Social Security at Eighty

As Social Security turns 80 today, you can expect the media to gush about the recent projections about the improving finances of the program.

On July 22, the Trustees of the Social Security Trust Fund released a report that concluded the exhaustion point for the Trust Fund is likely to occur later than previously thought.

The media collectively let out a sigh of relief because the report wasn’t a complete disaster as has been the case over the last five years. Michael Hiltzik could not contain his exuberance. Within hours of the report’s release, he wrote.

 “The Social Security trustees delivered a harsh blow Wednesday to those who claim the system is structurally unsound, requiring major cutbacks. In their annual report for 2015, they declared that the program's fiscal health has improved over the last year, for predictable reasons: The economy is improving, and workers' wages are rising.” 

The problem is that none of it is true -- at least given the data provided in the annual report. There was no harsh blow to those who claim that the system is structurally unsound. The program’s fiscal health deteriorated in 2014.  In fact, the Trustees lowered their outlook for the next decade. If the economy is improving, it is not reflected in the annual report.

According to the Trustees Report, 2014 was a typical year. The system’s performance for revenue and expense were in line with expectations. Time, which is the cost of doing nothing, added $900 billion in unfunded liabilities to the system. Basically, the fuse remained the same while the bomb grew larger.

The trustees have offset the structural cost of the system with increased optimism about the future. In the year following the Trustees Report for 2013, the authors found slightly more than $500 billion in combined revenue and cost savings. This combined savings will push the exhaustion point of the Trust Fund out about a year. 

So where did the savings come from?

By comparing this year’s forecast for the Trust Fund with that of last year, you can see that the savings come from two source, lower projected expense and interest on the assets held by the Trust Fund. Understand that a considerable amount of the latter is based on the former.

The undisputed driver of the improvement in the finances is the decline in projected expense. Over the past year, the Trustees have come to believe that the system will deliver smaller checks or few checks than previously forecasted. The outgo from the system between 2015 and the 2032 should drop by roughly $350 billion. This is roughly double the impact of improving revenue.

It is unclear from the revenue forecast that the economy will improve until 2029. The forecast for accumulated revenue between 2015 and 2028 declined year over year by nearly 20 billion. 

This loss is quickly offset by rapidly rising revenue projections for 2029 and beyond.  In just four years, the increasing revenue will account for $200 billion. That revenue does not come entirely from rising wages, though. Nearly half of that sum comes from projected interest on Trust Fund assets.

It doesn’t matter if the Trustees call revenue interest on loans or gifts from Santa. It is important to understand where the improvement is coming from. Last year, the Trustees expected the period of 2029-2032 to generate a total of $222.9 billion. This year, the figure is up 35% to more than $300 billion for the 4 year period.

That “interest” comes in part from higher projected balances in the Trust Fund. These balances come directly from the expected reduction of program outlays. If these reductions do not materialize, neither will the projected interest revenue.

The Trustees are in fact forecasting higher wages, and more jobs. Between 2025 and 2089, average wages will rise faster than at almost any time in history.  While this helps Social Security with incremental revenue, it hurts the system with rising expenses because the benefits formula indexes past contributions to average wages. So rising wages would trigger immediate increases in benefit levels of those crossing into retirement. Falling cost is not something that is normally associated with rising wages. 

The Trustees did not say that the system’s financials have improved. They say that they will improve in the future. If their optimism is unfulfilled, we are back in the same position as last year.

As Social Security turns 80 today, you can expect the media to gush about the recent projections about the improving finances of the program.

On July 22, the Trustees of the Social Security Trust Fund released a report that concluded the exhaustion point for the Trust Fund is likely to occur later than previously thought.

The media collectively let out a sigh of relief because the report wasn’t a complete disaster as has been the case over the last five years. Michael Hiltzik could not contain his exuberance. Within hours of the report’s release, he wrote.

 “The Social Security trustees delivered a harsh blow Wednesday to those who claim the system is structurally unsound, requiring major cutbacks. In their annual report for 2015, they declared that the program's fiscal health has improved over the last year, for predictable reasons: The economy is improving, and workers' wages are rising.” 

The problem is that none of it is true -- at least given the data provided in the annual report. There was no harsh blow to those who claim that the system is structurally unsound. The program’s fiscal health deteriorated in 2014.  In fact, the Trustees lowered their outlook for the next decade. If the economy is improving, it is not reflected in the annual report.

According to the Trustees Report, 2014 was a typical year. The system’s performance for revenue and expense were in line with expectations. Time, which is the cost of doing nothing, added $900 billion in unfunded liabilities to the system. Basically, the fuse remained the same while the bomb grew larger.

The trustees have offset the structural cost of the system with increased optimism about the future. In the year following the Trustees Report for 2013, the authors found slightly more than $500 billion in combined revenue and cost savings. This combined savings will push the exhaustion point of the Trust Fund out about a year. 

So where did the savings come from?

By comparing this year’s forecast for the Trust Fund with that of last year, you can see that the savings come from two source, lower projected expense and interest on the assets held by the Trust Fund. Understand that a considerable amount of the latter is based on the former.

The undisputed driver of the improvement in the finances is the decline in projected expense. Over the past year, the Trustees have come to believe that the system will deliver smaller checks or few checks than previously forecasted. The outgo from the system between 2015 and the 2032 should drop by roughly $350 billion. This is roughly double the impact of improving revenue.

It is unclear from the revenue forecast that the economy will improve until 2029. The forecast for accumulated revenue between 2015 and 2028 declined year over year by nearly 20 billion. 

This loss is quickly offset by rapidly rising revenue projections for 2029 and beyond.  In just four years, the increasing revenue will account for $200 billion. That revenue does not come entirely from rising wages, though. Nearly half of that sum comes from projected interest on Trust Fund assets.

It doesn’t matter if the Trustees call revenue interest on loans or gifts from Santa. It is important to understand where the improvement is coming from. Last year, the Trustees expected the period of 2029-2032 to generate a total of $222.9 billion. This year, the figure is up 35% to more than $300 billion for the 4 year period.

That “interest” comes in part from higher projected balances in the Trust Fund. These balances come directly from the expected reduction of program outlays. If these reductions do not materialize, neither will the projected interest revenue.

The Trustees are in fact forecasting higher wages, and more jobs. Between 2025 and 2089, average wages will rise faster than at almost any time in history.  While this helps Social Security with incremental revenue, it hurts the system with rising expenses because the benefits formula indexes past contributions to average wages. So rising wages would trigger immediate increases in benefit levels of those crossing into retirement. Falling cost is not something that is normally associated with rising wages. 

The Trustees did not say that the system’s financials have improved. They say that they will improve in the future. If their optimism is unfulfilled, we are back in the same position as last year.