Save Social Security? It's already solvent
BOSTON — Social security doesn't need "saving," a goal of both Republicans and Democrats in Washington. It is already in "fine shape," says New York actuary David Langer.
That's not what the Social Security trustees maintain. Last spring, they calculated that the Social Security Trust Fund would run out of money in 2034. At that point, payroll-tax revenues won't fully cover due benefits.
The trustees also said that the Social Security tax will eventually have to be raised 2.19 percent over the next 75 years above the 12.4 percent that employees and employers now pay jointly to provide all the benefits due retirees and other beneficiaries.
But Mr. Langer says predictions of a shortfall are nonsense, based on false assumptions.
By law, the trustees must peer 75 years into the distant future to determine the adequacy of financing over the entire lifetime of virtually all current participants in the program.
But as Yogi Berra once noted: "It's tough to make predictions, especially about the future."
Economists have a hard time forecasting a year ahead, let alone 75 years. So there is much room for disagreement on future economic trends crucial to the solvency of Social Security.
Langer, who does actuarial work for various private pension funds, goes further than merely quarreling with the trustees' conservative economic assumptions. He accuses the six trustees of violating standards of the Actuarial Standards Board (ASB).
For example, rule No. 27 of the board says actuaries must take into account "appropriate recent and long-term historical economic data" in their projections.
In this regard, the trustees assume an after-inflation 1.3 percent annual economic growth rate on average over the next 75 years.
Yet, says Langer, real growth in gross domestic product since 1930, through the thick and thin of depression, war, recession, and boom, has averaged 3.2 percent per year. In the last two years, it has been 3.9 percent. "There is thus little apparent reliance on recent experience or longer-term experience," he says.
If a more realistic 2.9 percent growth rate was chosen, the Social Security deficit would fall from 2.19 percent of payrolls at the end of 75 years to 0.71 percent, a Social Security actuary told Langer.
If another adjustment in the trend of consumer prices - already made by the Bureau of Labor Statistics - was taken into account by the Social Security trustees, the deficit would virtually disappear.
So Langer figures the Social Security System is actually in "long-range actuarial balance."
If that's the case, the drive by some conservatives and Republicans to replace or supplement the present Social Security system with a privatized pension plan would lose any urgency.
Langer admits that actuaries have "a fair degree of leeway" in selecting assumptions for financial projections. But should they choose to depart from historical experience, they must explain why, another ASB standard requires. Langer doesn't think the Social Security actuaries have adequately explained their deviation from past economic experience.
Indeed, Langer sees "political abuse" in the selection of key assumptions. That possibility stems from the process.
Professional actuaries at the Social Security Administration provide the trustees with a range of assumptions and the consequences of these assumptions on the projections for solvency of the system. They do recommend one set of assumptions, but this is kept secret.
Then the trustees make a final choice. Four of the six trustees are political appointees - Treasury Secretary Robert Rubin (until this summer), Labor Secretary Alexis Herman, Health Secretary Donna Shalala, and Social Security Commissioner Kenneth Apfel. Two others are outsiders.
Washington economist Dean Baker suspects the political trustees selected assumptions for the 1999 report that would show some solvency progress, but not so much to jeopardize their plan for keeping Social Security reform on the table.
That effort may have been in vain. Mr. Baker, a Social Security expert at The Preamble Center, sees any changes in the system by the Republican-led Congress as unlikely before the elections in 2000.
Republicans have found that privatization doesn't sell well in focus groups. Nor are they likely to embrace modest reforms proposed by President Clinton.
The result: deadlock.
(c) Copyright 1999. The Christian Science Publishing Society