Friday, April 27, 2012

The Trustees Report, in English

For those of you who don’t like the actuarial mumbo-jumbo of the Social Security Trustees Report, public trustee Chuck Blahous has penned a guide to the 2012 report, available over at e21. Worth checking out.

Excess of Scheduled Benefits over Tax/Premium Income for Soc. Sec./Medicare (As % of GDP)



WilliamLarsen said...

Nice colorful chart. However, why reference GDP (Gross Domestic Product)? Both the Medicare 1.9% and Social Security DI and OASI taxes of 1.8% and 10.6% respectively apply to wages only, not GDP which includes a lot of other stuff. If you want people to understand the magnitude of the problem, you need to use the correct variable and that is % of earned wages.

Making this change will make the shortfall much larger. In fact why stop at 2040? The problem last year was 2036 when 76% of scheduled benefits could be paid; this of course is a sizeable shortfall. But it gets worse as the 2.1 births per woman reaches equilibrium between the cohorts born after 1975 which will take 65 years to reach worker equilibrium and 100 years to reach beneficiary equilibrium. If the birth rates decline, then the problem gets worse. If birth rates increase, raw materials become a larger problem than it will be.

I have a question that no politician will answer. "Who are they trying to save social security for?"

WilliamLarsen said...

"We know that things will change from year to year, but they can get better as well as worse. Though if Social Security’s finances continue to worsen, maybe I’ll have to eat my words."

Andrew, I wish I had never began trying to model social security. In the 40 years now that I have been doing it, I have learned a lot.

In 1984 as I was increasing Wage Growth, I found that the present value of Social Security got worse. I could not understand this and thought I had a math/program error. However, I did not. What I had was correct, what I realized was that Wage Growth used to index wages created the increased present liabilities. Wage Growth like inflation must be lower than the US Treasury for the trust fund to produce "work" that is meaningful to OASI. With the US Treasury Rate at well below wage growth, the trust fund is loosing value faster that the rising future liabilities it is "intended" to fund. In simple mathematical terms, we have a mathematical divergent series.

The trust fund, and US Treasury Rates are meaningless in terms of the total problem. The Trust fund can be viewed as a flywheel on a lawn mower which its sole intent is to keep momentum high so the engine does not stall when a large load is applied. The trust fund is so small compared to the present value unfunded liability that its value/input on OASI is negligible even within 20 years and is absolutely worthless after 20 years.

When the trust fund reaches a level of 20% to expenses there is no COLA and as expenses in the next year increase, the trust fund ratio must be maintained at 20% thus requiring incremental cuts each year until sometime past 2070.

At some point in time equilibrium will be reached between workers and beneficiaries. This means there is a mathematical limit to what can be paid. My math indicates it will be about 59% of scheduled benefits at current birth rates.

Raising taxes takes resources that could have gone into IRA's, 401K, mortgage down payment, education, etc, thus reducing future individual wealth of most workers. In simple terms taking all potential savings and earmarking them to social security with a negative return.