Social Security and the Baby Boom

I've been hearing and reading a lot about Social Security these days since the President made it the centerpiece of his second term agenda. He says there's a crisis brewing, and he is going to fix it. A plan is forthcoming and speculation is rampant, yada, yada, yada!

Since I was a young man, and began hearing of Social Security's problems, I assumed that I couldn't count on Social Security existing in the same form as my parents relied on. I have saved and invested, learned hard lessons not taught in school, had some successes, and depending on how health care costs go, have a shot at a modest, comfortable retirement.

As I get closer to retiring, and the long awaited diminishment (reform in Washington-speak) of Social Security, I'm junking my assumptions and actually studying the problem. So far, here's what I know.

Boomers - From Go ask Alice to Cialis, what a long strange trip it's been.

Ah, the Baby Boom! Born into the post WWII prosperity, we've had so much laid at our doorsteps. Spoiled hippies of the sixties and seventies, we are charged with sapping the morality of our nation. The "Me Decade" of the eighties and the materialism of nineties yuppies followed. It seems we're just a bad bunch.

And now, we're screwing up Social Security, the jewel of FDR's New Deal!

The problem, as we all have heard by now, is that the numbers of retirees drawing SS benefits will surge significantly as the Boomers retire. The current SS surplus will begin to dwindle, starting in 2018, and be depleted by 2042, when benefits will have to be cut by 27% to maintain a pay as you go system. Or, the government will have to take funds from the general fund to shore up SS benefits.

Social Security - The little Ponzi scheme that could.

How's it work? Well, here's the SloJoe view:

It's been described by critics as a Ponzi scheme, which is a con where investors pay in a principal amount with a guaranteed return, that comes from the principal of newer investors. Eventually, the scheme tanks when new investors quit coming, though the con artist splits with the money before that happens.

There's some truth to this. My payroll taxes are not being deposited in an interest earning account with my name on it that I will draw down when I retire. Instead, my money goes straight out the SS revolving door to pay the benefits of current retirees, the excess into special T-bills. When I retire, I'll be getting money that younger folks pay in.

The beauty of the deal is that, unlike the Ponzi scheme, the law ensures that younger working people chip in. A Ponzi scheme requires volunteers! As long as there are enough workers paying taxes, SS can keep the checks coming. Naturally, that's where the Boomers provide the rub.

Of course, that's the glass half empty view. Consider this. Although the government calls it social insurance, my taxes pay my parents benefits and provide them a safety net in their old age as they did for my grandparents and, hopefully, my kids will do for me and my wife.

The glass half full view is that SS is a contract between the generations to provide a basic level of security to the elderly and disabled. Pretty noble stuff, eh?

Anatomy of a crisis.

So where's the fire? If we have until 2042 before something gives, why the urgency to fix it now?

The reason I've heard is that the longer we procrastinate, the more it will cost to bail SS out. And that makes sense. I've been bitten that way myself. It's the old pay me now, or pay me later conundrum.

However, since I junked my assumptions, I've started looking at other people's assumptions too, including our buddies, those pillars of actuarial rectitude, the SS Trustees.

Like good analytical folks trying to predict the future, they factored in a boatload of things that could have an impact on their forecast which, after all, boils down to how much will they have to spend and how much will they take in. As they put it in Section V - ASSUMPTIONS AND METHODS UNDERLYING
ACTUARIAL ESTIMATES(a thrilling read):

The future income and cost of the OASDI program will depend on many demographic, economic, and program-specific factors. Trust fund income will depend on how these factors affect the size and composition of the working population and the level and distribution of earnings. Similarly, program cost will depend on how these factors affect the size and composition of the beneficiary population and the general level of benefits.

They aren't kidding, either! They looked at fertility, mortality, immigration, total population, life expectancy, productivity, inflation, average earnings, real-wage differentials, labor force and unemployment, gross domestic product, interest rate . . . you get the picture. They looked at a lot of important stuff and made their best estimate on each, put them together in a way they believe will most accurately predict how much cash SS will take in and pay out for the next 75 years.

It's serious stuff put together by serious people, and they recognized that they were making a big guess based on a whole bunch of other big guesses about an unknowable future. So they made three forecasts: a worst case called the high cost forecast, the intermediate forecast that is being quoted so much, and a best case forecast called, you guessed it, low cost.

