Projection is an Art, not a Science, especially for the SSA
The scary headlines of the past few days have been well-discussed below by Dale Coberly and Barkley Rosser.
Data, however, is only as good as its assumptions, and the overall trend is well worth a glance. (Note: I took the 2013-2017 data from BC professor (and director of their Center for Retirement Research) Alicia H. Munnell’s Table 1 here.
| Year of Trustees Report: | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
| First year outgo exceeded income excluding interest | 2010 | 2010 | 2010 | 2010 | 2010 | 2010 | 2010 |
| First year outgo projected to exceed income including interest | 2021 | 2020 | 2020 | 2020 | 2021 | 2018 | 2020 |
| Year trust fund assets are projected to be exhausted | 2033 | 2033 | 2034 | 2034 | 2034 | 2034 | 2035 |
Note that last year’s projection that 2018 would have a funding shortfall turned out to be so incorrect that this year’s report didn’t even pretend there would be excessive demand until next year.* Also note that, despite a relatively anemic recovery in the labor force, the projection “we’re out of funds” date keeps getting extended, though not so much as it did pre-Tepid Depression years.
More coming up. As usual, the report is only so good as its data assumptions and there are some interesting assumptions made.
*Part of this, as Henry Aaron noted Tuesday, is that the Disability portion of SSDI has declined precipitously from projections.
After 35 years of saving for retirement in the Trust Fund, retirees have saved a whole three years of pay in, roughly equivalent to the same years of payout. There are four years of pay in in the Trust Fund but one of them has to be held back for a legitimate purpose of the Trust Fund: which is having an automatic benefits paying mechanism to fillin if FICA collections suffer a shortfall. Believe it happened a couple of times.
This would be obvious if we didn’t spread out pay out over so many years it gets confusing — oh, so gradually filling in the very gradually growing shortfall until the last “US Savings Bond” runs out — then everybody can start shouting: Social Security is running out of money!
Time to hike the FICA tax about 33% (to cover 25% shortfall that will fall by then). And lower the income tax as much as is no longer needed to cash retiree bonds. Of course this may happen a lot sooner if income tax payers balk from paying higher and higher rates. More wealthy on average income tax payers — have a lot more political clout than average poorer FICA payers.
Want to do it all over again; start saving money for the next retiree generation(s) the same way? First we’d have to hike the FICA tax even higher — allowing us to lower income tax even more …
… wait a minute: isn’t that where we came into this movie? …
maybe we should have — maybe we should now — just hike FICA as needed as we go along. :-O
Data for 2019 report
https://www.ssa.gov/OACT/TR/2019/lrIndex.html
Data for 2018 report
https://www.ssa.gov/OACT/TR/2018/lrIndex.html
There are more people working, but at a lower than predicted increase in wages. Nonetheless, SSA now predicts wage increases will continue above 4% for a longer period than they did a year earlier, so they predict the TF will last longer.
A downturn will blow up their predictions in the short term. Until that downturn arrives they should keep predicting on the low side because they use a long term average growth which includes downturns. (I predict the SS prediction will be low because I predict there will not be a downturn before the next report).
Although I do not trust the prediction in the short term, I do trust it enough to say we should adopt increased FICA ASAP.
Arne:
More people working and higher wages due to productivity gains would resolve much of the issue of funding. The issue of fewer people working to support the increased numbers of retirees was a flawed argument.
Ken – If you want to talk SS you should go the real source for info, That would be SSA and its annual reports.
In 2010 non-interest income was less than expenses (Cash Flow Negative). But that is not something that SSA projected in 2013/14/15/16/17 as your chart suggests. It had already happened.
If you want to look at how SSA did in forecasting the first year that there would be a cash flow deficit then you should look at the 2009 SSA Annual Report to Congress. In that report SSA forecast (intermediate case) that the SS Trust Fund would remain cash flow positive through 2015.
But SS went cash flow negative the very next year. In other words, the deep thinkers at SSA missed this critical variable by a country mile.
Page 41 of the 2009 Report:
https://www.ssa.gov/OACT/TR/2009/tr09.pdf
ADDENDUM TO MY POST ABOVE (this is what I wanted to conclude the other day but couldn’t figure out how to express it:
Should we start another Trust Fund for future retirees (to save with) — in which case we will have to hike the FICA so it is brings in more that Social Security retirement (to start piling up a few bonds with again) —
— or —
should we just hike FICA as much as needed to pay for current retiree out go as we go along?
” The issue of fewer people working to support the increased numbers of retirees was a flawed argument.”
