'Natural Born Citizen' Nonsense: Donofrio v. Wells

Trust Fund Monthly Reports: Oct update

OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion

DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.
Per IV.A2 the opening balance for DI was $214 billion, projected year end under IC $218.7 billion, under LC $221.3 billion

June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion

Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion

Sept 30th/Q3: OAS $2.177 trillion// DI $219 billion

Oct 30th/Five-sixths: OAS $2.187 trillion// DI $218 billion

Galloping Gertie: Tacoma Narrows Bridge Collapse

Trust Fund Monthly Reports: Q3 Update

Sept cash balances for the OAS and DI Trust Funds were just released for September, i.e. Q3. Since Social Security works on a calender year basis and the Federal Budget on a FY basis you could use these numbers to compare directly to OMB projections (and I will) for now here are just some straight numbers.

The web page for all the Trust Fund Reports (including Medicare HI, Highways etc) is Trust Fund Monthly Reports While generally Social Security is reported for convenience as having a single Trust Fund which will go to depletion (or not) in some future year (currently 2041), in reality there are two Trust Funds which are legally distinct and can have different levels of solvency and so different projected depletion dates. The larger by far (about 10 to 1) is the OAS (Old Age Survivors) TF. Its report can be found at OAS Monthly TF Report. Its smaller companion the DI (Disability Insurance) TF can be found at DI Monthly TF Report These can then be cross checked against the relevant tables in the 2008 Report:
Table IV.A1.—Operations of the OASI Trust Fund, Calendar Years 2003-171 [Amounts in billions] and Table IV.A2.—Operations of the DI Trust Fund, Calendar Years 2003-171 [Amounts in billions]
OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion

DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.
Per IV.A2 the opening balance for DI was $214 billion, projected year end under IC $218.7 billion, under LC $221.3 billion

June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion

Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion

Sept 30th/Q3: OAS $2.177 trillion// DI $219 billion

I'll have some more thoughts later and cross-post the expanded post to Angry Bear. But it looks like for the first time since at least 1997 Trust Fund cash balances for the current year will slightly trail projections under Intermediate Cost. Whether this is a 'half full, or half empty' situation depends on how you evaluate 'slightly'.

What do you get for $150,000?

Social Security: Hard Solvency vs Soft Solvency vs Sustainable Solvency

'Sustainable solvency' is a new buzz phrase floating around with 'intergenerational equity' and 'unfunded liability'. But before exposing how the term blurs the real issue we need to examine the concepts of what I call 'hard solvency' vs 'soft solvency'.

'Hard solvency' is used here to describe a Social Security system that can pay 100% of all scheduled benefits over the seventy-five year actuarial window with no changes to current law in the form of tax increases or increases in retirement age. If and when we ever achieve it supporters of Social Security can clearly call 'game over, and we won'. But we are not there, instead the most recent Report would have us being able to pay out full benefits until 2041 and 78% after that. These numbers are subject to change and on balance have been improving (the 2007 Report had a 75% payout at Trust Fund depletion). Still as long as the numbers continue to improve supporters have a good case for pushing a plan consisting of 'Nothing'.

Now 'soft solvency' is conceptually a little more difficult. The current schedule of benefits is set up so that future generations of retirees get a fair share of real wage increases over their working lives, that is it provides improvements in standard of living equivalent to those of people still in the work force. Per Prof. Rosser of JMU this improvement means a benefit in real terms of 160% of what similarly situated retirees get today. And if we use what I call Rosser's Equation we see that 78% of 160% = 125%. Which is to say that after TF depletion future retirees will be able to buy a basket of goods 25% better on average than my mom can today. Now it might be that the future basket will pale somewhat when compared to people still in the workforce or to the basket that retiree was collecting in 2040 but it can hardly be described as some huge crisis. By this standard any time Rosser's equation delivers a result of 100% or better we can say that the overall system is in 'soft solvency'. Another way of describing this would be in terms of 'intergenerational equity'. If the Gen-X retiree of 2041 is still getting a real benefit as good or better than his grandmother did in 2008 there can hardly be any equity issues to resolve.

If we establish soft solvency as a floor and hard solvency as a goal we can say that currently we are 40% of our way home. Whether we really need to take positive steps in the short run to boost the result of Rosser's Equation is a question of policy preference and a balance between current utility of dollars for workers today against future utility for retirees thirty years down the road. And by the way not forgetting that these two populations largely overlap. That is it may be more efficient to hope to close the gap between 125% and 160% by mechanisms outside of Social Security itself.

But in any event both hard and soft solvency look at the outlook from the standpoint of the beneficiary for whom results closer to hard are on balance better than results closer to soft, but not necessarily so much so as to simply accept higher payroll taxes to achieve 'hard', 'soft-plus' might be perfectly acceptable if need be.

When critics of Social Security use language like 'dead broke' and 'bankrupt' all they are really saying is that Social Security is not currently passing the test of hard solvency. Which is fair enough, but it also suggests that any fixes should move the needle away from current levels of soft solvency towards hard, that is getting that 78% number up. Instead they pivot and invoke the concept of 'sustainable solvency'.

'Sustainable solvency' in practice means eliminating 'unfunded liability' which in our terms is the difference between the current projections of soft solvency (78% of 160% = 125%) and hard solvency (100% of 160%), that is it is a gap in benefits. But in their terms 'unfunded liability' is a pure burden on future taxpayers and so seen as a gap in future income vs cost. From that perspective it doesn't matter whether you address the gap on the income side or the cost side, instead the focus is on eliminating it one way or another. What this implicitly does is to kick hard solvency to the curb. Even though in a real sense 'crisis' starts out as a failure to achieve hard solvency, the solutions simply accept that some version of soft solvency is in fact good enough, if that is if it can be used to introduce a system based on Personal Retirement Accounts (PRAs).

So the task for supporters of Social Security as currently configured is to put the privatizers' feet to the fire. Does their solution give a better result then the current level of soft solvency projected? If not why should current workers and near retirees buy in? The system as currently configured is projected to deliver a minimum of soft solvency plus and is trending more and more towards hard solvency. Why should we accept a result that doesn't deliver more solvency at equivalent cost?

Social Security Checkup: Monthly Trust Fund Reports

Near the end of each month the Treasury Dept releases Trust Fund Reports giving balances to the penny for the previous month. By comparing these balances to the projection in the Annual Reports we can get a rough idea of how Social Security is doing year to date. This year's Report was released on October 2. Two caveats:
One, these numbers are not seasonally adjusted and I couldn't tell you the relative impact on total wages of summer employment vs harvest vs holiday. Each are marked by the entry of temporary workers into the system.
Two, Social Security collects FICA on your total check right up to the point you hit the annual cap at which point they stop collecting at all. For example if you have a salary of $200,000 per year you would see full deductions for Jan to Jun, a small deduction for July and nothing thereafter. This should make for the earlier parts of the year seeing relatively higher collections than the latter. But once again I can't quantify the effect.

So this is an imperfect tool. But it is what we have. So lets have some numbers.
The web page for all the Trust Fund Reports (including Medicare HI, Highways etc) is Trust Fund Monthly Reports While generally Social Security is reported for convenience as having a single Trust Fund which will go to depletion (or not) in some future year (currently 2041), in reality there are two Trust Funds which are legally distinct and can have different levels of solvency and so different projected depletion dates. The larger by far (about 10 to 1) is the OAS (Old Age Survivors) TF. Its report can be found at OAS Monthly TF Report. Its smaller companion the DI (Disability Insurance) TF can be found at DI Monthly TF Report These can then be cross checked against the relevant tables in the 2008 Report:
Table IV.A1.—Operations of the OASI Trust Fund, Calendar Years 2003-171 [Amounts in billions] and Table IV.A2.—Operations of the DI Trust Fund, Calendar Years 2003-171 [Amounts in billions]
OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion

DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.
Per IV.A2 the opening balance for DI was $214 billion, projected year end under IC $218.7 billion, under LC $221.3 billion

June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion

Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion

I had some calculations up but they all got garbled in my head so I deleted them. Bottom line 2008 is shaping up to be a kind of sucky year for Social Security. What was a decent picture for OAS mid-year now is kind of dim, it is unlikely that we will even hit Intermediate Cost projections. What was a really bright picture for DI is now less shiny, from June to August the balance actually shrank, if that continues at the same rate it too will fail to hit IC projections.

