From scanning blogs and news stories, it's clear that a number of people believe the Social Security Trustees projections are overly pessimistic. They might be. (They also might be overly optimistic -- there's a great deal of uncertainty involved here.)
Leaving aside the question of whether the Trustees projections are reasonable -- I believe they are -- it's important to understand how differences in those projections might change outcomes for the system. In other words, if the Trustees ARE pessimistic, how much better will Social Security's finances be?
It's possible to estimate this using the Sensitivity Analysis contained in each year's Social Security Trustees Report. It reports high and low estimates for each demographic variable and how a high or low value for any given variable would by itself affect system financing. If all the variables are set to their high or low cost value, we get the overall high or low cost scenarios for the system.
To make this process easier, I created a simple spreadsheet that estimates how different values for a few of the major economic/ demographic variables affect Social Security's annual cash flows and trust fund ratio (the ratio of trust fund assets to benefit costs in a given year). I used the Policy Simulation Group's SSASIM model to estimate cash flows for the high/low cost values of four different variables: the total fertility rate (children per woman); net immigration; improvements in mortality; and real wage growth. These are the biggies in affecting annual cash flows. Other factors have smaller effects, and changes to interest rates affect only the trust fund ratio.
Using the SSASIM output, I calculated a simple linear function for each variable, which allowed me to estimate the change in annual cash flows for each variable. I then net these out so a number of changes can be combined to estimate the effects on the total system.
Please note: this simple model is designed for illustrative, educational purposes, to give a ballpark estimate of how different demographic/economic assumptions affect Social Security's financings. So it's a crude tool.
But it's also a useful tool. Consider that many people argue that the Trustees' economic assumptions are overly pessimistic. Well, the principal economic assumption is real wage growth; that's how productivity filters through to the program. What if we increase real wage growth from 1.1 percent, which is about its average over the past 40 years, to 1.7 percent?
The chart below shows the change in cash flows. The red line is the Trustees' intermediate projections, while the blue line is adjusted for higher wage growth. The difference is significant -- deficits are delayed for a few years past 2017 and are always smaller than under the lower-growth assumption. However, is higher wage growth -- 50% higher than projected or seen over the past four decades -- enough to fix the system, such that we don't need to bother with reform? No. By the 75th year the deficit is around 3.75% of payroll rather than 5.3%. In other words, economic growth -- while certainly helpful -- won't plausibly be high enough that we can safely ignore the problem.
You can play with other variables as well. Fertility is a big factor: if we can increase our fertility rate significantly then Social Security's problems really do become a lot easier. But if fertility falls to European levels, we're in big trouble. I hope this little tool is interesting. You can download the spreadsheet here.