Ares
7th January 2013, 07:35 PM
CONGRESS and President Obama have pushed through a relatively modest stopgap measure to avoid the “fiscal cliff,” but over the coming years, the United States will confront another huge cliff: Social Security.
http://graphics8.nytimes.com//images/2013/01/06/sunday-review/1216-srw-sub6-SOCIAL-190.jpg
In the first presidential debate, Mr. Obama described Social Security as “structurally sound,” and Mitt Romney said that “neither the president nor I are proposing any changes” to the program. It was a rare issue on which both men agreed — and both were utterly wrong.
For the first time in more than a quarter-century, Social Security ran a deficit in 2010: It spent $49 billion dollars more in benefits than it received in revenues, and drew from its trust funds to cover the shortfall. Those funds — a $2.7 trillion buffer built in anticipation of retiring baby boomers — will be exhausted by 2033, the government currently projects.
Those facts are widely known. What’s not is that the Social Security Administration underestimates how long Americans will live and how much the trust funds will need to pay out — to the tune of $800 billion by 2031, more than the current annual defense budget — and that the trust funds will run out, if nothing is done, two years earlier than the government has predicted.
We reached these conclusions, and presented them in an article in the journal Demography, after finding that the government’s methods for forecasting Americans’ longevity were outdated and omitted crucial health and demographic factors. Historic declines in smoking and improvements in the prevention and treatment of cardiovascular disease are adding years of life that the government hasn’t accounted for. (While obesity has rapidly increased, it is not likely, at this point, to offset these public health and medical successes.) More retirees will receive benefits for longer than predicted, supported by the payroll taxes of relatively fewer working adults than projected.
Remarkably, since Social Security was created in 1935, the government’s forecasting methods have barely changed, even as a revolution in big data and statistics has transformed everything from baseball to retailing.
This omission can be explained by the fact that the Office of the Chief Actuary, the branch of the Social Security Administration that is responsible for the forecasts, is almost exclusively composed of, well, actuaries — without any serious representation of statisticians or social science methodologists. While these actuaries are highly responsible and careful and do excellent work curating and describing the data that go into the forecasts, their job is not to make statistical predictions. Yet the agency badly needs such expertise.
With considerable help from the actuaries and other officials at the Social Security Administration, we unearthed how the agency makes mortality forecasts and uses them to predict the program’s solvency. We learned that the methods are antiquated, subjective and needlessly complicated — and, as a result, are prone to error and to potential interference from political appointees. This may explain why the agency’s forecasts have, at times, changed significantly from year to year, even when there was little change in the underlying data.
We have made our methods, calculations and software available online at j.mp/SSecurity so that others can replicate or improve our forecasts. The implications of our findings go beyond social science. As the wave of retirement by the baby boomers continues, doing nothing to shore up Social Security’s solvency is irresponsible. If the amount of money coming in through payroll taxes does not increase and if the amount of money going out as benefits remains the same, the trust funds will become insolvent less than 20 years from now.
To save Social Security, which has lifted generations of elderly people out of poverty, tough choices have to be made. One option is to continue raising the retirement age, perhaps to as high as 69 or 70. While the full retirement age is gradually increasing to 67 (for people born in 1960 or later) from 65, this increase is not enough to counterbalance the gains in longevity.
A second option is to increase payroll taxes, for example by taxing wages over $113,700, the current earnings limit. A third is to limit the annual cost-of-living adjustments, possibly by changing how those adjustments are calculated. A fourth is to reduce benefits — for example, by lowering the initial benefits for workers whose lifetime wages are above the national average (currently $43,000 a year). Other choices, in numerous combinations, are possible, too.
One factor that might be considered is new research suggesting that retirement itself, although popular, may reduce life expectancy by breaking lifelong routines and disrupting deep social connections. One might question how much government policy should actively encourage retirement, as opposed to merely making it an option.
Americans need to discuss these difficult choices — and the Social Security Administration needs the ability to improve its forecasting technology by adding statisticians and social science methodologists to help its actuaries institute more formalized quantitative and statistical procedures.
In 1983, after the last time the trust funds ran a deficit, the National Commission on Social Security Reform, led by Alan Greenspan and with members appointed by President Ronald Reagan and Congressional leaders, produced a report that led to changes in payroll taxes. But in the quarter-century since, there have been only modest changes in the program.
We know much more now about mortality and demography, and so an open debate today about Social Security’s future could be even more productive than it was then. The high levels of partisan strife may not make the present seem like the best time to reach a bipartisan agreement. But few issues are more important to more Americans, of both parties, and the longer we ignore the problem, the more disruptive any change will need to be to keep Social Security alive.
