Saturday, October 22, 2005

Unleash your Inner FDR: Social Security as Opportunity

Time for Politics.

Social Security offers the opportunity to reverse a whole generation of political defensivism on the part of Democrats. We have the unique chance of changing the entire narrative.

Because Social Security "crisis" is not a matter of numbers, not really, it is a story in support of an ideology which can be boiled down to "Markets Good, Government Bad". This story has been carefully crafted for seventy years and finally got its opportunity to be put in play in 1980 with the election of Ronald "Government is not the solution, government is the problem" Reagan.

As it turns out Reagan was forced to compromise on Social Security in 1983 and accept an increase in payroll tax. The response of the Social Security haters was then laid out in the Fall 1983 issue of the Cato Journal Social Security: Continuing Crisis or Real Reform? Particularly illuminating is the article by Butler and Germanis "Achieving Social Security Reform: A “Leninist” Strategy". They laid out a careful, long term strategy that would allow them to kill Social Security at the next crisis point, which point was projected to coincide with the retirement of the first Boomers, which would start as early as 2008. According to the story the impact of Boomer Retirement would send the whole edifice crashing leaving Private Accounts standing triumphant.

But history and the economy did not play nice. They conspired to return economic numbers that started to push shortfall and depletion back. This trend accelerated in the nineties and can be inspected here Economics Policy Institute: Changes in Trustees Projections over time. A Trust Fund that was projected to run dry in 2023 was over a period of years adjusted to a Trust Fund projected to run out in 2041, and that date was being pushed back more than 1.3 years per year.

Privatizers panicked. Their carefully generated narrative began to lose its punch. In 2041 the youngest Boomer (born in 1964) will be seventy four, the oldest (born in 1946) ninety-six. It would be pretty hard to argue that they in fact had not fully paid for their Social Security themselves. So privatizers began to tweak the numbers and move the goalposts. In doing so they had to cast doubt on the very existence of the Trust Fund. Hence the talk of "worthless IOUs". But even this new story is losing its impact.

Because amazingly enough we may not even need to tap the Trust Fund principal, we may need at worst to tap a fraction of the interest due. Because we are soundly beating the productivity numbers required by Low Cost.What is the Low Cost Alternative: What does it mean and Low Cost predicts just that: a minor shortfall in income less interest against cost in 2023 which is more than offset by interest earned. Absent some future government proving themselves to be Crooks and Liars in abrograting Trust Fund bonds issued with the Full Trust and Credit of the United States beating Low Cost means we are home free.

But it might well be better than that. The economy is returning productivity numbers close to double what Low Cost requires, and minor changes in productivity in the early years have outsized impacts on the Trust Fund in the outyears. As it sits we may have a Trust Fund that is actually overfunded going forward. And that is our opportunity.

Imagine a March 2006 Report that announces that not only will Social Security not be going broke, it will be a net lender forever. That shows that privatizers pushing "Crisis" were not just alarmists but outright liars trying to sabotage the legacy of Roosevelt. Do you think we could run with that? Do you think we could run ON that? Well I do.

Friday, August 05, 2005

Principal Economic Assumptions: What are they?

I constantly talk about "Productivity", but of course it is not the only number series involved. If we take Tables V.B1 Principal Economic Assumptions and V.B2 Additional Economic Factors we see a total of 11 columns:
Earnings as a percent of Compensation
Average Hours Worked
GDP Price Index
Average annual wage in covered employment
Consumer price index
Real wage differential

Average annual unemployment rate
Average increase in Labor Force
Average increase in Total Employment
Average increase in Real GDP
Average annual interest rate

I focus on Productivity for a few reasons. One the Trustee's front it in their discussion, they talk about it in section B.1, they put it in the left hand column of the table. And they characterize it so "The rate of change in total productivity is a major determinant in the growth of average earnings." No they don't say "the major", but "a major" suggests that we should place close attention.

Two, the effects of Productivity on Trust Fund exhaustion are direct: a bigger future economy will have an easier time financing a fixed pool of boomers. This is true however we structure the financing and the payout.

Three, the effects of the other number series are harder to understand. The problem we have is that wage increases and inflation work on the Trust Fund in different ways. Wage increases boost contributions. Inflation increases boost cost. And the interaction is pretty complex. It works this way. Your ultimate initial retirement check depends on a combination of your income history and the overall rate of real wage increases. If workers as a whole do better you do better. But there the linkage stops, adjustments to your retirement check after that are determined by CPI: consumer price inflation. Okay lets unravel this a bit.

