Wednesday, December 12, 2007

Crisis Maintenance at 3.0% GDP (historic trend)

The following three posts try to make an attempt to show how the Intermediate Cost alternative would have to be adjusted to keep Social Security 'Crisis' constant, that is to not have the current 2041 date recede further into the future. The methodology assumes that greater than expected growth in any give year can be offset one for one by subtracting equivalent points from future years. In fact due to compounding on the interest on a greater than expected surplus the effect would actually be greater than depicted here, though not significantly over the period presented.

From 1985 to 2006 Real GDP increased on average a shade over 3.0% 2007 Report Table V.B2.-Additional Economic Factors . This table shows how Intermediate Cost responds to trend growth over the short run.

The vertical axis has the Intermediate Cost alternative projections given in the 2007 Report for the years from 2007 to 2016. The horizontal axis represents the numbers as they would have to be adjusted for 3.0% GDP over the period 2007-2012.

2007 2.6
2008 3.0-----2.9
2009 2.8-----2.7-----2.7
2010 2.6-----2.6-----2.6-----2.5
2011 2.6-----2.5-----2.4-----2.4-----2.3
2012 2.4-----2.3-----2.3-----2.2-----2.1-----2.0
2013 2.2-----2.2-----2.2-----2.2-----2.1-----1.9
2014 2.1-----2.1-----2.1-----2.1-----2.1-----1.9
2015 2.2-----2.2-----2.2-----2.1-----2.0-----1.9
2016 2.2-----2.2-----2.1-----2.1-----2.0-----1.9

There has been exactly one five year period since 1960 with average Real GDP of 2.4. Two years of growth at trend would put us at a point where all future five year periods were bleaker than anything in the past. Now current forecasts generally call for a dismal 2008 so this process might not kick in right away. But whether you start in 2009 or 2010 growth at historic trend grinds crisis down to nothing in a short period of time.

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