Sunday, August 31, 2008

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.

Saturday, August 30, 2008

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 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.

Friday, August 29, 2008

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.