Tuesday, March 25, 2008

2008 Trustees Report released

Today the Social Security Trustees released the 2008 Report on the program's finances. The report is available here. The summary of the Social Security and Medicare Trustees Reports is available here.

The short story is that the short- and medium-term forecast is about the same, while the long (and extra long) term forecast is improved. The date at which social security begins to run cash deficits remains the same at 2017, as does the date when the trust fund is projected to become insolvent (2041).

However, the 75-year actuarial deficit improves significantly, from 1.95 percent of taxable payroll to only 1.7 percent of payroll. One way to think about this is that an immediate and permanent payroll tax increase of 1.7 percentage points -- from 12.4 percent to 14.1 percent -- would be sufficient to keep the program solvent for 75 years, though not beyond.

Beyond 75 years, the infinite horizon actuarial deficit also declined, from 3.5 percent of payroll in the 2007 Report to only 3.2 percent of payroll in the current Report.

These long-term deficit reductions reflect not changes in the Trustees' assumptions, but improvements in the methods the SSA actuaries use to project the program's finances. Specifically, the actuaries improved their modeling of immigration, particularly of individuals who immigrate to the United States but later emigrate, generally to their country of origin. These individuals would work and pay taxes into Social Security, but generally not collect retirement benefits. As a result, they are a net plus to system financing.

Commentary: While these new methods for modeling immigration clearly correct a shortcoming in previous methods, more remains to be done in modeling the earnings, fertility and mortality of immigrants, who often differ in all these respects from the native born. In general, the earnings, fertility and mortality of immigrants are not modeled distinctly from the native born. Lower earnings and lower mortality means that immigrants generally receive a higher return from Social Security. Lower earnings also means that individuals who work in the U.S. but return home are a smaller windfall, since their taxes would be lower than average American workers. However, higher fertility could mean that future population growth would increase, which would improve Social Security's finances. I believe these issues can best be analyzed using a microsimulation model in which individuals are modeled distinctly, rather than in the semi-aggregated cell-based model the SSA actuaries use for most of their analysis.


Bruce Webb said...

Thanks for a fair and balanced response here.

This Report may finally have cleared up an anomaly seen in the 2005-2007 Reports. Although growth numbers were in line or even below Intermediate Cost projections the actual payroll receipts came in ahead, not by a lot in the scheme of things but significant enough.

I haven't gone back in detail but the dollar amounts in play align pretty well with the figures being advanced for the new immigrant model.

Still it seems odd to me that this would have the full effect of .30 of payroll (which was offset by the negative .06% due to change of actuarial period), then again I am not going to look a gift horse in the mouth. The new 1.7% number is going to present a huge challenge for privatizers, in particular for LMS which has a 1.5% payroll tax already built in along with a package of benefit cuts equating to an additional 2.7%, and this not including the proposed cap increase. He is tasked with convincing workers to take on a 4.2% solution (5.2% for higher income workers to $160k) to a 1.7% solution. He tries to finesse this by using Infinite Future Horizon (as over at EV today) but even this is letting him down as that gap has slumped by a full half point over the last to years (3.7% in 2006 to 3.2% in 2008). And it is pretty easy to mock Infinite Future.

My argument against LMS is going to be that if we already are going to be asked to take a 1.5% increase why not just take the extra .2% projected over the 75 year window and call it good (about $100/year for a median $50,000 income household).

Andrew G. Biggs said...

I think it's wrong to compare the revenue increases/cost savings in the Liebman, MacGuineas, Samwick plan to the current 75-year deficit, for three reasons:

First, they made a plan to address the problem as existed at that time, based on the best estimates available to them. Had the problem been bigger, their plan would have done more; had it been smaller, they would have done less.

Second, and more importantly, it's wrong to compare the size of their tax and benefit changes to the 75-year actuarial deficit because LMS aimed at a much higher target -- sustainable solvency. And this has nothing to do with the infinite horizon measure. Sustainable solvency involves a) being solvent through 75 years, and b) having a stable or rising trust fund ratio at the end of the period. Accomplishing this goal -- which people from both sides of the aisle have embraced, and which there's no sensible reason not to desire -- simply requires more than 1.7 percent of payroll.

Third, you also have to compare the benefit levels payable from LMS. I haven't checked them lately, but if the program cost more than needed to achieve sustainable solvency but also paid higher benefits, that would simply be a policy choice.

Bruce Webb said...

One the payroll gap at the time LMS was originally promoted was projected at 1.92%, something openly disclosed in the plan they submitted to the SSA Office of the Chief Actuary for scoring. Even though the language of the Report supported Infinite Future numbers and were featured in the Reports down in the Tables they were only referenced in passing in the Summary. They were not in some sense 'Official' and all concerned understood that. I watched in amusement. Plus they have not modified the plan since in response to new data, the current version published on Liebman's KSG site is dated Dec 2005. So much for the 'more/less' argument'.

