other hand if the graphed line NEVER hits zero then Scheduled Benefits can be paid in full and so ARE Payable Benefits.
But for very good reasons the Trustees are mandated to not allow things to get that close to disrupting the relation between Scheduled and Payable and instead have set up a test point that serve as the Canary in Social Security’s Coal Mine. And that test point is a Trust Fund Ratio of 100, or one year of next year’s cost for any given year tested. If that tested or projected ratio is set to stay above 100 for each year of the selected time window then Social Security is ‘solvent’. Which gets us back to our Figure II.D6.
In 2011 Figure II.D6 showed High Cost and Intermediate Cost not only busting downwards through the 100 mark and so failing the test for solvency in that year, but also hitting the zero bound of Trust Fund Depletion. On the other hand Low Cost or line I only nudges the 200 mark and then rebounds from there. Making this curve A shape of solvency. But many other curves would meet that test and in fact any such curve that exited the 75 year window between 100 and 200 would equally be A shape of solvency and in some important respects THE Shape of Solvency. Because odd as it may seem an overfunded Trust Fund would be a bad thing. On the other hand so preventable as to not even be a concern. Questions about that can be deferred until comments.
Backtracking a little bit, there are good reasons to call Intermediate Cost projections ‘realistic’ and Low Cost and High Cost ‘artificial’. But this does not have to do so much with a committment to ALL of Intermediate Cost projections as hitting the EXACT median point but instead to a methodology that has Low Cost having all its variables come in in a way positive for solvency while High Cost has them all coming in negative even where there is no reason a priori to believe that all dozen or so will move in the same direction. So while it is tempting to call Low Cost ‘optimistic’ and High Cost ‘pessimistic’ this is only true as narrowly applied to Social Security Solvency as defined. For example people living longer, healthier and happier lives is taken in isolation bad news for Social Security solvency. Yet most of us wouldn’t consider a wave of untreatable pneumonia that wiped out 90% of all residents of nursing homes overnight ‘Good News!’. But it would do wonders for Social Security Solvency and after the immediate medical expense for Medicare as well.
On the flip side most of the economic numbers that undergird Low Cost and nearer to Low Cost outcomes would be positive for society as a whole. For example lower levels of unemployment coupled with higher real wage would go a long way towards restoring Social Security to solvency even if that better resulting standard of living meant more workers living to be Great Grandpas and Grandmas. So we can with a clear conscience root for Full Employment while avoiding construction of Soylent Green facilities or ramping up Ice Floe manufacturing to launch Gramma on a one-way trip into the Artic.
Snark aside what this means is that we don’t have to commit without reservation to every particular projection that goes into Low Cost, just enough of them to bring the tail of Intermediate Cost first above a TF Ratio of 0% and then ideally to a level that never hits 100 from the upside. We DON’T need a tail going out through the 75 year window at the 300 level and trending up. On the other hand a curve that bottoms out at say 128 and stays steady from there would be almost ideal. Though to be safe one would want to have that tail tick up a bit. But there are any number of ways to accomplish that. One way is just to assume Intermediate Cost economic and demographic numbers and make up the difference on the revenue side. This is basically the position of the ‘Raise the Cap’ folks. Another would be to make a conscious and sustained effort to postively change those economic and demographic numbers of Intermediate Cost in a way that moves them towards Low Cost without resorting to putting Gramma on the Ice Floe. That is basically the little known position of the ‘Rosser-Webb’ folks. Or you could go for the ‘First Do No Harm’ position of baking revenue increases into the pie while having a mechanism to back off if ‘Rosser-Webb’ actually comes through.
Which is in a nutshell the meat of the Northwest Plan. It seeks to achieve as close to a perfect Shape of Solvency as possible by introducing the right changes to the formula at the right time in reaction to real time data as it comes in. The various authors of Northwest have varying opinions as to the merits of say Intermediate Cost vs Low Cost but in the end it matters not. Because the methodology adapts to the data and targets the Shape.
Webb – Why didn’t you use the 2013 TF report for this?
The reason is that in 2013 the Trustees concluded that neither the High Cost/Low cost and the Intermediate case had the TF ratios remaining above 100. (the chart is on page 18 of the 2013 TF report).
