Saturday, November 4, 2017

CBO Projects Small Improvement in Social Security Financing

The Congressional Budget Office released new projections of Social Security's long-term financial health. While still showing a much larger funding deficit than the figures released by Social Security's Trustees, the CBO shows a small improvement relative to last year's figures. Over 75 years, the CBO projects a shortfall equal to 4.5 percent of employee payroll, versus a 4.7 percent gap in the office's 2016 projections.

Since last year, CBO has made changes to its projections of five key inputs: productivity in the economy, interest rates, the population, the labor force participation rate, and the share of earnings that is subject to Social Security payroll taxes. The changes to the first three of those inputs worsen the Social Security system’s projected finances, whereas the changes to the last two improve them. Moreover, an additional year of deficit—2091—is now included in the calculation of the actuarial balance, which worsens the 75-year outlook.
CBO projects larger deficits in Social Security’s finances than do the Social Security Trustees. That difference is largely explained by CBO’s and the trustees’ different projections of several major inputs into estimates of the system’s finances: earnings subject to the Social Security payroll tax, components of GDP growth, the population, and real interest rates (that is, interest rates adjusted to remove the effects of inflation).
Nevertheless, while the CBO projects a small improvement relative to its 2016 figures, the longer-term trend has been troubling. In the mid-2000s, progressives and Congressional Democrats often cited the CBO's projections in preference to the Trustees' figures, because the CBO showed a smaller deficit and this seemingly weakened the case for reform. Since that time, however, the CBO's projected long-term deficit has more than tripled. Both parties should pay attention to the CBO's projections. If the office proves to be correct, the Social Security shortfall will be far larger than either party's preferred policy changes could tackle.


Arne said...

Since the valuation period accounts for only 0.1 percent of the change, the larger changes in to chart can be seen as a measure of the uncertainty in the projections. They can't project future cycles, but they are overly driven by projecting from the current cycle.

2008 was too low because it still carried the upside of the housing boom. 2013 jumped too much when they finally realized the recovery was taking a long time. I can't produce better numbers, but I can predict that by the time we reach the end of this cycle they will have over-corrected to the optimistic side again.

My bottom line: people who support a societal safety net need to recognize that the formulas we use will need to change over time.

Andrew G. Biggs said...

You make a legit point, but I think you're inferring why the changes took place. I don't think those were the main drivers. Say, at some point (I forget the year) CBO switched from using SSA's projections of mortality to doing their own projections. That had a big (negative) effect, but didn't have anything to do with the business cycle. It was just a step they took after they had the economic side of the model set up and did more of it in-house.

WilliamLarsen said...

If you could predict the future, everything would be great. But no one can. So how do you plan? I have found that using a 20 year moving average in terms of return, inflation has worked fine. Yes some years do not fit being too low in terms of the projected SSA Trust fund Balance and in other years, SSA revenues were to high. However, the net result has been a steady and equivalent cost in terms of wages. Forget GDP, it has no correlation in any given year to wages that are subjected to the payroll roll tax. GDP has no correlation to the calculation of the initial OASI benefit. Nor does GDP have any correlation to the cpi which is used to increase the OASI benefit once it has been calculated.

The only variables that really matter are Workforce, Beneficiaries, Life span of Cohorts, wage growth, US Treasury Rate and cpi.

Wages determine OASI revenues as well as determine future benefits.

CPI determines the rate of change in benefits.

US Treasury Rate determines the Income on the Trust fund. However, the size for the trust fund is tiny compared to the size of a fully funded trust fund which makes this income negligible in real terms. Over 75 years it makes a small difference, but this is one of the major problems with solving the SS problem

Life span affects the cost of the program, but in reality with the increase in life expectancy at full retirement age, it is negligible. In fact the rate of change in life span at age 67 has been slowing for a long time now. However, it still is increasing, but at an ever slower rate of change. So this variable because it is decreasing in essence puts a cap on future costs in terms of projections. Use the highest growth rate and you now have worst case.

They should just leave the assumptions alone. They are never correct from year to year.