Social Security Shortfall Warrants Action Soon
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The recent spate of Social Security reform proposals makes this a particularly useful moment for a refresher on the Social Security challenge itself. Earlier this month, I and Robert Greenstein (executive director of the Center on Budget and Policy Priorities) released our co-authored paper sponsored by the Pew Fiscal Analysis Initiative detailing the scope and relative certainty of Social Security’s fiscal shortfall. Our paper also explains why we are better off addressing this problem sooner rather than later.
It has naturally caught the attention of readers that Robert Greenstein and I have different policy views, and in particular different views about how best to repair the Social Security shortfall. This was to my mind one reason why this joint paper was worth writing. It is trivial for those who already agree on policy to agree on the nature of the problem. What we need, however, is for people with different policy instincts to come together around a common understanding of the problem and of the need to work together to address it. I was fortunate here to collaborate with a highly professional co-author (and with equally professional supporting staff) who did not allow our differences over policy to get in the way of a common understanding of the facts.
I would summarize the main findings of our paper as follows.
Point #1: While many economic and demographic variables bear upon the Social Security trustees’ projections, no single variable is likely to vary from current assumptions by enough to eliminate most of the shortfall.
This can perhaps be understood best by looking at the following picture. It is a pretty cluttered image with more data than a typical reader needs. But basically it shows how certain critical assumptions – fertility, mortality, immigration, wage growth, inflation, and interest rates –bear upon Social Security finances.
Every piece of fiscal information in this picture is shown as a percentage of taxable worker wages. So, for example, when the 75-year actuarial imbalance is given as “1.92,” that means 1.92% of all worker wages subject to tax over the next 75 years. Where it says that the imbalance in the 75th year is “4.12,” this means there is a gap between income and outgo equal to 4.12% of all taxable wages we expect workers to earn in that year. These numbers may seem small but remember, this is not the total amount of worker wages absorbed by Social Security, this is just the financing gap to be filled between projected incoming taxes and outgoing benefits.
To see the Trustees’ current “best-guess” assumptions, look at the middle column. To see what various illustrative “low-cost” and “high-cost” variations (changes that make Social Security either less or more costly) do to the projections, look to the columns on the left and the right.
Do so, and it quickly becomes clear that no single assumption is likely to be so far off that it eliminates most of the problem, no matter how defined. The trustees’ “low-cost” fertility assumption, for example, is 2.3 children per woman. We haven’t seen a 2.3 fertility rate in this nation in any single year during the last 40, but this scenario assumes that we see it in every year over the very long term. Even if we did, more than half of the Social Security shortfall would remain. Similar results occur with the low-cost real wage growth assumption. That assumption is 1.8% per year -- more than double the historical average over the last several business cycles. Yet even if per-capita wage growth accelerated to this degree, we’d still have over half of the Social Security problem.
Examine the assumptions one by one and it quickly becomes clear that even if the trustees have a particular assumption wrong we will still need to deal with Social Security’s shortfall.
Point #2: Even with combinations of variables fluctuating from current projections, it remains highly unlikely that the shortfall will disappear without legislative action.
Some policy advocates have occasionally suggested that the Social Security shortfall is sufficiently uncertain to justify a “wait and see” approach before legislative action. The evidence, however, is that this is highly unlikely to prove the right course.
A probabilistic analysis of the trustees’ projections shows very few scenarios in which all or even most of the projected shortfall disappears, even if we permit the full range of assumptions to fluctuate. The 80 percent confidence band, stretching from the 10th to the 90th percentile of these different possibilities, shows not a single scenario in which even half of the projected shortfall disappears. Even out at the distant edge of the possibilities, at the 97.5th percentile, a shortfall remains.
Also of note, there are far more scenarios in which the problem is far worse than currently projected than there are in which the shortfall vanishes. The 2.5th percentile of the scenarios shows a financing shortfall roughly twice the intermediate projection. Unlikely though this is, it’s actually much more likely than any scenario in which we don’t need to take corrective legislative action.
Point #3: The trustees’ projections are not, as some have argued, unduly conservative.
Some have suggested that the Social Security trustees, both in the past and currently, employ unrealistically conservative assumptions with respect to economic growth. Some of these critics have in turn suggested that much of the problem would go away were it not for the conservative economic growth assumptions. An examination of the evidence, however, finds that this is untrue.
Aggregate economic growth is the product of growth in the labor force times per-worker productivity growth. The trustees are not projecting that future productivity growth will slow significantly relative to recent historical norms. Instead they are -- like other forecasters – simply projecting that net labor force growth will slow as the baby boomers exit the workforce.
Moreover, an examination of previous trustees’ reports does not support the criticism that they have been too conservative in the past. The trustees have generally been qualitatively accurate with errors on both sides of the line, slightly on the fiscally optimistic side overall.
Point #4: Social Security finances should be repaired for the program’s own sake, though this would also have the effect of improving the long-term federal budget outlook.
This has been a point of some sensitivity in the public Social Security debate; some have expressed the concern that Social Security might be a “target” of misguided cuts, to address a larger unified budget problem existing irrespective of Social Security. This concern has probably been voiced more on the left than on the right, so by our mutual agreement Bob Greenstein addressed this subject during our presentation while my own remarks focused more narrowly on Social Security’s internal finances. In sum, our paper argued that Social Security finances should be balanced for the program’s own sake (though obviously, any improvements in Social Security’s own outlook would also contribute positively to the unified federal budget outlook).
Point #5: It is better to act sooner rather than later to repair Social Security finances.
Bob Greenstein also handled this part of our public presentation; our paper stressed that early action would allow for more gradual changes, leave more policy options available, provide advance notice to beneficiaries and taxpayers, and strengthen public confidence in Social Security.
Clearly, the most draconian, precipitous outcomes are those that follow under a “no action” scenario – a sudden, 22% reduction in benefits affecting not only new retirees but also those previously in retirement (some of whom are already collecting benefits today). This would be a highly undesirable outcome; the extent to which it can be moderated is proportional to the time over which changes can be gradually phased in, making earlier action far preferable to later action.
Reasonable people can and do differ over the best means of repairing the Social Security shortfall. It’s important that we recognize, however, that the shortfall is real, it’s not going to go away, and the earlier we address it the better off we as a society will be. I’m very pleased to have had an opportunity to collaborate on what I believe is an important, bipartisan explanation of these important findings.
Charles Blahous serves as one of the two public trustees for the Social Security and Medicare programs. He is also the author of Social Security: The Unfinished Work.