My point is that in the two years from 2011 things at SS have deteriorated markedly. There is no scenario any longer that keeps SS in the black long-term. It does no good to wish for the low cost outcome, even that does not fill the bucket.
I think that you should have just used a chart based on Dale’s spreadsheet. It would have shown better than words or the chart you did include what the real goal should be.
No plan can ever maintain the TF at 100 without periodic adjustments. I think one of the major disservices that the 1983 fix did was allow people to believe that it was a permanent solution.
The solvency of SS is dependent on maintaining the proper ratio of workers to beneficiaries for the economic conditions. As productivity goes up, the ratio needed decreases, but as years spent in retirement increases, the actual ratio decreases faster. Getting it to balance (on paper) is not too hard, but understanding what that chart should look like and what would make it change is key knowledge for anyone offering meaningful solutions.
Bruce,
It is time for you to admit that the optimism you had for Low Cost was driven by the same optimism that fueled the dot-com and housing bubbles. Getting back to LC would be getting back to bubble economy, and I dont think that is something you should want. As Dean Baker says, why is housing that is too expensive for so many people something that anyone want?
Look at the the 1995 report and compare the Worker/Beneficiary ratios that were predicted to what actually happened. The boom ecoomy led to many more workers. Look at the BLS numbers for Employment-Population Ratio and you can see the boom years there too. Yes, better policy can help, but you are asking for a lot. Dean’s increased leasure policy would actually lead to a higher W/B ratio being needed.
Arne the optimism I had for Low Cost was the result of accepting the base conclusions of the Washington Consensus which as the term suggests was the default position among almost all ‘serious’ economists and policy makers.
It was a simple fact that if you injected the same economic assumptions that Privatizers were using in the 2000-2004 period into Social Security that SS would overfund. And it wasn’t me going to Congress and testifying about the threat to the world economy if we paid down long term debt too fast, that was Chairman Greenspan. It wasn’t me insisting that the country could afford huge tax cuts and increases in military spending and STILL pay off the debt in a decade, that was the Bush Administration. And it CERTAINLY wasn’t me that insisted that we could deliver historic rates of returns on equities to every single worker in America if they just trusted their retirement to Wall Street. Every single bit of that was the result of people, and I might add mostly people on the Right, accepting economic projections for their own purposes that were at least as optimistic as Low Cost. And if you read me early pieces carefully enough I rarely made any claims wilder than that. Now I certainly challenged the assumptions of Intermediate Cost. But my point then and now was that everyone else was challenging those assumptions too. Except when it came to Social Security ‘Crisis’.
When I see Greenspan and the Bush economic team and Hasset and Biggs come crawling apologizing for their in the event inexcusable optimism in pushing their agendas then maybe I’ll consider adding a mea culpa. But until then I will just fall back on the same mantra I was repeating in 2004:
If Privatization is Necessary, it Won’t Be Possible. If Privatization is Possible, it Won’t Be Necessary.
That is any set of conditions that would deliver SS into ‘Crisis’ would doom a system of personal accounts funded by unversal participation by wage workers. Because there was an inherent tradeoff and tension between returns on capital and labor cost. Maintaining historic rates of returns on equities meant wage suppression. Which meant less capacity for labor to save and invest. Which is exactly what we are seeing.
Krasting I didn’t use the 2013 Report because it didn’t show the Shape I needed. And that Shape is what Solvency would look like irrespective of the plausbiity of every element in the model that produced it in 2011 and didn’t in 2013.
Plus the very fact that Low Cost’s curve looks so different in 2013 than it did in 2011 while Intermediate Cost’s barely moved raises interesting questions of its own. And I will be glad to enter into those if you like. But you can only make so many points in a single blog post and have to leave certain things unsaid.
Plus you have not demonstrated your claim that things have actually deteriorated for Social Security over the last two years. In what respects? And no pointing at the 2013 version of this Figure doesn’t count. Not at least without understanding and defending the changes in assumptions actually adopted by OACT.
Arne I remain thoroughly unconvinced by any argument based on W/B ratios given the ridiculous immigration assumptions in the Report.
If the U.S. is fundamentally faced with a labor shortage due to a shift in W/B driven by Boomer Demographics then the answer to that shortage is to hire more workers either domestically or by opening the borders.