Second I don't buy an argument that defines 'sustainable solvency' as the trend between year 70 and 78, we simply don't know enough about economic conditions after mid-century to make those kind of predictions, heck we don't have consensus on Q2 2008.

Third while you may not have peaked at Chart 1 from LMS recently I have and four out of nine categories of workers in the matrix get results at less than 100% of scheduled benefits. At rates that range from 89% to 96%. It would seem that most lower income workers would have got a better benefit simply taking the 1.5% tax increase and sticking with traditional Social Security and dropping the package of benefit cuts. In the years since the arithmetic has continued to move against LMS and in favor of my preferred plan of Nothing.

Anonymous said...

the trust fund will not become insolvent in 2041.
it will have done the job it was designed to do: bridge the extra costs of the baby boomer retirement.

in any case the trust fund is not Social Security. when the trust fund is reduced to the one year buffer it was originally designed to be, Social Security can continue forever on a pay as you go basis, as it was originally designed to be.

the only way you get to talk about "insolvency" is by assuming that people will never be smart enough to raise their payroll tax by about 2% (each) in order to pay for their own longer life expectancy in retirement.

that 2% will amount to about 20 dollars per week on an average income that will be about 300 dollars per week larger than today's.

Andrew G. Biggs said...

The sum total of your argument really just comes down to the fact that LMS were aiming at a higher target than you would aim at. That's fine, but why single out LMS? Diamond-Orszag also aims at sustainable solvency; so did all the plans from the 1994-96 Advisory Council, including the most liberal one. It seems a bit much to criticize them alone for doing what most analysts think is the responsible step.

Bruce Webb said...

LMS is not aiming at a higher target, not when examined from the perspective of workers' pocket books. Instead they propose a package of tax increases and benefit cuts totaling 5.2% of payroll equivalent that does not provide a 100% solution for four out of nine categories of workers (Table 1). Whereas a 1.7% tax increase solves the whole problem-if the goal is securing worker retirement.

We have a 'Crisis' currently defined as a cut in benefits in 2041 from a level 160% in real terms compared to a similarly situated retiree today to one only 125% and that all using economic assumptions that have proved to be too pessimistic. I haven't reviewed all the plans in detail but they all seem to start from the position of phasing in the pain early so as to avoid sticker shock 34 years out. That doesn't make sense for anyone over the age of forty. And people under forty can just get off the couch and grow the economy at rates close to what we did.

LMS proposes to ask me to make very large sacrifices in the face of a smaller problem which seems to be fading away. Well I don't see why I should accept extra taxes now and guaranteed benefit cuts after I retire in 2023 to prevent a possible but unlikely cut in 2041.

LMS has some worthy policy goals, it is just not at all clear why those goals which would benefit the country at large should be financed by the subset of Americans who are wage workers.

I don't care that most analysts think this is the responsible step, most analysts went along with the Iraqi WMD story. I have been studying these numbers pretty closely and thinking through the issues pretty much on a daily basis since 1997 and came to the reasoned conclusion by about 1999 that 'Social Security is not broke' and certainly not in the sense currently accepted by most Americans by people using the term 'bankrupt' to mean 'check only 28% better than the one my Mom gets today'.

To quote myself from Nov 2005:
"A certain portion of the Republican Party has always hated Social Security on principle. You see it most starkly in some of the novels of Ayn Rand, but from Alf Landon to Grover Norquist large portions of the Right simply despise the very idea of collective social responsibility. They disguise it in many fashions, the current version is "The Ownership Society", but it really boils down to "I got mine, and screw Grandma Millie" (Enron- the gift that keeps giving).

Advocates of private accounts, with a few exceptions, don't care about retirement security for lower income workers. They just don't. They want to kill Social Security and with it wipe out the New Deal. They are not even particularly secretive about this, a little Googling on Grover Norquist or the Cato Instistute will open some eyes. They want to wipe the legacy of FDR right out, they want to set the clock back to McKinley and Hanna in 1898."

I read through much of the Fall 1983 issue of Cato Journal 'Social Security: Continuing Crisis or Real Reform'. An agenda was set assuming that an opportunity would come rivaling that of the 1982/1983 crisis, all that was needed was to prepare an alternative when the time came. Just to be on the safe side it seems everyone signed on to the plan laid out in Butler and Germanis 'Achieving Social Security Reform: A 'Leninist' Strategy'. At least they had the grace to put it into scare quotes.

I don't see a reason to back down a bit from that 2005 statement. Cato was and remains ideologically opposed to Social Security and has worked steadily for 25 years to undermine confidence in it. And did a pretty fine job, I take my hat off to you and yours. Too bad the economy out performed projections and ruined your party.