Which just goes to show the ultimate truth about Social Security, it prospers in good times, it shares the pain in bad as receipts react to covered employment and real wages. (We have a parallel here with the late seventies, a reform was put in in I believe 1977, it didn't fare well when stagflation simultaneously choked off revenue while boosting cost. The result was a new crisis and a need for a bigger reform in 1983).

Social Security Actuaries score the Warshawsky Plan

(Cross posted at Angry Bear)
Andrew Biggs directs our attention to a new detailed PRA plan by Mark Warshawsky, a member of the Social Security Advisory Board: Notes on SS Reform: Actuaries Score New Reform Proposal The post does not link to the plan itself but instead to a detailed scoring of it by the Office of the Chief Actuary in a memo to be found here (PDF) Estimated Financial Effects of “A Reform Proposal to Make Social Security Financially Sound, Fairer, and More Progressive” by Mark Warshawsky

I just came across this and haven't studied it in detail (and boy is there a bunch of detail) but like any plan it raises some standard questions.

1) Is the rate of return assumed on the PRAs actually reasonable under Intermediate Cost assumptions? (The No Economist Left Behind Challenge).

2) The plan assumes a direct transfer from the General Fund to supplement the PRAs starting in 2012 equivalent to .5% of payroll. Given that one current definition of 'crisis' is 'General Fund transfers starting in 2017 to pay partial interest', adding an additional transfer amount starting even sooner seems to undercut the overall message. How do advocates of the plan address this?

3) The Warshawsky Plan assumes a whole range of cuts and adjustments to retirement age, tax on benefits, and to the benefit formula generally. Each is scored individually as seen in Table A (which follows the actual memo page 14). Any combination of those scored cuts and adjustments that add up to 1.7% of payroll would put current Social Security in Long Range Actuarial Balance. What happens if we just take this cafeteria style?

Provision 3 would modestly raise the cap for a net addition of .15% of payroll. Provision 4 would gradually expose all SS benefits to taxation for an additional .24% of payroll. Provision 6 would bring in all new State and Local government employess for a net addition of .22% of payroll. Provision 7 would increase early and full retirement ages for an addition of .56% of payroll. Provision 8 is a little obscure but it would seem to just reduce lifetime benefits for disabled workers for a net addition of .35% of payroll. For a total combination of 1.52%. I don't really get provision 5 but it would give you an additional .65% of payroll for a new total of guaranteeed tax increases and benefit cuts of 2.17 of payroll. Which is to say .47% more than would be needed to simply fix the program as is.

Now Warshawsky sweetens the plan by reducing payroll tax by 1.0% (presumedly translating to a increase in worker pay of .5%) but offsets that with a new transfer from the General Fund of .5%. Now given the different incidence of Income tax and FICA this means a lower income worker would benefit more by the reduction of FICA by .5% from his first dollar than he would from some theoretical increase in income tax to fund that transfer from the GF. But enough to offset the guaranteed increases proposed?

No one really doubts that you could close the proposed 1.7% gap by some combination of tax increases and benefit cuts and Warshawsky's plan does that up front. But in this scheme where do PRAs come in?


This is where the water gets deep. The proposed FICA tax cuts in provisions 1 & 2 total 1.26% of payroll. Hurrah for workers! But the guaranteed cuts in benefits in provisions 3 to 8 equate to 2.17% of payroll. Which means workers are .91% behind right from the get go. Plus you add in whatever their share of that additional .5% of GF transfer. Then you get the whopper, Warshawsky proposes to change the benefits for everyone by an ADDITIONAL 1.46% of payroll under provision 9, meaning the worker is guaranteed a combination of 2.37% plus of average cuts in the face of a gap now scored at 1.7%. But wait, some of that money was steered into private accounts, surely most people will make up the gap from the equity premium. Won't they?

Well maybe. If the economy grows at a rate that allows for assumed returns and if you are willing to take higher levels of risk some people after 2029 or so get a better deal overall. But not everybody and not anything is guaranteed. The actuaries put it this way

The personal account annuity replaces the smallest portion of the reduction in the scheduled benefit for the married couple with only one earner. The annuity would fall somewhat short of covering the PIA reduction for one-earner couples retiring at 65 in about 2030 or earlier. For single workers and two-earner couples retiring after 2039 with low career earnings, however, this approach would generally be expected to provide an overall increase in retirement income.

Translation: Boomers and most Gen-Xers get less net than they would be leaving the system alone.

This is by no means a complete analysis of the plan, more like a skim, and for those with the chops I encourage you to dig in. But I just don't see how the average worker really benefits under this plan given the risk involved. The benefit cuts are guaranteed, the gains from the PRAs are contingent. Plus we haven't even examined the NELB component, can they really get these projected PRA yields at Intermediate Cost assumptions?

Intergenerational Equity, Unfunded Liability and Selfish Boomers

The newest buzzphrase in the Social Security world is 'Intergenerational Equity'. It is indeed the theme of the new movie IOUSA (to whose webpage I link) which itself is pretty much a documentary of the Concord Coaltion's Fiscal Wake Up Tour. (The fact that Concord was founded by Pete Peterson and rights to distribute the IOUSA film are in the hands of the PGPF: Peter G. Peterson Foundation not being a coincidence at all.)

One of EconomistMom's (who is a/the chief economist at Concord) first posts was entitled The Young People Get It which in turn was plugging the Youth Entitlement Summit 2008 in turn sponsored by Americans for Generational Equity an organization first founded in 2006 and funded by the usual group of conservative foundations.

The idea isn't new exactly, in Googling around today I found this lengthy article from Sept 2003 that probably explains it better than I can (I have only read the first page so far) Generational equity, generational interdependence, and the framing of the debate over social security reform. But before I turn this one over to a discussion of that let me highlight one thing.

If you go to the IOUSA webpage and look for the first part of the description of the overall issue you find it framed as follows (bolding mine) :

I.O.U.S.A. boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. As the Baby Boomer generation prepares to retire, will there even be any Social Security benefits left to collect? Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions.

Sure they go on to talk about military spending and foreign debt but the discussion ALWAYS starts and mostly ends with Social Security and equally ALWAYS with a dig at Baby Boomers.

Having run into this particular article I want to post this now as Part 1 and get some discussion going on the overall topic and then return to the theme of 'Social Security Crisis = Selfish Boomers' in a latter post.

Unfunded Liability Bookended

In the last installment of this Social Security series we kind of dug into some of the details of unfunded liability, what it was and what it wasn't and most importantly where the incidence occured: in the past or in the future. Backwards Transfer is Back. In the course of that I think it became pretty clear that none of that liability really was the consequence of overpayments to what Social Security calls 'past participants' that instead it was all due to a gap between future cost and future income for 'current participants'. But in the course of that discussion the role of 'future participants' fell through the crack when instead the numbers have some surprising implications. But before getting to that I want to back up and consider Unfunded Liability more broadly.

Traditionally Social Security has judged solvency over the short term (10 years) and the long term (75 years). Which seems reasonable enough, 75 years being a period that will capture the retirement years of pretty much any current worker. The metrics of solvency were typically expressed as percentage of payroll or percentage of GDP. In 2003 the Reports introduced new measures of solvency which expressed the gap between income and cost in Present Value dollars over the 75 year window and indeed over the Infinite Future. The first set of numbers just divides this into periods: first 75 years, 75 years to Infinite Future, and total and expresses it in dollars.
2003: $3.5 trillion, $7 trillion, $10.5 trillion
2004: $3.7 trillion, $6.7 trillion, $10.4 trillion
2005: $4.0 trillion, $7.1 trillion, $11.1 trillion
2006: $4.6 trillion, $8.6 trillion, $13.4 trillion
2007: $4.7 trillion, $8.9 trillion, $13.6 trillion
2008: $4.3 trillion, $8.3 trillion, $13.6 trillion
What do these numbers tell us? Well not much really. Generally you would expect the unfunded liability over the first seventy five years to increase simply because of normal population growth, we will have more people overall in year seventy-six than we do in year one, as we drop the latter and add the former we can expect an uptick in liability which right now is about .06% of payroll. The relatively small changes from 2003 to 2004 and 2006 to 2007 can be explained in this way. On the other hand the bigger movements from 2005 to 2006 or 2007 to 2008 turn out on examination to be the result of additional changes in assumptions, in the first case in assumed interest and in the latter changes in assumptions about immigration. But other than that the numbers don't really give us much guidance except perhaps to wonder why the future numbers from year 76 on, representing as they do the Infinite Future are not even larger. To get insight into this we need to move to a more granular analysis. Which comes under the fold.

