To understand this low-profile, subversive attack on our Social Security system, it is essential to recognize that Social Security is different from other government spending and taxation. Unlike other kinds of government programs, Social Security is a defined benefit pension plan, where contributors pay premiums in exchange for benefits.
The premiums are workers' FICA insurance contributions, matched by employers. The benefits are joint and survivor annuities, life insurance, and disability insurance. The benefits are paid if and when the insured event (premature death leaving dependents, disability, or old age) occurs.
Like its private sector counterparts, Social Security generally faces a significant time lag between the receipt of premiums and the expenditure of related benefits. To ensure that its promised benefits are adequately financed, Social Security's income and outgo are projected over a long period of time, well into the future. The same is done for proposals to expand the program's modest benefits.
To develop these projections, Social Security, like other pension plans and insurance companies, employ actuaries. They are the experts trained to use statistics and other actuarial methods to assess probabilities and risk regarding future economic and demographic conditions. In the near-term, economic factors dominate these valuations; demographic factors become more and more determinative, the longer the valuation period. Social Security has always used extremely long valuation periods. Since before Social Security's creation, eighty years ago, its valuation periods have never been shorter than thirty-five years. Indeed, they have been as long as eighty years.
And actuaries tend to be very good at their jobs. Starting in 1934, a year before the enactment of Social Security, the federal government employed actuaries to develop estimates for the proposed Social Security legislation. In 1934, those actuaries projected that the percentage of the U.S. population aged 65 and over would be 12.65 percent in 1990. What did it turn out to be? 12.49 percent!
Starting in 1941, the first year after monthly Social Security benefits began being paid, the actuaries have prepared projections that, to this day, are reported to Congress by Social Security's Board of Trustees. Today, Social Security's Office of the Chief Actuary employs approximately forty full-time actuaries, whose sole job it is to make calculations regarding Social Security.
In stark contrast, economists, well-trained and capable as many are, lack the requisite training to make these long-range projections. They and other non-actuaries have no training in the discipline of actuarial science. Nor have they passed the difficult and intense series of tests necessary to be licensed to practice as an actuary. Because actuaries are the trained and recognized experts, insurance companies and pension plans, including Social Security, employ actuaries for this work; they do not hire economists or specialists in other disciplines, because they lack the requisite training and expertise. Unfortunately, the lack of expertise and training has not stopped some non-actuaries from trying to get into the act, when it comes to Social Security.
In response to the growing movement to expand Social Security, several non-actuaries who have waged a decades-long effort to convince Congress to cut benefits are, in effect, working the actuary-refs, by challenging the numbers. They are doing this in two ways. First, they are arguing that current and future benefits are considerably larger than the actuaries report. Second, they claim that Social Security's projected shortfall is substantially larger than the actuaries say.
Though these non-actuary advocates have been unsuccessful in bullying the actuaries, they apparently have been successful with some influential non-actuaries.
They somehow succeeded in convincing Social Security's Board of Trustees, none of whom are actuaries, to remove information from the Trustees Report about the size of Social Security's benefits. This was quite obviously done over the objection of the actuaries, since the Chief Actuary, for the first time in the history of Social Security, mentioned the removal as a "caveat" to the normally boiler-plate Statement of Actuarial Opinion. The information was removed, despite the fact that the information had been included in every trustees report for more than two decades. Even worse, it was removed in such a way that what was left gives the highly misleading impression that future benefits are increasing, when in reality they are declining.
Then, in December, more non-actuaries got into the act. The economists at the Congressional Budget Office released a report showing that, indeed, benefits were very high, and, in some cases, substantially higher than pre-retirement wages.
A few weeks ago, CBO corrected its report:
After questions were raised by outside analysts [actuaries, perhaps?], we identified some errors in one part of our report, CBO's 2015 Long-Term Projections for Social Security: Additional Information, which was released on December 16, 2015.
CBO's corrected results, while still likely flawed, brought them into closer alignment with the actuaries' numbers. But the correction came only after attention-getting opinion pieces, arguing against expanding Social Security and highlighting CBO's erroneous conclusions, ran in the Washington Post, the Wall Street Journal, Forbes magazine, and elsewhere. CBO's February retraction was not the first time CBO had to publicly correct mistakes in its long-term projections
This is just the tip of the iceberg. Much more serious than the fight over the adequacy of Social Security's benefits is the fight over the size of Social Security's projected shortfall. After all, beneficiaries know the size of their benefits, and it is indisputable that those benefits will replace a smaller portion of people's wages in the future. What is not so easily known to the American people is what various proposed expansions of benefits will cost and how large the projected shortfall, still decades away, will be.
Historically, non-actuaries gave appropriate deference to the projections of the actuaries on these kinds of questions. Now that has changed.
One of the culprits, CBO, was established in 1975 to provide Congress information about the budgetary impact of federal policy. The legislation establishing CBO sets up a one-year timeline for the budget process, since the budget is for one fiscal year. In addition, the legislation directs CBO to develop five-year projections - a long time in the world of budgets. In other parts of the legislation, CBO is directed to develop estimates "not to exceed 10 years beyond the effective date," and "up to 10 years."
It is appropriate for economists to make five-year and even in some circumstances, ten-year budget projections. But for longer projections, as demographic assumptions become more important, it is actuaries, not economists, who have the appropriate expertise and training.
For the first quarter century of its existence, CBO stuck to economics and budgeting.
But in 2003, after the appointment of a new CBO director, CBO - which employs no actuaries - started producing long-range, seventy-five year projections for Social Security.
