Tuesday, May 1, 2012

Can we expect Social Security’s financing to get worse?

Over at National Review, Veronique de Rugy writes that the shift in the trust fund insolvency date from 2036 in the 2011 Trustees Report to 2033 in this year’s report is part of a broader trend where projections of the system’s financial health have grown worse over time.

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She’s clearly right that things are not looking as good today as they had in the past (although the 2057 projection for the 1990 Trustees Report doesn’t seem right to me). 

Nevertheless, my gut is that the guesses we make in a given year are about as good as they can be, given our ignorance regarding the future. 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.

11 comments:

Arne said...

My take (based on some comparing of reports) is that there is too much projecting of today's conditions as if they were the norm. By 1995 the recent worsening had brought the projection back to 2031. For the next decade it advanced steadily, but as we now know, we were in a bubble. (The 2001 recession was in the middle of the housing bubble.) 1990, too high. 1995, too low. 1999, too high. 2012, too low.

The long run trend that is believable is that we are living longer and not retiring later, so the cost of retirement is higher. We need to increase revenue but we should not try to fix 75 year's worth all at once.

WilliamLarsen said...

"The long run trend that is believable is that we are living longer and not retiring later, so the cost of retirement is higher."

Sorry, but what is the actual cost of collecting 17 more days of SS benefits out of 20 years? A baby born this year will live 17 days longer than a baby born last year at age 67. This increased life expectancy is a red herring. Even the SSA states so on its website

" “Life expectancy at birth in 1930 was indeed only 58 for men and 62 for women. But life expectancy at birth in the early decades of the 20th century was low due to high infant mortality, and someone who died as a child would never have worked and paid into Social Security. A more appropriate measure is probably life expectancy after attainment of adulthood.
Since average life expectancy at birth is now about 76, this is interpreted as implying that people collect benefits for 14 to 18 years longer than they used to. However, as Table 1 indicates, the average life expectancy at age 65 (i.e., the number of years a person could be expected to receive unreduced Social Security retirement benefits) has only increased a modest 5 years (on average) since 1940. So, for example, men attaining 65 in 1990 can expect to live for 15.3 years compared to 12.7 years for men attaining 65 back in 1940. So the actual increase in time that males can anticipate receiving Social Security is closer to 3 years than to 14.” http://www.ssa.gov/history/lifeexpect.html

The increase in life expectancy is largest at birth due to decreased infant mortality rates of 20% to well under 1%.

My computer model uses a 20 year moving average of wages, inflation and US Treasury Rates and it has maintained 2036/2037 since 1984. Using current assumptions (short term) is like trying to time the stock market.

As wages increase, the future costs sky rocket, but revenues fuel the short term financing of OASI. As wages decrease, the future costs decrease as well as revenues thus decreasing long term costs, but also shortening the life span of the Trust Fund.

Arne said...

William,

You have all the right data, but are drawing the wrong conclusion. Since 1990 the life expectancy of a 65 year man has increased another 2.2 years (per the SS annual report). If the FICA rate increased at this same "modest" rate (2.2yr/15.3yr = 14 percent in 22 years), then SS would run a perpetual surplus.

SS does not require an endlessly increasing number of workers, but it does require adjustments so that each generation pays enough to cover the reality that it will live longer than the one before.

steveegg said...

The 2057 fund exhaustion date in the 1990 report is off, by one year. The more-optimistic of the two "intermediate" scenarios (II-A) had OASDI going belly-up in 2056, while the more-pessimistic of the two "intermediate" scenarios (II-B) had OASDI going belly-up in 2042.

The fun part of that year was the claim that DI would be good until 2025/2020 in the two intermediate scenarios, and 1996 in the worst-case scenario. As we know, it took a rejiggering of the FICA/SECA allocations to keep that afloat through 1994.

WilliamLarsen said...

Arne - "SS does not require an endlessly increasing number of workers, but it does require adjustments so that each generation pays enough to cover the reality that it will live longer than the one before."

