adios
03-13-2005, 07:13 AM
From the Heritage Foundation:
Behind Social Security's Big Numbers (http:/http://www.heritage.org/Research/SocialSecurity/wm662.cfm)
If you think this guy's hyping these numbers look at his footnotes.
Behind Social Security's Big Numbers
by Andrew Grossman
WebMemo #662
February 10, 2005
Are we $27 trillion in the hole on Social Security? Or is it just $3.7 trillion? It is difficult to make sense of all the numbers floating around as people discuss Social Security reform. To do so, one needs to understand just what the most-cited measures of Social Security’s future burden really mean.
Total Cost vs. Net Present Value
Before plunging into the numbers, it makes sense to take a step back and think about what they actually represent. There are two ways to express the government’s future obligations in terms of today’s money: net present value and total payments.
Net present value estimates represent the amount of money the government would need to have on hand and invested today in order to make Social Security solvent. This lump sum and its accrued interest earnings would be used (along with Social Security payroll taxes) to pay future benefits.
Net present value is a financial measure that is commonly used to evaluate long-term financial decisions on a comparable basis: A family, for example, could think of the initial size of its home mortgage as representing the net present value of the loan. As a practical matter, however, the federal government should not invest in the private market in order to accumulate earnings. Additionally, it is difficult for the government to stash away funds for the future. For example, what happened to the decades of surplus Social Security income? Congress spent it.
Total payment estimates represent what the government will pay for Social Security benefits, putting just enough money into the system every year to be able to make its promised benefit payments to Social Security recipients. A total payment estimate, then, represents the sum of a stream of future payments, all adjusted for inflation into current dollars. A family could equate that number to the total of all the monthly payments they will make to retire their mortgage.
How Much Red Ink?
The numbers in this section all represent different ways of measuring and talking about Social Security’s future shortfall. All are derived, in one way or another, from the 2003 and 2004 Social Security Trustees’ reports.
$3.7 trillion[1]: This is the net present value of Social Security’s unfunded obligations through 2078. In other words, this is the amount of money that the government would need to have on hand and invested today so that it could make Social Security solvent when combined with the Trust Fund bonds and future payroll taxes. This would balance out the program’s future deficits so that it could fully pay promised future benefits though 2078.
This number (the technical name for which is the “75 year unfunded obligation net present value—trust fund perspective”) is misleading in three ways:
* It does not account for the cost of repaying the Trust Fund bonds from 2018, when the system begins to run deficits, until 2042, when the Trust Fund is exhausted. This money will have to come from general revenues via higher taxes, increased borrowing, or huge spending cuts elsewhere.
* It extends only through 2078, although the Social Security Administration projects deficits beyond that date.
* It is the amount of money that is needed today, right now, to close the program’s shortfalls; every year’s delay in fixing Social Security costs a year of investment and compounding, increasing the cost of Social Security in net present value terms.
For these reasons, this number is a deceptively small measure of Social Security’s future burden.
Still, Social Security is in bad enough shape that even the small numbers are enormous. The relatively small $3.7 trillion estimate of Social Security’s future burden is still nearly four times the value of all individual federal income tax receipts from 2003.
$5.2 trillion[2]: This is the net present value of Social Security’s cash-flow shortfall through 2078. In other words, this is the amount of money that the government would need to have on hand and invest today so that it could pay Social Security’s promised future benefits through 2078 and pay back $1.5 trillion for the Trust Fund’s bonds.
Still this number extends only through 2078 and represents the amount of money that the government would need to collect and invest today. It is more than twice as big as the entire federal budget and is often referred to as the “75 year shortfall net present value—budget perspective.”
$5.8 trillion[3]: This is the sum of the payments, in 2003 dollars, that the government will have to repay to the Trust Fund between 2018, when Social Security’s cash flow goes negative, and 2042, when the Trust Fund’s bond holdings are finally spent. In other words, this is the total cost to keep Social Security going even before the Trust Fund is empty.
Without any changes in Social Security, these payments will come out of general revenues via higher taxes, increased borrowing, or spending cuts elsewhere. So what’s wrong with this number? It doesn’t account for Social Security’s deficits after 2042. This number is called the “sum of trust fund payments.”
$11.9 trillion[4]: This is the net present value of Social Security’s cash-flow shortfall: in other words, the amount of the money that the government would need to collect and invest today so that it could pay Social Security’s promised future benefits forever. This estimate uses a controversial infinite time-horizon. On the one hand, it doesn’t ignore what happens after 2078. But on the other hand, it is an uncertain business to project so far into the future.
Like other budget-perspective estimates of Social Security’s burden, this number represents the amount of money that the government would need to invest today to pay back the Trust Fund and fill the future shortfall. Excluding these Trust Fund payments, this measure drops to$10.4 trillion[5], the number that the President often cites to describe Social Security’s future burden.
Though an imprecise exercise, projecting Social Security’s shortfall so far into the future does illuminate several points. First, the difference between this measure and the analogous 75-year budget-perspective shortfall is $6.7 trillion. In other words, assuming standard returns, it is the amount of money the government would have to have on hand and invest today, and not touch at all for 75 years, and then use starting in 2079 to cover promised benefits. This demonstrates the danger of relying on estimates that stop short in 2078 and look no further.