If we are to take IC projections seriously we have to believe that unemployment will remain stubbornly high forever, while immigration numbers stay flat in nominal and shrinking in relative terms compared to the overall population and yet the problem is that we won’t have enough workers to support Grandpa in retirement. That is incoherent.
If we are lacking workers going forward in the face of pretty dismal labor participation numbers domestically we can either start offering higher wages and lowering barriers to employment. OR we could just do what the Right is always insisting we do, go right to an renewed Bracero program of importing and exploiting low wage foreigners.
But I can’t take seriously a Right economic package that simultaneously holds that the biggest threat to America is open borders. AND a lack of workers. You can worry about Mexicans taking American jobs or worry about where America is going to get low wage janitors, orderlies and night nurses for Boomer nursing homes. But worrying about both at the same time is incoherent. Or as here simple special pleading.
As to using Coberly’s numbers. Well as it turns out I am back in school and in fact taking a course on Excel that will ultimately give me the skills to import his spreadsheets and then generate charts from them. But I am not there yet, if you would like to lend a hand and send me the resultant charts in jpeg form I will get them right up on the site.
And if I did I would reinforce one point I was trying to make here. We don’t need a Shape that looks like Low Cost as it was in 2011. There is no reason to keep TF ratios above 200 and have them going to above 300 as they leave the 75 year window. And still less to have the Low Cost shape as it was in 2004 which had TF ratios bottoming out even above that and going out the window above 600. What we need is a slow glide curve down from current levels of 300 to 125 or so and then a flattish line exiting the 75 year window. And by inspectionof the numbers that is exactly the shape that Northwest would have if graphed.
But so too would any number of other models. For example we could devise a model that was more pessimistic than Low Cost and more optimistic than Intermediate Cost that was designed to fit the desired Shape simply by changing some economic assumptions. Maybe Low Cost’s 4.5% ultimate unemployment is too low to be achieved. Alright but does that mean that we are committed to IC’s 5.5%? Or can we get some improvement by assuming 5.1%? Same with Real Wage. Maybe 1.5% is too optimistic. But maybe 1.12% is too pessimistic. What if we try a model that combines 5.1% unemployment and 1.35% Real Wage and see what that does to the Shape? And if it falls short then maybe we could make up the gap with some sort of Northwest Lite and boost FICA at half the rate that NW proposes based on IC projections.
Which frankly is why I bought into Northwest to begin with. It’s methodology is such that it can be adapted to results either better or worse for solvency than Intermediate Cost without an advance committement to anything like Low Cost. What Northwest does, without perhaps its principal author realizing it is exactly to target the Shape of Solvency. It just proposes to do so as a default on the revenue side on the grounds that if the serious people insist that Intermediate Cost is in fact the right economic and demographic model then NW will make SS solvent within it. And the same is true for almost all conceivable future Intermediate Costs.
What I am suggesting here is a supplementation of Northwest with a deliberate policy plan targetting those numbers of IC that can in fact be improved, even if they maybe can’t all get to LC. Some policy actions are positive for Social Security solvency and also positive for the broader economy. And from the perspective of the majority policy actions that are directed at More Jobs. At Better Wages are appropriate and necessary.
But there is no need to take the binary choice of Intermediate vs. Low Cost. Because Low Cost is consciously and artificially devised to represent the outside of a probability range for all the variables within it. And we can all agree that it is unlikely we go 12 for 12 on every row in Tables A.1 to A.4 and B.1 and B.2 in the Low Cost column. On the other hand if we go 6 for 12 and get numbers better in half the rows of the IC column then we will see the Shape change. Maybe not all the way but some. And THEN tweak it with FICA increases. The situation is NOT Northwest or Bust, of Raise the Cap or Bust, or Price Index or Bust, there is instead a very wide range of alternatives once we unshackle ourselves from IC. Low Cost is just one of those alternatives and one that is by design at or near the edge of the probability spread.
But Low Cost does give us ideas on what to target and by how much even if we never get all the way there.
Krasting
Social Security being “in the black” doesn’t mean a damn thing.” Social Security can raise it’s income or lower its costs at the stroke of a pen. What matters is whether the cost is worth the benefits. Any sane person understands that in all forseeable circumstances it will be.
