Friday, June 17, 2016

New paper: “Is Social Security Wealth?”

“Is Social Security Wealth?”

by Andrew Rettenmaier
Texas A&M University

This study identifies Social Security wealth as the accrued benefits based on past participation in the program. This definition is similar accrued pension wealth associated with defined benefit plans. The distributions of accrued Social Security benefits for the years 1985 to 2006 are derived from individual earnings record available in the Social Security Administration's 2006 Earnings Public Use File. The estimated accrued Social Security benefits are much more evenly distributed than are the estimates of savings wealth. Individuals in the top 10% of the estimated wealth distribution, excluding Social Security, held 70% of wealth as of 2006, but only 33% of accrued Social Security benefits. Once accrued Social Security benefits are included in a total wealth measure, the percent of the total attributable to the top 10% declines to between 55% and 62%.

Click 1602 to view the paper in pdf format.



WilliamLarsen said...

" However, as of 2014 these accrued benefits were estimated to be $31 trillion, or over 40% the size of conventional measures of household wealth..... This study identifies Social Security wealth as the accrued benefits based on past participation in the


"accrued Social Security benefits are not formally recognized as
liabilities of the federal government or as assets of current of future beneficiaries. The lack of an
enforceable property right is the primary reason they are neither liabilities nor assets"

$31 trillion is far more than the unfunded liability that the CBO and SSA both project. The trust fund has less than $2.8 Trillion.

"Across all years, the present values are estimated assuming a real rate of return
of 2.9% which is the longstanding real rate of return assumption used by the Social Security and
Medicare Trustees in producing their annual reports"

It the real world of mathematics the real rate of return of 2.9% is inaccurate. You simply cannot subtract one exponential rate from another linearly. For less than ten years, it is not a big deal, but over 45 years it becomes large.

A larger problem is labor participation rates are very low compared to seven years ago. US Treasury rates are less then 3% while inflation is 1% so even 2.9% is being very liberal. The 31 Trillion could easily go past $40 trillion using today's US Treasury Rate and CPI.

Andrew G. Biggs said...

I think you're misunderstanding what he's saying. The accrued benefits number comes straight from SSA's actuaries and is a different number than the unfunded liability. And when he says he's calculating present values using the trust fund bond yield (2.9% real) that's not supposed to represent the rate of return for participants. They're just different numbers in both case.

WilliamLarsen said...

Andrew I understand the 2.9% is not paid to individuals, but to the trust fund. With a $31 Billion in a theoretical trust fund today earning 2.9% real return (after CPI) will miss its first year mark by nearly $1 Trillion dollars. By year 5 it has missed the mark by a large portion.

When a person looks as SS-OASI as wealth and present the accrued benefits in the same manner as pension benefits, then we are looking at a fixed number of years. We have those who are beneficiaries who will all be gone within 50 years. We have those who are working who will be gone in 85 years. I would estimate that withing 85 years from this year all those who are paying into SS-OAS or who are collecting SS-OASI benefits will be gone.

In a nut shell we have encapsulated the total cost of SS-OASI at an instant in time. The SS-OASI payroll tax is far higher than the value of the scheduled benefits of those who have not begun working and paying SS-OASI taxes. Thus anyone entering the work force today will subsidized each and everyone listed above.

Taking it to the next step, we need only look at most 85 cohorts and determine the cost. This is how I understand the article was written. The problem with the 2.9% is that is not representative of today. As with saving for retirement the earlier you begin saving, the less you need to save as a percent of let us say wages (that type of income that is the source of the theoretical pension wealth). In other words when the first five years "real" rate of return is less than that of the estimated/projected overall return, it means that the years 6-85 will have to be far more.

In simple terms, the article highlights the magnitude of the problem. The problem is the labor participation rate is far lower than it was prior to 2008 and the US Treasury rate is far lower while CPI is not proportionately lower. I think the value is too low. It is this type articles that create a lack of confidence in the mathematics and leads to many saying the problem is not large.

The problem is huge. As an individual we all should be saving for retirement. To save for retirement you need a source of income. As soon as an individual has a source of income, they have the opportunity to save (they have more than they did before). If we assume that most individuals begin working by age 25 and most individuals retire at age 67, the individual would have 42 years to save in order to provide for their retirement of 20-25 years. Pretty straight forward. If the individual starts later in life, they have fewer years to save and the time value of money (if it does exist) performs less work resulting in a much higher rate of savings or a much higher rate of return.

No expand the individual to a nation by summing the individuals from age 25 to age 110. Is the individual calculation any different from that of the nation, no? A 25 year has 42 years to save. A 55 year old has 12 years to save. A 67 year old has no more years to save and will draw funds for 25 years. How long does the US have to save as a nation is the same number of years left to fix Social Security. The weight average of all cohorts is around 5 years. In other words we are like the individual who has not begun to save until they are age 62. Can this individual on average save enough to replace 41% of life time indexed wages, no?