Infinite Hooey: PV and Past Participants in Social Security
by Bruce Webb
2007 Report Table IV.B7
2008 Report Table IV.B7
2009 Report Table IV.B7
There are some prominent commentators on Social Security who insist that its future Unfunded Liabilities are in large part the result of over-generosity to past participants, and particularly those who drew benefits from the program in the early years without fully contributing. And who when asked for proof point to Table IV.B7. And yes I do have Jim Glass among others in mind. To see why this is nonsense you can start by comparing the same table from three different years.
A typical retiree in 1980 would have been born in 1915 and entered working life by 1936 and so have been subject to payroll tax for his entire working life. He would also be 93 or 94 this year meaning that he and his predessors drawing benefits back from 1940 are overwhelmingly likely to be in what Social Security calls ‘past participants’ or as we say ‘dead’. Meaning that whatever benefits they drew are now fixed in stone, nothing that can happen between 2008 and 2009 can possibly change that amount. Now we know that in actual dollars all benefits paid out until 1980 totalled $999.6 billion. Now you can play around and try to express that in 2009 dollars but what you can’t do is make the consequent value vary much, it is what it is.
In 2007 the Present Value of Unfunded Obligations for Past and Current Participants was $14.5 trillion
In 2008 the Present Value of Unfunded Obligations for Past and Current Participants was $15.2 trillion
In 2009 the Present Value of Unfunded Obligations for Past and Current Participants was $16.3 trillion
Why does this value grow so much from year to year? Well it is not because the Greatest Generation is magically padding their already collected retirement by close to a $trillion per year, Past Participants share NO part in the blame here. Instead the biggest culprit is inflation, with the 2009 Report 2008 and its costs are in the past and 2083 and its costs are added to the outlook. But other factors enter in as well as can be seen in Table II.D2 from this year’s Report.
Unfunded Liability moves in response to changes in assumptions about events in the FUTURE, it has NOTHING to do with benefits collected in the PAST. You can’t change mortality assumptions for people who are already dead. When we see that of the total -0.30% deterioration that -0.05 was the result of change of valuation period (swapping 2008 for 2083) and -0.11% was for changes in mortality and fertility assumptions while -0.15% was for changes in economic data (i.e. the current recession) it is clear that none of this has to do with some mythical overpayment to the Greatest Generation. I don’t know exactly why even people are smart as Orszag have fallen into this ‘legacy debt’ concept, but certainly explanations about how this works numerically have not been convincing to date.