On the contrary, more people working increases the ratio of workers to beneficiaries and that is precisely what SS needs. Bruce K is correct that the SSA forecast in 2009 was overly optimistic. We had a recession that reduced the expected W/B ratio from a predicted 3.2 to an actual 3.0 in a single year. You can see from the 1995 report that they predicted W/B to start dropping, but the dot-com boom actually caused an increase.
And Baby Boomers will retire. SSA predicts W/B of 2.3 in 2034. An extra tenth or two will not stop us from needing more revenue to meet scheduled benefits. It takes between 2.7 and 3.0 workers per beneficiary to be stable.
The NW Plan has “triggers” so if we keep a strong economy we can slow down raising the FICA rates sooner, but we need to start now if we want to keep them gradual (.1 percent per year, or coberly’s approximately 1$/week/year).
“In 2010 non-interest income was less than expenses (Cash Flow Negative).”
Would you exclude investment earnings when you calculated your own cash flow?
Arne – Interest income is paid to the SS Trust Fund in paper (not cash).
The definition of Cash Flow is set by SSA. For 2018:
Cash flow for the Old Age fund was NEGATIVE $103B
Cash flow for the DI Trust fund was POSITVE $23B
The combined Trust Funds were cash flow NEGATIVE $80.1B.
Try this SSA link to look at the data. This is a menu, ask for the calendar 2018 data.
https://www.ssa.gov/cgi-bin/ops_period.cgi
If you’re interested in the SS cash flows I suggest you look at the monthly data for 2018. January and April are positive cash flow, the other ten months are negative.
The monthly data highlights an important point The SSTF must be maintained at a level of not less that One Year’s worth of Benefit payments. If there was no TF, then there would be a big shortfall in the cash needed to make benefit payments from one month to the next..
When you understand the cash flow issue (the asymmetry of SS cash income) then you will understand that the focus on 2035 (the year the TF=0) is bunk. The real question is: In what year does the SSTF = next years Benefit obligations?
Answer: 2029 See page 10 of the 2019 SS Report. SSA defines the 100% level as “the minimum level for financial adequacy”.
https://www.ssa.gov/oact/TR/2019/tr2019.pdf
well
first, projection is a science not an art. that doesn’t mean projections yield accurate predictions when conditions change.
but more important, Krasting is quite wrong in his understanding of “cash flow.”
The TF was overfunded during the years of the Baby Boomers paying IN to FICA in order that there would me money in reserve (the TF) for them to draw on when they retired, avoiding an “unfair” increase in FICA on the following, smaller, generation.
this is perfectly normal, prudent, financing.
screaming that the SS is broke, flat bust, is not normal or sane.
The enhanced TF will run out approximately (approximately) as the need for it disappears due to the dying off of the boomers.
Meanwhile, however, the after-the-boomer generation is expected to live longer than previous generations, while the generation following them is expected to experience slower wage growth. If SS is to continue to mean something as retirement insurance, the rate of savings (also known as the FICA or payroll tax) needs to be increased a small amount so SS income matches SS outgo (benefits).
This is the real issue. Screaming about current cash flow or the exact date the TF runs out is a false issue created entirely by the people who have hated Social Security since Roosevelt invented it.
Denis
I like you and read your posts on the need for better labor unions with interest and to the extent of my knowledge agreement.
I wish if you were going to comment on Social Security you would take the trouble to read my posts. Or at least read the Trustees Report… not the Trustees Summary… enough times until you understand it… not as Krasting distorts it.
Until that, or something like that, happens your comments will be based entirely on your own free association from the lies you have heard and only add to the confusion.
I believe that you, unlike Krasting, are honest and well meaning. But you need to base your thinking on actual facts. Some of which I try to provide… and which you may check for yourself, if you are careful.
BK,
If I google “social security cash flow” I get:
“These cash flows—the tax income, the investment (and redemption) of the securities, the interest on the invested reserves, and the payment of benefits”
https://www.ssa.gov/policy/docs/ssb/v75n1/v75n1p1.html
I don’t think SSA defines cash flow the way you think.
Arne – Page 232 of the 2019 Report to Congress (Glossary). The definition of Cash Flow at SSA:
Cash flow. Actual or projected revenue and costs reflecting the levels of payroll tax contribution rates and benefits scheduled in the law. Net cash flow is the difference between non-interest income and cost.
Note – the CF definition excludes interest income.
So you’re wrong on the facts. Let this one go.
