To: "homestead AT lists.ibiblio.org" <homestead AT lists.ibiblio.org>
Subject: [Homestead] Social Security--the straight skinny
Date: Tue, 18 Jan 2005 05:35:36 -0700
The New York Times Sunday Magazine has the best article I have seen on
social security. It is too long to post here. If anyone wants to read it,
go to:
Currently, Social Security is running a hefty surplus; the payroll tax
brings in more dollars than what goes out in benefits. By law, Social
Security invests that surplus in Treasury securities, which it deposits
into a reserve known as a trust fund, which now holds more than one and a
half trillion dollars. But by 2018, as baby boomers retire en masse, the
system will go into deficit. At that point, in order to pay benefits, it
will begin to draw on the assets in the trust fund.
The debate over Social Security's solvency is really two debates. The first
is over how long the trust fund will last. The law requires the Social
Security Administration to estimate its financial condition for 75 years
into the future, and the agency's conclusions depend on the assumptions it
makes about what America will look like decades hence -- how much people
will earn, how large their families will be, how long they will live.
Politicians and other commentators tend to speak about these long-range
trends, or at least about Social Security's finances, with an air of
precision. This is almost amusing, since few economists can predict the
swings in the federal budget even a year in advance. Joshua Bolten, head of
Bush's Office of Management and Budget, said of Social Security last month,
''The one thing I can say for sure is that if left unattended, the system
will be unable to make good on its promises.'' But the Social Security
Administration itself pretends to no such certainty. Its actuaries (about
40 are on staff) frankly admit that the level of, say, immigration in 2020,
or of wages in 2040, is impossible to forecast. ''The only thing we are
sure of is that it won't happen precisely as we project,'' says Stephen
Goss, the chief actuary at the agency. And the trustees' annual report,
which is based on the actuaries' analysis, takes pains to say that it is
not making a prediction. It makes a projection -- three different ones,
actually -- that amount to informed but very rough guesses. The agency's
best guess, labeled its ''intermediate'' case, is that the system will
exhaust its reserves in 2042. At that point, as payroll taxes continue to
roll in, it would be able to pay just over 70 percent of scheduled
benefits. That would leave a substantial deficit, but one that Congress
could easily avert if it were to act now when the projected problem is more
than a generation away.
What's more, there is a strong case to be made that the agency is erring on
the side of being overly pessimistic. If its more optimistic projection
turns out to be correct, then there will be no need for any benefit cuts or
payroll-tax increases over the full 75 years.
No one can definitively predict that outcome, either, of course, but David
Langer, an independent actuary who made a study of Social Security's
previous projections compared with the actual results in 2003, thinks the
''optimistic'' case is its most accurate. Over a recent 10-year span, the
trustees' intermediate guesses turned out to be quite pessimistic. Its
optimistic guesses were dead on, and its pessimistic case -- sort of a
doomsday situation -- was wildly inaccurate.
And, contrary to widespread belief, recent demographic trends have been
modestly better (from an actuary's gloomy standpoint) than anticipated. For
instance, longevity hasn't increased as much as expected. Partly as a
result, since 1997 the agency has pushed back, by 13 years, the date at
which it projects its reserves will be exhausted. In other words, as the
cries of impending doom started to crescendo, the guardians of the system
have grown more optimistic.
IS THE TRUST FUND TRUSTWORTHY?
The second debate concerning solvency is over whether the securities in the
trust fund will be honored or whether, in Moore's pointed imagery, the fund
will resemble a bank ''after it's been robbed by Bonnie and Clyde.'' This
seems an odd preoccupation. Social Security does not own junk bonds or
third-world debt; it invests in U.S. Treasuries, considered the safest
investment on the planet. Since 1970 there have been 11 years in which
Social Security has operated at a deficit; each time, it redeemed bonds
from the trust fund without a fuss. Goss, the agency's actuary, says he has
no doubt it will be able to do so again. ''Absolutely,'' he said when asked
if the trust-fund bonds are sound.
[Homestead] Social Security--the straight skinny,
Gene GeRue, 01/18/2005