The Table numbers vary a little bit between reports with what was Tables IV.B7 and IV.B8 in earlier Reports become IV.B6 and IV.7 but all are titled Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participants[Present values as of January 1, 2008; dollar amounts in trillions] People who read the last post may remember that the Trustees break down "Program Participants' in kind of an odd way:
'Past participants' would seem to be that group of people who formerly drew benefits but no longer do. In short the dead.
'Current participants' are defined as everyone fifteen and older and so include all current workers and current retirees.
'Future participants' are defined as everyone under fifteen plus those not yet born. The table assigns dollar figures to these groups as follows:
Row 1 = "Present value of future cost less future taxes for current participants" (Over the next 100 years)
Row 2 = "Less current trust fund"
Row 3 = "Equals unfunded obligation for past and current participants" (Note that in this case the contribution of past participants is likely positive overall)
Row 4 = "Plus present value of cost less tax for future participants for through the infinite future"
Row 5 = "Equals unfunded obligation for all participants through the infinite future"
This result can be expressed as an equation. So what does it look like over the same period as above? (Figures in trillions)
2003: $11.9 - $1.4 = $10.5 -$.0 = $10.5
2004: $12.7 - $1.5 = $11.2 -$.8 = $10.4
2005: $13.7 - $1.7 = $12.0 -$.9 = $11.1
2006: $15.1 - $1.9 = $13.3 + $.1 = $13.4
2007: $16.5 - $2.0 = $14.4 - $.8 = $13.6
2008: $17.4 - $2.2 = $15.2 - $1.5 = $13.6 (rounding is Trustees')

What does this tell us? Well actually quite a bit. The increases in column one are mostly I think to be explained by current demographics, fewer people entering the workforce compared to the large cohort of Boomers leaving. And column two is just showing the effects of a Trust Fund in current surplus with column three being the simple sum.

But it is column four that is most interesting to me. Biggs looks at that and sees future participants paying more in taxes than they are projected to get in benefits. I suggest that is the wrong way to look at it, instead turn it around. In 2003 future participants, then defined as all people born after 1988, taken as a whole could expect their benefits to be fully funded by their taxes. Which is to say that long term Social Security is projected to return to pay-go with a surplus and that all of the problem is in fact confined to the next 100 years.

This has some profound implications for policy. Under current projections Social Security is set to pay out 78% of the scheduled benefit starting in 2041, an amount that will shrink to 75% at the end of the 75 year window. But at that point the very youngest of the 'current participants' of 2008 will be 90 and the impact of that cohort will be fading rapidly and we can reasonably expect it will go to zero right at the end of the hundred year period. Meaning that any fixes we choose to put in over the next couple of decades could be reversed later on with no damage to the long, long term outlook for Social Security. In actual practice there is no way we could limit the impacts of any medium term fixes to the current batch of current participants, some of the earlier cohorts of future participants will no doubt be called to sacrifice along with existing current participants. But there is a light at the end of that long tunnel. And if over the next couple of decades we can beat the current economic projections and so reduce the growth of column one and three we can make that light brighter and brighter.

In the light of the above equations Social Security's unfunded liability is more akin to a fixed term mortgage than an infinite burden. We can and should take some efforts to pay it down quicker while knowing that given regular payments it goes away some time in the next hundred years anyway. As the post title notes, that liability is effectively bookended.

Backwards Transfer is Back: Social Security's Unfunded Liability

(Cross posted at Angry Bear)
Awhile back we had a series of posts at AB about the causality of Social Security's 'unfunded liability' in response to a comment by Jim Glass over at Andrew Bigg's. The first post was XXXVI: $17 Trillion Backwards Transfer. Andrew answered back with Responding to Angry Bear: Where does the $17 trillion deficit come from? to which I replied with XXXVII: Backwards Transfer: Biggs Responds

Well clearly Andrew was not convinced because he is now back with some new charts with More on How Future Deficit is Caused by Over-Generosity to Past Participants. I am still not convinced, he is trying to stick a $15 trillion dollar future tab on past extra benefits collected by a past group that only collected a portion of a total of $999.7 billion paid out by 1980. My response is over there. Feel free to add to it or contrawise explain to me in comments why I just am just not getting it.

If you want to start with the basic numbers they will be found in Table IV.B7.—Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participants[Present values as of January 1, 2008; dollar amounts in trillions] and Table IV.B6.—Unfunded OASDI Obligations for 1935 (Program Inception) Through the Infinite Horizon[Present values as of January 1, 2008; dollar amounts in trillions] along with some definitions in the associated text. For extra credit you might consider what the implications of adopting the new CBO: Updated Long Term Projections for Social Security does in this context. Because by lowering the payroll gap going forward from 1.95% (Trustees 2007) to 1.06% (CBO 2008) you end up with trillions slashed off of future unfunded liability. Since this effect cannot in any way be attributed to new actions by past and mostly dead participants it seems to be hard to attribute those unfunded liability effects back to start with. There seems to be a fatal confusion of past and future going on here.

Social Security 'Crisis' at a Glance

Reposted from April
This figure shows in graphic form the outcomes of Intermediate Cost (II) vs High Cost (III) vs Low Cost (I)

This figure (II.D6 from the 2008 Report) gives a nice visual summary of the varying outcomes of the three Alternatives: Low Cost (I), Intermediate Cost (II) and High Cost (III). It tracks Trust Fund ratios under the various alternatives.

There is a certain lag between Income falling behind Cost and Trust Fund Ratios starting to decline. Under Intermediate Cost projections total Income excluding Interest falls behind Cost in 2017, at which point the General Fund will have to start transfering real dollars in partial payment of accrued interest. But as long as the remaining unpaid interest remains ahead of projected cost the Trust Fund balance will continue to grow. On the other hand the TF ratio peaks at some point before that as projected costs increase at a greater rate than the balances do. So as we can see in Table IV.B3.—Estimated Trust Fund Ratios, Calendar Years 2008-85[In percent] the rate of growth of the TF ratio slows around 2010, essentially stalls in 2012, and stops in 2014 even as Income excluding Interest continues to exceed cost. We can contrast this to the dollar figures as seen in Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions] where you see the dollar value of Income excluding Interest falling behind Cost in 2017 (Shortfall) while balances keep increasing until 2023 (peak).

This explains why so many critics of Social Security place the date of crisis at different points. You can look at the absolute value of the TF ratio or balance in which case the key dates are 2014 and 2023 respectively, or you can look at the rate of change in which case the key dates become 2010 and 2017. Supporters of Social Security need to keep a sharp eye on exactly what the opponent is citing as support for 'crisis' and what the real world implications are.

The Basic Vocabulary & Concepts

Social Security Trustees: that group of appointed officials responsible for top level oversight of Social Security and so the people who sign the Annual Report. They include ex officio: the Secretary of Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. In addition there are two Public Trustees appointed by the President for six year terms. These six also serve as the Trustees of Medicare.

Social Security Administration: that government organization that administers Social Security. For our purposes the most important component of SSA is the Office of the Chief Actuary (OACT) responsible for developing the economic and demographic models underlying the Reports.

OASDI: combined acronym for the two legally separate insurance plans that make up Social Security. OASI (Old Age/Survivors Insurance) provides limited benefits to minor children and their mothers (typically) should the worker die before retirement age and then converts to an inflation adjusted annuity at full retirement age. This is what most people think of as 'Social Security'. DI (Disability Insurance) provides benefits for qualified workers who become disabled in the years between the disability and full retirement age at which point beneficiaries are switched to OASI.

