This is a follow-up to my post of November 5, 2015 that focused on the two problems with any proposed reforms to Social Security that simply reduce the system’s 75-year actuarial deficit to zero.
As Yogi Berra said, “It’s tough to make predictions, especially about the future.” If we knew for sure what the future held, it would probably make it easier for us to plan for it. But if we did, we wouldn’t need people like actuaries who make a living by making educated assumptions about the future.
Last month, the Congressional Budget Office (CBO) released, Social Security Policy Options 2015 which examined the impact of 36 specific policy options on their estimate of the 2015 75-year actuarial deficit. But, instead of using the assumptions for future system experience adopted by the Social Security Trustees and the Social Security Administration actuaries, those rascals at CBO tweaked a few of the Trustee’s assumptions. The effect of this tweaking of was to increase the estimated 2015 75-year actuarial deficit from 2.7% of taxable payroll to 4.4%. Wow, over a 60% increase in the estimated deficit from tweaking a few assumptions!
Well, of course the CBO report got a bunch of folks upset. In her recent article, Alicia Munnell, the Director of the Center for Retirement Research at Boston College, calls the CBO estimate “astounding” and implies that the CBO report was issued for the purpose of setting “the stage for benefit reductions.” She is upset because she feels that “cutting benefits [now] would be a huge mistake.” She argues that the 2015 75-year deficit probably isn’t any higher than her Technical Panel’s “preferred alternative” estimate of 3.42%. Her article implies that the CBO report makes the system’s financial problems sound insoluble.
Whose assumptions are a better estimate of future system experience? The Trustees’? The CBO’s? Alicia’s Technical Panel’s? I have no idea. And frankly, no one does (now that Yogi has passed). As the ultimate sentence in Alicia’s article indicates, “Only time will tell which of us comes closer.” And that is the primary point of this post. Since we don’t know what the future holds, we need to solve our best estimate of the size of the problem in the near future. But equally important, we also need to use sound actuarial principles to ensure that the system automatically maintains its actuarial balance in the future when actual experience deviates from assumed experience (because trust me on this one, it will). The alternative is to simply assume that the “best estimate assumptions” will be accurate for the next 75 years and proclaim the program “fixed” as members of Congress did back in 1983. We just have to look at the mess the system is in now to see how the lack of automatic adjustments has worked for us.