The guys with the crystal balls can “project” any scenario they want to. Over seventy five years these are rank guesses and no one making the guesses will be called to account.
What “the Northwest Plan” does is show that by raising the tax a tiny amount when conditions suggest that such a raise will preserve the present benefit schedule Social Security will never NOT be “in the black.”
But you have to pay for it. The cost is not high. Even the pessimistic CBO projections which you got hysterical about a while back can be paid for by raising the payroll tax less than a dollar a week in any given year when wages are projected, by the same projecters, to go up over ten dollars a week.
The only problem faced by Social Security is people who don’t know what they are talking about, or are lying, shouting “doom, doom.”
Webb/Coberly-I could list a bunch of numbers showing you how things have deteriorated at SS since 2009. In every way that one could measure solvency things have gone downhill. The NPV of the unfunded portion, the shortened time frame for reaching depletion of the TF The rapid shift from positive to negative cash flow (and the reality that SS will never – ever be cash flow positive again). I could go on. But you are smart enough to know these things. I guess you choose to ignore them.
I urge you to look into the Larry Summers/Krugman discussion over the past few days (see Angry Bear article:)
http://angrybearblog.strategydemo.com/2013/11/secular-stagnation-a-three-decade-overcorrection.html
Bottom line on this is the growing recognition that the US (and most of the rest of the world) is facing a very long period of sub par (below potential) economic growth. Look at this and you will find it impossible to say that the “Low Cost Scenario” is going to be the reality over the next decade. If you asked Summers/Krugman they would tell you that the High Cost outcome is much more likely over the next ten-years. (if that is the case, then SS is in big trouble.)
One thing that NO policy maker would suggest is more taxes. Especially not more regressive payroll taxes. I continue to tell you that increasing taxes to stabilize SS is simply not in the cards. I remind you that the cost of “fixing” SS is about 1% of GDP every year – forever. That comes to $170B for 2014 and rising every year thereafter. You can play games with yourself about 80 cent a month, but you must know in your hearts that your numbers do not get the job done.
krasting
i know in my brain that my numbers will get the job done. i know in my heart that you don’t know a damn thing about social security. your “numbers” don’t mean what you think they mean. in fact, they don’t mean anything.
This is a very interesting post. Politics of funding aside the real action, in my view, has always been LC, IC and HC assumptions. I’ve always wondered if some asumptions, say unemployment, are more heavily weighted than others? I cannot tell from the Report. Nonetheless I can see targeting policies to influence the Shape but then we start to get into politics and that’s even worse than “actuarial science”.
little john
i have avoided talking about low cost high cost etc because they do not matter with repsect to the purpose and value of SS. SS can pay whateve it takes to keep old people from starving in the streets. the cost will alway be reasonable… too low to notice for most sane workers, and they get their money back.
So Coberly knows everything, and everyone else knows nothing at all.
The word is Hubris – excessive self-confidence.
I don’t make numbers up, I quote from the most recent report from SSA and CBO.
And when you say “in your brain” the numbers will work out, may I remind you that you do not understand the mechanics of NPV?
i wrote a longer reply to krasting off site. i am asking dan to run it as a post.
krasting… sorry that i know more than you about somethng i have actually studied. knowing more than you is not hubris.
Rather than just talking about numbers, let’s use the numbers to show what you are talking about. Coberly has shown how his numbers work for SS.
Bkrasting, show us, don’t tell us, what is wrong with his numbers
Everyone knows that SS is beginning to fail; it is that the left will not admit that their great beacon for the workers party is collapsing…
This is discuss is meaningless as well, because you will always be able to save it – as long as you make cuts to it or increase the tax flow…
It will not be long before the first crack ups appear, as SSDI goes broke and payment to indolent parasites are reduced…
Just watch, however, as pro-parasites forces quickly lay the blame on others…
It is so predicable…
Hans,
You are full of crap. Show your proof.
krasting
i read the summers – krugman piece. it’s hard to see how it lends any support to your case. once again you have completely failed to understand what you read, taken a few lines out of context and pronounced doom, doom.
Little John I think you posed the question just slightly wrong.
If the arithmetic and algebraic aspects of the models were performed correctly, and we have every reason to believe that the folks at the OACT know their business then every variable is weighted correctly. Which is NOT to say that they all weigh the same.
