Monday, June 22, 2009

Barron’s: The Myth of 2016

Barron's Gene Epstein argues that rising labor force participation by older workers will put off Social Security's insolvency:

Last month, the media flashed the latest grim news on Social Security: Its trustees had concluded that the money pouring out of the system will start exceeding the tax dollars flowing in by 2016, a year earlier than previously forecast. Unreported, however, was a curious fact: The calculations effectively deny the existence of a longtime trend that probably will delay the arrival of Social Security's doomsday. That trend is Americans' growing propensity to work beyond traditional retirement age. In doing this, the agency could be making a $200 billion mistake in its assessment of Social Security revenue over the next 10 years. That sum is the likely unanticipated income from payroll taxes levied on older workers who remain on the job, based on the projections of demographer Peter Francese, who has had an excellent record predicting such trends. A hundred billion here, a hundred billion there, and pretty soon you're talking real money -- enough to keep this system in the black until at least 2018. While such a delay might not sound too impressive, it does give Washington two more years to come up with a viable solution for the nation's most sacred entitlement program.

The full text of the article seems to be available here. Here's the author talking about his article on video:

Overall, I suspect that Epstein may be overestimating increases in labor force participation by older workers and underestimating the degree to which the Trustees already include data on the current upsurge in work by older Americans. In any case, even Epstein isn't arguing that this will cause a significant delay in Social Security's coming deficits.

The issue of labor force participation by older individuals came up during the deliberations of the 2007 Technical Panel on Assumptions and Methods. As I recall, many on the panel argued that labor force participation by older workers would rise, such that over 75 years the labor force participation rate of people in their late 60s would rise to that of folks in their early 60s today, but I don't believe the panel as a whole made such a recommended change in assumptions. In any case, the increases Epstein is arguing for go well beyond this.


James said...

While such a delay might not sound too impressive, it does give Washington two more years to come up with a viable solution for the nation's most sacred entitlement program.


I find this to be a curious conclusion since a) we won't know for certain whether Epstein is correct until more data is available, meaning more years must pass; and b) I didn't realize finding a solution to social security needed to wait until the surplus ACTUALLY disappeared.

At least to my mind, the prudent course of action is begin finding a solution asap, rather than waiting for nearly a decade, only to discover the assumptions you were making a decade earlier were much too optimistic. If nothing else, the recent financial tsunami (which, as we all know, wreaked havoc on SS revenue, should have taught us something about our predictive prowess.

Bruce Webb said...

Well I argued to a list-serv elsewhere that the problem with Epstein is that he has surrendered the field of battle to AEI.

The strong argument for Social Security is that a focus on the date of cash surpluses vanishing is just misguided and that the real emphasis should be on how to maintain benefits after Trust Fund Depletion, an event not projected for close to thirty years.

In effect Epstein just blew a big hole in the bottom of the ship of supporters of traditional Social Security and then suggested embarking on an earnest discussion of how we should arrange the deck chairs.

Congratulations Andrew, Epstein has surrendered to your basic argument and apparently doesn't even recognize that fact.

As I have noted before the DI component of Social Security went to cash deficit a couple of years ago and nobody noticed, it was a non event. Because in overall budget context the initial amounts did not even rise above the level of noise. Since OAS is ten times the size of DI the effect in 2017 (sic) when its TF goes cash negative will be that much higher and will show up as a ripple. But instead we are encountering rhetoric suggesting that it will be a tsunami. And rather than push back Epstein is arguing we have a little more time to build up sea walls.

Trust Fund depletion is a real event with real consequences, the Commissioner and the other Trustees having no legal authority to unilaterally change benefits or borrow money. But the argument that negative cash flow into the combined Trust Fund in 2016 or 2018 constitutes crisis is simply to make arguments from facts outside of Social Security solvency itself. That is if Congress does nothing the Treasury will continue to issue checks to beneficiaries and debiting TF balances. Whether Congress chooses to find these cash dollars from new taxes, cutting existing discretionary spending, or just borrowing is a political argument constrained largely by events and outcomes exterior to Social Security.

Epstein is simply buying time to address a 'crisis' defined by AEI and friends and in doing so handed a victory to the 'Reformers'. Not that I would expect much different from anyone writing for Barron's (which has a different target audience than say Mother Jones or The Nation).

Andrew G. Biggs said...

Bruce, A fair point -- as I think I've said before, 2016 is the beginning of the government's Social Security problem, while 2037 is the beginning of Social Security's Social Security problem. That said, both are problems.

Moreover, if you set up a program that's run by the government, in which individuals have no ownership rights to their contributions or benefits, it's hard to argue if the government decides at some point that the cost burden is too high and it wants to reduce benefits. I confidently predict that will take place well before 2037.