SSI: not in fact an acronym for Social Security itself, instead it stands for Supplementary Security Income, a General Fund program administered by Social Security to provide supplementary benefits for low income disabled, blind or senior workers, many of whom did not work enough quarters to qualify for regular OAS or DI.

Low Cost, Intermediate Cost, High Cost (the 'Three Alternatives'): the Social Security Reports present not one model of future economic and demographic projections, but instead three with Low Cost representing a more optimistic model for long term solvency, High Cost a more pessimistic one, with Intermediate Cost representing a median outlook. There is in fact a good deal of controversy about whether Intermediate Cost (IC) represents a true probabilistic median or whether outcomes closer to Low Cost (LC) should be adopted. The author of this blog is strongly inclined to the later.

Pay-Go: Social Security is structured so that in any given year benefits are paid out of current taxes paid. While this is not notably different from how other government programs are financed or for that matter how most private insurance plans handle benefits and premiums, it has led to amazing confusion, much of it deliberate, due mostly to the failure to understand the fundamental nature of Social Security as an insurance/annuity plan rather than a defined pension plan.

Social Security Trust Funds: perhaps the most misunderstood component of Social Security and one that will be the subject of a number of future posts. Historically the Trust Funds (because there are two: one for OAS and one for DI) have served as reserve funds and the measure of solvency for the system as a whole. They serve to buffer out temporary divergences between Income and Cost and ideally have a balance equal to one year of projected cost. In recent years the Trust Funds have been allowed to baloon to levels well above that in recognition that current demographics project extra strain as Boomers retire and that is was prudent to PARTIALLY mitigate that by piling up extra reserves. But the idea that the Trust Funds were ever thought to 'pre-fund' Boomer retirement is more or less a myth to be explored later on.

Trust Fund Ratio: the Trust Funds are measured in terms of projected costs vs balances as a function of time with a TF ratio of 100 representing one year of reserves and the statuatory target for the Trustees.

Short Term and Long Term Actuarial Balance: the current measures for Social Security solvency. Short Term Actuarial Balance means the Trust Funds projected to have TF ratios above 100 in each of the next 10 years. As of 2008 both Funds were in Short Term Balance. Long Term Actuarial Balance means the Trust Funds projected to have TF ratios above 100 in each of the next 75 years. As of 2008 the combined funds are not in Long Term Balance and are projected to fall out of Short Term Balance in about 2027. However these dates can and do change and the hows and whys of this will be the topic of some future posts.

Social Security Reports: 1941-2010

The debate over Social Security is rather a curious one in that its infrastructure is or should be entirely numeric. We have various dates when Social Security will face changes, in turn those dates are driven by specific economic and demographic assumptions laid out in tables and figures in the Reports of the Trustees of Social Security. Reports dating back to 1941 are freely available at the link in a variety of formats. Recent Reports are available in HTML, PDF, and in paper (with free first class mailing), older Reports in either PDF or HTML depending on date. Yet
oddly you can go through most Social Security comment threads without a single reference to the underlying data. In a later post I will explore why this is, but for now I just want to give links to the various Reports broken out in a way that affords easy access to the key tables and figures, at least for the Reports from 2001-2010.

The links for 2001-2010 go to pages here that in turn allow access to HTML versions of the Reports
2010 Report
2009 Report
2008 Report
2007 Report
2006 Report
2005 Report
2004 Report
2003 Report
2002 Report
2001 Report
In March 2006 the Social Security Administration took down the HTML versions of the 1997-2000 Reports leaving readers to rely on the PDFs. The whys and wherefores of this remain mysterious. In any event the following links are to the PDFs from the SSA.gov website.
2000 Report
1999 Report
1998 Report
1997 Report
1995 and 1996 are available in HTML
1996 Report
1995 Report
Reports from 1942 to 1994 are available in PDF from the following page
1942-1994 Reports

Relaunch of the Bruce Web

The Bruce Web started first and foremost as a place to stash links to the various Reports of the Trustees of Social Security and more particularly to the the various components of the Reports such as the List of Tables and the List of Figures. This allowed me to quickly add links to the relevant data to comments I was posting to other blogs. I also added some textual posts that allowed me to sort out my thinking. But from its inception in Nov 2004 when Bush through down the Social Security guantlet to pretty much now it wasn't really much of a blog in the usual sense. I wasn't posting regularly and didn't have comments enabled, it was really a resource for and by me.

But then came the May 2008 invite to be a front page poster on Social Security at Angry Bear, which in turn raised my profile a bit and drawing what to be polite I will call 'critics'. There is currently some dispute about comment policy at Angry Bear which led me to bring my more partisan and polemic posts back here. I still expect to be posting more objective things at AB, for example releases of various Reports from SSA or CBO. But anyone who wants to get down and dirty will need to travel over here.

Comments policy. This particular version of Blogger does not allow me to edit comments. It does allow me to delete individual comments or entire blog posts and that process is at my complete discretion. I don't intend to delete anything but pure hate speech, on the other hand if you don't like my editorial policy you can start your own free blog in like ten seconds.

I expect to be putting up a new post every few days, more often if people start leaving comments. I think I will start by essentially recapitulating the blog, that is rather than update and reorganize past posts just more or less start from scratch.

Rounding out the Angry Bear Series on Social Security

My last two front page Social Security Posts on Angry Bear were:
CBO: Updated Long Term Projections for Social Security
Social Security 2027: A date for Action?

Over that same span we saw Social Security posts by Jack, coberly and pgl, so clearly the topic itself is in good hands. On the other hand for a variety of reasons I became sort of a lightning rod in a way that made the comment threads on my posts unattractive for non-trollish commenters. Additionally there was some concern about the ways I felt I needed to push back on the trolls who did comment.

So basically I am declaring victory over there and bringing it back here and eventually to my new blog (supposedly) under development. I still expect to be commenting extensively at AB but maybe without the restraints that come with being a front pager.

Anyway I hope to boost the content level here. Because while the economic argument over Social Security solvency is by and large over the politics resulting from that are just beginning to unfold. Fully expect a regular opening by me of a can of FDR WhoopAss on the privatizers.

The Angry Bear Social Security Series

Social Security Posts on Angry Bear Soc Sec 0-23 (starting May 2008)

More Social Security Posts from Angry Bear Soc Sec 24-44

Even More Posts from AB: late Aug to Dec 2008

January 2009: a Flurry of Social Security Posts at AB

Angry Bear Social Security Blogging: Spring 2009

AB Social Security Blogging: Northwest Plan Edition

Fall 2009-Spring 2010

Social Security: Where's the Report?/Catfood Commission Ed

Fall 2010 Social Security Posts

Unfunded Liability (Tables IV.B6 & IV.B7)

More Social Security Posts from Angry Bear

Rather than risk choking Blogger on too many links, I will start a new list here. The first twenty three can be found at Social Security Posts on Angry Bear
XXIV: Treasury's Social Security Issue Brief no. 5
XXV: Advisor Jason Furman on Obama's Plan
XXVI: Social Security Low Cost and the 100/100 Target
XXVII: Robert Myers and Prefunding Social Security
XXVIII: Infrastructure; or a New Direction for the Trust Funds
XXIX: What Does Patriotism have to do with Social Security 'Crisis'
XXX: 2 Questions not Asked in 2000, or 2004 Either
XXXI: What is Title 1?
XXXII: Means Testing as a Trojan Horse
XXXIII: Medicare Finance
XXXIV: Open Thread/Assignment Desk
XXXV: Monthly Trust Fund Reports
XXXVI: $17 Trillion Backwards Transfer
XXXVII: Backwards Transfers: Biggs Responds
XXXVIII: Financing Shortfall
XXXIX: Pay-Go and Unfunded Liabilities
XL: Double Books and the 'No Economist Left Behind' challenge
XLI: Why Not Assume Low Cost?
XLII: Unfunded Obligation and Transition Cost
XLIII: Solvency: Demographics or Productivity
XLIV: 'We Can't Grow Our Way Out'

My New (and as yet contentless) web site and blog

I have been subscribing for three years to a web hosting service that I never got around to using. Well as of today the beginnings of a new site are up at Unvarnished Webb. For now I see this as being Webb's everything BUT Social Security website and blog.