Higher inflation means higher payouts both short and long term. So all things being equal a jump in projected inflation is an immediate drag on the Trust Fund via increased payouts. Bad for Solvency (but oddly due to the disconnect from CPI and medical inflation not necessarily bad for current retirees. Topic for another time).

Increases in hours worked and average wage will increase contributions and so inject money into the Trust Fund. On the other hand they will increase your retirement check when the time comes and so increase costs. I have had posters elsewhere claim that this offsets itself, but I don't think so. The time shift between contribution and retirement check should make this a net gain for Solvency in a paygo system and the effect should roll forward. Like I said the effect some of these other number series are harder to understand. But people are free to bring numbers.

From the standpoint of solvency is seems clear that inflation is bad and real wage differential is good. But without a lot of study and more numeric skills than I have it is difficult to determine the significance of any particular number. But what I do know is that if productivity year in and year out comes in above both the Intermediate Cost and Low Cost projection Solvency is increasingly likely. And if we convince ourselves it will permanently come in above those points we are justified in asking skeptics to identify the particular number series that will offset that, and how they specifically work on Trust Fund balances.

Because I just don't think the long-range trends in this table are reversible EPI: Changes in Trustees Projections over time

The differences between projected 2004 and real 2004 (that is from the 2005 Report Table V.B1)
Productivity 2.7% 3.3% Earnings -.3 -.5 Hours worked (increase) .0 .0 GDP Price 1.6% 2.2%
Average wage 3.6% 3.8% CPI 1.2% 2.6% Real Wage Differential 2.4% 1.2%

Productivity is the Loneliest Number but still no. 1

I had an interesting e-mail from an economist who wanted to remain anonymous. He/she pointed out that Productivity is only one variable and that the Trustees had a stochastic analysis that validated the current exhaustion date. Let me make a couple of points here.

One, Productivity is shorthand for the whole range of economic numbers. It is true that the other numbers can vary, but many of them, like real-wage growth, have been tied to Productivity. True there are rumblings that this linkage is breaking down but it is incumbant on others to show how that offsets the huge gap between projected and actual Productivity. If Productivity was coming in at 2.2%, barely above the 2.1% used by Low Cost, I would still have a good case that we were on the road to solvency under the "if this goes on" theory, but I wouldn't be so cocky. My advice would still be to do nothing, if we are beating the model we are beating the model. But in the real world Productivity is coming in above 3.0% and now we are entering "what if" territory. "What if" 2005 ends up with a number over 3.0%? My answer is Solvency. Others can knock me off that mountain, but just pointing out that the other numbers of Low Cost are similarly optimistic compared to Intermediate Cost doesn't buy anything. Show me that they are being undershot by enough to offset the dominant variable. I am open to argument.

Two, I have never claimed to be an economist. But embedded in that stochastic analysis (which is studded by so many qualifiers and warnings about methods and reliability of projections to start with) is this sentence: "Each time-series equation is designed such that, in the absence of random variation, the value of the variable would equal the value assumed under the intermediate set of assumptions" (2005 Report p. 159). Near as I can tell all this analysis is doing is allowing variation around the assumed ultimate numbers under Intermediate Cost for the out years and seeing what happens. Given that in past years the Trustees have asserted that variations in the out years have little influence of ultimate results, it is not surprising that the results of this admittedly experimental model validate that. This is a relatively new part of the Report, introduced in 2003, and in this humble bloggers opinion is more intended to confuse and give some greater validity to Intermediate Cost than is warranted. You assume Intermediate Cost numbers as your point of departure and you would expect the outcome to vary around the projected result.

But it is near term numbers that are the big drivers, small changes at the beginning of a curve have outsize effects on its ultimate values. I have been begging professionals to weigh in from day one. Show me reasons why I should not just take Low Cost at face value. This was a nice, if private first step. Not entirely persuasive, but welcome.

Thursday, August 04, 2005

Scoop just ate my homework: MyDD diary

I have been taking up too much space at Economist's View (but Mark Thoma should be a daily stop for anyone discussing Social Security.) So I want to return to the topic of my previous diaries: Life After Solvency.