The problem with this concept is that when SS-OASI began, they paid meaningful benefits to gain support for the program. These meaningful benefits are what created the "Legacy cost", the first 35 cohorts who began paying OASI taxes.

Boomers have paid nearly twice the cost of their benefits. The actuarial cost of full benefits at age 67 is less than 6% of payroll and that is using the US Treasury Rate. Boomers have paid the equivalent of more than $14 Trillion to SS-OASI, yet the trust fund has less than $2.6 Trillion. So is is a fact, each cohort born prior to 1940 in most cases has not paid enough to fund their benefits.

The FICA rate is not the problem now. The problem was and still is that they implemented OASI without any design as how to pay for the early cohorts. The best implementation would have been to start collecting from age 21 and under in 1937 thus eliminating those who were over age 21 in 1937 from ever collecting. This would have provided the funding need to pay scheduled benefits at less than 6% payroll without the need for decades of huge tax and base increases.

14% is too low to solve the problem. When the beneficiary ratio reaches 2.2 to 1, the payroll tax needs to be close to 17%.

WilliamLarsen said...

"Since 1990 the life expectancy of a 65 year man has increased another 2.2 years (per the SS annual report)."

This equates to an increase of 36.5 days per cohort at age 67.

I use the Cohort Tables from SSA and they show the increase is 17 days per cohort.

http://www.ssa.gov/OACT/NOTES/as116/as116LOT.html

1990 was 19.88 years, 2000 was 20.42 years equates to 19.71 days more per cohort. 2010 cohorts are not out yet so unless the rate of change in increased life expectancy has begun to grow v slow down, I would question SSA's value of 36.5 days per cohort.

WilliamLarsen said...

When the Big fix of 1983 was implemented, the Trustees projected exhaustion past 2064. It is my believe because they use GDP to determine revenue v wages x workers and do not calculate unique average SS-OASI benefits per cohort x number of beneficiaries within that cohort, that the SSA projections have a lot of error in their projects.

To me instead of using GDP, Average Wage which SSA already has would be superior to GDP. SSA also has the number of workers and their ages (cohorts). This means it is simple to calculate revenue and future beneficiary costs easily. If US wages go up, the each cohort costs is easily calculated as well as each years OASI revenues. US Treasury rates generally follow inflation (except the past three to four years).

Inflation also tends to correlate to Wage Growth as well.

Trying to time "SS-OASI's" variables on a yearly basis creates huge errors.

Arne said...

"The problem with this concept is that when SS-OASI began, they paid meaningful benefits to gain support for the program."

The problem here is that you point to a feature of the program and call it a problem.

It is a reality that my grandparents generation had their savings wiped out. If we had not paid for their social security we would have paid for their welfare. You can't save money that you are spending. You can have a pay-as-you-go program that continues forever (with appopriate adjustments).

If you want to see what has been happening to life expectancies of people retiring in the last decade, you need to look at the 1930 and 1940 tables, not the 1990 and 2000 tables. (Or look at a table that reports life expectancy of people who are 65 in 1990 and 2000.)
http://www.ssa.gov/OACT/TR/2012/lr5a4.html

Some people complain that Boomers are the greedy folks who want more out than they have put in, others complain that Boomers have already put in more than their share. Both sides miss the reality that helping those who outlive their retirement savings in turn insurance against outliving our own retirement savings is reasonable and fair. Keeping SS as a balanced paygo program makes sense.

WilliamLarsen said...

“The problem here is that you point to a feature of the program and call it a problem.”

You can call it a feature, but it is this feature which has lead to the largest portion of the unfunded liability. No one cohort or group of cohorts have even attempted to rectify this. What do you think the $16.5 Billion unfunded liability in 1943 has grown to over the past 70 years? This feature was a concept only with no financial analysis to support it just as a ponzi scheme has no financial support of success.


“It is a reality that my grandparents generation had their savings wiped out. If we had not paid for their social security we would have paid for their welfare. You can't save money that you are spending. You can have a pay-as-you-go program that continues forever (with appopriate adjustments).”

