Yes Virginia, Social Security Is in Crisis

Remember how during the Bush administration, Democrats and the port side in general mobilized against efforts to reform Social Security by telling us that there is no crisis?

Sure you do. Anyway, you will be displeased to know that the reassurances are just not true:

For the first time in more than a quarter-century, Social Security ran a deficit in 2010: It spent $49 billion dollars more in benefits than it received in revenues, and drew from its trust funds to cover the shortfall. Those funds — a $2.7 trillion buffer built in anticipation of retiring baby boomers — will be exhausted by 2033, the government currently projects.

Those facts are widely known. What’s not is that the Social Security Administration underestimates how long Americans will live and how much the trust funds will need to pay out — to the tune of $800 billion by 2031, more than the current annual defense budget — and that the trust funds will run out, if nothing is done, two years earlier than the government has predicted.

We reached these conclusions, and presented them in an article in the journal Demography, after finding that the government’s methods for forecasting Americans’ longevity were outdated and omitted crucial health and demographic factors. Historic declines in smoking and improvements in the prevention and treatment of cardiovascular disease are adding years of life that the government hasn’t accounted for. (While obesity has rapidly increased, it is not likely, at this point, to offset these public health and medical successes.) More retirees will receive benefits for longer than predicted, supported by the payroll taxes of relatively fewer working adults than projected.

Remarkably, since Social Security was created in 1935, the government’s forecasting methods have barely changed, even as a revolution in big data and statistics has transformed everything from baseball to retailing.

This omission can be explained by the fact that the Office of the Chief Actuary, the branch of the Social Security Administration that is responsible for the forecasts, is almost exclusively composed of, well, actuaries — without any serious representation of statisticians or social science methodologists. While these actuaries are highly responsible and careful and do excellent work curating and describing the data that go into the forecasts, their job is not to make statistical predictions. Yet the agency badly needs such expertise.

With considerable help from the actuaries and other officials at the Social Security Administration, we unearthed how the agency makes mortality forecasts and uses them to predict the program’s solvency. We learned that the methods are antiquated, subjective and needlessly complicated — and, as a result, are prone to error and to potential interference from political appointees. This may explain why the agency’s forecasts have, at times, changed significantly from year to year, even when there was little change in the underlying data.

A number of solutions are offered to solve the Social Security crisis, but unfortunately, none of them encompass allowing for even the partial use of alternative individual investment accounts. Yes, it can be risky to invest your money in the stock market, as the financial crisis has shown. But over the long run, people who invest in the market have seen excellent returns. Closing our eyes and ears to this fact when considering how to reform Social Security all but guarantees that our response to the crisis will be wholly inadequate.

  1. Guruforhire

    There is no trust fund.

  2. Bryan Van Blaricom

    Yes, I notice the article didn’t mention that the so called “trust fund” consists of a bunch of IOU’s the government has written to itself in the form of government bonds and is actually part of 16+ billion dollar national debt that is soon going to plunge us into the economic abyss, while all social security payments are actually made out of current revenues.

  3. Nick Stuart

    Even if it was a requirement that an individual account funded by the individual’s payroll tax must be entirely invested in Treasury securities (which are considered to be default risk-free since the Treasury can pay them off with worthless fiat currency) it would be beneficial to the individual in that they would have a property interest in the account and could bequeath it to their heirs. The individual would at least have what they have (even if it’s value were virtually worthless due to inflation) than have nothing but a benefit contingent on congress’ largess.

  4. LHFry

    Most people don’t understand how the SS system works and Democrats keep telling them not to worry, that the “trust fund” is in surplus.   For many yearspayments in exceeded payments out.    But the overage was not retained - Treasury securities (government bonds) were “purchased” with the incoming funds and the money went to the General Fund to pay other obligations.   The Treasury securities held by the “trust fund” pay interest and they can be redeemed to pay benefits, however, both the interest paid and the funds “redeemed” come from the General Fund.    The General Fund is total tax receipts plus, if total tax receipts are not sufficient to pay all obligations,  money is borrowed from China and elsewhere.     So to the extent that we must borrow any money to pay interest on the bonds and/or to permit redemption of the Treasury bonds, the deficit increases.   

    See the SS Administration’s own trustees report which can be found on the SSA website:  http://www.ssa.gov and this article by Megan McArdle that explains why it is illegal to fund private pension plans in the same way:   http://www.thedailybeast.com/articles/2012/12/14/assets-in-name-only.html
  5. Guruforhire

    There is no separate fund.  The money taken in the payroll taxes can be spent at congresses discretion, the fact they CHOOSE to lend to themselves and claim an asset is immaterial.  Its not a separate pot of money, it has never been so.

    If we eliminated the trust fund by either just zeroing it out and claiming a mulligan, or by paying ourselves back it doesn’t change our ability to pay our seniors, or the fiscal situation of the united states one bit.

    Its just a fraudulent placebo to make people feel better.

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