Social Security Solvency with no changes in benefits, retirement age or payroll tax is not an impossible dream. Each year the Trustees lay out a set of economic numbers that would would produce that result. This dataset, called Low Cost never gets a bit of attention. But that doesn't make it go away. You can get a little (okay a lot) of background at my website starting with What does Low Cost mean? More below the fold.
Welcome back, if you left at all. Over the last ten years Low Cost consistently returned the same result: flat trust fund ratio. What does that mean? For a fuller explanation you can check outThe Trust Fund Ratio explained. In brief the Trust Fund is a lot closer to a checkbook than a savings account. Contributions and interest earned go in, checks go out. The Trust Fund ratio is simply your balance expressed as a function of time. For example the Trust Fund ratio at the end of 2004 stood at 305 which means 3 years 18 days Table VI.C6.—Operations of the Combined OASI and DI Trust Funds
in Fiscal Years 2000-14
That is our current reserve and the direction of the curve is headed up under all three alternatives: Intermediate, High Cost and Low Cost Figure II.D7.—Long-Range OASDI Trust Fund Ratios Under Alternative Assumptions and if you look at our old friend Intermediate Cost (II) you see familiar dates like 2017 (when the curve peaks) and 2041 (Trust Fund Depletion). But what's up with curve (1): no drawdown until 2023? a slight dip then we sail through the 75 year window with a 450 Ratio? Are the economic numbers of Low Cost so optimistic that this is just pie in the sky? Judge for yourself. Personally I think 2.1% for 2005, 2.2% for 2006 and no number higher than that in the out years is more than doable.

Payroll vs Productivity: What would it take
2005 Report: Economic Assumptions

Low Cost is doable. In my view it is already done. You plug current growth numbers into this model and that ratio just keeps on rising.

If anyone responds maybe we can talk about what this would all mean. Meanwhile you might want to check out the terrific Rock the Vote flash Social Security: Don't get played and maybe follow that up with Lee Arnold's animation Social Security: The Real Connections. Lots to chew on. Mangia.

Saturday, July 02, 2005

Social Security: it it about Solvency or about Ayn Rand?

It was an odd moment. I was riding in the elevator with the Chair of my County's Democratic Party and he thanked me for my website. Taken aback I asked how he had stumbled on it and he said that people had been passing it around. So maybe it is time for me to give some sort of introduction.

This site is all about the numbers. You get links to every Social Security Report from 1942 to 2005, you get breakouts to particular tables from all Reports from 1997 to 2005, you get some explications of what those tables mean. The numbers are important, if you are going to participate in the debate over the future of Social Security you need to understand them, you need to understand their implications, you need to be able to measure them against the numbers you read in the paper every day. Because oddly enough this debate is not about numbers and in most respects it never has been.

A certain portion of the Republican Party has always hated Social Security on principle. You see it most starkly in some of the novels of Ayn Rand, but from Alf Landon to Grover Norquist large portions of the Right simply despise the very idea of collective social responsibility. They disguise it in many fashions, the current version is "The Ownership Society", but it really boils down to "I got mine, and screw Grandma Millie" (Enron- the gift that keeps giving).

Advocates of private accounts, with a few exceptions, don't care about retirement security for lower income workers. They just don't. They want to kill Social Security and with it wipe out the New Deal. They are not even particularly secretive about this, a little Googling on Grover Norquist or the Cato Instistute will open some eyes. They want to wipe the legacy of FDR right out, they want to set the clock back to McKinley and Hanna in 1898.

To most Americans this must seem like over the top hyperbole, but the Norquists, Roves and Gingriches of this world are dead serious. They not only want to repeal the entire legacy of Franklin Roosevelt, they fully intend to erase the Trust Busting legacy of Teddy Roosevelt. From a legislative point of view they would simply wipe the 20th century off the table as if it had never existed.

Social Security is target one. But it is wildly popular, taking it on head on was in practical political terms impossible, it was deemed the Third Rail of American Politics for a reason. So in 1983 the Right decided to attack it at its weakest point. The impending retirement of Baby Boomers would put considerable strain on the system, even the reforms of the 1983 Act could only defer the challenge. So the Cato Institute took that challenge head on, they confronted Solvency and cheerfully concluded "Can't happen" and so started selling private accounts and phase out as alternatives. They didn't try to advance the ideological case, they just pushed "bankruptcy".

But unfortunately the numbers bit back. The original entry point to this site is Social Security is not broke: by the numbers You don't have to buy into my political spin, but you should know the numbers in play. Hmm, Table V.B1.

