Crowding Out During the Industrial Revolution
Practice Final for Econ 113

Why Oh Why Are We Ruled by These Fools? (Yet Another Social Security Edition)

Ah. It becomes clearer and clearer why nobody in the administration who knew anything about Social Security substance was trotted out the week before last to provide details on Bush's endorsement of Pozen's "progressive price indexing." The numbers are ugly.

Jason Furman reports:

The Impact of The President's Proposal On Social Security Solvency And The Budget, 5/10/05: In an April 28 press conference, the President announced sliding-scale benefit reductions modeled on a plan proposed by investment executive Robert Pozen. Unfortunately, the White House has not released the traditional analysis by the Social Security actuaries of the effect of its plan on Social Security solvency. It is standard practice for policymakers and outside analysts who present Social Security plans to provide the actuaries’ analysis when, or shortly after, they release their plans.

In the absence of an analysis by the Social Security actuaries, this analysis provides some of the standard actuarial and fiscal estimates of the President’s proposal. The analysis is based on the actuaries’ analysis of the Pozen proposal, which has been released, analyses by the actuaries of other private-account plans that contain features similar to those of the President’s plan, analysis by the actuaries of the President’s private accounts through 2015, and the data in the 2005 Social Security trustees report....

Because the sliding-scale benefit reductions (also called “progressive price indexing”) that the President has proposed would not start until 2012 and would be small initially, this proposal would move back the date when Social Security’s benefit costs will first exceed its tax revenues by only two months, to slightly later in 2017. [Note that Bush and the Bushies have been pushing the 2017 date as a "crisis" point for months.] The sliding-scale benefit reductions would have a somewhat larger effect on the date when Social Security would become "insolvent" — the benefit reductions would move that date back by six years, from 2041 to 2047.

The President’s private accounts, however, would accelerate the date on which Social Security begins to have a cash-flow deficit, as well as the date of insolvency, because establishing the accounts requires diverting large sums from Social Security to the accounts. When the sliding-scale benefit reductions and the private accounts are considered together (i.e., when both components of the President’s plan are examined), the plan is found to move forward the year in which Social Security would become "insolvent" from 2041 to 2030. This result could be averted only by large cash transfers from the Treasury or additional benefit reductions or tax increases. The plan also would accelerate the year in which the program begins to run cash-flow deficits from 2017 to 2011.

The President’s sliding-scale benefit reductions, by themselves, would close 59 percent of Social Security’s long-term (i.e., 75-year) funding shortfall.[2] (White House statements that the benefit changes would close 70 percent of the cash flow gap are somewhat misleading; they refer to the percentage of the gap that would be closed in a single year — 2079, the 75th year — not to the share of the cumulative 75-year gap that would be closed.)

When the private accounts are added in, however, the President’s plan as a whole is found to close only 30 percent of the 75-year gap. [Here Furman assumes a--high, as assumed by the SSA actuaries--3% real Treasury borrowing rate. With a lower, more realistic borrowing rate private accounts make money for the government (it borrows at 2% and lends at 3%) and lose money for beneficiaries.]

More than two-thirds of the gap would remain. Additional benefit reductions, new revenues, or large transfers from the rest of the budget would be necessary to fill the substantial remaining gap.