Why Writers Say That Social Security Can't Go Bankrupt

In writing about Social Security, I get a lot of impassioned missives to tell me how wrong I am, with links that purport to show how wrong I am.  I welcome feedback, but understand that just because you read it on the internet does not make it true.

Some of these emails are better than others. The worst of these include links to the blog pages of traditional media.  The readers tend to confuse the credibility of the media brand with the accuracy of the article.  Just because a blogger writes for Forbes blog page, does not mean that a Forbes' editor has read the piece much less fact checked it.

The most spammed piece in my mind is from Forbes blog writer, John T. Harvey, who has published “Social Security CannotGo Bankrupt.”  Understand that before you send it, the article does not say what you think it says.

Readers who have sent the piece to me believe that the article says that Social Security is financially stable, and that the concerns that I express are meritless. The writer hasn't said that Social Security is financially stable.  He is playing semantics in which that Social Security cannot run out of money.  It can run out of political support..

His analysis presents politics and money as completely separate and unrelated.  The difference is theoretical.  The writer sees Social Security as a political system, whereas the laws of the system make it a financial system of dedicated inputs and outputs.  Political systems can run short of political support.  Financial systems can run out of money.  In practice, the system fails regardless of wording. 

The problem with the theory in the article is that the author completely misrepresents how Social Security works.  If laws mean anything, Social Security is self-financed.  That means the system collects revenue from workers in exchange for the promise of future benefits.  This is why Social Security Administration says that the system is self-financed.

The writer chooses to ignore the impact of future benefits.  He writes, “It’s an immediate transfer from workers today to retirees today.”  If future benefits did not exist, then he would be correct.  The problem is that if you eliminate future benefits you pretty much eliminate the political support for the system. 

Beyond mischaracterizing the system’s operations, he leverages the standard straw-man of the debate.  No one says that the Social Security Trust Fund will dry up making it impossible for anyone to receive their Social Security payment.  Everyone says that if the Trust Fund dries up, that people will get checks of a lesser amount.

It is important for the reader to understand. If Social Security operated as the writer suggests, he would be correct.  The Trust Fund would be unnecessary if the revenue was tax money which did not generate future obligations.  We would match tax revenues and pay outs.  The problem is that the revenue collected today defines what we owe in the future.

“The lesson from this is that if we want Social Security to “be there” when we retire, our efforts must be focused on increasing productivity and making sure in particular that these increases get passed on to workers in the form of higher wages”

The writer seems unaware that Social Security indexes past contributions to average wages.  There is nothing about higher wages that makes Social Security more stable.  As wages rise, the primary insurance amount of new retirees is pushed higher.  The definition of their own future benefits is pushed higher.

The writer would be right if Social Security worked as he presents.  Unfortunately it doesn’t.

 

Jeb Bush Projections On Social Security Off By 30 Years

This statement is off by roughly 30 years.  Can we expect candidates to know the finances of the government's largest expense?

“We need to look over the horizon and begin to phase in, over an extended period of time, going from 65 to 68 or 70,” he added. “And that, by itself, will help sustain the retirement system for anybody under the age of 40.”

Jeb Bush’s statements from CBS’s “Face the Nation” about Social Security expose a distance from the issue that is unhealthy for Americans who depend upon the system. In his interview, he states the wrong retirement age, and delivers promises which are off by decades.

A number of his critics have already pointed out that Bush misstated the normal retirement age (“NRA”).  The NRA of Social Security is 66, not 65.  It hasn’t been 65 in more than a decade. Yes, some enjoy poking a wealthy politician unacquainted with his own retirement age about the suggestion to increase the NRA of others.

For me, it is a forgivable slip given that Bush was speaking on a Sunday morning news program, rather than in a more formal setting.  He has spoken in the past of increasing the retirement age.  In this interview, he was only providing additional clarity to a past position. 

Originally published on TheHill.Com, (see the article)

This chart shows the life prospects of a retiree.  The change to gradually increase the retirement age that started in 2000, basically accounts for all of the increase in a retiree's life expectancy until 2050.

