January 14, 2005,
In the debate over Social Security reform, the dollar figures involved can be dauntingly large and dizzyingly complex. That opens up a lot of opportunity for demagogic mischief, and the leftist opponents of reform are taking full advantage.
In fact, there seems to be no end to the Left’s demagogic innumeracy on Social Security. In an op-ed in the New York Times last week, Barry Schwartz, a professor of psychology at Swarthmore, wrote that “the administrative costs of keeping track of these private accounts, according to President Bush’s Commission to Strengthen Social Security, will be 10 to 30 times the cost of administering the current system.” But the President’s Commission’s report said that the administrative costs would be about the same as those of the current system: three-tenths of 1 percent per year. That’s 30 basis points not 30 times.
Why the Times would hold out a professor of psychology as an expert on such matters is a mystery. And so far the Times has not run a correction (“public editor” Dan Okrent accused me of being “infantile” when I asked for one). Of course, the Left has already repeated the Times’s uncorrected statement. Three days later it appeared almost word for word (to put it delicately) in a Molly Ivins syndicated column. No correction there, either.
Ivins is on a roll. In another column this week, she wrote that “The Social Security trustees, paid to be professional gloom-mongers on this subject, say [the system is] good until 2042 ... not before Social Security goes broke, but before Social Security has to dip into its trust fund.” Dead wrong. What the trustees really say is that Social Security will start dipping into its trust fund in 2018. The year 2042 is when they say the trust fund will be entirely and utterly exhausted after 24 years of dipping. Correction? Surely you jest.
The Left has been playing “can you top this” when it comes to exaggerating the so-called “transition costs” of implementing personal accounts. The Washington Post started it when it dropped a bomb a few weeks before the presidential election, claiming the “cost” of private accounts would be $2 trillion. Since then the number has grown with every leftist retelling. Now, in his Tuesday New York Times column, Paul Krugman has the “cost” all the way up to $15 trillion.
In reality, there are no such “costs” there is only government borrowing to make possible the diversion of tax dollars into private accounts. That borrowing is the consequence of the Social Security system’s deficit, which already exists and will come due in the future anyway. But Krugman can’t even get the amount of the borrowing right. His $15 trillion is derived from figures underlying a chart in a July 2004 Congressional Budget Office report. These figures unrealistically assume 100 percent participation in voluntary personal accounts. They are not adjusted for inflation which exaggerates them by about 60 percent over the decades-long timeframe we’re talking about here, according to sources at the CBO. And they are calculated by an arcane stochastic simulation model, not a standard actuarial model.
Here’s the real deal: According to the President’s Commission’s report, in which these calculations were done under the supervision of the chief actuary of the Social Security Administration,
The amount required beyond that which is already accounted for by projected Social Security cash surpluses under ... is approximately $400 billion in present-value terms.
The worst leftist demagoguery concerns the question of just how deeply the Social Security system is in the hole. The best estimate of the system’s deficit is $10.4 trillion, this according to the most recent annual report of the Trustees of the Social Security Trust Funds. That $10.4 trillion is the present value of all of the system’s future liabilities, minus all its future revenues, and minus the value of the trust funds. Here’s a simple way to understand what that means: $10.4 trillion is the amount we’d need to inject into the trust funds today to make the system self-sustaining forever.
Leftist opponents of reform always quote a much smaller number $3.7 trillion. But that’s only the present value of the system’s deficit for an arbitrary 75 year period. Why report the deficit for just that period? Why not 76 years, or 77? For that matter, why not just 3 years? Then everything would look really hunky dory.
The reason is that the 75 year analysis is a tradition with the Social Security trustees. That’s always been the way they’ve reported on the system’s solvency. But in the last 2 years they’ve looked beyond the arbitrary 75 year cut-off date, and they discovered there’s an abyss out there: a $10.4 trillion abyss.
All along it’s been arbitrary and dangerous to only look out 75 years even though, intuitively, that may seem like a very long time. The reality is that, because of the aging of the American population, the economics of Social Security get very much worse in the distant future. So every year that goes by, a relatively good year for the system rolls off the analysis a year in which FICA tax revenues still more than cover benefit payments. And every year that goes by, a new terrible year is added at the back end a year in which the trust fund has been exhausted and benefits have to be either paid out of general tax revenues or cut. That’s why 22 years ago everyone thought the Social Security problem had been licked with the Greenspan tax hike. But now 22 good years have rolled off and 22 bad years have been added. And the system is worse off today than it was then.
That’s why leftist opponents of reform are wrong when the repeat endlessly the notion that there’s nothing wrong with Social Security that a little tax hike won’t fix. After a few years the system gets unfixed again, and it’s time for more tax hikes. But that’s the part the Left doesn’t want you to know about, so opponents of reform find themselves in the absurd position of having to defend the arbitrary and flawed traditional 75 year deficit analysis.
As is usually the case for the Left, the best defense of the indefensible is a good offense. And so we find a lengthy editorial in the New York Times last week trying to discredit the idea of looking beyond 75 years into the longer-term future of Social Security’s true deficit. Referring to the $10.4 trillion reality as a number pulled “out of the air” and “essentially bogus,” the Times cites a protest against the Social Security trustees’ adoption of it:
The American Academy of Actuaries, the profession’s premier trade association, objected to the change. In a letter to the trustees, the actuaries wrote that infinite projections provide “little if any useful information about the program’s long-range finances and indeed are likely to mislead any [non-expert] into believing that the program is in far worse financial condition than is actually indicated.” As it often does with dissenting professional opinion, the administration is ignoring the actuaries.
Kent Smetters, a Wharton professor who has been deeply involved in the Social Security Administration’s development of better diagnostics for assessing the system’s solvency, shared with me a letter he wrote to the Times which, of course, the paper has refused to publish. In it Smetters wrote that “only a subset” of the American Academy of Actuaries subscribed to the dissent on which the Times relies:
More important, this subgroup’s protest was based on the incorrect claim that the infinite-horizon shortfall does not grow over time and, in particular, that larger reforms are not needed in the future if Congress delays action. Much to their embarrassment, the independent Public Trustees proved them wrong. Social Security’s independent chief actuary recently estimated that the imbalance grows by about $600 billion each year in which action is delayed.
So here’s what you need to know. The Social Security system is $10.4 trillion underwater right here, right now. The Social Security trust funds run out of money in 2042. Administrative costs of personal accounts would be about 30 basis points per year, the same as the cost of running the existing system. And the present value of the financing required to fund personal accounts is about $400 billion.
Those numbers are actually pretty simple, aren’t they? Now I wonder why the Left just can’t seem to get them straight?
Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at firstname.lastname@example.org.