The Social Security and Disability Insurance programs’ Trustees issued their annual report to Congress as expected this month. Their message is even more strongly worded — that the Social Security and Disability Insurance programs face longer-term insolvency of an astounding magnitude. But this year’s modeling utilized aggressive assumptions to hide how quickly the catastrophe is barreling down on us.
Year after year, the Trustees have exhorted Congress to protect the long-term viability of these entitlement programs. Last year’s report mentions a 1994 commission. “In 1994, … the Trustees recommended … that ‘the Advisory Council on Social Security conduct an extensive review of Social Security financing issues and develop recommendations for restoring the long-range balance of the OASDI program.'” In the early 1980s President Reagan’s administration also had a commission to examine the viability issue and to develop recommendations. More recently, initiatives from Congress and the Obama administration led to the Simpson-Bowles Commission, which was tasked to address Social Security as part of reducing the national debt. Every commission and every Trustees’ report pointed to the problem of retiring Baby Boomers, an issue that existed ever since the birth of the Boomers from 1946 to 1964. Little to date has been done to address the issue.
The 2016 report shows how politics trumps reality. Let me restate that, given the obvious. Politics — getting elected — is more important than the welfare of not only the retiring Baby Boomers (like myself), but also that of other future retiring generations. This issue is thoroughly entrenched in social welfare, the economy and the nation’s debt burden.
In this year’s report, the Trustees allowed altering of assumptions underlying the programs’ actuarial modeling to produce a politically-correct answer. And the Presidential politics are even more astounding. If anyone is looking for an example of how “the system” is rigged, “the system” being the workings of both Congress and the Federal government’s executive branch, here’s a prime example.
Playing with the Estimated Insolvency Year
For the past four years, the Trustees have estimated that the Disability Insurance Trust Fund would become insolvent in the Presidential election year 2016. How does Congress add to the funds in the Disability Insurance Trust Fund to keep it solvent without raising taxes? The answer is the same tool used in the mid-1990s — through a reallocation of the payroll tax (the OASDI line on your pay stub) from the Social Security program to the Disability program. Congress included the reallocation in last summer’s “Bipartisan Budget Act of 2015”. The total payroll tax wasn’t increased. Here’s the temporary reallocation, according to the 2016 report. (Click on the link.)
Congress also reallocated the payroll tax from the Social Security program to the Disability Insurance program in the mid-1990s to keep Disability Insurance afloat. The mid-1990s move kept Disability afloat for another two decades, but advanced the year Social Security’s Trust Fund was estimated to become insolvent forward 13 years, from 2044 to 2031.
This year’s report kicked the Disability Trust Fund’s insolvency date a mere seven years down the road to 2023 (around or just beyond mid-term elections during the second term, if it happens, of our next President). However, the estimated insolvency date of the Social Security Trust Fund didn’t budge. It remained the year 2035. Here’s the history of the Trustees’ insolvency projections, updated for this year’s report. (Click on the link.)
A reasonable person might wonder how the reallocation would have no impact on the insolvency date of the Social Security Trust Fund. Yes, the Disability program is much smaller than Social Security and was propped up for a much shorter time in last year’s move, but the reallocation should have had some impact, even for just a few years.
Manipulating the Modeling Assumptions
So I looked into the assumptions behind the modeling to see what had changed since last year. I found at least one major reason how “no change in the Social Security insolvency estimate” was spit out of their model. As my University of Chicago Booth School of Business Nobel-prize-winning corporate finance professor Merton Miller said back in around 1981, “If you torture the data long enough, it will confess.” They clearly played with assumptions until they got the answer they wanted.
Having been a rating agency analyst and Senior Credit Officer in the electric power sector, which was going through deregulation in the late 1990s, I’ve seen assumptions and I’ve seen assumptions. I didn’t expect any issuers to present wildly conservative forecasts when borrowing money, but some issuers’ forecasts were more credible than others. One issuer, which owned a regulated utility, was so chronically and materially overly-optimistic about how they were borrowing and spending holding company cash on global expansion that I lined up their successive forecasts and the ensuing realities just to show why our rating practice had to discount what we were being shown in each forecast. That letter was circulated to the company’s board of directors.
Assumptions are key to a reasonable and reliable estimate of outcomes. They need to be supportable relative to both the recent past and to expectations of future behavior. The Trustees provide tremendous detail about the assumptions used for the three scenarios they run — an intermediate scenario (their basic expectations, and the statistics I use here), a high-cost scenario and a low-cost scenario. Their forecast horizon is 75 years, as required by law.