Life Expectations At Retirement By Year For Social Security
Year	Survivor	Male	Females
2000 (Life Expectancy At 65)	87%	20.42	22.97
2050 (Life Expectancy At 67)	89%	21.06	23.41
Source: Social Security Administration Actuarial Study 120 (A survivor is the likelihood of a 21 year-old reaching retirement)

 

Politicians See Social Security Fix As 'Easy'

Over and over again, the media and experts tell us that financing shortfall in Social Security is relatively easy to address.  Conventional wisdom presents options for Social Security as though the problem with system is one of political will rather than one of economic resources. Basically if politicians could just get along, all of Social Security’s troubles would evaporate.

The latest to make this claim is Lindsey Graham, who reportedly said “you could [design a plan to fix Social Security] on the back of a napkin.” There is no way to be polite about this statement.  If you believe that Social Security can be solved in 15 minutes or on the back of a napkin, it is because you have an inner struggle with the meaning of commas and zeros in very large numbers.

The problem isn’t politics.  It is economics..... (See More At FedSmith.Com)

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. 

Chris Christie And Honesty About Social Security

This article originally appeared on TheHill.

Last week, Governor Chris Christie dedicated time to champion entitlement reform at a 4-stop tour through New Hampshire. The governor said “Washington is afraid to have an honest conversation about Social Security, Medicare and Medicaid with the people of our country. I am not.”

 

So let's be honest.

 

The Trustees will soon release the 2015 Trustees Report which will give us new insight to the financial imbalances in Social Security. In the report issued last year, the Trustees projected that the financing constraints of the system will emerge in 2033, forcing a 23% reduction in benefits. That exhaustion point means that someone who turns 67 today on average expects to outlive scheduled benefits.

 

To be honest, the proposal that Governor Christie laid out does not “fix” Social Security.  The changes do not even assure us that Social Security will function for 75 years, roughly the time to get most existing contributors through retirement. The Committee for a Responsible Federal Budget projects that his changes create about 60% of the savings necessary to kick the can once again.

 

The biggest problem with Christie’s proposal is that the components do not address the structural issues within Social Security that are causing the imbalances reported by the Trustees. The package in total simply takes the projected reduction of benefits and codifies on whom the reductions will fall.

 

His proposal calls for the normal retirement age to increase gradually to 69.  What does a change in retirement age mean to someone who is 50? The person can still retire at 67, but with the lower benefit levels offered by early retirement.  Those rules translate into a 13.3% reduction of benefits for someone who elects to keep the retirement age that he has today.

 

This change would make sense if the problems within Social Security derived from increases in life expectancy of future retirees. The Social Security Administration projects that the life expectancy of a retiree will rise about 2.5 years between 1980 and 2030.  If adopted, Christie’s plan would make the increase the normal retirement age by 4 years over that time.

 

While Christie is telling the truth that Americans are living longer, he isn’t telling the whole truth.  The research of the Social Security Administration reveals that the largest increases in life expectancy occur at a time of life when people are generally contributing to rather than collecting from Social Security.

 

Christie’s proposal also includes the adoption of the Chain-CPI for future COLA adjustments.  He says that this measure tracks inflation more accurately. This is however not true.

 

If we are going to be honest, Chain-CPI does not measure actual inflation.  It measures in part how people respond to inflation. If I decide, for example, that my health insurance is too expensive, and increase my deductible so that my premium remains the same, Chain-CPI says that the cost of living hasn’t changed because I use less expensive insurance.

 

The use of Chain-CPI is a benefit cut which reduces buying power of benefits over time. This alternative is a very strange way to fix old-age insurance because the change progressively reduces benefit levels as someone ages.  The use of Chain-CPI for Social Security’s COLAs is somewhat like fire insurance which decreases its coverage as more rooms of a house burn.

 

The governor’s proposal would introduce the idea of means-testing the program. While some estimate that this change will save the program a lot of money, this alternative breaks a founding principle of the program.  Social Security should provide benefits without a means or needs test. 

 

The reasoning for this principle is sound.  The program was created to lower the likelihood that a retiree might fall into poverty-ridden old-age.  A means-test tends to discourage the savings that actually prevents poverty-ridden old-age. This approach is a strange way to fix Social Security.

 

If we are going to be honest, the worker who is 50 and younger is likely better off rejecting Christie’s proposal, and accepting the estimated 23% reduction in benefits when the Trust Fund is exhausted. The governor’s vision of Social Security offers even less benefits, and less protection of those benefits.  It secures the future mainly for politicians who get to argue about who is ‘fortunate enough not to need’ Social Security as today’s workers approach retirement.

