Thursday, May 14, 2015

Social Security On The Fritz?

Janet Novack of Forbes reports, Social Security In Far Worse Shape Than Official Numbers Show:
Over the last 15 years, the Social Security Administration’s Office of the Chief Actuary has consistently underestimated retirees’ life expectancy and made other errors that make the finances of the retirement system look significantly better than they are , a new study by two Harvard and one Dartmouth academics concludes. The report, being published today by the Journal of Economic Perspectives, is the first, the authors say, to compare the government agency’s past demographic and financial forecasts with actual results.

In a second paper appearing today in Political Analysis, the three researchers offer their theory of  why the Actuary Office’s predictions have apparently grown less reliable since 2000:  the civil servants who run it have responded to increased political polarization surrounding Social Security “by hunkering down” and resisting outside pressures—not only from the politicians, but also from outside technical experts. “While they’re insulating themselves from the politics, they also insulate themselves from the data and this big change in the world –people started living longer lives,’’ coauthor Gary King, a leading political scientist and director of Harvard’s Institute for Quantitative Social Science, said in an interview Thursday. “They need to take that into account and change the forecast as a result of that.”

In its annual report last July, Social Security predicted its old age and disability trust funds, combined, would be exhausted in 2033 and that after that point the government will have enough payroll tax revenues coming in to pay only about three quarters of promised benefits. King said his team hasn’t estimated how much sooner the fund might run out, but described it as in “significantly worse shape” than official forecasts indicate.

In addition to underestimating recent declines in mortality (i.e. increases in life expectancy) for those 65 and older, the Actuary has overestimated the birth rate—meaning the number of new workers who will be available to pay baby boomers their benefits 20 years from now , the researchers assert. Before 2000, the Actuary also made errors, but they went in both directions and the Actuary was readier to adjust the forecasts from year to year as new evidence came in, King said. Since 2000, he added, the errors “all are biased in the direction of making the system seem healthier than it really is.’’

A Social Security spokesman said today that Chief Actuary Stephen Goss couldn’t comment on the papers because he wasn’t provided them in advance and is tied up today in meetings with the Social Security Advisory Board Technical Panel.  But the spokesman pointed to an Actuarial Note which Goss and three colleagues published in 2013 in response to a New York Times op-ed by King and one of his current coauthors,  Samir Soneji, an assistant professor at Dartmouth’s Institute for Health Policy & Clinical Practice. In that op-ed, they attacked the Actuary’s methods of projecting mortality rates and predicted the trust fund would be depleted two years earlier than predicted. In their response, Goss and his colleagues called King and Soneji’s methods of predicting death rates “highly questionable” and noted that the Actuary’s methods have been audited since 2006 by an independent accounting firm and received unqualified opinions.

The dust-up might be ignored as bickering by the pointy heads, if it weren’t so consequential.  In a recent Gallup survey, 36% of workers said they were counting on Social Security as a major source of retirement income. Differences over the estimates are important, King observed, because they affect “basically half of the spending of the U.S. government,’’ including Medicare.  Moreover, the forecasting assumptions affect the projected impact of any proposed changes to the program.

In their political paper, King, Soneji and Konstantin Kashin, a PhD candidate at King’s institute, recount how partisan fighting over Social Security intensified in the late 1990s, when conservatives began arguing the program was unsustainable and should be partially privatized, with younger workers offered individual savings accounts. In 2001, newly elected President George W. Bush appointed a commission intended to support such a change, but he put the issue aside after the September 11 terrorist attacks. After his reelection in 2005, however, Bush started pushing for changes in a series of town halls and speeches that, the paper notes, put the Social Security actuaries under “an extreme form of political pressure.’’ Democrats and news reports pointed to changes in the language used by the Social Security Administration that seemed (in line with White House policy) to emphasize that the program was not financially sustainable. Goss openly clashed with a Republican Social Security Commissioner.

Bush’s privatization push flopped and during recent elections some Republicans have attempted to cast themselves as the protectors of Social Security, which enjoys strong support from voters across the political spectrum. In 2013, after President Obama proposed a deficit reduction deal that, along with raising taxes on the rich, would have chipped away at inflation adjustments in Social Security, the idea was attacked by politicians from both parties.

