Calling Chicken Little
We’ve said it before, and we’ll say it again: there is no Social Security crisis. But the president continues to tell the public that there is a crisis, that by 2004 the system will be “flat bust, bankrupt.” This is so patently untrue that it would be humorous if so many people didn’t take it seriously. Even people who are opposed to Bush’s privatization plan are falling for some of the propaganda, as witness this letter from “Old Nate….”
Another Stupid Criminal Story.
Our government, headed by George W. Bush has taken billions of dollars out of the surplus we have paid into the Social Security fund and given us worthless I.O.U.s.
Now we are told that Social Security is soon to be broke and won’t be able to pay us.
So let me get the story straight. The thieves who stole our money are back and demanding that we change the system so that they get more money. And using our money to tell us we must do better by them.
I guess that criminals just get bolder, not smarter.
Did I get the story straight ? What did I miss ?
Old Nate
Well, Old Nate, you do have the basics of the story straight as it has been told over and over again by the White House, but you’ve missed the truth, and by a mile.
It’s interesting to note that you have accepted a fair part of the propaganda at face value, and drawn some inferences that could actually work in favor of the president’s plan! You start with a statement that there is no Social Security Trust Fund, just a bunch of “worthless I.O.U’s. What’s important about this as a starting point for your version of the story is that:
a) the assertion that there is no trust fund is a keynote of Bush’s plan to dismantle Social Security, and
b) you’ve swallowed it hook line and sinker, yet
c) it is completely untrue!
The Trust Fund exists– all you have to do is refer to the annual reports of the Trustees:
That’s the horse’s mouth, my friend, and all of the lies of the president and his claque cannot change it. Bush may be a 21st Century incarnation of the classic Texas horse-thief, but he hasn’t stolen the Social Security trust fund, at least not yet.
The Social Security Trust Fund along with three related trust funds(!) is invested in non-negotiable U.S. Treasury Bonds. They do earn a small amount of interest, but the intention was never to make money. The overriding concern was (and is) security. In fact there is absolutely no way to invest money that is more secure– the bonds represent the “full faith and credit of the United States Treasury,” just like the cash in your wallet. If the trust fund bonds are “worthless i.o.u.s” then every treasury bonds, and every dollar bill in your wallet, is a “worthless i.o.u.” For the president to say that “the money has been spent,” or that there is no trust fund, or that the trust fund is “just paper” is to discredit the entire United States Treasury, and imply that it may not feel a need to make good on its debts. This might well be a factor in the present weakness of the US dollar as compared to European and Asian currencies. We can picture some committee of bankers in Tokyo saying “we better discount US dollars because their own president is saying ‘it’s just paper’.”
We hesitate (momentarily) to apply logic to anything the president says, but he simply cannot have it both ways– either the trust fund exists, or it doesn’t. If it exists, then the president is a liar. If it doesn’t, he is a thief. Take your pick. Either way, continued promotion of his privatization plan can be nothing other than an attempt to set up the biggest robbery in history.
Your letter, perhaps unwittingly, exposes another flaw in the president’s logic and “strategery.” As a senior citizen, you have been told by the administration and its dupes and paid propagandists that nobody who is 55 or older will be affected by this reorganization. The continued repetition of this mantra begs three questions:
1. How can those 55 and over not be affected, if there is no trust fund?
2. Why should people over 55 support the president’s plan if it does nothing for them?
3. If it is good for people under 55, why won’t it be applied to those who are over 55?
Fortunately, many Republicans and journalists are coming to the conclusion that there is no crisis, and that the president cannot sustain his argument that there is. When we re-elected Bush, the rest of the world asked “just how stupid are the American people?” Well, it seems Bush is going out of his way to find out, and we don’t think he is going to like the answer. To quote the man himself, “Fool us once, shame on you. Fool us.. uh… ‘ya just can’t get fooled again.”
We’ve said all along that the Social Security system might need a bit of tweaking. We’ve even refined that to say that if the assumptions used by the trustees and by the Congressional Budget Office prove to be correct, any adjustments will have greater effect the sooner they are implemented. We’ve also pointed out that assumptions by both organizations are extremely conservative, amounting to “worst case” scenarios.