As of now I just threw up some bare bio info (in case any classmates or ex-coworkers want to track me down) and a picture of my mug as well as one of my brother. Later I hope to get some of my old graduate school papers reformatted and maybe build a geneology page. But as for now this is mostly a notice to myself to not drop the ball and get going.

Update. Just got the blog itself to upload properly. It is called Caught in the Web

Social Security Posts on Angry Bear: Baker's Dozen Index

The following represent a series of posts on Angry Bear over the course of May 2008. They more or less recapitulate the content of this blog and my thinking as it has evolved over time.

0: Basics Revisited and Three Myths (though numbered zero this actually came mid series)

I: Bruce Webb's Take on Social Security
II: The Shape of Low Cost
III: The Numbers of Intermediate Cost
IV: A History Lesson
V: What does Lenin have to do with this?
VI: LMS and the Infinite Future
VII: Present Value vs Present Values
VIII: Calculating the Cost of Inactivity
IX: The Paradox of Benefit Cuts
X: The Danger of Low Cost
XI: Seven Good Questions by Reader Arne
XII: LMS, Solvency and 'Crisis'
Adding to the Baker's dozen.
XIII: 'Crisis' at Shortfall; or Show me the Money
XIV :Why Benefit Cuts and Cap Increases Backfire
XV: Why Do They Care
XVI: Democracy and Reaction
XVII: Cap Increases and Donut Holes
XVIII: Social Security Advisory Board Technical Panel Report
XIX: Narratology of Crisis
XX: Reframing the Trust Fund
XXI: When Personal isn't Private
XXII: What If? Low Cost as Fairy Tale
XXIII: Low Cost, a Follow Up on the Fairy Tale
Posts XXIV and beyond are indexed at More Social Security Posts from Angry Bear

And just in the interests of meta-self-referentialism here is the link back to this page from Angry Bear: Index: the Baker's Dozen

LMS Tables

First Angry Bear Social Security Post

Well Reader Dan invited me to submit some posts on Social Security and so here I am. Depending on reader interest this is the first in a series trying to get us to a deeper understanding of what Social Security actually is and where it is likely heading. And that may be a much different place than most people currently think.

Social Security finance is a really odd beast, it has a strong up is down quality that tends to baffle people. For example I will be making the case in a later post that cutting Social Security benefits actually harms the long range financial stability of the system. Why this seeming paradox holds requires us to examine some mechanical peculiarities of a PayGo system given the details of the current state of its financing. But before diving into the deep end I want to establish a conceptual framework, that is to show you Social Security through my eyes.

First it all starts, and mostly stops, with the Trustees' Reports, more formally known as the 'ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUNDS'. Almost every fact, factoid and date cited in this debate comes directly or indirectly from this Report. (Certainly CBO has a slightly different interpretation but they don't really challenge the fundamental assumptions of the Trustees). For the most part in this game all of the players are playing out of the same playbook and more importantly out of a particular subset of that book. More on that point later. The first lesson people need to learn is that 'It is already built into the model'. This is particularly important in relation to the demographics, because the first response from those hearing that Social Security is not particularly in crisis is: 'What about the Boomer Retirement?' 'More retirees, less workers, what don't you get about that?' or 'People are living longer!" Well I know all those things mainly because the demographers working in the Office of the Chief Actuary know them full well and have already accounted for them in their models. Which are published in the Report. Which I read.

Second point. Social Security really and truly is Insurance. Endless efforts have been made to blur this fact, and I expect/hope to see some in comments, but they all fail in the face of the actual operation of the system. Social Security collects premiums from all wage workers up to a determined wage level and disperses benefits to qualified beneficiaries. Which is pretty much the same as what New York Life does, cash flows in one door and out the other. That varying things happen with excess cash in between are not really the concern of the buyer and future beneficiary of the policy, as long as they get the promised benefits when the time comes then all's fair. That is there is no functional distinction between drawing a benefit dollar from the existing investment pool as opposed to simply paying it out of current premiums, PayGo does not equate to Ponzi. Banks and Insurance Companies don't have current cash reserves equivalent to all of their obligations, instead that money is locked up in what may be long term investments, instead they rely on current cash flow to carry the load. Of course banks are required to hold some cash reserves with the Federal Reserve and Insurance companies themselves carry reinsurance, you can't get too close to the edge. And this is where Social Security Insurance departs from New York Life, instead of reinsurance it has Trust Funds.

Which gets us to the third point. Social Security is not the Trust Funds anymore than New York Life is its reinsurance policy. The Trust Funds are simply the numeric measure of how much Social Security has in long term reserves. This amount can over any given year or series of years trend up or down without directly effecting benefit payments. In an up year Income Excluding Interest exceeds Cost and so surpluses flow to the Trust Fund, in a down year Income Excluding Interest lags Cost and the Trust Fund has to be drawn down, but typically not by much, current income is always carrying much of the load and would even if the Trust Fund went to zero.

Last points for today. Trust Fund 'crisis' is normally set at two possible points. One is crisis at Shortfall, that point where Current Income is projected to fall behind Cost for an extended period. This would require a sustained drawdown on the Trust Fund as more and more interest is diverted to pay current benefits. Whether this really equates to 'crisis' requires an analysis of the actual dollars in context. That rarely happens, instead people jump right to 'Raise taxes to unendurable levels! or Slash benefits to the bone! We got to act now!!' Well this hysteria whether real or fake (and much of it is fake) is simply that. Absent an examination of the numbers it is simply as Shakespeare put it 'A tale told by an idiot, full of sound and fury, signifying nothing', In this particular case if you can't say it in numbers you really shouldn't be saying it at all.

The second 'crisis' point, and the more traditional one, is crisis at Depletion, that point where the Trust Fund has been drawn down to nothing. Once again the temptation is to jump to "Oh My God we'll have to raise taxes' or worse 'Its bankrupt!! Dead broke!!! Checks will stop!!' Well that too is mostly nonsense, by law we need do nothing at Trust Fund Depletion, instead benefits would simply be reduced to whatever level was supported by current income. Whether that adds up to 'crisis' is once again a matter of comparing the numbers to the actual schedule of benefits while comparing it to benefit levels today. In the event the relevent equation from the 2008 Report is 78% of 160% = 120%. More on that later.

So lessons attempted here?
1. Numbers matter and they are to be found in the Reports. Including all the relevant demographic ones.
2. Social Security is in fact a Pay as you Go Insurance plan with a certain level of reserves. It is not a Ponzi scheme.
3. That reserve is called the Trust Fund, but is not itself the whole of Social Security any more than your bank account is the whole of your finances.
4. No one likes to draw down their reserves as we would at Shortfall, but you have to put that in context of your entire financial position. Which means looking at the numbers, see point 1
5. You plan for your retirement and ideally meet 100% or more of your goal. Hitting 78% may or may not be some sort of crisis, it might just mean buying a smaller boat. We need to examine Depletion in the context of both absolute level of benefit cuts and probability that the current projection will come to be.

I'll be glad to answer questions and meet challenges in comments. In future posts I will be explaining some of the odd terminology used: Low Cost alternative, Trust Fund Ratio, Covered Worker Ratio etc. For those who just can't stand to wait you might want to browse the Nov. 2004 archives of the Bruce Web (bruceweb.blogspot.com).

Angry Bear Blogging

I have been invited to join the posters over at Angry Bear. For a while I suspect I will use this place as a drafting board and only move it over when the piece is fully ready.

I don't check my traffic and so really don't know if I actually get much, but if someone wanders by feel free to drop criticism or suggestions into comments here and then maybe join the discussion over at AB.

Paranoic Newtonian Low Cost

In science a theory does not have to be 100% true to be useful. It turns out that 19th Century physicists were not nearly as close to the limits of science as they thought as first Einstein and latter the Quantum folk set those limits far, far back. But within the limits of normal every day reality you never really need to build in adjustments for either relativistic or quantum effects, Newton is plenty good for ordinary purposes.

So I propose to use my Paranoia theory as a reasonable Newtonian tool for analysis and ask the question 'What if?'

