The Media And The Collapse Of Social Security

The media is a major player in the decline of the prospects of Social Security.  It has consistently proven unable to express the challenges of the program in terms that the public understands.

Writers in general focus on headlines, rather than content. For example, over the past two weeks, the media has jumped on a recent study published in the Journal of Economic Perspectives that accuses the actuaries of the Social Security Administration (“OCACT”) of systemically overstating the projections for the solvency of the trust funds.

While any question about the integrity of these forecasts deserves coverage, even the best coverage of this story failed to explain the basics of how this study fits into the questions about the stability of Social Security.  Most of the stories inflated the breadth of the research, and applied the findings far removed the scope of the study.

The study isn’t about the future.  It is about the past.  It deals with the inputs to the forecast, not the output of the forecast. It deals with three inputs, not all inputs.  It tells you almost nothing about the long-term decline of the projected solvency of the Trust Funds. In total, study suggests that OCACT is getting worse at fortune telling, and we don’t know why.

Oddly enough, the answer is actually pretty simple: OCACT did not foresee the Great Recession five years out. The irony here is that most of the reporters covering this story didn’t see the financial crisis coming when it was months away.

The study expresses the revelation in language that is highly inflammatory. It said, “In recent years, especially after about 2000, the Social Security Administration began issuing systematically biased forecasts with overconfident assessments of uncertainty.” It is the language rather than the content that has created the coverage.

It really can’t surprise anyone that forecasts during a steady economic expansion, 1982 to 2000, were more accurate than ones from a period of economic uncertainty which started with the end of Internet Bubble and finished in the Great Recession. The lesson of the study is that even the best forecasts are subject to the mercy of future events.

News coverage went in a different direction:

“[Since 2000], the forecasters proved overly optimistic, overestimating revenue and underestimating costs, with the total error reached nearly $1 trillion.” ~ Barron’s

A great deal of coverage prominently cited a figure of $1 trillion dollars. This figure does not come from the study, or its authors.  According to Gary King an author of the study, the figures were a calculation of the media writer.

The figure deals with issues that are well outside the realm of the study. The $1 trillion dollars of total forecasting error is the sum of ALL variance in forecasting inputs and modeling errors. The study on the other hand examines only three of the ingredients that go into baking the pie that we call the forecast.  Moreover, the study provided the cost assessment of only a sliver of one of the variables.

That sliver happens to be the sliver that makes the forecast appear worse. The study estimated of the cost of people 65 and older outliving statistics. This is the number of people who lived longer than the actuaries expected. The calculated cost to the program was equal to the number of unexpected beneficiaries multiplied average benefits.

If you are going to calculate the impact of under-estimating mortality, the estimate needs to include all ages, not just the ones where people are collecting benefits.  The estimate in the study is only meaningful if the only age group to outlive expectation is those people 65 and older. You have to know at what point in our lives that we are living longer.

The answer to that question may surprise you.  OCACT recognizes that we are living longer.  In 1940, somewhere between 50% and 60% of the population could expect to survive from 21 to 65.  In 1990, that figure had risen to 72% to 83%.  Big increase, yes.  That increase in life expectancy is however occurring at a point in our lives where we are generally contributing to Social Security rather than drawing benefits.

Overall, the report doesn’t change my view.  I use the information from OCACT almost exclusively.  Over the years of writing about Social Security reform, I have come to trust the forecasts from the Social Security Administration as the best-effort available.  They may not always be right, but I am confident that no one is paying them to be wrong.

The study largely represents a missed opportunity to ask more serious questions.  As much as I use the data from OCACT, I recommend that you follow the trend.  Since 1987, the system has lost about 1.5 years of solvency for year one calendar passed.  At that rate, the system reaches insolvency in 2027.  This study tells you nothing about the longer-term decline, and in fact seems to ignore it.

The projections of the Congressional Budget Office are even more troubling.  It projects that Social Security will turn cash flow negative in 2017, rather than the more optimistic figure of 2020 provided by the SSA.  The gap in forecasts is longer than it might take to arrive.  No one is asking about that gap.

The coverage of the study drives home a larger issue.  How can we expect to have an informed debate about Social Security when the media puts headlines over content?

- See more at: http://www.fedsmith.com/2015/05/26/the-medias-role-in-social-securitys-collapse/#sthash.P4vQeMWN.dpuf

Chris Christie And Means Testing Social Security

In a recent article, I questioned the candor of Chris Christie in his proposed Social Security reform.  Now it is time to question the wisdom.

Governor Christie's proposal contained a controversial policy option of means-testing benefits.  Some believe that phasing-out benefits for higher-income Americans should be the first option to consider for addressing the financing gap in Social Security.  This alternative should be the last.  It introduces terrible incentives to the system, and begs questions about how we pay for benefits. 

Supporters of this policy option argue that this approach narrows the imbalances without disrupting the retirement plans of existing seniors.  This alternative appeals to politicians because it affects few current voters, and fosters a feeling of responsibility that we are doing something about a predictable crisis.

The foreshadows of that crisis are well documented.  According to the Social Security Administration, the system has less than a break-even chance of paying full benefits through 2033.  That means someone who reaches normal retirement age this year expects to outlive the system’s ability to pay scheduled benefits.

Would eliminating the benefits of the affluent make a difference?  Not really. In one example, the Social Security Administration projected that means-testing benefits would not even change the date of the projected exhaustion point of the trust fund.  Mind you, that projection assumes that no one tries to avoid the reduction in benefits.

The fact is that people will try to avoid losing benefits.  A means-test serves as an implicit tax on savings, which will discourage savings and deflate economic activity.  The consequence is to discourage people from saving outside of the system.  These rules would unintentionally change the system that was created to provide a buffer against poverty-ridden old-age, into one that fosters it.

Means-testing Social Security largely postpones the crisis only to have it grow in consequence. By removing savers from the system, the mix of beneficiaries will increase overtime in both number and dependency upon the system. We are essentially shifting deck chairs on the Titanic to make room on the boat for more passengers who don't swim very well.

Means-testing creates a more serious problem for how we pay for Social Security benefits.
Today the system is self-financed.  That means it borrows money from workers in exchange for the promise of future benefits.  This proposal takes money in exchange for nothing. 

One is a contribution and the other is a purely a tax. The distinction is critical to Social Security because a tax brings along the question of priority.  Taxes are allocated yearly based on political priority.  A contribution is dedicated financing over time.  Social Security has grown into the largest expense in the budget in large part because of the perception that benefits are paid for by contribution.

Social Security's position within the budget becomes more precarious as we shift the way we pay for the system from contribution to tax. Voters will ask whether it is a wise use of public money to provide a subsidy to the people who had the best jobs over the longest careers. They will ask whether it is fair to pay husbands twice as much as wives.  Benefits make a lot of sense when we pay for them with contributions. 

FDR did not want politicians deciding who needs and who doesn't need benefits.  He wanted workers to have 'a legal, moral, and political right' to benefits.  FDR did not want the needs of the elderly to be just another political priority. 

Social Security was intended to be old-age insurance, a hedge against the cost of the unknown.  It was based on four characteristics only one of which remains, that benefits should not be means-tested or based on need.  If we preserve none of the qualities of Social Security, why are we keeping the name?

It is possible to say that the world has changed since 1935.  It is possible to say that the system has become more progressive since that time.  It is possible to say that means testing Social Security benefits simply extends those changes that we have made over time.

What it is not possible to say is that means-testing Social Security makes it work.  It fixes the system by giving it a new purpose much like fixing a hole in the wall by calling it a window.