Are the Social Security Trustees Reports Too Pessimistic?
About This Event

The annual Social Security Trustees Reports have projected for several years that the current Social Security program is not sustainable over the long term under scheduled benefits and taxes. But a number of commentators have suggested that the trustees are too pessimistic in their projections, thereby painting an unnecessarily bleak Listen to Audio


Download Audio as MP3
picture of the outlook for Social Security. Charles P. Blahous, a special assistant to President George W. Bush for economic policy who focuses on Social Security, will examine the trustees' track record as well as the variables that may bear upon the accuracy of their current projections. Stephen C. Goss, chief actuary of the Social Security Administration, and John Sabelhaus, unit chief of long-term modeling at the Congressional Budget Office, will comment. Kent Smetters of AEI will moderate.

Agenda
8:30 a.m.
Registration
9:00
Speaker:
Charles P. Blahous, Office of the President
Panelists:
Stephen C. Goss, Social Security Administration
John Sabelhaus, Congressional Budget Office
Moderator:
Kent Smetters, AEI
10:30
Adjournment
Event Summary

September 2007

Are the Social Security Trustees Reports Too Pessimistic?

 

The annual Social Security Trustees Reports have projected for several years that the current Social Security program is not sustainable over the long term under scheduled benefits and taxes. But a number of commentators have suggested that the trustees are too pessimistic in their projections, thereby painting an unnecessarily bleak picture of the outlook for Social Security. Charles P. Blahous, a special assistant to President George W. Bush for economic policy who focuses on Social Security, examined the trustees' track record as well as the variables that may bear upon the accuracy of their current projections. Stephen C. Goss, chief actuary of the Social Security Administration, and John Sabelhaus, unit chief of long-term modeling at the Congressional Budget Office, commented. Kent Smetters of AEI moderated.

Kent Smetters
AEI

Social Security is an issue that cannot go away and that needs to be addressed. It is probably the most important issue currently facing the United States. Predictions of Social Security budget shortfalls, dispensed by watchdogs like the Social Security Trustees, have been derided as doom-and-gloom forecasts. Whether or not these forecasts are overly pessimistic has a direct relationship to how serious the Social Security funding problem actually is.

Charles P. Blahous
White House

Although seemingly arcane, the debate over whether Social Security Trustees Reports are pessimistic actually cuts to the very heart of the matter. The current Trustees Report predicts rising costs as a result of the impending retirement of baby boomers. It posits that without something being done, Social Security outlays will exceed revenue around 2017 and forecasts insolvency around 2041. If these predictions prove accurate, then something must be done about Social Security. Many claim that the trustees are overestimating future costs, however, and thereby claim that there is not as much of a problem with Social Security as there might seem. In fact, a study has found that nine times as many articles in the media allege the trustees to be overestimating future costs as allege them to be underestimating future costs. Government officials have also sometimes declared the trustees to be overly pessimistic.

To determine whether the Trustees Reports are overoptimistic or pessimistic, it is reasonable to consider the trustees' track record to date. We can consider all Trustees Reports published subsequent to 1983, which was the year of the last major reforms, and calculate how well they predicted the state of Social Security in 2005. In particular, we can consider how accurately the Trustees Reports forecast the 2005 trust fund ratio and the 2005 income/outlay ratio. Every single Trustees Report issues three different predictions: high-cost, medium-cost, and low-cost. In fact, over time, we find that the trustees' high-cost (that is, most pessimistic) predictions fared best in predicting the 2005 cash flow balance as percent of payroll. In predicting the 2005 trust fund ratio, the intermediate projections were closest to the truth, and taking the two metrics together, the intermediate projections are also superior. While some may wonder whether these results are being driven by the particular tests cited here, this test actually understates the superiority of the intermediate projections. To this end, in considering predictions for other years, such as 1995, we find that the intermediate estimates also fare best. Thus, past predictions of the trustees have been neither optimistic nor pessimistic, but instead completely on the mark. Only by extreme cherry-picking of data can one come to a different conclusion.