Gary King is a professor of government and director of the Institute for Quantitative Social Science at Harvard. Samir S. Soneji, a demographer, is an assistant professor at the Dartmouth Institute for Health Policy and Clinical Practice.
http://www.nytimes.com/2013/01/06/opinion/sunday/social-security-its-worse-than-you-think.html?_r=0
http://graphics8.nytimes.com//images/2013/01/06/sunday-review/1216-srw-sub6-SOCIAL-190.jpg
In the first presidential debate, Mr. Obama described Social Security as “structurally sound,” and Mitt Romney said that “neither the president nor I are proposing any changes” to the program. It was a rare issue on which both men agreed — and both were utterly wrong.
For the first time in more than a quarter-century, Social Security ran a deficit in 2010: It spent $49 billion dollars more in benefits than it received in revenues, and drew from its trust funds to cover the shortfall. Those funds — a $2.7 trillion buffer built in anticipation of retiring baby boomers — will be exhausted by 2033, the government currently projects.
Those facts are widely known. What’s not is that the Social Security Administration underestimates how long Americans will live and how much the trust funds will need to pay out — to the tune of $800 billion by 2031, more than the current annual defense budget — and that the trust funds will run out, if nothing is done, two years earlier than the government has predicted.
We reached these conclusions, and presented them in an article in the journal Demography, after finding that the government’s methods for forecasting Americans’ longevity were outdated and omitted crucial health and demographic factors. Historic declines in smoking and improvements in the prevention and treatment of cardiovascular disease are adding years of life that the government hasn’t accounted for. (While obesity has rapidly increased, it is not likely, at this point, to offset these public health and medical successes.) More retirees will receive benefits for longer than predicted, supported by the payroll taxes of relatively fewer working adults than projected.
Remarkably, since Social Security was created in 1935, the government’s forecasting methods have barely changed, even as a revolution in big data and statistics has transformed everything from baseball to retailing.
This omission can be explained by the fact that the Office of the Chief Actuary, the branch of the Social Security Administration that is responsible for the forecasts, is almost exclusively composed of, well, actuaries — without any serious representation of statisticians or social science methodologists. While these actuaries are highly responsible and careful and do excellent work curating and describing the data that go into the forecasts, their job is not to make statistical predictions. Yet the agency badly needs such expertise.
With considerable help from the actuaries and other officials at the Social Security Administration, we unearthed how the agency makes mortality forecasts and uses them to predict the program’s solvency. We learned that the methods are antiquated, subjective and needlessly complicated — and, as a result, are prone to error and to potential interference from political appointees. This may explain why the agency’s forecasts have, at times, changed significantly from year to year, even when there was little change in the underlying data.
We have made our methods, calculations and software available online at j.mp/SSecurity so that others can replicate or improve our forecasts. The implications of our findings go beyond social science. As the wave of retirement by the baby boomers continues, doing nothing to shore up Social Security’s solvency is irresponsible. If the amount of money coming in through payroll taxes does not increase and if the amount of money going out as benefits remains the same, the trust funds will become insolvent less than 20 years from now.
To save Social Security, which has lifted generations of elderly people out of poverty, tough choices have to be made. One option is to continue raising the retirement age, perhaps to as high as 69 or 70. While the full retirement age is gradually increasing to 67 (for people born in 1960 or later) from 65, this increase is not enough to counterbalance the gains in longevity.
A second option is to increase payroll taxes, for example by taxing wages over $113,700, the current earnings limit. A third is to limit the annual cost-of-living adjustments, possibly by changing how those adjustments are calculated. A fourth is to reduce benefits — for example, by lowering the initial benefits for workers whose lifetime wages are above the national average (currently $43,000 a year). Other choices, in numerous combinations, are possible, too.
One factor that might be considered is new research suggesting that retirement itself, although popular, may reduce life expectancy by breaking lifelong routines and disrupting deep social connections. One might question how much government policy should actively encourage retirement, as opposed to merely making it an option.
Americans need to discuss these difficult choices — and the Social Security Administration needs the ability to improve its forecasting technology by adding statisticians and social science methodologists to help its actuaries institute more formalized quantitative and statistical procedures.
In 1983, after the last time the trust funds ran a deficit, the National Commission on Social Security Reform, led by Alan Greenspan and with members appointed by President Ronald Reagan and Congressional leaders, produced a report that led to changes in payroll taxes. But in the quarter-century since, there have been only modest changes in the program.
We know much more now about mortality and demography, and so an open debate today about Social Security’s future could be even more productive than it was then. The high levels of partisan strife may not make the present seem like the best time to reach a bipartisan agreement. But few issues are more important to more Americans, of both parties, and the longer we ignore the problem, the more disruptive any change will need to be to keep Social Security alive.
Gary King is a professor of government and director of the Institute for Quantitative Social Science at Harvard. Samir S. Soneji, a demographer, is an assistant professor at the Dartmouth Institute for Health Policy and Clinical Practice.
http://www.nytimes.com/2013/01/06/opinion/sunday/social-security-its-worse-than-you-think.html?_r=0