In general I would say the biggest factors are those of employment numbers, real wage, productivity and interest real and nominal. Because those can and have move somewhat independently. For example the traditional relation between real wage and productivity seems to have broken down some in the last few decades with improved productivity not being reflected in real wage the way it used to. Just as the old concept of NAIRU that posits a inverse relation between inflation and unemployment started looking a little sick these last few decades. For example a lot of the massive improvement in outlook for Social Security between 1997 was driven by higher than expected levels of employment (which increases current revenue) combined with relatively low inflation (which curbs increases in current cost via COLA). That improvement flattened out in the 2000s and reversed at the end not because inflation got out of hand but because employment numbers stagnated along with Real Wage and then fell.
So bottom line the numbers to be concerned with for solvency when examining the daily papers are employment and wages. Because improvements in either go right to the bottom line of SS revenues. Whereas productivity and GDP may or may not depending on labor share of the gains. So while the formula might mathematically weight everything corrrectly, certain variables should weight more heaviliy in your counting on your fingers calculations.
As I have been saying a lot: More Jobs. At Better Wages.
BTW Real Wage is tricky. Because while improvements in the short to medium run drive up revenues they also serve as a cost driver on the other end.
On the flip side of THAT, the costs they are driving translate directly into higher levels of real benefits, and the cost factor is a fraction of the benefit improvement. So from a worker perspective higher Real Wage is win/win for both present and future. But if we put on a tight enough set of blindered green eyeshades you might think that it all offset because more wages now just means higher payments later.
Of course from the standpoint of the actual individual worker that is a highly desireable feature and by no means a bug. Higher wages today AND a better real check in retirement. Who could kick at that?
And Krasting we KNOW you could list a whole bunch of numbers showing deterioration because you HAVE.
Unfortunately those numbers mostly are from your own data sets and you never adequately reveal your methodology. And what you do reveal seems wrong, but since so much of it remains behind the curtain it is had to say for certain.
But your key mistake is deadly to your argument. You refuse to understand that the Trust Fund is not a pension fund reliant on ROI. It just isn’t even as what we can see of your calculations put ROI on TF assets front and center.
So mostly your numbers have proven to be GIGO and not really the basis for any kind of discussion. And if anything the hubris is on you for never bothering to respond to our objections to what little of your methodology you want to share . Instead you just persist in pushing your same data sets.
Which maybe is not hubris exactly. More like crankdom and falling in love with your own conclusion first/argumentation later theory making. Either way it doesn’t make for fruitful exchanges.
Yeah, that makes sense. I like your slogan. More Jobs:Better Wages.
One thing that may be important in these discussions is what is the size of the hole that needs to be filled. Dean Baker and Christine Romer partook of this exercise early in the so called Great Recession. Baker at 1.2 trillion and Romer at 1.8 trillion IIRC, whenh describing the size of the economic hole.
IF we look at the size fo the SS hole……
Because I’m familiar with the numbers I like to use the CBO scoring from about 2 years ago- .6% of GDP. In a 15 trillion dollar economy thats 90 billion a year. 20 million jobs created, at 36k (2010 Census median male income, full time yr round) adds about 89.2 billion in more FICA.
Lets assume some wage growth, 20 million jobs at 43k, generates 109 billion in more FICA.
Raising the min wage to $10 thru 2017, in a good economy might raise – I dunno- heres a back of the envelop number, 5-6 billion a year in more FICA.
If we throw in returning to real tax progressivity and returning the Glass Steagal bank firewall, we’ll see an economy thats more stable, with shorter and shallower recessions, and far less job shedding. SO working families will be able to keep more of what they earn.
If the size of the hole is more like 1% of GDP, boost the income cap to 90%, about 216k, thats another .2% of GDP.
Need another .2% of GDP?….Index earnings IN AIME to prices.
The SST IC shortfall is manageable. Its not even a lot of money in the big picture. And remember, us Boomers will be statistically dead by 2048 or so. And by 2060 or so will literally not exist.
If we can nurse SS thru 2048-2050, the odds are much better that by 2060 TF assets will be growing quickly.
But I must be talking out my rear end because somebody typed Doom 3 times…. Humbug.