At last we have some support for both contentions in the form of an article by Philip J Feuer, who is described as a “retired pension actuary” who is currently an adjunct professor of mathematics and a Fellow of the Society of Actuaries. The article appeared under the headline “Social Security sky isn’t falling” and sub-head “Financial projections often wide of the mark.” It was in the business section (not news, nor editorial!) of the Rocky Mountain News on April 9th, and is well worth down and reading:
[Note: in the process of converting this article to the new SG format, we found that Feuer’s article is no longer available on the Rocky Mountain News’ web site or in their archive (?!). So we have tracked it down and will reprint it in full as a comment below]
Among other telling points, Feuer confirms that the underlying assumptions that lead to a projected shortfall in 2042 or 2052 are “far too pessimistic.” But he goes farther, and provides a specific example which tends to discredit the entire Bush plan. One of the fundamental assumptions is that Gross Domestic Product (GDP) will increase at a rate of 2% per year. Historically, the increase has been around 3.5% per year. If you change the assumption, not to a justifiable 3.5% but to a mere 2.6% annual growth in GDP, what happens to the projection? The trustees and the CBO would “would project system solvency for 75 years!” The exclamation point is Feuer’s, although we are happy to add one of our own!
In other words, the projected financial health of the Social Security system depends on what assumptions you are making. GDP growth is a fundamental assumption, and a slight increase, while still very conservative, is enough to change the picture entirely.
It’s also interesting to note the editorial cartoon that accompanied Feuer’s article in the print version of the paper:
The cartoon shows a midget Social Security system about to get clobbered by a gigantic Baby Boomer, which contradicts the entire article– the editor’s way of winking at the reader. It’s poor practice journalistically; an insult to the writer and to the intelligence of the reader. We have some questions for Rob Reuteman, the Business Editor, who presumably chose the cartoon or at least approved it– did you bother to read the article? Or could it be that you just don’t get it? A cartoon reflecting the sense of the article would have shown the Social Security truck approaching Baby Boomer Hill. Or perhaps the little guy could be Bush and the big guy could be Real Numbers.
So, Old Nate, you can relax a little bit– the Social Security surplus has not been stolen, and the bolder Bush gets, the more likely he will be put in his place. We don’t really want him to get smarter, do we? Commentators on the left are already saying that Bush’s pig-headed insistence on promoting this political dead duck is the best thing they could hope for. He’s fashioning an albatross for his own neck.
–SG
What do you think? Please enter a comment below.
May 31st, 2005 at 10:25 pm
Your “Calling Chicken Little” social security article is right on the mark - keep up the great work and let’s hope other media start looking to Sten Gazette for instructions on how to grow a set of you-know-what to publish the truth and challenge the corrupt!
May 31st, 2005 at 10:29 pm
Philip Feuer’s article, as found on the Arkansas Leader’s web site:
SOCIAL SECURITY PROJECTIONS VS. POLITICAL PREDICTIONS—
AN ACTUARY’S VIEW
There’s a misapprehension abroad in the land. Politicians, media people, and other societal leaders are drawing unjustified conclusions from mathematical estimates. How? By ignoring the probabilistic nature of long-term forecasts and expressing 100 percent certitude that Social Security is doomed to fiscal collapse.
These alchemists transmute uncertain projections into hard and fast predictions. For example, in his article in the Wall Street Journal, Bob Kerrey says that in eight years, income from payroll taxes will (emphasis added) be insufficient to pay Social Security benefits owed at that time. Meanwhile, Treasury Secretary John Snow tells Congress that everyone needs to agree that the Social Security System is “headed for ruin.” George Bush, more folksy, but with hardly less hyperbole, says that Social Security will be “flat bust, bankrupt” in 40 years unless Congress acts now.
In the first place, the word “bankrupt” is a red herring. Under the system’s most used set of actuarial assumptions (the “intermediate” ones), benefits are still expected to be paid at 70 cents on the dollar after 2042, the year the Social Security Trust Fund is projected to “run dry”. Moreover, under the Congressional Budget Office’s assumptions, this becomes 78 cents on the dollar after the year 2052. And only eight years ago, 2030 was the projected run dry date.
Why all these contradictory claims about the Social Security Trust Fund’s solvency? It’s because small changes in assumptions can result in large changes in projected financial results. For example, under another set of assumptions (the “optimistic ones”) used by the system’s trustees, the projections indicate no solvency problems for 75 years. And looking retrospectively, this set of assumptions more accurately predicted the course of events over the last 10 to 15 years than did the intermediate ones, which are giving rise to all the concern.