What if Low Cost really had been constrained to a particular limit, a limit that had it produce a fully funded system going forward? Well considered as such Low Cost would represent the answer to this question: 'what level of economic and demographic growth would fix Social Security without any changes in tax, benefits, or retirement age?' Which is an excellent policy question, it allows us to look at the various assumptions and draw conclusions, this data column maybe looks too optimistic, that one too pessimistic and so measure the respective effects on ultimate solvency. But whatever our conclusion Low Cost is always out there competing with every other proposal for reform or fix, it sets a barrier against the use of two sets of books, one that shows crisis and another that solves it. This sets out the fundamental challenge to privatizers, they constantly point to historic rates of returns on stocks while ignoring that those rates depend on long stretches of years of better growth performance than fully funded Low Cost, instead they need to show that they can get better than Intermediate Cost results and yet still stay under the limit established by the Low Cost model.

Now if Low Cost is a limit what is Intermediate Cost? Well it too establishes a limit, it puts privatizers on a budget. People often claim that 'We can't tax our way out of Social Security crisis'. Well of course we can, it just depends on how much pain we are willing to take. Each year the Trustees tell us exactly what the payroll gap is given Intermediate Cost assumptions, which is to say what amount of immediate tax hike would be needed to place the system in Long Term Actuarial Balance, which is to say fully funded with a constant reserve. In the 2008 Report that gap is 1.7% of payroll on wages up to the current limit of $102,000. Whether that is a lot or not is up for discussion, what isn't is that any privatization plan that costs more than an additional 1.7% of payroll isn't worth doing if it doesn't return a better result for most workers. Which gets us to the other limit of Intermediate Cost, that of percentage of payable benefits at Trust Fund Depletion.

People often talk about Depletion is terms like 'broke' and 'bankrupt' and conclude 'Social Security just won't be there for me'. Well as long as we have a payroll tax we can pay out some level of benefits, the dollar flow nevers go to zero. The proper questions would be 'How much will benefits need to be cut?' and 'What would be the net result in real terms to what retirees get today and in all years between now and projected Depletion?'. And we know the answers to both. The scheduled benefit right before Depletion has been calculated to be around 160% compared to a similarly situated retiree today (that is not my number but I trust the Professor who supplied it). The Trustees tell us that the cut in 2041 will be to 78% of the schedule. Well if we take 78% of 160% we get 125%, crisis in context means retirees starting 33 years out get cut back to a benefit only 25% better than the one my Mom gets today. Doesn't add up to 'crisis' to me. What it does is put up another benchmark for privatizers, if their plan builds in benefit cuts in excess of 22% at Depletion then the plan is just not worth doing, nobody comes out ahead net and almost everyone would benefit in the mean time by not taking whatever phased in changes between now and Depletion.

Which brings up another limit. On balance Depletion has been receding into the future and since 1997 at a rate of more than a year per year, even if that rate slows down any movement outwards discounts that date more and more particularly for Boomers, mortality tables suggest that half of us will be gone by 2041, asking people over fifty to undergo any sacrifice simply to avoid some kid only getting a 25% better check than our parents do today seems a bit much.

So there is a whole set of limits set here. Low Cost establishes growth numbers. Intermediate Cost establishes payroll gap, benefit cut at depletion and date of benefit cut. It also sets a base set of economic numbers. An honest privatizing plan needs either to work with IC numbers or rescore Social Security under their own assumptions. All those numbers are moving. Low Cost numbers seem reasonable by historical standards, the payroll gap has on overage been shrinking (down from 2.23% in 1997 to 1.7% today), the amount of the projected benefit cut has been shrinking (down from 25% in 2007 to 22%) today. The progress is admittedly incremental but it is pretty steady and every bit of improvement makes the cost/benefit analysis of any given privatization plan that much more difficult to sell. When privatizers tell you 'We can't afford to wait' what they really mean is 'The numbers are killing my plan'.

Viewed this way Intermediate and Low Cost serve as a vice. If the gap ever closes completely then obviously crisis is over but even if it doesn't it leaves increasingly little room for privatizers to operate in. My private estimation is that the vice will be tight enough by 2010 to make this debate moot, given a prolonged recession you might have to bump that back to 2012. But the day of reckoning is coming. Because they just don't have the numbers.

Paranoic Empiricism or Empirical Paranoia?

This post will take some time to develop, consider this installment one.

In 1997 I finally got my hands on the Annual Report of the Trustees of Social Security to find out why reported dates of Trust Fund depletion seemed to be moving. Well I found that answer, in short better than expected economic growth was driving that date out in time. But it was the numbers behind the numbers that provided the real surprises.

First I learned that the Social Security Trustees actually produce three different economic and demographic projections purporting to cover the full range of possible economic outcomes. The standard projection, the one always cited in the papers is officially called Intermediate Cost. It is accompanied by a more optimistic model called Low Cost and a more pessimistic model called High Cost. In looking at Low Cost two things jumped out. First its outcome was better than most people would have thought possible, if those numbers came home Social Security would be fully funded through the 75 year actuarial window. The second was even more interesting, the numbers needed going forward were not much different than the actual numbers of 1996, if the near to medium future looked like the near to medium past then we were essentially home free. Now in point of fact 1996 was at the time considered to be a pretty good year, having essentially identical numbers representing the top of a possible range of economic outcomes did not seem odd.

But then the 1998 Report came out and instead of the 2.5% Real GDP projected by Intermediate Cost (hereafter IC) or the 3.2% of Low Cost (LC) the actual number came in at 3.8%. Which was interesting enough in that it showed the short term model was too conservative, what the Trustees saw as the top end of the range clearly wasn't. But what was really interesting was the outcome of Low Cost. Other things being equal a better than expected first year number should have the mathematical effect of moving the curve up, 1998 Low Cost should have shown a better end result than 1997, fully funded should have yielded to somewhat over funded. But it didn't. While IC showed a full 3 year improvement with Trust Fund Depletion moving out from 2029 to 2032, LC stayed static at fully funded yet not overfunded.

Changes in Trustees Projections over Time 

Why was this? Well on examination in the face of a better than expected 1997 the reaction of the Social Security Trustees (or actually the staff actuaries in the Off of the Chief Actuary) was to adjust future growth numbers down, including a slightly lower number for the current year. It seemed a little odd that the net effect was equilibrium but odder things have happened.

But when lightning strikes twice you start to get jittery. Because in 1999 it happened again, growth numbers came in not only in advance of IC but also of LC, in fact strongly so with much the same result as in the 1998 Report, depletion moving out 2 years to 2034. But once again the outcome of Low Cost didn't budge, it still showed fully but not overfunded Social Security through the 75 year window. And on inspection you could see a further downward adjustment in future numbers. I began to smell a rat. In the face of two years of much better than expected numbers what would make you more pessimistic about the future?

Third time is a charm, the 2000 Report came out and the pattern was confirmed. Much better growth than even the 'optimistic' LC projected, Trust Fund depletion moving out in time by another 3 years to 2037 but LC stubbornly staying at its same equilibrium result.

Which is where the paranoia part comes in. Empirically the simplest explanation of the number series varying outside what would appear to be your confidence interval without a change to your upper limit is that it is in fact a deliberate limit, that the data was being fit to the curve. Now in a policy context this wasn't necessarily a bad thing, in fact it established Low Cost as a useful touchstone, outcomes closer to LC showing less need to address Social Security at all while any outcome better than IC at a minimum lowering the risk of doing Nothing short term. The problem is that the Trustees insisted this was not what was happening at all, instead these numbers were simply the best available information as analyzed by the career staff at the Social Security Administration. Moreover these numbers were examined and utilized by many other agencies including OMB and CBO, deliberate manipulation would imply a government wide conspiracy to conceal the true financial situation facing Social Security. And all of this mind you within a presumedly Social Security friendly Clinton Administration.

A empirical conclusion that seemed obvious based on pure examination of the number series crashed into political reality, there was no way to pull this off, it all just had to be a coincidence. Until it happened again, and again, and again. In all Reports from 2001-2007, now produced by the Social Security unfriendly Bush Administration, the result of LC remained constant: fully funded but not overfunded. It would appear that statistical lightning could strike the same effective point eleven years in a row. Yeah and I could let the money ride and hit 11 sevens in a row at a Craps table in Vegas, the smart money is against that happening.

