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.