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Home > Social Security System Is In Need Of Reformation

Although a couple of report by the press vary, a general figure reported based upon the calculations by the Social Security Trustees is that in 2042 the system will be able to pay 73% of benefits, a number that will fall to 68% in 2078. The Congressional Budget Office also provides estimates, and its figures are more optimistic predicting that 81% of benefits will be available in 2053, and 71% will be available in 2100. These figures are reported as though they were known with 100% certainty. We hear repeatedly with the appropriate fist pounding that the system either is, or is not in serious trouble depending upon who is talking the loudest at the moment. We are told that if nothing is done we will most certainly face calamity in the future. But do we know this for sure?

Here’s one way to think about it. Given enough time, two lines that are not exactly parallel will grow arbitrarily far apart. Thus, if the distance between the lines represents a surplus or a deficit in Social Security, we can make the surplus or deficit arbitrarily large by simply moving far enough into the future. All that is required is that the initial growth rates be slightly different. In the Social Security funding debate, these two lines are population and GDP. Growth in population is a key factor determining the demand for benefits in the future and the growth in GDP represents the ability to supply those benefits. All projections regarding Social Security’s ability to pay future benefits depend critically upon estimates of these two growth rates. Very slight changes in these growth rates can have very large effects on projections when you allow those differences to compound over many decades.

To get a sense of the degree of uncertainty, consider the most common estimate reported regarding benefits, the estimate for 2042. That projection was made forty years into the future. Go back forty years, to the mid 1960’s, and ask yourself how well people could have predicted the economy we have today. Or how about the figure that only 68% will be available in 2078? That is a seventy five year ahead projection. If we go back seventy five years from when the forecast was made, which is prior to 1929 and the onset of the Great Depression and several years before the creation of the Social Security system, how well would we have predicted GDP in 2005?

I do not wish to imply that Social Security will definitely be solvent fifty or one hundred years from now. Similarly, I do not wish to imply that it won’t be. We just don’t know. The forecasts that far into the future is sufficiently uncertain so as to render any firm conclusions regarding the health of Social Security difficult to make. We should keep our radar up because some estimates indicate that there may be bumps in the road ahead. But whether there is sufficient basis to radically reform the system based upon these highly uncertain estimates regarding the magnitude of the problem is a question that is worth asking.

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