The Effects of Alternative Demographic and Economic Assumptions on MINT Simulations: A Sensitivity Analysis
Research and Statistics Note No. 2014-03 (released April 2014)
by Patrick J. Purcell and Dave Shoffner
The Social Security Administration's (SSA's) Modeling Income in the Near Term (MINT) estimates income/wealth of future retirees. Estimates are based on demographic information from the Survey of Income and Program Participation: individual earnings histories and projections of interest rates, wage growth, mortality rates, and disability rates. Historically, MINT simulations were based exclusively on SSA's Office of the Chief Actuary's (OCACT's) intermediate-cost projections of key demographic/economic variables. The authors present the results of a sensitivity analysis in which they ran MINT using OCACT's low-cost/high-cost projections of mortality and disability trends. Those simulations estimated characteristics of the population aged 65 or older in 2040 under alternative projections of mortality/disability trends. The authors then describe simulations in which future real rates of return on stocks held in retirement accounts differ from the historical mean real rate of return used in baseline simulations. Sensitivity analyses can help MINT users choose model parameters with the greatest impact on simulation results.
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Chart 1 of their report shows the increase in life expectancy from 1950 to 2010. Females at age 65 increased from 18.6 to 20.7 years or 766.5 days over 60 years or 12.775 days per cohort. This amounts to 0.1882% increase per cohort. In terms of cost, it is far less than inflation in just one year let alone over 18.6 years.
For males at age 65 their life expectancy went from 13.1 years to 16.2 years or 1,131.5 days over 60 years. This equates to just 18.86 days increase per cohort. This small 0.3944% increase is over 13.1 years which again is far less than inflation.
For both males and females the cost to care for a cohort tiny. Change the US Treasury rate over the workers working years and retirement enough to fund this tiny increase is in the third decimal place. When looking at significant figures, the SSA's US Treasury Assumptions cannot even see it.
It is amazing they went to all this trouble with life expectancy when the single largest problem is the "legacy cost." Instead of focusing on the tiny, they need to start looking at the giant herd of elephants about to trample them.
The math in the above comment is silly. SS does not receive interest on all of the payroll taxes it receives, so the comparison to inflation is meaningless.
SS is pay-as-you-go. William may not like it, but that is how it works. Right now it is coming out ahead because it receives interest on the Trust Fund, but that is going to change - the TF will be drawn down. If we want to continue the current benefit schedule, which does increase the buying power of retirees as society in general gets richer, it will cost us more.
Over 75 years, male life expectancy at 65 is projected to increase by 30 percent. CBO project it would require an increase of 3.4 percent to achieve balance. 3.4/12.4 is 27 percent. So a 27 percent increase in taxes will cover a 30 percent increase in retiree lifespan. About what you should expect if you are willing to do meaningful math.
Arne, Social Security receives interest on the trust fund. You are correct that not all of a workers payroll tax is placed in the trust fund. In fact less than 5% of payroll taxes since 1937 has ever been deposited in the trust fund.
What you failed to appreciate was I was comparing the relative size of life expectancy as a cost to OASI and the relative cost of COLA to OASI over time. Life expectancy is tine relative to other variables, yet politicians use it to justify raising the retirement age.
Social Security was intended to be a self sustaining program.
"Three principles should be observed in legislation on this subject.
First, the system adopted, except for the money necessary to initiate it, should be self-sustainingin the sense that funds for the payment of insurance benefits should not come from the proceeds of general taxation.
Second, excepting in old-age insurance, actual management should be left to the States subject to standards established
by the Federal Government.
Third, sound financial management of the funds and the reserves, and protection of the credit structure of the Nation should be assured by retaining Federal control over all funds through trustees in the Treasury of the United States."
Arne, Social Security has been in a financial mess since its inception. In my opinion it is due to implementation with no design parameters or criteria by which to measure success. What we have is a political football that two sides kick back and fourth without regard to whom it hurts.
" If we want to continue the current benefit schedule, which does increase the buying power of retirees as society in general gets richer, it will cost us more.
"
Arne, why should the next generation pay for the misdeeds of the current and past generations? Social Security is a rigged ponzi scheme. Those who created it "the greatest generation" decided they only wanted to pay 2% on the first $3,000 of wages. Now you and others want your children and grandchildren (if you have any) to continue paying you benefits for which you yourself did not pay sufficient payroll taxes to fund. Had you and others done so the trust fund would be fully funded and each cohort would be supported based on their contributions, not the following generations.