I dug into the assumptions provided in the Trustees’ reports of the past four years. Here are the long-term intermediate scenario assumptions, taken from a nice summary chart provided in their most recent reports. (Click on the link below.) I’ve generally summarized the portion of the forecast horizon covered by the assumptions. The exact years can be found in the reports.
As can be seen, there is no change in recent report years for the fertility rate, disability incidence and recovery rates, the percentage change in productivity, or the unemployment rate. Who is earning the consistently-increasing real wages is a hot topic for another day.
Using the Immigration Assumption to Mask a Crisis
But the most intriguing assumption change, and one that would increase the total wage base to be taxed resulting in the model showing more resources for the Social Security program, is the immigration assumption. Here is that assumption’s recent history with the Excel spreadsheet’s calculation of the percentage change each year. Whereas immigration was assumed to annually increase a small percentage through last year’s report, this year’s annual net immigration assumption for that long time horizon had jumped to 11.8% from 2.7%. Year after year over 75 years. Whereas in the prior two years the modeling had assumed a total of 2.25 million new immigrants over the whole 75 year horizon, this year’s modeling assumes a total of 10.2 million new immigrants to be employed and to pay the payroll tax. That’s a big way to make sure the Social Security insolvency assumption doesn’t get pushed up a number of years. (Click on the following link for the immigration assumptions and their math.)
Since the Trustees forecast that they will be able to pay only 77% of promised benefits after the Social Security Trust Fund becomes insolvent and as tens of millions of ordinary folks rely upon this cash to pay their bills, this isn’t just an academic economic forecasting exercise. The tens of millions of Americans relying upon these resources can’t spend assumptions.
The Political “Third Rail” Isn’t Going Away
Social Security is the “third rail” of politics. No politician touches it because it is so contentious. The major media know this and tend to avoid covering the issue these days.
The reports use strong language exhorting Congress to take action immediately to address the two programs’ long-range solvency. The unfunded obligation for both programs was estimated to be $11.4 trillion in present value according to this year’s report. The Trustees state clearly that the longer Congress waits, the fewer the options and the more draconian the impact. There is no contract guaranteeing these benefits, unlike a public sector union contract.
The Trustees said specifically this year:
“To illustrate the magnitude of the 75-year actuarial deficit, consider that for the combined OASI [Social Security] and DI [Disability] Trust Funds to remain fully solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.58 percentage points to 14.98 percent, (2) scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of about 16 percent applied to all current and future beneficiaries, or about 19 percent if the reductions were applied only to those who become initially eligible for benefits in 2016 or later; or (3) some combination of these approaches would have to be adopted.” [page 5 of the 2016 report]
They continue, “If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2034.”
While this writer has huge reservations about a Trump presidency, she also feels the proposals by both President Obama and candidate Clinton to INCREASE Social Security benefits to be exceedingly cynical. Both Presidential candidates offer their agendas for the Social Security program in the July/August 2016 issue of the AARP Bulletin, essentially skirting the long-term solvency issue. President Obama created the Presidential Simpson-Bowles Commission in 2010, which was tasked with addressing the national debt including the Baby Boomer’s impact on Social Security. But neither he nor other political leaders are stepping up to this ticking bomb. The U.S. Treasury Secretary is the Managing Trustee of the Social Security and Disability Trust Funds. Two other Cabinet members are also Trustees.
Taxes cannot be raised to make up for insolvency without affecting economic growth. This nation continues to borrow more and more, and increasingly from foreigners who may not share our national objectives or even continue to have the resources to invest in our nation’s debt. In the Simpson-Bowles year of 2010, total U.S. debt outstanding was $13.6 trillion. As of June 30, 2016, it had increased to $19.4 trillion. That $11.4 trillion unfunded Social Security obligation mentioned in the 2016 Trustees’ report is 59% of the nation’s currently outstanding debt.
This isn’t a fun topic and will be very unpleasant to resolve. What is worse though — means-testing and reducing these benefits over time or waiting until the debt burden becomes unsustainable for future generations, resulting in large forced cuts? Do we face the issue as adults and manage our way through it to protect future generations, or do we continue to conveniently believe politicians’ promises and look the other way? Are younger voters looking in dismay at our current Presidential candidates as I do? My benefits will have to be reduced. I’ve known that Social Security wouldn’t fully be there for me for decades.
There is no other nation on earth with as much publicly-available information about their government and the freedom of speech to discuss it. As Joni Mitchell lamented, “Don’t it always seem to go that you don’t know what you’ve got ’til it’s gone?”
The generational impact will be acute if this isn’t addressed now. Future elections would be even more unsettled than this one. While current candidates stoke only anger, younger voters and thoughtful and informed older voters keep searching for honest candidates who are willing to address this unpleasant subject. We’re certainly not looking for promises of more benefits when the truth is the exact opposite.