My Tuesday Comments on Social Security: Some of us remember what happened in 1983 when Congress was sane and was facing a financial crisis. Within the span of six years, which happened to be the same six year election cycle of the Senate, the system was expected to crash. So bending to common sense, Congress made some changes that resulted in the system we more or less have today.
That was 35 years ago and there is writing on the wall that more changes will need to be made. The changes need not be dramatic and are relatively simple. But it will require leadership committed to the welfare and well being of the people they allegedly profess to lead. Right now I’m unsure about that.
The takeaway here is that my children will arrive at a point in time when Social Security will become a critical part of their ability to pay their bills and live what to them is a normal life. They are going to have to learn that if that is to happen, they have to vote for candidates who will work on their behalf.
by Dan Caplinger, August 19, 2018
The release earlier this year of the Social Security Trustees Report brought about the usual set of headlines explaining the financial crisis that the retirement and disability benefits program faces. The latest projections confirmed expectations that if nothing changes, the Social Security Trust Funds will be out of money by 2034. That could force an immediate and dramatic benefit cut for tens of millions of Social Security recipients at a time in their lives when they’re least able to weather an income cut.
Yet when you look at the report, you’ll find several instances within its 270 pages in which the trustees say that things might well turn out OK. Actuarial projections in these cases work out positively throughout the next 75 years, and Americans are able to keep getting their benefits without any threat to the trust funds. Under this rosy scenario, no changes to Social Security end up being necessary in order to assure the survival of the program and full benefits for all.
That raises an obvious question: What has to happen for this favorable outcome to happen? You’ll find the answer in the report, in its discussion of what it calls the low-cost assumptions for Social Security.
Projecting the future of Social Security
To make the sophisticated actuarial projections that go into producing the numbers in the Social Security report, those who prepare the report have to make assumptions about key variables that determine how much money Social Security brings in and pays out. But economists can’t be certain about exactly how those factors will play out. As a result, Social Security uses three different sets of assumptions: low-cost, intermediate, and high-cost.
These three sets of assumptions work the way you’d expect. The low-cost assumptions are generally optimistic, predicting quicker recoveries from economic downturns, expecting stronger economic growth over the long haul, and seeing other factors work out favorably from the standpoint of funding Social Security. The high-cost assumptions take a more pessimistic view, expecting weaker growth and prolonged recessions along the way. The intermediate assumptions split the difference.
In particular, here are a few of the assumptions that the low-cost model makes, compared to the intermediate scenario:
• Fertility rates of 2.2, compared with 2.0 under the intermediate assumptions.
• A rise in economic productivity at an ultimate average annual of 1.98%, rather than 1.68%.
• A rise in the consumer price index at an average of 3.2% annually, rather than 2.6%.
• An expected growth rates in average earnings of 5.02%, compared with 3.8%.
• Long-run real wage differentials of 1.82%, versus 1.2%.
• Larger working-age populations and labor force participation than in the intermediate model, with unemployment rates of 4.5% compared with 5.5%.
• GDP growth of 3.2% rather than 2.4%.
• Real interest rates of 3.2% versus 2.7%, based on nominal interest rates of 6.4% compared to 5.3%.
How all these factors interact gets complicated quickly. But in general, using the low-cost assumptions, things work out well for Social Security. Relatively lower life expectancies reduce the length of time retirees collect benefits, and a lower number of married couples cuts the burden of spousal and survivor benefits on Social Security’s shoulders. Higher interest rates let the trust fund balances generate more income.
A low-cost scenario would be great — but don’t hold your breath
The Trustees’ Report shows the benefits of having the low-cost scenario play out. Under those projections, the combined trust funds for the old age and disability trust funds never run out, with the combined funds declining from the 2018 level of about 289% to reach a low point of 113% of expected annual benefits in 2050. From there, a shift back in demographics helps the trust funds build up capital again, topping two years’ worth of benefits by 2095. That’s a far cry from dealing with completely using up both trust funds by 2034.
The challenge with the low-cost assumptions is that they’re unlikely to occur. The fact that projections haven’t deviated much from their course of expecting trust fund exhaustion in the mid-2030s shows that the intermediate assumptions on which those projections are based have generally turned out to be accurate historically. It would take a fundamental shift to make low-cost assumptions more realistic.
Most of the reason the low-cost assumptions are there is to give a sense of how sensitive the results are to economic factors that differ from the intermediate assumptions. Just because the low-cost assumptions exist doesn’t mean that there’s any significant chance that they’ll actually occur. For those who think that the assumptions under the low-cost model represent targets for economic and fiscal policy to strive toward, it’s extremely unlikely that the economy will cooperate enough to fix Social Security without specific and direct action from lawmakers.