Saturday, May 21, 2005

Why are they so insistent? (From Brad DeLong's blog)

"What puzzles me is energy and persistence of this propaganda campaign with scant positive results."

It is not economics it is ideology. Exactly zero in this campaign has the interest of future retirees at heart. We have to talk numbers, because in the end this will be decided on numbers, but when I point at 2.0% as being the productivity number for 2005 currently used to set policy I am not making an economic case, instead I am making a forensic case that these people are simply not serious. They don't believe these numbers, they can't. Economic reality has already left Intermediate and Low Cost's numbers in the dust and surely someone in the Bush Administration understands that.

The numeric case for Social Security solvency was made by 2001. Anyone who was seriously concerned with the question of whether the American economy could meet its mid-century obligations to Social Security had only to read the 2001 Report, take its numbers seriously, and measure them against any reasonable projection going forward. It wasn't broke then and it is not broke now.
2001 Report: Economic Assumptions
These people took an economy that returned 3.2% in 2000 and put up 2.2% as their "optimistic" Low Cost number for 2001. The notion that sharp slowdown was in any sense a best case scenario was frankly bizarre then, stubbornly repeating it year in and year out when reality keeps slapping you in the face with better numbers begins to border on pathological. But only if you assume that this discussion is being carried out with economics as a backdrop.

The Right Wing case for killing Social Security is iron-clad in their own minds. It is Socialism pure and simple. And they are taking a simple page out of Goldwater's playbook: "Extremism in the pursuit of Liberty is no Vice". Small 't' truth is not going to stand in the way of capital 'T' truth.

Cato and Heritage and AEI took the lazy man's way out in 1983. Rather than making the case on the merits, rather than arguing that Social Security was a bad policy choice under any economic conditions, they chose the "It's going broke anyway" path, they put their whole weight behind "something is better than nothing". The dawning reality that "nothing" equates to full funded Social Security Trust Fund is rocking their world, they are desperately trying to play catch up with "infinite future liability" "intergenerational income transfer" "worthless IOUs", with pretending that "Full Faith and Credit of the United States" is just a meaningless catch phrase. God Damn it the numbers were supposed to be there for them, the impending wave of Boomer retirements was supposed to put an unendurable burden on Social Security. Numbers were going to be their Best Friends.

Well you don't go to war with the numbers you want, you go to war with the numbers you have. In this case Republicans declared War on Social Security in 1936, started drawing up War Plans in 1983, and simply assumed that they would have an unlimited Army of Numbers to back them up when push came to shove.

Well much as we have seen in the wholy tragic and unnecessary War on Iraq, Hope is not a Plan. And while most Americans will stand up and salute when you wrap yourself in the Flag and call out "Support the Troops", only a tiny minority are kneeling at the shrine of Milton Friedman and intoning "Markets".

These people are true believers and eager enlistees in the War on Social Security. Unfortunately for them they put their full trust in the Shock and Awe of Trust Fund Insolvency and they have no viable back up plan. Their "energy and persistence" is only a mask for desperation, admitting that their 70 year dream of killing Social Security is melting away before their eyes is killing them. But watch out, proverbally the dying beast always lashes out at the last moment.

(Or as the VP put it after I penned this: during its "last throes")

Sunday, April 24, 2005

Solvency and the Long Bond: Economic Life after Crisis

Most discussion of Social Security Solvency has been in the context of Privatization and more narrowly on whether private accounts help or not. A certain consensus has shaken out: to the extent that "Crisis" exists it doesn't manifest itself until the 2040's and private accounts in and of themselves wouldn't help anyway. So there is a tendency to agree with the following memorable phrase: "Social Security Privatization is as dead as Bob Dole's dick, let's move on".
But it is not just about private accounts. Sure killing the 70 year dream of the Republican Party of killing Social Security by privatizing it is important for all kinds of reasons, notably 2006 midterms. But there are important macoeconomic implications to Solvency. Assessments of the impacts of Current Account deficits and the impact of Bush Tax Cuts both depend critically on the Trust Fund balance in the year 2025, Solvency will rock our world.

