By David Hogberg on 1.19.05 @ 12:07AM
It’s much more than the $3.7 trillion that critics of reform would have you believe.
How much is it going to cost to keep Social Security solvent
over the next 75 years? If you listen to the opponents of Social
Security reform, not to mention most press accounts, you'll hear
the figure of $3.7 trillion.
A New York Times editorial from January 3 stated: "Over a 75-year time frame, Social
Security's shortfall is estimated by the Congressional Budget
Office at $2 trillion and by the Social Security trustees at $3.7
trillion, a manageable sliver of the economy in each case." In a
recent paper for the Center on Budget and Policy Priorities, Jason
Furman, William G. Gale, and Peter R. Orszag write,
"Over the next 75 years, the deficit in Social Security is 0.7
percent of GDP (or $3.7 trillion) according to the Social
Security actuaries."
Yet that $3.7 trillion figure is misleading for two reasons.
First, it is a "rolling total" that increases with every passing
year, all else being equal. Part of the increase comes from slight
changes in various demographic variables. But a good part of the
increase comes from the fact that each new report from the Social
Security Trustees analyzes a slightly different 75-year period by
dropping the current year and adding another year 75 years hence.
In so doing, it eliminates a "good" year when Social Security is in
surplus and adds a "bad" year when it is in deficit. So, page 10 of
the 2003 Report states that Social Security's "unfunded obligation over
the 75-year projection period has increased from $3.3 trillion to
$3.5 trillion." Page 2 of the 2004 Report notes that the unfunded obligation "over the 75-year
period is $3.7 trillion in present value, $0.2 trillion more than
the obligation estimated a year ago." If the debate should continue
into next year, the reform opponents will probably be saying that
Social Security has a shortfall of "only" $3.9 trillion.
The second reason $3.7 trillion is misleading is that it leaves
the public with the impression that the federal government will
only have to come up with $3.7 trillion over the next 75
years to keep the system solvent. Yet as the quote from the
2004 Report notes, that $3.7 trillion is the "present value." The
2004 Report on page 200 defines present value as
the equivalent value, at the present time, of a future
stream of payments (either income or cost). The present value of a
future stream of payments may be thought of as the lump-sum amount
that, if invested today, together with interest earnings would be
just enough to meet each of the payments as they fell
due.
Thus, $3.7 trillion is not what is needed over the next 75
years. It is what the federal government would have to invest
right now to meet the Social Security's 75-year shortfall.
Since the federal government isn't going to come up with an
extra $3.7 trillion to invest tomorrow, a more useful figure in
understanding the shortfall is the "cumulative cost." That is the
cost to the taxpayers, over a 75-year period, of paying off all the
treasury bonds in the Social Security trust fund plus meeting all
the obligations of Social Security once the trust fund runs dry.
Using data from the 2004 Trustees' report, that number is (sit
down) $24.9 trillion in inflation-adjusted dollars! That is an
annual average of $332 billion extra that the taxpayers will have
to pony up for Social Security. Even that doesn't tell the full
story because included are the years 2004-2018 when Social Security
is still running a surplus. After 2018, the annual Social Security
deficit grows quickly: By 2022 taxpayers will have to pay almost
$100 billion above what they will shell out in payroll taxes to
meet all of Social Security's obligations. That will reach over
$200 billion in 2027, over $300 billion in 2033, and $400 billion
in 2046. If you are under 40 years of age, chances are quite good
you will live to see all of those dates.
Yet the confusion does not end there. Opponents also compare
apples to oranges by contrasting that $3.7 trillion present-value
figure with the cumulative cost of reforming Social Security. For
example, in that same New York Times editorial, the
editorialists write that to pay for President Bush's reform plan
"the government would borrow an estimated $2 trillion over the next
10 years or so and even more thereafter."
An accurate comparison would examine both the present value of
the Social Security shortfall with that of the present-value cost
of a reform plan, such as the Reform Model 2 constructed by the
President's Commission on Strengthening Social Security. According
to page 128 of the Commission's report, "the total transition investments under Reform
Model 2 would be approximately $900 billion in present-value
terms." Last time, I checked $900 billion is less than $3.7
trillion. It is also possible to compare cumulative costs. Using
data from the Trustees, the cumulative costs of Reform Plan 2 are a
mere $225 billion. Any fifth-grader -- even those in public schools
-- should be able to figure out that $225 billion is less than
$24.9 trillion.
Unfortunately, the reform opponents' inaccuracies are beginning
to take hold. Witness this paragraph from a recent
article from the Associated Press:
The retirement system faces a projected $3.7 trillion,
75-year shortfall. Bush wants to overhaul the program to let
younger workers divert some of their Social Security payroll taxes
to personal accounts. But that alone won't fix the problem and
could require upfront costs of $1 trillion to $2 trillion over 10
years.
With press like that, reform opponents are going to have little
incentive to clear up the confusion.
Author's note: Anyone wanting to know how I
calculated the cumulative costs, email me at dpokerhog@cox.net.
topics:
Taxes, Social Security