These are my grandparents and parents as well. My mom told me years after I began protesting Social Security that my grandfather would sit on the porch with his old “cronies” and debate Rosevelts Social Security. My grandfather made the comment “Social Security will ruin the US. I think he was 100% correct. As for having savings wiped out, this is a fact of life and no amount of crying over spilled milk will make it whole. The notion that we pay social security or we pay it in other kind is simply not true. Social Security allowed older parents to live on their own instead of keeping generations together. SS create the misconception that elderly parents had enough finances to live by themselves. I can tell you from life’s experience that it is far cheaper to maintain one home instead of two. It is far cheaper in term of groceries, utilities which is what we refer to as economy of scale.


If you want to see what has been happening to life expectancies of people retiring in the last decade, you need to look at the 1930 and 1940 tables, not the 1990 and 2000 tables. (Or look at a table that reports life expectancy of people who are 65 in 1990 and 2000.)

The single largest increases began after 1900, but the rate of change slowed dramatically after 1930 and has continued to do so. I present the entire 1900 to 2000 cohort tables and show how rate of change in increased life expectancy affects social security. The SSA states it is not increased life expectancy that is the problem and I agree. I present the 1990/2000 cohort series to identify and present fact that 17 days longer in retirement at age 67 is not a big problem. In fact it is less than ¼ of 1% over a long period of time while inflation is 12 times larger in any giver one year time frame.

Arne said...

William,

You talk about having an economic model. You need to look at the economic growth and increasing standards of living again.

An economy in which we increase taxes to maintain scheduled benefits will lead to increased standards of living for retirees and for workers. If we choose, we certainly can afford to have seniors living on their own. It becomes easier to afford it as time goes on.

Having 80-something parents move in with 50-something children may have advantages for some, but it is far from a universal solution.

WilliamLarsen said...

An economy in which we increase taxes to maintain scheduled benefits will lead to increased standards of living for retirees and for workers. If we choose, we certainly can afford to have seniors living on their own. It becomes easier to afford it as time goes on.

The increase in standard of living is simply increased buying power of the dollar and increased wage growth that exceeds inflation. As the US wage increases, so does the future SS-OASI benefit. The 1977 benefit formula uses indexed wages to determine the initial benefit. This creates a fair method to calculate the initial SS-OASI benefit based on wages. Unlike the previous Congressional method that increased benefits from 1940 to 1972, >50% than CPI over the same time, it ensures each cohort at age 60 begins with the same basic value of benefits in relationship to wages.

Changing the wage index would mean that each cohort would no longer begin at age 60 with the same buying power that previous beneficiary cohorts (after 1977) did. COLA does not and was not meant to maintain the beneficiary’s standard of living with that of society, but to maintain the ability to buy the basket of goods that were available in the year they turned 60.

Increasing the payroll tax will decrease the standard of living of workers. Taking more from a workers paycheck lowers their standard of living while providing current beneficiaries the ability to compete for goods and services using the workers increased taxed wages.

In simple terms, SS0-OASI is a zero return. Applying the OASI tax to paying down a 30 mortgage would in effect be equivalent o reducing a 30 year mortgage to 14 years 3 months. The cost of the remaining payments is pure savings at the mortgage rate, far better than SS-OASI. Increasing the payroll tax will lower personal savings even more while disenfranchising more of the working population from participating in the economic prosperity of the country and world at large. In other words increased taxes to support OASI is throwing good money (that has potential to reduce debt and increase savings) after bad that already is zero to negative.

As for parents moving with their children, has anyone presented the true savings this would be? For example, maybe a married couple making $25K each ($50K combined) would rather have the extra $5,300 more each year and would take care of a parent. How many children help take care of a parents home? Think of the reduced cost of utilities, transportation, groceries, etc that could add another $10,000 a year to the $5,300? How much are children willing to pay to have their parents live by themselves?

As for those who do not want to take care of their parents, then those groups (parents and children) need to save more so they are not a burden on others.