Social Security

John Seater pointed me to a recent paper by Blocker, Kotlikoff, and Ross, "The True Cost of Social Security".

Implicit government obligations represent the lion's share of government liabilities in the U.S. and many other countries. Yet these liabilities are rarely measured, let alone properly adjusted for their risk. This paper shows, by example, how modern asset pricing can be used to value implicit fiscal debts taking into account their risk properties. The example is the U.S. Social Security System's net liability to working-age Americans. Marking this debt to market makes a big difference; its market value is 23 percent larger than the Social Security trustees' valuation method suggests.

The authors argue that an estimate of Social Security's unfunded liabiltiy should account for the uncertainty of wage growth. (It's wage growth that largely drives both SS benefits and taxes.) After accounting for that uncertainty, they estimate the unfunded liability in 2005 at $10.4 trillion, almost $2 trillion more than estimated by the Social Security Administration.

$2 trillion: but what's a couple of trillion among friends? We need to update the famous wisecrack attributed to the late Sen. Everett Dirksen as follows: "A trillion here, a trillion there, and pretty soon you're talking real money." (But note that Senator Dirksen never actually made the wisecrack. How disappointing.)

Most economists who have studied the issue think that in a few decades the government will have a substantial problem funding currently promised Social Security and Medicare benefits. (Especially Medicare.) A short. non-technical summary of the problem by distinguished economist Edgar Browning is here. His longer, more detailed paper is here. And if you find that useful, you can buy his recently published book, Stealing from Each Other: How the Welfare State Robs Americans of Money and Spirit.

Maybe a good outcome from our current financial problems is that more people will believe that the future eventually arrives.

Finally, if you haven't seen it, you should read the incredible story of how Congress has mandated that if taxpayers ask to see the Social Security "trust fund" they be shown fake bonds printed on a laser printer.

Comments

[kyle8]

All our current money is fake anyway. It is just bits and bytes floating around on the internet. Now that the government owns a large portion of the real estate market, they can sell these assets off a little at a time to fund social security.

On a more serious note. They have three ways to fund social security, First they will have to change the COLA so that it understates inflation, then they inflate the economy. At the same time they raise the years of eligibility, and then raise the payroll tax.

These might be the final spark we need to get people to support a true reform and overhaul of the entire tax/entitlement system. Or, maybe everyone will just go along like sheep with an austerity program.

[kim]

Here are a couple of articles about Chile's social security system. The first one is from the CATO Institute so it may be just a little biased...
http://www.cato.org/pub_display.php?pub_id=5981
The second article explains why you said Americans would be skeptical about implementing the same type of system...
http://www.socsec.org/publications.asp?pubid=332

Kim

[JorgXMcKie]

My students have enough trouble understanding that the phrase "wages have remained stagnant" for (enter X number of years to bash opponent) does not mean total compensation has remained stagnant.

The trade-off especially between wages/salary and health benefits (let alone other benefits like personal days or flex-time or whatever) seems to stump them.

If I now have to point out that the trade-off for 'free' health care (or invisibly paid for by your employer with your potential wages) *also* means underfunding your own SS because neither you nor the workers following you will be paying as much as you would with higher wages (but lower 'free' health care benefits) their heads will explode.