Saturday, August 30, 2008

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.

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