Social Security’s Ridiculous Actuarial Predictions
January 8, 2013 2 Comments
NY Times – Social Security’s Flawed Forecasting:
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.
The article doesn’t tell the story very well and lots of people will miss it. You need to click on the multimedia link to appreciate just how bad Social Security’s actuarial models really are.
The authors consider the implications:
To save Social Security, which has lifted generations of elderly people out of poverty, tough choices have to be made. One option is to continue raising the retirement age, perhaps to as high as 69 or 70. While the full retirement age is gradually increasing to 67 (for people born in 1960 or later) from 65, this increase is not enough to counterbalance the gains in longevity.
The intent of Social Security is to make sure everyone has the means to support themselves in their old age when they can no longer work. If we’re living longer – and the numbers clearly show that we are – then to keep the system in balance we’ll need to divide those extra years of life between more years of work and more years of retirement. Everything else is just bandaging the problem.
A second option is to increase payroll taxes, for example by taxing wages over $113,700, the current earnings limit.
This may wind up happening because of political expediency, but it isn’t addressing the problem (a happy problem at that) of people living longer. If we’re spending more years in retirement we’ll need to work longer to pay for that retirement, versus having someone else pay for it.
A third is to limit the annual cost-of-living adjustments, possibly by changing how those adjustments are calculated.
Lowering the cost-of-living adjustment would mean that the poorest retirees eventually won’t be able to make ends meet. That’s a terrible solution.
A fourth is to reduce benefits — for example, by lowering the initial benefits for workers whose lifetime wages are above the national average (currently $43,000 a year). Other choices, in numerous combinations, are possible, too.
Here you’re getting into areas that are tricky in terms of fairness, not to mention political practicality. Are you really going to tell someone who averaged say $50,000 per year income that they’re not going to get the full benefits they’ve been promised their entire life? And it isn’t like someone at that pay level would exactly be raking it in on Social Security.
If you’re going to reduce benefits, it would be at the high end of the benefit scale, probably with means testing for people with a certain level of assets or other retirement income. Means testing has some ethical briar patches, too. Are you going to punish people who lived frugally, accumulated assets, and set aside retirement money in 401Ks and IRAs? If so, you’re reducing the incentive to plan for retirement.
If we’re living longer, the best solution is to raise the retirement age.