Monday, November 27, 2006

Selective projections and trends

Compare and contrast:

Disco Stu: “Did you know that disco record sales were up 400% for the year ending 1976? If these trends continue... A-y-y-y!”

Maxspeak: “The chart shows the program levels for the next 20 years, the official MaxSpeak correct Federal budget planning time horizon.”

Dean Baker: “The Post is more honest than usual in today's column, noting that the program is solvent for the next 35 years according to President Bush's Social Security Trustees (40 years according to the non-partisan Congressional Budget Office) and that the projected explosion in health care costs implies that Medicare is a much bigger problem, but then argues that workers need time to plan for their retirement. While time for planning is great, one might think that 20 years is plenty.”

So, you see, there’s no need to reform Social Security; there’s plenty of funds for twenty or thirty years. Just don’t look beyond that horizon where the Social Security Trust Fund drops off like Village People record sales in 1982:


From the 2006 Social Security Trustee Report on “Projections of future financial status”:

The year-by-year relationship between income and cost rates shown in figure II.D2 illustrates the expected pattern of cash flow for the OASDI program over the full 75-year period. Under the intermediate assumptions, the OASDI cost rate is projected to decline slightly during 2006 through 2008 and then increase up to the current level within the next 2 years. It then begins to increase rapidly and first exceeds the income rate in 2017, producing cash-flow deficits thereafter. Despite these cash-flow deficits, beginning in 2017, redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2040, when the trust funds will become exhausted. This redemption process will require a flow of cash from the General Fund of the Treasury. Pressures on the Federal Budget will thus emerge well before 2040. Even if a trust fund's assets are exhausted, however, tax income will continue to flow into the fund. Present tax rates would be sufficient to pay 74 percent of scheduled benefits after trust fund exhaustion in 2040 and 70 percent of scheduled benefits in 2080.
The inescapable fact about Social Security is that demographics is destiny. When Social Security was formed there were sixteen workers for every retiree; now there are three and in 30 years there will be two. This is why a team of actuaries at the Social Security Administration has extrapolated this less-than-rosy fiscal scenario. Some would say we should reform a system borne out of the Great Depression and drag it into the 21st century. Others warn that it’s all just a right-wing trick to dismantle the cornerstone of the New Deal. But only one of us has math on our side.

Extra - From today's editorial in the Washington Post:
Some Democrats dispute the urgency of the problem, arguing that the notional assets in the Social Security trust fund are sufficient to pay all the benefits promised to retirees for the next 40 years. But a retirement system needs to make credible promises that last longer than that: A worker who is 30 can't entrust her retirement to a program that will run short of money as she turns 70. Moreover, a solvency fix for Social Security requires a long lead time. Cuts in benefits must be signaled years ahead so that workers have time to plan for them. Any increase in the payroll tax needs to be implemented soon in order to keep the size of the increase to an acceptable level.
And Sebastian Mallaby makes the case for personal/add-on accounts with "A Fix for Social Security? How personal accounts could please both sides."

1 comment:

Eric said...

Yes, quite right. The pain will start in 2017 when the U.S. shifts from raiding the SS Trust Fund to paying for cashed-in bonds. That's crisis #1.

Crisis #2 is Social Security's alone when the Trust Fund has no more bonds. The inability to pay promised commitments is commonly called "bankruptcy".