Since the 1990s, the actuaries at the Social Security Administration have been projecting a manageable shortfall that will, without Congressional action, materialize in around two decades The actuaries' projections have varied year to year, but never substantially.
When CBO first got into the act, it projected somewhat smaller shortfalls than the actuaries. Then, in 2013 - soon after Senator Elizabeth Warren and other prominent members of Congress began publicly advocating for expansion - CBO's projected shortfall increased by 73 percent in just one year. It jumped again in 2014, and yet again in 2015. According to CBO's non-actuaries, Social Security's projected long-range shortfall more than doubled, increasing by a whopping 125 percent in just three years.
The smooth operation of Social Security oversight and policymaking depends on projections that are reliable and trustworthy. The actuaries spend all year long, every year, studying trends, perfecting techniques, and refining their projections. Their projections are steady and consistent, wavering only slightly from year to year.
Not so, CBO. Estimates that more than double the projected shortfall in the span of just three years should raise red flags in and of themselves. Not surprisingly, CBO's underlying assumptions are highly questionable:
- CBO assumes that for the next three-quarters of a century and beyond, income and wealth inequality will continue to grow substantially. This, despite the fact that leaders of both political parties are expressing their concern about, and commitment to reduce, that very disparity.
- CBO assumes that we will experience very low interest rates for the next 75 years, far lower than we have experienced over the last four decades.
- CBO assumes that disability rates will remain high and, indeed, increase, over the next three-quarters of a century, despite recent experience showing that they are tapering off.
- And perhaps most indefensible, CBO projects that longevity will improve at the same rate for all ages, despite acknowledging that this assumption is totally inconsistent with historical experience - which it is. Other than simplicity of calculations - by no means, an adequate defense - it is hard to intuit any basis on which such a biased assumption would be made.
What is crucial to recognize is that every single one of the above questionable assumptions biases the results in favor of showing a significantly larger shortfall. The simplifying assumption that longevity will improve for all ages at the same rate in and of itself distorts the projection significantly. That simplifying assumption alone under-estimates Social Security's projected income and over-estimates its projected costs. (It reminds one of the joke about an economist trapped on a desert island with an unopened can of soup: First step, assume a can opener.) This kind of error exemplifies why actuaries and actuarial methods, not economists and economic models, are the better way to go with respect to Social Security's wage insurance.
Perhaps revealingly, there appear to be no CBO assumptions whatsoever that differ significantly from those of the actuaries in the direction of reducing the shortfall. Every single significant difference increases the shortfall. In a fair-minded analysis, where dozens of assumptions are made, one would expect to find disagreements in both directions.
Moreover, CBO makes its projections without any public oversight. It does have a panel of economic advisors, but none of them are actuaries, they deliberate in private, and there is no public report of their assessments.
In sharp contrast, the actuaries' long-range projections are subject to two annual, publicly available, full-scope audits. One is conducted by a major accounting firm, which SSA's Inspector General selects (different ones in different years) and with which the IG contracts. In producing the audits, the accounting firms either have in-house actuaries or subcontract with one of the major actuarial consulting firms to assist. Another annual audit is conducted by GAO, which has actuaries on staff. All of these reviews are publicly available.
Bad as it is to have CBO's economists acting as actuaries and with no oversight, they are not the only ones. Other influential actors, similarly untrained in the rigorous and demanding discipline of actuarial science, are getting into the act. A technical panel, appointed by the Social Security Advisory Board and composed primarily of economists, recently substituted their uneducated judgment for that of the actuaries and advocated for assumptions that would substantially inflate Social Security's projected shortfall.
And perhaps most reprehensible, Social Security's Board of Trustees, for the first time in the history of the program, has apparently overridden the best judgment of the actuaries. Though none of the Trustees are actuaries themselves, they have made decisions that required the Chief Actuary to amend the boilerplate Statement of Actuarial Opinion so that it includes a number of caveats to both the 2014 and 2015 Trustees Reports. (One of the several caveats concerned the objectionable actions by the Trustees to remove accurate information about the size of the benefits and leave a misleading chart in its place, as discussed above.)
It is time for all of these meddlers to back off. The Office of the Chief Actuary has a long and distinguished history of being outstanding professionals, independent from outside pressure. Its dedicated civil servants are the only ones in the nation who work day in and day out, year after year, on Social Security's actuarial projections. Policymakers should respect those civil servants as the experts that they are, and should treat their projections as the gold standard, as long as they remain reasonable and consistent with prior projections.
Congress should instruct CBO to stop producing long-range Social Security projections or, alternatively, to hire a team of actuaries. And, Congress should subject their projections to the same rigorous outside, public oversight that the SSA actuaries' projections are. Even then, Congress should treat them - and all others - as merely advisory, one more way to evaluate the reasonableness of the projections produced by SSA's actuaries.
Actuaries outside the Office of the Chief Actuary, economists, and other non-actuaries should, of course, feel free to assess whether SSA's actuarial projections and underlying assumptions are reasonable. What they should not do, though, is seek to substitute their own opinions, reasonable or not.
CBO should recognize its limitations. Most certainly, part-time, volunteer technical panels should recognize their limitations. Most importantly, the Trustees themselves should recognize their limitations and show deference and indeed, some humility, to those who possess the relevant expertise and training.
Having a single, agreed-upon baseline, produced by the independent, expert actuaries of the Office of the Chief Actuary has been an important hallmark of Social Security's successful eighty-year history. Outside interference, well-meaning or not, subverts that essential work and indirectly undermines an important Social Security institution, the Office of the Chief Actuary. Today, a time when public institutions are widely under attack, that kind of meddling not only undermines Social Security; it undermines our very government.
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