Krasting
you are still missing the point. whatever they call it, the income into social security includes the interest, and principle, from the Trust Fund.
since that interest was anticipated, and planned for, a long time ago. and it’s “running out” was also anticipated and planned for, it is dishonest to point at “non interest income” it and scream “it’s broke.”
don’t get in a fight with Arne about the exact language used to describe the reality. it’s the reality that counts, not the words.
and the reality is that SS will not reach a situation where income is less than outgo… ever. either the tax will be raised… the right thing to do. or benefits will be cut… destroying social security as meaningful retirement insurance. we know that. we have known it for a long time.
pointing to the current “shortfall” of non-interest income as though it was not expected and planned for and screaming that it is a crisis is a form of dishonesty, or simple ignorance.
so let this one go. turn the page:
we are at a point where to maintain SS as meaningful insurance for retirement (and death and disability) we need to raise the payroll tax a total of 2% for each worker sometime over approximately the next sixteen years. we can do that one tenth of one percent per year at a time.. that’s about a dollar per week. something no sane person would even notice.
even as it adds up over a time when wages are rising ten times as fast. and even if wages did not rise would still be the necessary amount to pay for a basic retirement, and the fairest and simplest way to get the money.
Denis
an apology
reading your comment more carefully i think i see that you are not saying anything so different from what i am saying. just saying it in a way i didn’t recognize.
one thing: raising the tax 33% is a misleading way to put it. it’s 33% of a 6% tax. so it’s raising the tax 2%. even the Trustees Report has given up calling it a 33% tax increase…
incidentally, for those who don’t like the idea of a tenth of a percent per year increase, the Trustees offer an immediate and permanent increase of 1.4% for each the worker and the employer.
this would be noticed because of all the screaming by the Big Liars. But it would not be felt. And you would get the money back, with interest, when you need it most.
There are other disadvantages.. not very important… having to do with the politics of maintaining a large Trust Fund, and not getting the “no need to pay it back” that comes from raising the tax small amounts at need. And mostly having to put up with the screaming “SS is broke” for the next 75 years… when another increase of about 1% each for the worker and the employer will probably be needed.
We could probably leave that for the people who will be alive then to work out. But we won’t get the peace of mind that would come from “being done with it” forever.
Coberly,
Leaving your simple common sense solution behind — and skipping to my nightmarish vision:
Whenever the Trust Fund runs out we have to start building a Trust Fund for the next generation of retirees, don’t we? That means we have to raise the FICA high enough to start a new Trust Fund, right?
So relying the Trust Fund to partially fund Social Security retirement instead of fully relying on FICA tax — means we have to permanently (endlessly) maintain FICA rates higher than needed to fund current retiree benefits …
… except when FICA begins to shortfall — then we partially rely on Trust Funds being cashed by income tax …
… until the Trust Fund runs out and we have to up FICA again to cover the gap …
Wait a minute; what is going on here??????????????????
Wait; I think I get it: we are either building the Trust Fund or draining the Trust Fund(s) — and at the same time — either raising FICA above outgoing benefits or holding FICA below out going benefits, respectively — assuming the next generations always have Trust Funds of their very own. :-O
Denis
experiencing a little mental rigidiy myself, if not actual hardening of the arteries, i can sympathize with all those people out there (ten? fifteen?) who don’t get what you are saying. so..
yeah, probably, maybe, …. but i think the serous people out there just want to kill social security outright. theTF is just an easy thing to lie about. as for the folks who want to “expand” social security by getting the rich to pay for it, i don’t think they are smart enough to know what they are doing.
killing SS by turning it into what the liars have been saying about it…
and what the deeper thinkers on that side know is probably the easiest way to kill it (turning it into welfare, which they have been calling for for years. they being subtle enough to understand the value of a simultaneous attack on the flank..
“Let this one go.”
The proper response to finding something that does not make sense is to dig deeper. You are correct that for the Annual Report the SSA does have the non-standard definition you quote. Presumably, that is why they need to put it in the glossary – so you will know the definition they are using in that document when you run across it. You will not run across the term cash-flow in the discussion of short term estimate, only in long term.
So, you and I and Alicia Munnell were confounding the Report definition of cash flow as soon as we applied it “key dates” in the short term.
Oh boy…
I can provide you with hundreds of reports issued by SSA that highlight the Cash Flow. These reports cover monthly, quarterly and annual financial information. The Bottom Line of these reports is always “Net Cash Flow.” The description of Net Cash Flow (NCF) is in each of these reports:
Net Increase in Asset Reserves Less Interest
So the definition and use of the term NCF is used by SSA in measuring short term results. You say the opposite.
You also say you do not understand. Let me try,
There is a huge SSTF. It pays the TF interest of $45B in both June and December. (big bucks)
There are two ways that Treasury could pay SS what is owed.