Now, I'm not going to second guess the experts, so here are their words:

Significant uncertainty surrounds the intermediate assumptions. The Trustees have traditionally used low cost (alternative I) and high cost (alternative III) assumptions to indicate this uncertainty. Figure II.D7 shows the projected trust fund ratios for the combined OASI and DI Trust Funds under the intermediate, low cost, and high cost assumptions. The low cost alternative is characterized by assumptions that improve the financial condition of the trust funds, including a higher fertility rate, slower improvement in mortality, a higher real-wage differential, and lower unemployment. The high cost alternative, in contrast, features a lower fertility rate, more rapid declines in mortality, a lower real-wage differential, and higher unemployment.

So what do the other assumptions look like? Here's Figure II.D7:

In English, when the blue line hits the bottom of the graph, that's the year SS can't pay some part of benefits with its own money - the dreaded unfunded liability. What they are saying is that SS will remain solvent indefinitely in the best case. Also, it's really complicated and hard to predict the future, so they are guessing. It's scientific guessing, which is impressive, but it's still a guess.

So there's the crisis. Are you buying it? I'm not taking it on faith anymore.

Tap dancing on the third rail of politics.

So along comes the President, newly reelected, with a plan to save Social Security from this crisis. He speaks in stark, emphatic terms:

But if you're a youngster in America, you better understand that by the time -- if you're in the 20s and by the time you retire, if nothing is done about Social Security, the system will be bust. In other words, there won't be anything available for you.

I guess that's what you call an exaggeration! However, I expect the President to paint a bleak picture. He wants to reform Social Security. It doesn't really bother me. I try to be a rational actor about issues, and have a high threshold for Washington mendacity.

However, I was surprised by my reaction to a leaked memo that recommended cutting benefits by changing how they are calculated. It may affect me, and my first reaction was, OK, it it's necessary, I'll take the hit for my kids welfare. But then I considered that I wouldn't be the only one taking the hit. I'm the primary wage earner in my family, and my wife will be dependent on my retirement benefit. I got a little steamed. I discovered that, for the first time in my life, I could be a single issue voter! I'll be sure to share that with my Congress critters.

I don't think I'm the only one who will react that way.

Fool me once, shame on you. Fool me twice...We won't get fooled again!

I not a fan of the ad hominem attack as a way to refute an argument. I think it is intellectually lazy and dishonest to say, The Republicans have manufactured a crisis because they want to destroy Social Security, and replace it with individual accounts that will provide a windfall for their rich brokerage house buddies, as some liberal pundits have been doing. They may be right, but it doesn't mean there isn't a problem.

After all, the high cost and intermediate forecasts above don't paint the rosiest of pictures!

That said, the people providing the information to support the administration's argument deserve some scrutiny for accuracy and veracity.

Oh, wait. Those people are part of the Bush administration, who told us about Iraqi WMD, didn't tell us about global warming, and do a lot of spending off budget. The forecasters may be honest, but they are in with a questionable bunch!

But, maybe the facts are suspect, as well as being guesses! And, not everybody at the SS Administration is happy about it:

Over the objections of many of its own employees, the Social Security Administration is gearing up for a major effort to publicize the financial problems of Social Security and to convince the public that private accounts are needed as part of any solution.

The agency's plans are set forth in internal documents, including a "tactical plan" for communications and marketing of the idea that Social Security faces dire financial problems requiring immediate action.

Social Security officials say the agency is carrying out its mission to educate the public, including more than 47 million beneficiaries, and to support President Bush's agenda.

. . . SNIP . . .

But agency employees have complained to Social Security officials that they are being conscripted into a political battle over the future of the program. They question the accuracy of recent statements by the agency, and they say that money from the Social Security trust fund should not be used for such advocacy.(emphasis mine)

Well, that is reassuring!

The bottom line - Swallowing the Camel.

If you are still reading this ramble, thanks for your patience.

In drawing conclusions, I think everybody will have to make up their own mind about this, depending on their values, their level of trust in what we are being told, and in the people doing the telling.

As for me, I don't buy the urgency. A forecast that ranges from a worst case funding shortfall in 2032 to a best case sustainable surplus dictates a cautious appraisal, not panic!

Plus, there are more pressing problems. Health insurance costs could completely derail a lot of people's retirement plans, and they aren't being addressed. The Medicare situation looks far more dire. And then there's the budget deficit and it's expansion of the national debt. Throw in Iraq and the Al Qeada problem, and Social Security's possible long term financial health fades to smoke on the horizon when the house is on fire!

Bottom line. We should keep an eye on how Social Security is doing, and not be stampeded. And, as always let's keep an eye on the Washington crowd and a hand on our wallets!

If there's more, it's here.