Friday, February 27, 2009

Blahous: Social Security Fix Demands Honest Numbers

The Hudson Institute's Chuck Blahous has a new op-ed out through Bloomberg News on the lessons of the 1983 Social Security reforms:

If we want the success of 1983, then we need to look at the problem with the clear eyes of 1983. That means acknowledging the size and immediacy of the coming shortfalls and rejecting accounting practices that obscure them. As the 1983 effort's unique success -- and near-failure -- shows, this level of clarity is our only hope.

Click here to read the whole article.


Bruce Webb said...

In the early 1980s, Democrats and Republicans alike understood that Social Security faced a shortfall that was coming fast. Both parties also understood that contemporary workers paid the entire cost of financing benefits for current retirees. There were no impassioned arguments about the Social Security trust funds. In fact, the trustees did not include trust-fund accumulations in their estimates of the program’s long-range balance.

This may have been because the Trust Funds were within months of depletion when the Commission was formed, you don't include what you don't have.

The Commission set out to provide Short Term Actuarial Balance over a range of assumptions. Per Myers they also took a look at the Long Term and were able to conclude that under Intermediate Cost assumptions that they had addressed it on average. Moreover they supplied a Low Cost alternative that knowingly or not would fix the entire gap. Outcomes close to the higher of the Intermediate models returned the TF to a ratio of 100 in ten years (a commendable result) and further outcomes in the late 1990s pushed the TF to a point where its legal obligations (note not assets) are sufficient to pay full benefits to 2041 (SSA) or 2049 (CBO).

But that fact is itself not reason to see "the problem with the clear eyes of 1983". We are not within 6 to 12 months of depletion, instead we are more like 384 months from that. With the advantage of hind-sight we might wish we had started planning back in 1972 when the TF first dropped below a 100 ratio, we might have been able to do a more thorough job than the Greenspan Commission was able to do. Nor would I support waiting until 2038 to start addressing this.

But trying to use the experience of 1983 to argue for action today is kind of odd as is the insistence that the dollars in the Trust Fund have already been 'spent'. Because after all that was true for the Trust Fund in 1971 as much as it is today. Those dollars too had been 'spent'. Which didn't cause planners or the Commission to discount the TF balances to zero when the time came.

I recognize that we are talking vastly different levels of TF ratio today than we were in 1983. On the other hand we are pretty close to TF ratios of 1957 (298 vs 2007 year end 345). The federal government fully recognized and paid those obligations in full with interest. Any suggestion that future administrations will do any different should be rejected in the strongest terms.

Andrew G. Biggs said...

I think Chuck's point was that through the mid-1980s the methodology for measuring the actuarial balance was different from that used today. Currently, the actuarial balance equals:
Present value of future income,
plus current value of trust fund,
minus present value of future costs, all divided by the present value of taxable payroll (over whatever period is chosen, usually 75 years).
From Social Security's founding through the mid-1980s, however, the actuaries used what was called the "average cost method." This was simply the average of annual balances, as a percent of payroll, over a given measurement period. This differed from the current approach in two ways: first, it didn't include the value of the trust fund; second, and perhaps more importantly, it gave greater emphasis to future years than does the current method. (In effect, the average cost method discounted future balances by the rate of wage growth, while the current method discounts them by the government bond return. Since wages tend to grow at a slower rate than interest this implies a lower discount rate, which gives greater weight to more distant years.)
How does this matter? If we used the average cost method today, the 75-year actuarial deficit would be around -2.8 percent of payroll, instead of 1.7 percent. So the deficits faced by the 1983 reformers aren't directly comparable to those today, since they're measured in different ways.