The Congressional Budget Office came out with its annual review of Social Security today. I write on this topic often, so I feel somewhat obligated to comment on the report. Amid the backdrop of the past few weeks’ market action and the big move by S&P this is a ho-hummer. That said, a few observations:
This report looks at SS through the lens of a 75-year time horizon. I guess someone has to do that (its mandated by Congress). I’m having a very difficult time of late looking out 75 days. Forget 75 years.
The critical years for SS are the next 20 (Boomer explosion). If the program does not crap out before 2030 there is a decent chance it will make to the “infinite future”. There is no discussion of the shorter time frame by the CBO. I would score the report a “D-” on that basis.
There is one chart that I want all to make note of. This looks at projected tax revenue versus benefit expenses. Note that for the next 75 years there will always be a deficit in this basic definition of solvency.
Not a day goes buy without someone making the statement that SS is self-funding. That’s a lie. The CBO says so (so does SS, but many do not listen).
In the past three years SS has gone from a huge surplus to a large and growing deficit. This was predicted to first happen in 2016. It came seven years early due to the 08 recession. It’s not possible to look at what has happened and not conclude that there has been a very serious deterioration in fundamentals at SS. CBO does not accept that reality. Their status report reads, “Pretty Darn Good!” From the report:
The shortfalls for Social Security that CBO is currently projecting are marginally smaller than those projected in 2010.
How could the CBO come to this unlikely conclusion? Easy:
CBO now assumes higher immigration rates and projects slightly faster growth in real wages than it did in 2010.
For this I give the CBO another failing grade. In the past few years immigration has actually fallen. (No jobs – Why come?) And the notion that real wages are about to reverse direction and shoot higher anytime soon is the least likely outcome. If the CBO has any doubts on this fact they should consult with Ben Bernanke. He has staked his career (and our well being) on the assumption that real wages are not going anywhere any time soon. Just this one time, I’m going to agree with Ben.
It looks to me as if the CBO fudged the results of the study. Someone must have said, “Make the result look like things are getting better!” The CBO is not supposed to have an axe to grind in their review of government programs. I think they chose to spin the results in an effort to deflect pressure away from the program in the coming months. Shame on them.
The CBO does acknowledge that there is a great deal of risk in any economic forecast. They address that by doing 500 different simulations of what might happen. (For that effort I would give their computer an A). Using this statistical approach they arrive at probabilities of how various generations will fare.
The first observation is an easy one to understand. According to the CBO if you were born in the 1940’s there is a 99% probability that you will receive at least 95% of the payments that you are scheduled to receive. Not bad for the pre Boomers.
But if you are born after 1950 the odds of getting full benefits is reduced. For example, if you were born in the 1960’s you have only a 34% chance of getting 95% of what you think you will get. That’s lousy odds. If you are now 50, there is a very high probability (99%) that you will get only 70% of what you are expecting.
It gets worse the younger you are. If you are a child of the 80’s the odds of you getting back what others who are older than you have gotten fall to only a 16% chance. If one is 10 years old today, well forget it. Your chance is about 1 in 10. I doubt too many toddlers read this blog, but I do hope a few parents of young kids get the message.
10 years from now SS will be sending out $100 billion a month. It will be running cash deficits of 300-400 billion a year. That 10-year old will be 20. Probably entering the workforce. And that young person will be looking at a busted system that will pay him far less than he/she will contribute.
How much support from workers who contribute to this program will there be a decade from now? I would imagine close to zero. But don’t worry about any of this. The CBO said every thing is fine. Nothing to look at here.
The decision to downgrade the USA by S&P has forced the issue of entitlements. We will not get through the rest of this year without SS and Medicare coming on the table and subject to significant cuts. There is no way to avoid that at this point.
The CBO report is going to be highlighted by all of the defenders of SS who cry that this program is not part of the problem. I think the CBO has done us a disservice. Consider the language used to describe the status at SS by the Social Security Trust Fund in their 2011 annual report to Congress:
The open group unfunded obligation for OASDI over the 75-year period is $6.5 trillion in present value and is $1.1 trillion more than the measured level of a year ago.
Let’s be real clear here. The PRESENT VALUE of the shortfall in SS is $6.5T. A massive number. That number rose in the last year by $1 trillion. In other words things at SS got worse by 20% in just the last year. This measure of the imbalance at SS is growing by $100b a month! Yet the CBO somehow made it look good.
It is precisely this type of thinking (and manipulation) that makes it so difficult for our leaders in Washington to take the steps we must take.
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