Crash course: Social Security is crashing faster than you think

National Review, Nov 7, 1994 by John Attarian

Declining mortality rates mean longer life spans, hence higher Social Security costs. American death rates adjusted for age and sex have fallen steadily with improvements in health care, living standards, diet, and exercise. Death rates fell by an average of 1.2 per cent a year between 1900 and 1991 and by 1.4 per cent a year from 1968 to 1991. Given this trend, the 1994 report's intermediate assumption of a 0.6 per cent average annual decline in the death rate between 1991 and 2068 looks too optimistic, as does even the pessimistic assumption of 1 per cent.

Overall, Robertson argued, the focus on intermediate assumptions imparts an optimistic bias to people's thinking about Social Security. In deciding which set of assumptions to use, the real test is which set most accurately portrays the most likely future and thus best enables Social Security to honor its promises. By that standard, he said, the pessimistic assumptions are "the most appropriate ... and even they may be somewhat optimistic."

In effect conceding that Robertson is right, the Social Security trustees' 1994 report revised some intermediate assumptions toward pessimism. The fertility rate was reduced slightly for the first 15 years, reflecting lower-than-expected birth rates in 1992. Male mortality rates were trimmed to reflect mortality rates in 1992 and 1993, which were below expectations. (These changes were offset by adjusting the projected future beneficiaries for the influx of illegal aliens, presumably less likely to get benefits than legal residents.) Some economic assumptions were also adjusted, which slightly worsened the actuarial deficit; e.g., labor-force participation rates were lowered to reflect increases in the number of workers expected to receive disability benefits. And the new future productivity growth estimates are 1.7 per cent (optimistic), 1.4 per cent (intermediate), and 1.1 per cent (pessimistic)--vindicating Robertson's position.

Furthermore, only the pessimistic projection is realistic enough to assume recessions during the next ten years: in 1995 (real GNP projected to fall by 0.5 per cent) and 1998 (real GNP down 1.7 per cent). This squares well with historical experience: recessions in 1975, 1980, 1982, and 1991.

Finally, the creepback of OASDI trust-fund exhaustion dates even under intermediate assumptions--from 2043 in 1990 to 2036 in 1992 and 2029 in 1994--indicates that pessimism is justified.

Busting the Budget

WHEN a Social Security trust fund's revenues can't meet outlays, it cashes in some of its Treasury bonds. The drain of the Disability Insurance fund began in 1992. If the pessimistic assumptions come true, the OASI fund will start redeeming its bonds in 2002. Even under the intermediate assumptions, Medicare's Hospital Insurance trust fund will start running down in 1996. To get the money for the bonds, the Treasury will have to cut other spending, raise taxes, or borrow from the public. Given Congress's record on spending reduction and the public's dislike of tax increases, the last option, meaning higher budget deficits, is the likeliest.