Social Security's Free-Fall Continues

By on July 29, 2015 in Current Events with 129 Comments

Last week, the Social Security Board of Trustees issued the 2015 report on the program’s financial status.

The message of the report was simple: the size of the bomb grew while the length of the fuse remained roughly the same.

In the report, the Trustees extended the projections for the exhaustion point of the combined Trust Funds from 2033 to 2034. And the media cheered.

You should look at the details of the conclusions before you applaud them. The improved outlook stems more from pencils than productivity or policy for that matter. The system isn’t financially healthier today. It will get fractionally better in the future than we predicted last year.

The improvement in the system’s prospects do not come from people working in a better economy.  The Trustees have offset what is with what might be. 2014 wasn’t good, but 2016-2089 are going to be fantastic! Understand that the drivers of the progress are jobs that do not yet exist and wage increases that have not occurred.

Once again, time, which the cost of doing nothing, drove the deterioration of the system in 2014. Time took its standard pound of flesh, adding $900 billion in unfunded liabilities. This means the program would still have created unfunded liabilities even if we had reduced benefit levels to zero for the entire year.

The Trustees’ computations have offset this structural cost in two ways. They say that they were too pessimistic in the past, and that they are now even more optimistic about the future.

When they say that they were too pessimistic in the past, it means that adjustments to the math make the projections of this year appear stronger when compared to last year.

The Trustees are also much more hopeful about the future, and let’s hope that they are right.  They expect large increases in wages. You can inspect their reasoning, but understand that they expect wages to rise every year for the next 75 years faster than they have grown in the past 50.

Another way to look at the conclusions is that we have gotten smarter about the finances of Social Security. Things are not as bad as we had thought, and things will get much better. Sorry for all of the worry that our pessimism created.

I have my doubts about this explanation.

Since 1983, the system has overstated the solvency of the program by roughly 50%. More recently, researchers from Harvard and Dartmouth accused the actuaries of the Social Security Administration last May of systemically “overstating the financial health of the program’s trust funds”.

That study specifically examined life expectancy.  It claimed that evidence showed the forecasting process was compromised by optimistic estimates.  It found that the estimation gap started in 2000, and has grown since that time.

How did the SSA respond? It made the assumptions about life expectancy even more favorable for solvency.

The Trustees also estimated that Obama’s executive action on immigration will provide a small but significant” positive impact on the system’s finances.  I have my doubts because many of these people already contribute to Social Security without any realistic possibility of collecting benefit.

These people are free money to the system. Yes, this practice is unfair.  No, creating beneficiaries will not make the system more solvent. I cannot explain how they believe that these workers will make Social Security more solvent over the 75 year-period.

The Trustees also updated a trend on the taxation of Social Security benefits, which is beneficial to Social Security. Most people are unaware that the revenue collected by the IRS on Social Security benefits is in part returned to the program.

The Trustees believe that they have under-estimated this revenue source. This isn’t a revenue source that has a lot of room to grow. Today someone who earns slightly more than poverty can trigger a tax that was created for those with substantial outside income. By 2034, the system will be clawing back benefits from people in poverty.

In 700 words, it isn’t possible to get to all of the questions about the assumptions of the Trustees. Jed Graham of the Investor’s Business Daily in an editorial opens more questions. He sees growth assumptions that are far out of the mainstream, and says that the Trustees have ignored the work incentives embedded in the Affordable Care Act.

I can’t predict the future. I know that the Congressional Budget Office disagrees with the direction of the forecast.  Researchers from Harvard and Dartmouth have documented questions about the accuracy of the forecasts.  Smart people can disagree.

While I am not the smart guy at the table, I can tell you that no one believes that doing nothing is the right answer.

© 2016 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

Tags:

About the Author

Brenton Smith (A.K.A. Joe The Economist) is the founder of “Fix Social Security Now” which provides information on all alternatives in the public debate on Social Security through its site www.FixSSNow.Org.

Top