Supporters of Social Security have been playing defense since November, time to play offense. I am going to assume a certain familiarity with the numbers and terminology here, those who want some background can find it on these pages: The Three Alternatives and What is the Low Cost Alternative

For the purposes of this diary I am going to assume Low Cost, that is that economic productivity growth for 2005 will meet or exceed 2.1% and that growth in the outyears will meet or exceed 1.9%. Not a stretch by any means, reported 2004 came in at 3.3% and the average over the last six years has been better than that. 2005 Report: Economic Assumptions

We start with the graph 2005 Report: Trust Fund Ratios Now outcome ( II ) is our old friend Intermediate Cost, Trust Fund Ratio peaks in 2013 and sinks more or less rapidly to 2041. But Low Cost produces outcome ( I ): the Trust Fund Ratio doesn't peak until 2022, sags a minor amount and then sails through the 75 year window maintaining a 4 1/2 year reserve.

This doesn't fully capture the dollar picture, the Trust Funds continue to grow even after the ratio begins to decline. For Intermediate Cost the dollar peak occurs in 2023. Under Low Cost interestingly enough the peak never comes. Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2005-80 Which still doesn't capture the entire picture, as long as payroll tax exceeds benefit costs interest earned on the bonds is just bookkeeping. The crux is when benefits exceed payroll, which for Intermediate is around 2018. Ironically we start borrowing five years before the actual dollar peak.

The main point for this entry is that the markets and economic forecasts generally have outcome ( II ) built in, 99% of the market assumes that the US will be faced with replacing a $6 trillion dollar bond portfolio with public borrowing to that same tune. What if that portfolio never had to be redeemed? What if borrowing didn't start to around 2023? And never hit an inflation adjusted amount of $150 billion a year until 2060 Estimates in Constant Dollars And all of this assuming just 1.9% productivity growth?

Short answer: Social Security Solvency transforms everything. Your view of the bond market and the role of the Chinese Central Bank may be about to change.

Saturday, April 16, 2005

Productivity: 2006 Budget vs Trustees' 2005 Report

They let the cat out of the bag. I did some poking around the 2006 Budget and found the following on p. 191. I have posed the question here and there: How do the Presidents' men predict productivity when they are talking tax cuts? The answer is here. "conservatively, to be 2.6% per year". How then do they get away with 2.1% as their optimistic number when talking Trust Funds?

2006 Budget: Analytical Perspectives

"Potential growth is approximately equal to the sum
of the trend rates of growth of the labor force and
of productivity. Potential GDP growth is projected to
be 3.2 percent through 2008, and then edge down to
3.1 percent during 2009–2010, primarily because of an
assumed slowing in labor force growth. The labor force
is projected to grow about 1.2 percent per year through
2008 on average, slowing to about 0.8 percent yearly
on average during 2009–2010 as increasing numbers
of baby boomers enter retirement.
Trend productivity growth is assumed, conservatively,
to be 2.6 percent per year. That pace is noticeably below
the average since the business cycle peak in the first
quarter of 2001 (4.2 percent per year). It is, however,
close to the pace during 1996–2000 (2.5 percent) and
not far from the average since the official productivity
series began in 1947 (2.3 percent)."

(Bolding mine)

Sunday, March 27, 2005

The 2005 Report

(Aug 08 edit: I have left the original text untouched. But as it turns out my exuberance was a little premature, productivity in fact fell off a cliff in Q4 2005 with the result that year end productivity came in pretty much in line with Intermediate Cost projections. But it was fun while it lasted, during the interval between the release of this Report and the BLA release of Q4 it seemed that full solvency of Social Security would have to be recognized by all at latest by 2008. Well that is reality for you.)
Pardon the incoherency, I am running around the room high-fiving myself. But first the numbers:

Entry Page
Table of Contents
List of Tables
List of Figures

Economic Assumptions Under the Three Alternatives
Trust Fund Ratios Under the Three Alternatives

Social Security is not broke. Exactly no one expects the economy to perform down to the levels of Intermediate Cost. I was stunned to see that the Trustees chose to take the whole hit in 2005. They chose to stick to their guns and return a Low Cost projection that showed the Trust Fund fully funded, but not over funded, consistant with past practice What is the Low Cost Alternative? In so doing they were constrained by definition to keep Intermediate Cost somewhere below Low Cost. Which yielded the following result: productivity growth slowing to 60% of 2004 rates in the face of a strong 1st quarter 2005.

According to the Trustees' own numbers the economy returned 3.3% in 2004. Now they would have us believe that 2.1% is an optimistic number and 2.0% a realistic number for 2005. Who are they trying to kid?