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© 2005 George Spitz for Council, georgespitz.com

The Social Security Crisis Fraud:
Why It Doesn't Need Fixing

By George N. Spitz

(CONDENSED VERSION, ORIGINALLY PUBLISHED IN SOCIAL POLICY, FALL 1998 ISSUE)

  A thorough analysis of the five demographic and seven economic assumptions used in the annual reports of the Social Security Trust Fund reveals the "baby boomer" aspect of the alleged social security crisis may be overemphasized. Other factors, particularly inflation, unemployment and growth, are generally overlooked to the detriment of a constructive solution, assuming one is needed.

  Annual Social Security Trust Fund reports contain three sets of assumptions provided by Harry C. Ballantyne, Chief Actuary Social Security Administration. One, which is classified "Intermediate" forecasts Trust Fund exhaustion in 2034. "Intermediate" was accepted as the "best estimate" by the seven Trustees, which include three Cabinet Officers, Robert E. Rubin, Secretary of the Treasury; Donna Shalala, Secretary of Health and Human Services and Alexis M. Herman, Secretary of Labor. A second group of assumptions labeled "High Cost" assigns 2024 as the depletion date. In sharp contrast, the consequence of the demographic and economic conjectures specified "Low Cost" is an actual $10.86 trillion surplus in 2034. The "High Cost" and "Low Cost" groupings are rarely commented on, much less scrutinized, by Congress and the media.

  The Trustees "best estimate" of inflation should be discussed and carefully analyzed. Based on a Consumer Price Index (CPI) factor of 100 for 1999, the Trustees forecast the now relatively stable CPI expanding 2.1 percent in 2000, then experiencing a consistently widening rate each year arriving at 3.3 percent for 2007, a pace maintained through the year 2075. Based on the 100 factor for 1999, the "best estimate" CPI reaches 299.93 in 2034. Small wonder that the average retiree in 2034 will be entitled to an annual benefit of $52,933 in current dollars, according to the "best estimate" of the Trustees, or that the Trust Fund will have difficulty in meeting its obligations.

  The "best estimate" assumptions for unemployment and growth, if anywhere near accurate, are also likely to exert a negative effect on the Social Security Trust Fund and equally prone to wield a depressing impact on society as a whole. The jobless, currently averaging 6,523,000, surges year by year to 8,783,000 in 2034. The Gross Domestic Product (GDP), which rose 3.9 percent in 1998, stagnates at a 2.0 growth rate from 2000 through 2007, then levels off to between 1.2 to 1.4 percent from 2019 through 2075.

  It is evident that the Trustees inflationary forecasts are not widely shared. Mort Zuckerman, publisher of the Daily News, wrote, in the May/June 1998 issue of Foreign Affairs, "Pessimists who warn of inflation should be ignored; American business leaders understand that today's low level of inflation is self-perpetuating." Mr. Zuckerman's optimism is backed up by the performance of the bond market. Over the past year, the bellwether 30-year, 5½ percent face value, US Treasury bonds, maturing in November 2028, have been selling at a premium fluctuating in the 102 range with par value 100. If the bond market had any inkling that these securities would lose roughly two thirds of their value by maturity, it is highly probable that prices would fall below par value and the Treasury would be forced to offer significantly higher interest rates on new issues of long term bonds.

  In further support of the relatively inflation-free future prognostications, the 30-year 3 5/8% inflation indexed-securities have been recently selling at slightly below par.

  If Social Security "reformers" actually believe these inflationary forecasts they should consider investing the current surplus in these new Treasury inflation-indexed securities. In April 1998, the Treasury offered 3 5/8% 30-year bonds due April 15, 2028. Assuming the CPI forecasts then accepted by the Trustees, a $1,000 bond purchased from the April sale would return $5,637.66 on maturity, $2,692.21 in coupon value plus $2,945.45 in accumulated compound interest. That's a pretty good prospect for the Social Security Trust Fund, certainly one meriting dissection by the fund's actuaries and discussion by the "reformers."

  On the other hand, investing a portion of the trust funds in the stock market is a ticklish recipe for those presuming consistent inflation. Historically, during periods of steady annual increases in the CPI, stock prices tend to stagnate. For example, from 1968 through 1982, the CPI (1982-1984 = 100) rose from 34.8 in 1968 to 96.5 in 1982. Over the same inflationary period, the Dow Jones Industrial Average for the Year drifted down from 906.0 in 1968 to 884.4 in 1982. Based on past experience, therefore, stocks are not the best types of investment in a prolonged upward movement of consumer prices. Furthermore, during an inflationary era rising interest rates depresses both stocks and long term bonds. If the Trustees, including former Wall Street wizard, Robert Rubin, really believe their inflationary prognostications, they should recommend placing the bulk of the Social Security Trust fund in either short term Treasury bonds or the aforementioned inflation indexed government securities.

  One wonders why in light of the troublesome long range prospects contained in the "best estimates" of life in year 2034, near exclusive focus is placed on the fate of social security recipients. Certainly, consistent 3.3 percent inflation combined with steady growth in unemployment adversely affects the well being of all segments of the population. Social Security reformers might, thus, consider alternatives to committing a large share of the budget surplus to the Trust Fund. In this respect, the package of assumptions titled "Low Cost" contains projections of "only" 7,560,000 unemployed in 2034, and annual CPI increases of 2.3 percent after 2007. Moreover, as noted, the "Low Cost" assumptions forecast a $10.86 trillion excess in 2034. Thus, why not devote a substantial portion of the budget surplus to reducing unemployment through prudent tax reductions and sound investment in infrastructure? Herein may lie a way of not only "saving social security" but also creating a better society for all in the 21st Century.

 
The Progressive, Pro-Peace choice in the New York City Democratic Primary for City Council 5th District on Manhattan’s Upper East Side and Roosevelt Island.