Because nobody knows what the future holds, it’s necessary to make assumptions about what’s coming. Projections based upon these assumptions give a hazy, but useful, view of the future. For private-sector defined benefit pension plans, the principal assumptions are for mortality, investment return, and pay increases. For Social Security, actuaries need to look ahead 75 years and make many more assumptions concerning the economy and demographic trends—for example, rates of change in the labor force, productivity, inflation, immigration, fertility, disability and perhaps the most significant of all (because it influences many of the other assumptions), rates of growth in the Gross Domestic Product.
Many people mistakenly believe that Social Security’s long-term solvency problems arise because of an expected decline in the number of workers per beneficiary—from 3.3 currently to 2 or fewer in 75 years. What they don’t know is that this decline has been factored in to all the projections made since the early 1980s. So what’s giving rise to the reported looming Social Security insolvency? It’s the increasingly pessimistic economic assumptions adopted by the system’s trustees.
Spurred on by Bush’s recent comments about Social Security’s long-term crisis, many economists have argued that the intermediate economic assumptions picked by the system’s trustees are far too pessimistic and that it doesn’t make sense to assume that the economy will operate in the future at a much lower rate than in the past. So perhaps the Gross Domestic Product average increase assumption could justifiably be raised from its current level of about 2% per year. (Historically, GDP growth has averaged about 3.5% per year.) Estimates indicate that raising this assumption to only 2.6% would project System solvency for 75 years!
Another assumption worthy of discussion is the one that predicts future investment returns. In the private sector pension plan arena, it’s well known that an increase of only one percentage point in the investment return assumption makes a plan’s long-term costs appear to drop by about 25 percent! Perhaps it’s time to follow the lead of state and federal agency pension funds and invest a portion of the Social Security Trust Fund in the private sector’s bond and stock markets. Were this to be approved, new projections would be required using a higher investment return assumption— and some or all of the long-term Social Security deficit would simply go away.
Investing in private sector assets has other advantages: the System would benefit from higher investment earnings and Congress would be unable to use the funds for other purposes. Also, it would silence those critics who carp that the Social Security Trust Fund holds treasury IOUs rather than real treasury bonds—as if an IOU from the U.S. Treasury is somehow worth less than a treasury bond. Even more egregiously, our president has averred, “There is no trust fund”and has stated that individual accounts would “replace the empty promises of government with real assets.” Empty promises, my foot! Someone needs to explain to the president that Social Security benefits are statutory—as well as moral—obligations of the United States government. They result from what is, in effect, a powerful intergenerational contract, enforced by a strong political expectation created by the payroll tax.
In my view, all of the above considerations argue for a moratorium on the political debates now raging in the halls of Congress and in the media. (OK, call me overly optimistic.) Instead, we need a new debate about assumptions by leading independent economic, demographic and actuarial professionals. Also, we could benefit from a debate in Congress about the advisability of investing some of the Social Security Trust Fund in private-sector securities.
Whether or not these debates take place, reason dictates that we abjure this administration’s “sky is falling “ approach and discuss the pros and cons of any privatization scheme on its own merits. Indeed, the president’s aides have opened the door to separate discussion of privatization by admitting that the proposed system of individual accounts will do nothing to solve Social Security’s financial problems—a long term “net neutral effect” is the jargon du jour.
For reasons known best to themselves, a vocal minority of “privatizers” has been attacking the Social Security System for years. We should not let ourselves be overly influenced by the hucksters, the alchemists and the crisis-mongers. Better to heed the wisdom of former Social Security Commissioner Robert Ball who says, “We have to stop acting as if 75-year estimates are absolute…it would be foolish to make too much of 75-year prophecies.” Ball knows full well that the more assumptions an actuary makes, and the longer the time period for which he makes them, the more his financial projections will fall wide of the mark. And we need to always remember the equally sound advice of Yogi Berra: “It’s tough to make predictions, especially about the future.”
PHILIP J. FEUER
FELLOW OF THE SOCIETY OF ACTUARIES
October 30th, 2005 at 6:35 am
Jut to inform you
December 8th, 2005 at 10:56 am
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