Finally the pattern broke in 2008 with results to be seen below:

Shape of Low Cost This year Low Cost for the first time ever shows what an overfunded Trust Fund would look like, I can finally ditch paranoia and using the Trustees own numbers begin to explain the risks of an over funded system, an outcome that until 2007 had officially been deemed impossible by two Administrations. Just excuse me if I hold onto some of my paranoia, I formed a conclusion in 2000, openly posted it in Nov 2004 under What is the Low Cost Alternative and had it stand up to test with the 2005, 2006 and 2007 Report. I may have been wrong but I wasn't crazy, or at least not much, Occam's Razor suggested that Low Cost was being artificially constrained, careful examination of the numbers year over year showed clear signs of under motivated changes in data points for future years and it beggers belief that everything just happened to return the exact same equilibrium result.

My belief anyway.

100/100 in action

In the post below this one I argue that high Trust Fund ratios present a threat to Social Security by transferring it from worker paid insurance to general fund paid welfare. This was specifically a political calculation, under our current situation the Economic Right has successfully been able to separate federal spending into two categories: one of spending that we can't NOT afford which includes all things military, and the other of spending we CAN'T afford which includes most social spending. That the stuff that we can't NOT afford comes with prices starting with 'b's and the stuff we CAN'T afford comes with prices typically starting with 'm's never seems to register. (The Administration practically wet itself announcing $200 million in world food aid yesterday, which works out to 8 hours of the current costs of waging war in Iraq). It is important to keep Social Security from being lumped in with all those other programs, the Right hates it and always has. That is not hyperbole, if they can kill they will, Alf Landon explicitly ran against it in 1936 and the Republicans never really stopped.

A Trust Fund Ratio of 100 is not only a reasonable target, it is in fact the legal test of Short Term Actuarial Balance for the Trustees. Now one way of getting there is to use the brute force method of simply not collecting FICA at all for the next two and a half years and so drive the TF ratio down from its current level of 360 to 100. But that would mean taking a combined $800 billion annual hit to the General Fund over that period. Not only is that not going to happen, it is not necessary. Instead we need to craft a new model that will deliver us to sustainable solvency after 2040.

We know what level of tax increase we would need under Intermediate Cost assumptions: 1.7% of payroll. We know the growth numbers that will return an overfunded system along the lines of Low Cost: 2.9% Real GDP in the years after 2013. So lets go target shooting.

For political reasons our first target point is 2011. We can start with Intermediate Cost assumptions and assume we will need to start phasing in that 1.7% with an initial increase of .4% of payroll. If between now and 2011 we beat IC numbers we simply shave that initial increase down to compensate. If we do enough better to make it unnecessary we can make an adjustment in the next target point of 2015 or whatever interval we choose but always with the goal of delivering 100% of benefits while keeping the TF tail from going long term significantly over a ratio of 100.

It is my personal opinion that subsequent adjustments in the targets will be more likely in the direction of cutting the rates rather than raising them, but in this case opinions don't matter, economic performance does. Rather than quarrel about 75 year windows instead we can just settle on a policy outcome and adjust the FICA rate as needed to hit it.

This is not to say that the current schedule is perfect or that adjustments to benefits are totally off the table, we might agree to settle on a 95/100 solution. But the points are one, we need to be proactive and not reactive, and two there are significant dangers to allowing the Trust Fund ratio from getting out of hand, we are in fact called to thread the economic needle.

Social Security Low Cost & the 100/100 Target

100% of scheduled benefits plus sustainable solvency with a 100 Trust Fund Ratio.

The current system of reporting Social Security solvency depends on a projection model. The Trustees ask the Office of the Chief Actuary to come up with a range of possible economic and demographic outcomes and score solvency under models that purport to represent the median (Intermediate Cost), the top (Low Cost), and the bottom (High Cost) of that range. This has led to a certain amount of controversy with one camp arguing that Intermediate Cost by coincidence or design has been too pessimistic, while another camp argues that it is in fact carefully constructed in light of best available information. Well that is not getting us anywhere, quarreling over which 75 year economic model is superior is kind of laughable considering that we don't have consensus over what happened over the last 75 days. (Are we in recession yet?) I suggest a new approach.

Instead of projecting why don't we try targeting? And a good starting point is the current schedule of benefits. To recap the situation. Social Security benefits are adjusted to capture the changes in real wages over a workers lifetime. What this means in practice is that historically Social Security has been a better deal for each generation, offset by some increases in payroll taxes along the way. Under the current schedule benefits in 2041 are set to be about 160% compared to the benefits a similarly situated retiree gets today. However under Intermediate Cost Assumptions the accumulated surplus in the Trust Funds is scheduled to run out in that year resulting in an immediate reset in benefits to 78% of the schedule. Now one way to look at this is to apply Rosser's Equation (after Prof. Rosser of JMU who pointed me to these numbers) and see that 78% of 160% = 125% and call the deal done. Because a benefit 25% better than my Mom gets today guaranteed until I am 84 doesn't exactly rise to the level of personal crisis. Then again the world doesn't revolve around me.

So lets just assume that we want to target 100%. But what about the other 100? What is this Trust Fund Ratio you talk of?

The Trust Fund Ratio is simply a measure of the trust fund balances expressed as a function of time with 1 year = 100. If Social Security income from all sources continues to track total cost you end up with a stable Trust Fund Ratio. More income than cost ratio goes up, less income than cost ratio goes down. By law the Trustees are mandated to keep a minimum Trust Fund Ratio of 100. This allows for a certain degree of short term fluctuation in employment and hence payroll receipts to occur with creating financing gaps, keeping the TF ratio above 100 is a reasonable policy outcome. But there are limits, at some point a high TF ratio becomes actually a threat to the health of Social Security itself. Oddly enough you can really be too rich.

It works like this. Social Security surpluses are currently invested in Special Treasuries. Despite some hysteria these bonds perform just like any other Treasury, they carry specific interest rates and specific terms and are backed by the Full Faith and Credit of the United States. They are just as real as that dollar bill in your wallet. But is exactly because these bonds are real that they can become a problem. To see why you have to examine the past and present projection of the Low Cost Alternative.

From 1997 to 2007 Low Cost always returned the same outcome, a fully funded Social Security system with a flat TF ratio through the 75 year actuarial window meaning that total income tracked total costs putting the whole system in long term equilibrium. Now while this is a perfectly adequate outcome it would not in fact be an ideal outcome, the TF ratio settled out at high enough levels that the cost of paying the interest starts representing an appreciable burden on the General Fund. Not a big burden but enough of one to get noticed, under 2007 Low Cost the General Fund would be required to pay out about 10% of the interest owed in years after mid-century or about 2% of total system cost. Now there is nothing particularly unfair about a 98%/2% split between payroll tax and general fund, on the other hand the obligation never stops even while the original utility of the excess borrowing fades away. Table VI.F8.-Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2007-85

The 2008 Report tossed us an entirely different complication, under the newest Low Cost projection the system never settles into equilibrium, instead you get outcome I in the figure in this post Shape of Low Cost the tail doesn't flatten and the TF ratio rockets up to 650 in 2085 and rising from there. To see why this is a problem you have to take this process to its logical end. A TF ratio of 2000 at an interest rate of 5% would require General Fund transfers equal to 100% of overall system cost to restore equilibrium. Which is to say that Social Security would lose all semblance of being a worker financed insurance system and simply be transformed to welfare. In fact I would argue that any TF ratio above 1000 is a longterm danger, restoring the system to equilibrium requiring a transfer of more than 50% of total cost and so making SS into at least a partial welfare program. But by a really cruel mathematical irony the only way to drive the TF ratio down is by cutting the revenue from the payroll tax and so in the short term INCREASING the share borne by the General Fund. Instead you need to get this particular tiger's tail under control before the acceleration sets in.

Trust Fund Depletion: Crisis? or Tax Cut?

Social Security 'Crisis' comes in two forms: shortfall and depletion. 'Shortfall' is that time when receipts from payroll tax and tax on benefits fall short of cost and so Trust Fund assets first need to be tapped. Shortfall currently is projected for 2017 under Intermediate Cost projections. But in this post I propose to examine 'Depletion', the date when all Trust Fund assets are depleted, currently projected for 2041.

