Marginal Utility

by Ken Houghton

2006 Trustees Report (warning: PDF)

The headline, of course, is that the Fund is now projected to need to borrow from the General Fund (as opposed to the current situation) in 2040--one year earlier.

How do you claim this when productivity growth has (once again) severely exceeded expectations?

Trust Fund exhaustion is one year sooner and the unfunded obligation is higher than last year’s report largely because of the passage of a year and small revisions to several key assumptions including a lower assumed real interest rate. [emphasis mine]

The year that passed realized a surplus* gain of either $43.973 billion or (at least) $1716 billion in assets. (I assume the latter, since I assume one sentence from the press release* has an "m" where a "b" should be. UPDATE: Tom confirms this in his first comment.)

So we know the "passage of a year" phrase is bollocks as a reason for the acceleration.

The other caution is that lower real return on SSA assets implies lower real return on equity assets.

UPDATE #2: PGL at Angrybear has more, including putting the SSDI deficit into context. He also sends us to a CNN report that noted:

A change of a year or two in trust fund exhaustion estimates isn't considered significant because it reflects small adjustments in long-term averages that are made based on the latest economic factors, including the rise or fall in interest rates, wage growth and inflation. This year, for example, the trustees assumed a slightly lower real interest rate and a slightly increased long-term fertility rate. [emphasis mine]

I feel guilty having stopped at two, but both of my neighbors have three (one expecting a fourth), so an econometrician/quantitative sociologist would say we're on target.

By the way, CNN also presents this article, which dovetails nicely into the question of what the Trustees did to immigration expectations (which were severely understated last year). The answer is provided by Dean Baker ("Trustees Continue to Assume Slowing Immigration, Weak Productivity") who provides some more details in a CEPR Social Security Byte:

The trustees assume that economy-wide productivity growth will average 1.7 percent over the 75-year planning period. This is 0.1 percentage point higher than in the 2005 report, but they also assumed that the gap between the CPI and the GDP deflator will be 0.1 percentage point higher than in the 2005 report, so that the change in the productivity assumption had not impact on projected real wage growth, and therefore no effect on the long-term solvency of the program. By comparison, in their long-term projections, both the Congressional Budget Office and the Office of Management and Budget assume that productivity growth will average 2.1 percent.

The trustees also assume that immigration will be slower in the years ahead than it has been in the recent past. They assume that annual immigration will soon fall to 950,000 and eventually to just 900,000 a year compared to peaks of more than 1.3 million a year in 2001-2002. According to the trustees’ sensitivity analysis, if immigration were sustained at the high levels of the recent past, it would reduce the long-term shortfall by 12 percent.

The projected date of depletion of the trust fund was moved forward a year to 2040, as recent economic news has been somewhat worse than had been projected. Specifically, last year’s report projected that average real wage growth in 2005 would be 2.1 percent, followed by 2.2 percent growth in 2006. The new trustees report shows real wage growth in 2005 as just 1.0 percent and projects real wage growth for 2006 of just 1.2 percent.

Bruce Webb weighs in here (I think).

UPDATE #3: Mark Thoma Explains It All to You. And Bruce Webb in comments notes:

Oddly enough if you take II.D7 and examine it over time it always ends up with the same shape....But interestingly enough Low Cost never shows an overfunded Trust Fund, for more than a decade the Trustees' official high end economic assumption has returned the Goldilocks solution. Low Cost's porridge is never too hot and never too cold, hmm, hmm always just right. Odd coincidence? Or fitting your numbers to a predetermined curve?