But the problem of how to solve the system’s long term funding deficit has hardly gone away and the political  heat seems to be rising again. Democrats have slammed a provision adopted by the new Republican Congress that would block a transfer of money from the Social Security old age fund to the Social Security disability fund, which will be depleted next year. They say such transfers have been routine in the past and that it is a ploy by Republicans to force cuts in the retirement program too. Last month, Republican New Jersey Gov. Chris Christie, a possible Presidential candidate, proposed that the age for receiving full Social Security benefits be raised gradually to 69 and that benefits be limited for individuals with more than $80,000 in other income and ended completely for those earning more than $200,000. 
King emphasized that there is “no evidence whatsoever,” that Goss and his actuaries are bending to political pressure from either Democrats or Republicans. On the contrary, he said, while resisting such pressure, they’ve put too high a value on remaining consistent in their forecasts, in part because they don’t want to “panic” the public. “They’re trying to show the numbers don’t change because they think it will inspire confidence. Maybe in the very short run it will inspire confidence by not changing the numbers. But having the numbers be wrong doesn’t inspire confidence at all,’’ King said.

The political paper asserts that Goss has resisted changes in forecasting assumptions suggested by the Social Security Advisory Board’s Technical Panel on Assumptions and Methods—a panel of actuaries and economists that meets once every four years and is in session now. In some cases, the paper claims, the Actuary has made some suggested change in an assumption, but then changed another, unrelated assumption in the opposite direction “to counterbalance the first and keep the ultimate solvency forecasts largely unchanged.” In their 2013 Actuarial Note, however, Goss and his colleagues say that while the 2011 Panel did push for faster changes in mortality assumptions, the panel’s recommendations, if adopted in full, would have actually resulted in a projection that the Social Security trust funds would run out a year later.

King, who presented his own findings to the Technical Panel yesterday, is pushing for one big change in the Actuary’s practices that he says the Panel has also favored: making all the Actuary’s data and methods open for scrutiny by others. “This is a period of big data. When you let other people have access to data, things like Money Ball happen,’’ King said. In addition to new algorithms, he said, the government actuaries need to take note of recent findings about unconscious bias by researchers and apply new methods social scientists have developed to guard against such bias. “Four hundred years ago you had people sitting in a monastery and thinking they thought great thoughts and that was their entire life,’’ King said. “Now we check on each other. If they would leave things open they’d have so much help and they’d be better off politically because their forecasts would be better.”
I'm going to be very brief with my comments. First, Social Security is one of the best programs the United States ever adopted (never mind Stan Druckenmiller's dire warnings). President Roosevelt signed the Social Security Act on August 14th, 1935 and it had a profound effect on the retirement security of millions of Americans ever since (if only the U.S. had signed a universal health bill back then!).

As far as the article above, I'm in no position to verify the accuracy of the reports criticizing the actuarial methods of Chief Actuary Stephen Goss but I do agree that the data and methods need to be open to the scrutiny of others.

Actuaries have a god-like status in the financial world because it's hard to become an actuary. You literally have to pass a series of extremely tough exams and really need to know your stuff when it comes to the assumptions you plug into your models.

But actuaries aren't gods and there are plenty of disagreements among very smart actuaries. I've had discussions with the current and former Chief Actuary of Canada to see how they think and where they agree and disagree. Also, while the Office of the Chief Actuary of Canada prides itself on its independence, the reality is there are political pressures on it, especially when it doesn't toe the ruling party's lines (Canada's former finance minister Paul Martin did a hatchet job on our former Chief Actuary, one of his biggest political blunders ever).

But politics aside, I'm definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don't work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they're incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That's the real challenge that lies ahead.

Interestingly, Bernard Dussault, the former Chief Actuary of Canada and a staunch defender of defined-benefit plans and enhancing the CPP, shared this with me on the article above:
All those discussions on the validity of the actuarial valuations on the OASDI programs are unfortunately just a case of "shooting the messenger". Irrespective of the degree of accuracy of the concerned actuarial estimates, the OASDI is actually (and still) in a difficult financial position. The worst aspect of it is the higher (currently 12.4%) contribution rate that will be required as soon as the fund is exhausted in the early 2030s. The current "intermediate" pay-as-you-go rate (13.6% re: http://www.ssa.gov/oact/TR/2014/VI_C_SRfyproj.html#317167 ) already exceeds the 12.4% actual contribution rate and will unavoidably continue to increase until at least 2030 (likely not beyond 2035) to about 18%.
I thank Bernard for sharing this with my readers. Below, CBS 60 Minutes reports on thousands of errors to the Social Security Administration's Death Master File can result in fraudulent payments -- costing taxpayers billions -- and identity headaches.

Keep in mind that 60 Minutes has a few critics who dismiss these reports as hit jobs. As I stated above, I believe Social Security is one of the greatest social programs introduced in the U.S. but it needs to be enhanced so that all Americans can retire in dignity and security.

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