Whether Depletion constitutes crisis depends on where you are sitting. Under current law at Depletion benefits are automatically reduced to whatever level then current Social Security income sustains, a level that currently projects at 78% of the scheduled benefit. On the other hand the current benefit schedule would have a 2040 benefit 160% in real terms of what a similarly situated retiree gets today and by application of Rosser's Equation we have 78% of 160% = 125%. So 'crisis' is here defined as '25% better check than my Mom gets today'. While it is a nice feature of Social Security that each generation gets a better outcome you have to ask whether the difference between 25% better and 60% better rises to the level of national priority when we have 47 million people uninsured. As an example a person scheduled to retire in 2041 would be 33 today and likely to have young children and moreover have plenty of time to plan for retirement. Telling that young parent that his retirement check 33 years out is more important than funding his childrens' education or health care is on examination kind of absurd. And yet that is where 'crisis' takes us.

Now lets move up the age scale and see what a 2041 crisis means to someone currently 66, or 55, or 44. If I am 66 and preparing for full retirement next year the prospect of a benefit cut 31 years out isn't exactly scary and even less so if the proposed cures include phased in cuts in between (as most 'reform' plans do). I'll be very lucky to still be kicking at 97. Similar considerations hit for the 55 year old, mortality tables suggest that half of his cohort will be dead and most of the rest on the way out, any 'reform' plan that carries some combination of tax increases and benefit cuts is just going to hit you twice. Now a 44 year old is on the cusp, she is likely to still be drawing benefits in 2041, but on the other hand she is looking at a potential of 23 years of higher taxes until retirement in 2031 coupled with ten years of whatever phased in benefits cuts might be required to 'save' Social Security. On balance none of these people have a reason to move on Social Security, 'crisis' in numeric context is no crisis at all.

But now let's move down the age scale and see what a 2041 depletion crisis means to someone 22, 11, and 1 years old. Time to bring in some numbers.

Trust Fund Operations 2008-2085

Under Intermediate Cost assumptions, Social Security starts drawing on the General Fund in 2017 as income from taxation lags total cost. Initially this just takes a portion of the interest due but mounts until in the mid 2020s all accrued interest is needed at which time it becomes necessary to start redeeming the principal. Eventually by 2040 this transfer from the General Fund reaches $806 billion. (Which is a lot of money but when adjusted for inflation works out to $335 billion in inflation adjusted constant dollars or less than they typical Bush deficit.) But then the obligation effectively ceases, after an additional transfer of  $267 billion in 2041 the legal obligation on the General Fund simply stops. Result? $806 billion tax dollars suddenly freed up.

Which gives the taxpayers of 2041 some choices. They can examine Rosser's Equation and figure that 78% of 160% = 125% is just not that bad a deal for Grandpa and so use that $806 billion somewhere else, say to shore up Grandpa's Medicare, or maybe they will just take it back in the form of a tax cut, or some combination of spending and tax cuts.

So where does that 22 year old fit in this picture? Well he is not retirement eligible until 2053 and so has a full 12 years of an effective tax cut in exchange for potentially having to take a somewhat lower retirement. At worst it is a near wash. And the 11 year old of today? In 2041 he will only be 44 and maybe more inclined to take his chances funding his IRA than continuing to pay General Fund taxes to bolster Social Security. 

When you sum it all up there is only a narrow band of people on either side of 30 for whom a crisis defined as a minor cut in real benefits 32 years out even makes sense, and that would have to be weighed against other uses for that current payroll dollar. As for Boomer's and Millennials both there is exactly zero reason to move on this front.

Low Cost is out There & Why that could be a bad thing

People who follow Social Security issues understand that in addition to the Intermediate Cost Alternative whose dates and numbers are universally reported in the press that the Trustees also present two other models called Low Cost and High Cost. Low Cost is typically depicted as being more 'optimistic' while High Cost being more 'pessimistic'. But that depends on your perspective. In reality Low Cost is better depicted as 'hotter' in economic terms and High Cost as 'cooler'. Now for most purposes the a relatively hotter economy than current Intermediate Cost assumes would be a good thing, all kinds of things are possible given higher levels of productivity and GDP, but for the specific purposes of Social Security it is possible that you can get too much of a good thing.

The post above explains why for most people a crisis defined by a minor benefit cut starting in 2041 for most cohorts is offset by the tax savings to everyone else after Depletion. Social Security 'crisis' in context being just a run of years in the 2030's when General Fund transfers to redeem the principal in the Trust Fund approaches current levels of deficits but then resets to zero for 2042.

But what happens under Low Cost? Well until the 2007 Report the Low Cost alternative always returned the same result: fully funded Social Security with flat Trust Fund ratio (reserves expressed as a function of time). While at first glance this seems like an ideal outcome a look at the numbers reveals a little different story.

2007 Report: Trust Fund Operations 2007-2085

Under 2007 Low Cost Income excluding Interest continues to exceed cost until 2023 at which time a portion of the interest accrued needs to be tapped. The amount needed never exceeds more than about a fourth of the actual interest earned and doesn't amount to a whole lot once you adjust the total for inflation, in constant dollars it works out to about $120 billion a year. But it never stops. Generation after generation ends up paying interest on a debt piled up by people paying excess taxes from 1983 to 2023 even after all utility of that borrowing has been exhausted and the people who paid in the actual extra dollars have all moved on. This isn't a terrible outcome but it does hack away at the fundamental strength of Social Security as a worker funded insurance plan for workers, under 2007 Low Cost the General Fund subsidy, though certainly legally obligated, starts making it take on aspects of a welfare system.

With the 2008 Report we entered into a whole new world. Rather than Low Cost showing an outcome with a Trust Fund ratio in equilibrium we have Outcome I in the figure at the top of the post, a Trust Fund ratio that bottoms out around 2040 and then accelerates upwards after about 2060. This is a bad outcome. If the assets in the Trust Fund are real, and they are legal obligations, why should workers continue to pay into a system with trillions of dollars of accumulated surpluses? But flattening out that tail becomes more and more difficult, the only way to do it is to slash away at FICA taxes so that enough interest has to be drawn from the Trust Fund to get it back to equilibrium. The mathematical result is that the balance between Income and Interest in relation to Cost starts skewing. At an extreme a Trust Fund Ratio of 2000 with an assumed interest rate of 5% can only go to equilibrium by paying 100% of benefits from the General Fund in the form of Interest (5% of 2000 = 100% of Cost). At a Ratio of 1000 you end up at the crossing point where fully half of Social Security is being paid out of the General Fund by taxpayers that never benefited directly from the early 21st century borrowing to start with. Operationally Social Security starts looking like just another Federally funded social program, in a word welfare.

What is the solution? Well first we need to have a plan to flatten the tail of Low Cost, perhaps combined with some reexamination of what the long term Trust Fund Ratio should be. Under the law the Trustees are mandated to maintain a Trust Fund Ratio of at least 100 and that seems to be a reasonable target, that would deliver a total system where 95% of benefits are being paid from payroll tax and 5% by transfers to pay the accruing interest. And it would be nice to have as a goal meeting the benefit levels of the current schedule. Which is why I want to call this the 100/100 Plan. 100% of scheduled benefits and a Trust Fund with a consistent 100 TF Ratio.

Making this happen requires changing our conceptual Social Security model from one of projections to one of explicit targeting. First we need to provide a Baby Bear model, which is to say that combination of growth outcomes and taxation adjustments needed to achieve 100/100 equilibrium and then pair that with a truly median economic and demographic projection (because Intermediate Cost is not cutting it). If the actual economy performs better than Baby Bear in the current year than you calibrate the tax adjustment down, if the actual economy underperforms Baby Bear you set the future adjustment up. If we put the actual adjustment on a schedule with minimal political influence, say in the third year of every Presidential term, you would end up with a system of minor tweaks starting in 2011.

My bet is that the first tweak would likely be a relatively small cut in FICA, but with an extended recession it might be a somewhat larger boost but in any event in the range of plus/minus .2% of payroll. But in any event we need to plan for outcomes enough better than Intermediate Cost to risk the runaway Trust Fund we see under Low Cost.