SS & the Great Demographic Tsunami

This is very long, but I think it's excellent and right on target. Both as a Democratic strategy to fight Bush, and the right course to take on saving Social Security.

BOB WELCH, PhD
BOULDER, CO

Newspaper editorials across the nation, including the Washington Post and NY Times have bought half of the Bush propaganda that social security is broken and must be fixed now. They call on Democrats to stop obstructing and proposing alternative fixes. But is Bush’s thesis that its better to make the fix now rather than latter really a good prescription?

How many homeowners insure their homes for their full value? How many Floridians begin boarding up their windows and evacuating at the first announcement of a new hurricane east of the Caribbean with a projected landfall anywhere between Cancun and New York? Why does Boulder continue to develop downtown, including a new hotel under the threat of a 100 year flood? How many Boulderites stop frequenting downtown when the spring thaw begins? Typical behavior, and quite rational decision making under uncertainty, is to increase awareness, monitor the situation, take some low cost precautions, but take no costly and irreversible actions until projected time and place of landfall or flood is sufficiently accurate. Acting on poor information can be as foolhardy as failing to act when the threat is virtually certain. The clamor for action on Social Security, enjoined by editorials in papers from left to right, is analogous. Mr Bush wants to take irreversible actions -- private accounts that could cuts SS revenue by a third and cuts to benefits -- that severely cripple SS , a program that has been very successful for 65 years and at the root of the great American middle class, even though the time and date of the great demographic tsunami landfall remains highly uncertain.

Consider these features of the report of the Social Security trustees, the basis of claims of insolvency:

1) The methodology is “state of the art” but a forecast over 75 years, and heroically, an infinite horizon. Driving the analysis is a projection that as the ratio of retirees to labor force will increase from 1 in 5 to 1 in 3 between 2018 and 2035. I call this the demographic tsunami. This projection is an informed assumption that is independent of the variables in their study – that is, it is assumed fixed and will not respond to variables, such as personal income. Some other assumptions are purposely set at pessimistic values: productivity growth (assumed much lower than the gains made in the last ten years), birth rate (assumed to continue to fall), immigration (assumed to slow to a trickle), and labor force participation (again ignores the higher rate experienced in the 90’s) . I say “purposefully pessimistic” because as an actuarial study, the report is biased to err on the side of caution. This hybrid model of fixed demographic projections is open loop – that is interactions between the assumed projections and economic variables are ignored, probably because there is not a good understanding of how these assumed projections will respond over such a long period of time.

2) The history of the SS trustee’s reports since the 1983 reform suggests that there is considerable interaction between the demographic projections and the dependent variables in their analysis. The demographic tsunami was known in 1983 and its projected date of landfall (point at which the SS trust fund is depleted) has fluctuated considerably since the reform of 1983. It fell from a peak in 1988 of 2045 to a low of 2028 at the end of the Bush I recession in 1994, then rose to 2043 in 2004. In the latest report it fell back to 2042. Most likely, the original projections failed to predict the 1990’s expansion and its impact on productivity growth, labor force participation and immigration (legal and illegal) all of which resulted in a larger than predicted labor force, greater SS tax revenue, larger annual surpluses and total assets in the SS trust fund. Now the sluggish Bush economy is having its impact, bringing the landfall date a little closer. A lower labor force participation due to hidden unemployment and lower personal incomes is reducing projected SS revenue.

3) The pessimistic forecast doesn’t allow for a repeat boom as in the 1990’s. A similar boom would lift personal income, attracting more into the labor force, and increase the birth rate (higher employment and incomes reduce abortions, increase the viability of larger families, improve health, and lead to increases in productivity, all of which were seen in the 1990’s).

4) The pessimistic forecast doesn’t allow for the impact that a large retirement sector would have on employment. The fact is that the baby boomers will go into retirement with ownership of a major portion of the nation’s wealth. They will be healthier and longer lived. As the BB cohort moved through the past, the economy adjusted with a boom in school construction, then colleges and universities, then housing followed by aftershocks as their children also aged. So, too, will there be a boom in retirement villages, outpatient health and physical therapy, travel services, etc. As the tsunami comes to shore the imbalance in retirees to workers will be manifested in a labor shortage. The economy will likely respond with increasing personal incomes and higher productivity, attracting a higher labor force participation including many of the retires who will be more healthy and educated than earlier generations. All of these forces can result in higher SS revenues in a multiplier effect that is cut off in the SS trustees’ model by an assumption of independent demographics.

5) The BB’s are the frontal wave of the tsunami. As happened with schools and housing, there will be several aftershocks as boomer’s children and their children progress through time. As the boomers pass on, the ratio of retirees to workers will level off and fall and then rise and fall again. The best course is a steady course: prepare for each wave by saving in the troughs (as the 1983 rise SS tax) but anticipate that borrowing may be necessary at the crests.

6) In our nation’s history, when has there been a 75 year period that has not had surprisingly robust and poorly predicted demographic changes, primarily resulting in a phenomenal growth rate? The rest of the world’s population is expected to grow at a high rate. Is it not absurd to assume that the US economic engine will not continue to attract new immigrants and US businesses will not be demanding that higher in migration be allowed?

More:
http://www.lightupthedarkness.org/blog/default.asp?view=plink&id=820

If the shit hits the fan so bad that the pessimistic forecast comes true--that is, if for the next thirty years the economy grows at HALF the pace of THIS SHITTY QUARTER--I'll be first in line to cut benefits, since we will be losing education, defense, infrastructure and everything else too as America swirls down the hole of third world poverty.

No matter how big the trust fund is, if things get that bad, we will divert the money. It's like insuring your windows in case of an earthquake--why bother? If the earthquake is so small that only the windows break, you can fix them yourself. If so big it destroys the house, it won't help.

1. Increase the contributions to SS somewhat by moving the cap on contributions toward the historical level of 90% of all wages.
2. Stop giving away tax cuts and running huge deficits. If there is a need to borrow to make it through the tsunami’s crest, then the US will need a good credit rating.
3. Attack the root cause, the demographic tsunami. Seek an ideal retiree-to-worker ratio that is sustainable and direct policies to achieve that goal. This means increasing the effective labor force until the two populations are in balance: Invest in education that increases worker productivity; promote personal income growth and employment attracting a higher labor-force participation; develop a rational immigration policy that seeks a labor force that can sustain a controlled rate of growth, satisfy the demands of business, and the needs of the growing retired population; and, by all means, stay away from guest worker programs. We need immigrants that have a stake in America and are willing to join and contribute to programs like social security.

Bottom line for Democrats -- Far from being obstructionists, we say now is NOT the time to panic and do foolish things because of the uncertain pessimistic predictions of the SS trustees. Take actions that we will not regret if the pessimistic forecasts prove to be false. In addition to raising the cap on income subject to SS tax, Democrats support positive steps that are focused on a balance between retirees and the effective labor force, coordinated policies on immigration, productivity and education, economic growth and the environment, health care and care for the aged, that enable greater labor force participation through growth in personal income and employment.

Some folks would be without windows for a good long time if they had to come up with the money to pay for a whole houseful themselves. Alot of folks, in fact. Social security is what guarantees no windowless homes. But we have that, because in the most pessimistic scenario, we've still got 80% of benefits.

I recommended for greatest. We need to all know this info.

Putting social security aside, if part of the pessemistic outlook for America is decreased income, isn't that actually a bigger crisis than social security anyway?