False Alarm
by Dr. Irwin Kellner
Thursday, April 17, 2008
provided by MarketWatch.com


Commentary: Social Security's not likely to run out of money anytime soon

Reports that the Social Security system will soon run out of money have been greatly exaggerated.

As surely as day follows night, the annual report from the board of trustees of the OASDI fund (Old Age Survivors and Disability Insurance, otherwise known as Social Security) has brought forth alarms that the fund will run out of money in the not-too-distant future.

Although flush with cash now and over at least the next 10 years, the Social Security system is expected to gradually begin paying out more in benefits than it takes in from payroll taxes with the result that by 2041 its assets, in the words of the trustees, will be exhausted.

For those who look at only the summary page, this conclusion is nothing new. Indeed, the trustees have come to the same conclusion every year, the only exception being the year the fund is expected to run dry.

In 2000, the system's actuaries thought the assets of this fund would be exhausted by 2032. Two years later it was 2037. Now the projected exhaustion date is 2041.

Meanwhile, the Congressional Budget Office, which makes these projections as well, recently thought the system will remain solvent until at least 2052.

I don't make these projections personally, but I would like to point out that this year, as has been the case every year in the past, the actuaries have made and released not one but three projections. They call them low cost, intermediate and high cost.

The projection that has provoked these alarms is the intermediate projection. This reflects the trustees' consensus views regarding such inputs as economic growth, productivity, inflation, earnings, employment and interest rates.

Judging by past history, assumptions underlying the intermediate projection are very conservative, especially when it comes to economic growth. And as you might imagine, the speed at which the economy grows has a lot to do with the other variables, including the interest the fund earns from investing its surplus in Treasuries.

The intermediate projection assumes that the economy will grow by an annual rate of 2.3% per year between now and 2085. This may be higher than the 1.9% per year that was projected as recently as three years ago, but it is still well below the 3.4% that the economy grew on average between 1960 and 2005.

The actuaries' own low cost projection assumes an average annual growth rate of 2.9% between now and 2085. This is higher than the 2.3% pace embodied in the intermediate projection, but it is still well below the 3.4% average of the past.

Guess what? Under the actuaries' low cost projection, the Social Security system never runs out of money.

That said, you might ask the question why this more realistic projection has escaped politicians from both major parties.

I don't know why, but I can only theorize that it's because they haven't taken the time to read the entire report, which is available on the system's Website.

If you go beyond the highlights section to the projections section, you will see exactly what I mean.

In other words: If it ain't broke, don't fix it.

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