 

But let’s be completely honest.  Governor Christie’s solution is a stop-gap measure that solves the problems for today’s politicians rather the concerns of the retirees who depend upon the system.  Today’s 50 year-old will be in 20 years back at the table of politics explaining to his children’s generation that Social Security will work if they just accept less.

The Real Social Security Debate

Between Chris Christie and Senator Warren (D-MA), Social Security reform is getting more media coverage today than at any time in the past 30 years. From hearing the details, you might conclude they are talking about different government programs.  They aren’t. 

These people are part of the changing debate that is taking shape in Washington.  For decades, any problem that developed within Social Security was fixed by shifting the cost to future workers.  Today that isn’t possible. 

What is the problem? Social Security contains a massive imbalance between resources and promises.  The Trustees of the Social Security’s Trust Funds estimate that the system carries roughly $25 trillion dollars of promises for which the system does not expect to generate cash.  The figure means that we would have to add $25 trillion dollars today to the Trust Fund so that Social Security can work for all generations. That is more than $1.50 of brokenness for every $1 collected since its inception.

The primary force driving the gap wider is time, not demographics. According to the Trustees, adding a year to the clock created roughly 900 billion in unfunded liabilities because the gap grows just as though it were a bond charging the system interest.  Time measures the nothing that Congress has done every year for the last 32 years, and it is driving the crisis forming in Social Security more than all other demographic forces combined. 

Someone who is 32 today was born in the year of the last Social Security reform.  Congress has done nothing about the imbalances since that time.  Someone under the age of 50 didn’t even have a vote at the time.  The point here is that less than half of voting aged-Americans had a vote in the how the system is structured today. So the Social Security debate is in part a discussion about how to allocate the brokenness of the system to people who had nothing to do with the creation of it.  

For example,

• Eliminating the cap would push the cost difference onto high wage workers.
• Adding means-testing to the benefits formula means that wealthy retirees would absorb the gap.
• Increasing the retirement age allocates the cost to future retirees.
• Increasing the payroll tax distributes the cost to future workers. 

In the past, Congress has largely shifted the cost from generation to generation.  The last major reform to Social Security in 1983 allocated the highest tax increases and benefit cuts on people who were 11 and younger at the time.  Today the costs to fix Social Security are so large that there is no way to completely insulate voters from the changes.

So the new debate that is forming today is how to redefine what Social Security does so that voters will agree that the system works.  The Far Left would like to transform the program into a welfare program to keep the elderly out of poverty.  The Far Right wants Social Security to become a form of forced savings, in which workers are required to save for their own retirement. These changes are somewhat like fixing a broken refrigerator by calling it a doorstop.

These ideas do not fix Social Security.  They simply change the role that it plays in our lives. Originally Social Security was designed to be old-age insurance which would help a retiree hedge the potential cost of longevity.  It is statistically possible that for a retiree to live to 100, the cost of which would be staggering.  The point of Social Security 70 years ago was to give that worker some protection against outliving their resources.

Americans should think seriously about these transformations. We are trading what we can’t get for something that we already have. The government already offers many welfare programs.  The government already incentivizes retirement savings with an alphabet soup of retirement plans.  There is no alternative for the vast majority of Americans who need old-age insurance. 

These changes haven’t been well thought out because the goal isn’t to fix Social Security.  The goal of the real Social Security debate is to create a program named Social Security that doesn’t hemorrhage cash.  For example, reformers would like to change the COLA to a new measure of inflation. This proposal would fix a system which is supposed to provide old-age insurance by reducing buying power of benefits as someone gets older. That is like auto insurance which increases the deductible as the car wreck gets worse.

Do you want to privatize Social Security? The math is simple. There is no way to privatize a negative number.  We will have to fill in the $25 trillion dollar hole before there is anything to privatize.

Do you want Social Security to be a safety-net?  Social Security has no visibility into the need of anyone.  Millions of Americans are not even eligible for benefits.  The irony of this approach is that the cost of supporting Social Security as a safety-net would drive even greater numbers of younger Americans into the poverty that the welfare program is supposed to alleviate.

There is no real debate about Social Security reform.  It is a shouting match where few people are actually listening. We aren’t trying to fix a broken system.  We are trying to find someone willing to pay for one.