Wednesday, May 13, 2009

Why Robert Reich probably should never have been a Social Security Trustee

I like Robert Reich – he's funny and he talks straight when everyone else is preprogrammed. But on Social Security it's clear he paid a lot less attention to his staff when he was one of the program's Trustees than he does to lefty bloggers today. Here are some excerpts from his comments in Salon on yesterday's release of the Social Security Trustees Report:

Reports of these two funds' demise are not new. Fifteen years ago, when I was a trustee of the Social Security and the Medicare trust funds (which meant, essentially, that I and a few others met periodically with the official actuary of the funds, received his report, asked a few questions, and signed some papers) both funds were supposedly in trouble. But as I learned, the timing and magnitude of the trouble depended a great deal on what assumptions the actuary used in his models. As I recall, he then assumed that the economy would grow by about 2.6 percent a year over the next seventy-five years. But go back into American history all the way to the Civil War -- including the Great Depression and the severe depressions of the late 19th century -- and the economy's average annual growth is closer to 3 percent. Use a 3 percent assumption and Social Security is flush for the next seventy-five years.

First, there's a lot more to the Trustees Report process than simply signing off on what the actuaries come up with. There are meetings throughout the year between the Trustees' staff – yes, Mr. Secretary, you had several staff who attended these meetings. The key assumptions are agreed upon by the Trustees staffs; if they say no, it doesn't matter what the actuaries say. Second, and more importantly, when the SSA actuary told you what the rate of projected GDP growth was, did you ever think to ask why it's lower for the future than it was in the past?? If you did, I think he'd have given you an answer that resembles this:

GDP growth is a function of productivity growth and labor force growth; birth rates are lower today, meaning the labor force will grow more slowly tomorrow. Even with increased immigration, slower labor force growth will result in slower GDP growth.

The Congressional Budget Office does similar projections to those done by Social Security, and their projections for GDP growth – and for the system's finances overall – are very similar to the Trustees. In other words, Reich's basic argument about the assumptions used to project Social Security's finances is almost surely incorrect, but in such a simplistic way that it's embarrassing that he continues to make these claims.

Moreover, Reich says that higher economic growth would fix the problem. Well, GDP growth isn't a direct input into the system – we don't tax GDP and we don't pay benefits based on GDP – but we can analyze how higher wage growth would affect Social Security's finances. The answer is that even if real wage growth doubled, that would fix only around half the long-term Social Security deficit. And there's no way any policy can make long-term real wage growth double.

Reich's lack of attention to detail continues when he talks about solutions to the Social Security deficit, but I can't really be bothered to go on. I suspect that what makes Reich so interesting as a commentator – his quick wit and ability to seemingly discuss any topic under the sun – has a downside, in that he seemingly just doesn't pay enough attention to facts and numbers to get this important issue right.

1 comment:

Ashley said...

Reich needs to be frog-prepped.