IBD: Social Security Trust Funds' Health In Bad Shape

Pre-colonial English explorers assumed that black swans didn't exist, simply because they had seen only white swans. In the book "Black Swan," Nassim Nicholas Taleb describes how people are too wedded to biases of history and become blinded to the impact of a rare event.
In other words, just because something has a small probability of happening doesn't mean it can't — or won't.
Social scientists (especially economists and actuaries) use history as a guide to projecting the probability of an event occurring in the future. If an event has a low probability of happening, we usually discount it or ignore it altogether.
But the recently released Social Security Trustees report has us wondering if we're blinded to the Black Swan headed our way.
The 2013 report released last Friday estimates the Social Security trust funds will become exhausted in 2033, just 20 short years from now.
It also estimates that the 75-year shortfall is $9.6 trillion in present value terms. If we indefinitely extend past the 75-year period, the "infinite horizon," the shortfall is a whopping $23.1 trillion.
As bad as those numbers are, Harvard and Dartmouth social scientists Gary King and Samir Soneji assert that the finances are far worse because the Social Security actuaries are underestimating how long we will live — a claim the SSA actuaries refute.
Without going into the weeds of methodological conflicts, we suggest that the worst-case future for Social Security might be worse than the program's trustees think, and that the Black Swan may be swimming right up behind us.
A Game Of 'What If'
While the commonly reported figures for trust fund insolvency are based on intermediate assumptions — not too high, not too low — the trustees also calculate high- and low-cost assumptions. Social insurance experts are well aware that the high-cost projections of Social Security's future do not represent a worst-case scenario — the combined trust fund insolvency date under the high-cost assumptions is 2027, just 14 years from now.
Many of these same experts nonetheless claim that the worst-case future for Social Security is that promised benefits would have to take a 25% haircut if the trust funds go insolvent in 2033. Though a 25% reduction in benefits is scary enough, a Black Swan event could be catastrophically worse.
Consider a chronically sluggish economy that causes the gross domestic product to continue to fall well short of current projections, with attendant increases in disability rates and declines in birth rates.
Throw in a cure for cancer, and you have a flock (technically, a wedge) of Black Swans that will result in Social Security beneficiaries seeing far more than a 25% cut in their benefits.
We think the trustees and others who say "sooth" for a living should pay more heed to those surprising events that occasionally darken our skies and our lives.
The call of the Black Swan can often be heard before the bird itself arrives — and we should take advantage of such fortuitous heralding when it comes to the future of Social Security.
To be clear, we are not recommending that the current and normal distribution analyses that underlie the trustee reports should be replaced or even augmented by reliance on abnormal distributions.
Black Swan Czar?
We would, however, like to see the SSA's Office of the Chief Actuary hire a Black Swan Curator, charged with searching the skies for large birds headed our way, charting their course and finding a way to deflect those that might do us great harm.
One such bird is the stork, who threatens us more with his absence than with his presence, causing fertility rates to decline and Social Security's financial problems to increase.
Another is the vulture, whose absence is anticipated by King and Soneji, with inadequate mortality causing distress to the trust funds.
Perhaps most needed is the owl, whose wisdom may help us understand the influence of taxation and regulations on unemployment rates and GDP, and the subsequent impact of such economic parameters on the demographic assumptions (fertility, immigration, disability) used by the actuaries.
We hope that our recommendation to hire a Black Swan Curator (actual name optional) will be enthusiastically received.
But we are concerned that cost — and turf — control may prevent such a position from being created. We thus have ready a low-cost backup recommendation, which is that every trustee report be emblazoned with the warning: Black Swans Bite!
• Fichtner is senior research fellow at the Mercatus Center at George Mason University, having previously served at the Social Security Administration as acting deputy commissioner and chief economist.
• Kilbourne started actuarial divisions for three international consulting firms.

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