The trustees' current predictions for the future of Social Security are based on two separate assumptions: conjectures about demographics and conjectures about economics. The current demographic situation is fairly predictable, so there is little room for being too conservative (or vice versa). In predicting the future economic situation, the trustees predict future wage and productivity growth at the same rate as the average of the forty previous years, which seems reasonable. Even considering possible deviations from the predictions, at the 95 percent confidence interval, we get at most only a five-year difference in the onset of the moment when outlays exceed income. As a result, there is an ever-impending problem with Social Security. Legislators and others have sought to avoid this problem by characterizing the trustees' predictions as overly conservative, even though the data show their predictions to be on the mark. The longer we wait to fix Social Security, the more intractable this problem will become.

Stephen C. Goss
Social Security Administration

It is valid to say that past trustee predictions have been neither optimistic nor pessimistic. At the same time, there have been problems with past predictions. For example, after 1995, the trustees increased their long-term growth rate. The high rate of growth seen during the 1995-2000 period, however, did not turn out to be permanent--unlike what the trustees thought--and the 2000-2007 growth rate was over-predicted as a result. The trustees base their predictions on the current state of law, policy, and the economy, and not on what all these might be like in the future. They do not attempt to predict; instead, they go along with current trends. All the same, the trustees' predicted trust fund exhaustion date has been very stable at around 2040 for the past ten to fifteen years.

Going forward, some say the trustees are too conservative in predicting future life expectancy increases, which would lead to an underestimation of costs. The trustees, meanwhile, posit a 0.7 percent longevity growth rate, which has been the average rate of growth over the past century. Some also question the trustees' fertility rate predictions, wondering whether or not America's high fertility rate, relative to developed areas such as Western Europe, might be destined for decline. The trustees' assumption of 1.7 percent future annual economic growth seems reasonable. On the whole, the long-range numbers are speculative, but they have actually not changed all that much from year to year. While the long-range numbers are nothing more than conjecture, it is important to make sure that the assumptions behind them are reasonable, which seems to be the case with the trustees' predictions.

John Sabelhaus
Congressional Budget Office

There does not seem to be any bias in the trustees' predictions. At the same time, the long-term predictions issued by the trustees have not turned out to be entirely accurate. On the whole, there is a great deal of uncertainty inherent in long-term predictions, the result of which is that Social Security's finances can end up going any number of ways in future years. Nonetheless, an impending problem exists, to which there seem to be only two possible solutions: increasing taxes or cutting benefits. In considering these two courses of action, the issue of intergenerational equity comes into play. If taxes are kept constant and Social Security promises to the baby boom generation are met, the succeeding generation will get only 75 percent of the amount promised to it. On the other hand, given the real income growth that could take place in the future, the succeeding generation could still end up receiving more than the baby boomers, even if Social Security promises to them are not fully met. Keeping benefits constant while increasing taxes, meanwhile, would place an undue burden on the baby boomer generation. The tax rate might be set too high, which could give succeeding generations more than promised while overburdening baby boom generation. This is especially unfair, since the succeeding generation will be benefiting from future wage and economic growth. A near-term benefit cut of 11 percent would require no further cuts thereafter, given current predictions, and is thus sufficient for ensuring intergenerational equity. However, for the sake of fairness to the baby boomers, a near-term benefit cut of only 5 percent seems reasonable, along with additional benefit cuts for succeeding generations, should these be necessary.

AEI intern Boris Vabson prepared this summary.

View complete summary.
Also Visit
AEIdeas Blog The American Magazine

What's new on AEI

Poverty in America—and What to Do About It
image GDP for second quarter: Strong headline, weak innards
image Paul Ryan and the emerging conservative reform agenda in higher education
image Democrats' impeachment fixation
AEI Participants

 

Kent
Smetters
AEI on Facebook
Don't Miss...