"Over 75 years, male life expectancy at 65 is projected to increase by 30 percent."
30% times 20 years is another six years. This means that life expectancy is increasing at a yearly compounded rate of 0.3504%. This is a bit more than I calculate at 0.25% at age 67. this contradicts SSA cohort life tables by about 30%. SSA's cohort life tables show that the rate of change is slowing, not increasing.
I see you have combined both OASI and DI. You do know that these two program are very different? One is based on reaching a particular age while the other is based on loss. Both programs face totally different problems. Politicians like to combine both to minimize the size of the OASI problem while making DI appear more solvent than it really is.
The question that should be asked is Social Security a good deal?
A wage earner making minimum wage every year of their working life would need to save 8.327% of their wages every year and invest them in US Treasuries at market rates to duplicate SS-OASI benefit adjusted for inflation, wages and living to age 90 (well past the average life expectancy ate age 67). No now you think raising the OASI tax of 10.6% by 30% 3.6% to 14.2% is a good deal when you theoretically can buy the same product for 8.327%. People complain about high gas prices and healthcare, yet you think they will accept this increase.
Now of course the US Treasury is paying very little right now. This concerns me in that they are buying their own debt in order to keep interest rates low. The world is also flooded withe liquidity as well which will keep interest rates low. In addition low Treasury rates make the 75 year solvency short fall far worse than 3.4%
"So a 27 percent increase in taxes will cover a 30 percent increase in retiree lifespan. About what you should expect if you are willing to do meaningful math."
Meaningful math would not use 75 years. In fact they now call this type of math "The Cliff Effect."
In year 76 the large 30% increase that theoretically took place now needs a 33.7% increase. Why not use correct math and do it right the first time? Why not design the program to have changes built in that are mathematically correct for life span changes? Why not design the program so that each cohort theoretically pays enough payroll taxes to fund itself?
Individual for generations have worked saved and retired long before social security came along. Financial planers more often than not tell young people under 45 to not count on Social Security.
It will be interesting to see in 2016 when SS-DI is projected to exhaust its trust fund. Rather like a canary in a coal mine. Will congress be able to raise the payroll tax? Will congress do nothing and reductions of ~20% in SS-DI payments are implemented?
Maybe Las Vegas will begin taking bets on how SS-DI will be dealt with.
With the internet and so much more information available on Social Security will this have any impact? Keep in mind there are now boomers who lived through the 70 who saw payroll taxes and base increase year after year. they experienced the big fix of 1984 with the premise this would solve the problem until 2064. How many people will believe the next big promise? Will we get a similar Vietnam protest movement only against Social Security? It will be interesting.
"this contradicts SSA cohort life tables by about 30%"
I got my numbers from the cohort life tables. Over 75 years it goes from 20.1 to 26.2
"I see you have combined both OASI and DI."
The 3.4 percent increase is for OASDI combined. The cost increase is (contrary to your comment) essentially the same as the increase in lifespan.
"Individual[s] for generations have worked saved and retired long before social security came along."
Staying on the farm was once a solution. Going to the county run poor house was the lot for many. In any event, the Depression destroyed a generations savings.
"Financial plan[n]ers more often than not tell young people under 45 to not count on Social Security."
They are wrong. You do see the conflict of interest, right?
"Why not design the program so that each cohort theoretically pays enough payroll taxes to fund itself?"
It already exists as PAYGO. Why change it if it works? (To make it work only requires educating people that longer lifespans do mean higher costs and gradually making the needed adjustments.)
"A wage earner making minimum wage every year of their working life would need to save 8.327%"
Assuming a 40 year career and 2.9 percent real earnings, I get 13.0 percent. Individuals can do well compared to SS. But if everyone saves more, supply and demand says the earnings rate will drop.
"I got my numbers from the cohort life tables. Over 75 years it goes from 20.1 to 26.2"
http://www.ssa.gov/OACT/NOTES/as116/as116_Tbl_11.html#wp1104870
Male at age 65 in 2014 21.13 years
Male at age 65 in 2089 24.44 years
Increase over 75 years of 3.31 years
Female at age 65 in 2014 24.19 years
Female at age 65 in 2089 2014 27.34 years
Female increase over 75 years is 3.15 years.
The rate of change for a male is 0.1942% per year while for a female it is 0.1633% per year.
Are we looking at the same tables?
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