The Wrong Way:
Treasury could go to the debt market and borrow $45B. The cash from this borrowing could be paid to SSA. But SSA is required to only invest in Special Issue US Treasury Notes (“SI”). So the Cash goes back to Treasury and SSA gets the SI Notes. Treasury either holds onto the cash it just borrowed from the public, or it repurchases what it just sold.
Well that is idiotic. That is not how things are done,No need for all the cash. The matter is resolved by Treasury issuing new SI notes and bonds to SSA directly No cash is involved at all. Got that?
So SSA reports its numbers adjusting for non cash interest.
Do you understand? Google “PIK bonds”. This means Pay In Kind.
The SI Notes that the SSTF holds are PIK bonds. They pay interest in more Notes, not cash.
Somewhere above Coberly says that the cash/non cash issue does not matter. He’s right, up to a point.
In 2018 Treasury issued $1T of NEW debt to the public. $83B of that was to cover the cash shortfall at SS. Month to month SS is redeeming its TF holdings to pay benefits. The $83b CF deficit will go up every year from now on. SSA will necessitate that Treasury issue about $4T(!) of new debt to the public over the next 15 years.
It’s ok that Coberly doesn’t care about cash flow. He looks at this with the eyes of SSA. I’m an old bond guy. I do look at cash flow. After all, it is the bottom line.
Krasting
Old Bond Guy
but Social Security is not the Bond Market.
Try this:
I run a business. MY “cash flow” is the amount of money that comes in the door from my customers. This is the money I use to pay my bills, my employees, and myself.
I need to maintain a reserve to cover bills that come in during times of low cash flow, and i would like to build a reserve so i can expand my business. So during times of high cash flow (more than i need to pay current bills etc.) i put the extra money into low risk bonds.
Now, during times of low cash flow (not enough to pay current bills) I pay those bills out of the interest or even principle from my savings.
As a business i need to know the difference between “cash flow” and “drawing on my reserve.”
So far no different from Social Security… they do keep in mind the difference between “cash flow” and “interest income.” and use the definition you cite.
But they don’t go crazy, and neither would my business, if and when i draw from my reserve to pay current bills or to pay for long expected unusual expenses.
You and your friends the Big Liars DO try to make us crazy when Social Security draws from its reserve to pay current bills and long expected expenses.
Thing is, people use different words for the same thing, and sometimes the same words for different things. It is important to keep your mind on what is REAL.
And the reality is that Social Security will eventually need to increase its cash flow (raise FICA) if it wants to maintain a benefit level that keeps SS meaningful as retirement insurance (and disability and death insurance etc.) The amount is not large, and is exactly what we will have to pay one way or another if we are going to live longer… but not be able to, or not want to, work longer into old age.
Note the “not want to”. there is no reason we should work longer than we want to if we have paid for it ourselves.
Neither Krating nor the Big Liars nor the “progressives” have a plan that makes any sense. Any sense at all in the case of Krasting. Any sense in the face of normal risks in the case of the Big Liar privatizers.
And any sense in the face of American politics and the so-far normal distaste of American workers for living on the dole.
On the other hand, normal workers, sane people, can save for their own retirement, insured, simply by paying the needed increase in FICA at about a dollar more per week per year up to a limit of a total 2% increase while their wages are going up at least 20% and much more over time. It’s a matter of shifting part of their future higher standard of living from current spending to retirement needs (or wants).
I think that once they understand that their choice would be obvious to them, but the Big Liars have now been joined by the “progressives” and the Krastings to keep them confused and to play on the same short sighted greed that Bush’s privatizers were playing on.
Krasting
old bond guy:
i think the thing you miss in your discussion of Treasury operations to pay interest to SSTF
is that the US Government borrowed that money (essentially cash from the pockets of workers) in the first place. it owes interest to those workers (the trust fund established to pay their future benefits… in essentially cash).
all the backing and forthing with issuing this and that is completely irrelevant from the point of view of the workers who paid the money and are owed tha money. The government (“Treasury”) can get the money from issuing new bonds to the public, or taxing the people who pay general taxes. That is NOT SS being a burden on the government, or the general taxpayer. That is SS lending the money TO the government and getting paid interest, and eventually getting their principle paid back… just like anyone else who lends money to the government.
you certainly don’t make clear, and the Big Liars deliberately confuse the issue… that the money came from the workers and is owed to the workers.
all the crying about the poor treasury having to pay out 4 Trillion dollars or so is crocodile tears: they borrowed the money, they need to pay it back.
if they don’t want to pay it back in cash they can simply raise the payroll tax enough to cover current payments…. about a dollar per week per worker… and never have to pay back what they borrowed. this is a lot better for the workers as well as the general tax payer.
i would think an old bond guy would understand this.