The enormity of this number leads to a second point. Small changes in Social Security, such as have been made in the past and such as some propose now, are not enough to put the program on a permanently stable footing. At best, small changes push the problem of Social Security’s financing into the future. This number is as big as the entire U.S. economy and is often referred to as the “infinite time horizon net present value.”
$27.168 trillion[6]: This number is Social Security’s total negative cash flow through 2078, in 2003 dollars. It does not account for Social Security’s continuing shortfalls after 2078. Still, this number fairly represents, in today’s money, the future stream of payments that will be required to fill the deficits so that Social Security can make its promised benefit payments through 2078.
Moreover, without reform, those payments will have to be made up somehow: from higher taxes than under current law, spending cuts elsewhere, more borrowing, or lower benefits. This number is more than six times the total federal debt held by the public and is called the “sum of the deficits.”
Conclusion
An understanding of Social Security’s future burden makes the need for reform all the more apparent. Specifically, it demonstrates clearly the great value of reform that would retire more than $27 trillion in future deficit expenses while also protecting the benefits of today’s seniors and helping families to build nest eggs.
While each of the different ways of measuring Social Security’s future burden tells us different things about the program’s future costs, they all reveal the huge problems that Social Security faces if it is not reformed soon. By any measure, Social Security’s burden is heavier than we can conscionably pass on to our children and grandchildren.
Andrew Grossman is Senior Writer and Editor at The Heritage Foundation.
I thought the part where he stated that having $3.7 trillion invested now (we have $0 invested now in actuality) is deceptively small is very disturbing. Obviously the system has to change and I still wonder how it can be deemed very successful when in the end it will bankrupt this country if nothing is done. Also for those that decry the risk in privitized accounts, there's a risk in not having one as well and that risk is if the economy has a severe downturn, Social Security could suffer greatly i.e. payments could be drastically cut. Since the system is based on today's workers funding today's retiree's, a severe loss of government revenue would threaten Social Security payments.
Behind Social Security's Big Numbers (http:/http://www.heritage.org/Research/SocialSecurity/wm662.cfm)
If you think this guy's hyping these numbers look at his footnotes.
Behind Social Security's Big Numbers
by Andrew Grossman
WebMemo #662
February 10, 2005
Are we $27 trillion in the hole on Social Security? Or is it just $3.7 trillion? It is difficult to make sense of all the numbers floating around as people discuss Social Security reform. To do so, one needs to understand just what the most-cited measures of Social Security’s future burden really mean.
Total Cost vs. Net Present Value
Before plunging into the numbers, it makes sense to take a step back and think about what they actually represent. There are two ways to express the government’s future obligations in terms of today’s money: net present value and total payments.
Net present value estimates represent the amount of money the government would need to have on hand and invested today in order to make Social Security solvent. This lump sum and its accrued interest earnings would be used (along with Social Security payroll taxes) to pay future benefits.
Net present value is a financial measure that is commonly used to evaluate long-term financial decisions on a comparable basis: A family, for example, could think of the initial size of its home mortgage as representing the net present value of the loan. As a practical matter, however, the federal government should not invest in the private market in order to accumulate earnings. Additionally, it is difficult for the government to stash away funds for the future. For example, what happened to the decades of surplus Social Security income? Congress spent it.
Total payment estimates represent what the government will pay for Social Security benefits, putting just enough money into the system every year to be able to make its promised benefit payments to Social Security recipients. A total payment estimate, then, represents the sum of a stream of future payments, all adjusted for inflation into current dollars. A family could equate that number to the total of all the monthly payments they will make to retire their mortgage.
How Much Red Ink?
The numbers in this section all represent different ways of measuring and talking about Social Security’s future shortfall. All are derived, in one way or another, from the 2003 and 2004 Social Security Trustees’ reports.
$3.7 trillion[1]: This is the net present value of Social Security’s unfunded obligations through 2078. In other words, this is the amount of money that the government would need to have on hand and invested today so that it could make Social Security solvent when combined with the Trust Fund bonds and future payroll taxes. This would balance out the program’s future deficits so that it could fully pay promised future benefits though 2078.
This number (the technical name for which is the “75 year unfunded obligation net present value—trust fund perspective”) is misleading in three ways:
* It does not account for the cost of repaying the Trust Fund bonds from 2018, when the system begins to run deficits, until 2042, when the Trust Fund is exhausted. This money will have to come from general revenues via higher taxes, increased borrowing, or huge spending cuts elsewhere.
* It extends only through 2078, although the Social Security Administration projects deficits beyond that date.
* It is the amount of money that is needed today, right now, to close the program’s shortfalls; every year’s delay in fixing Social Security costs a year of investment and compounding, increasing the cost of Social Security in net present value terms.
For these reasons, this number is a deceptively small measure of Social Security’s future burden.
Still, Social Security is in bad enough shape that even the small numbers are enormous. The relatively small $3.7 trillion estimate of Social Security’s future burden is still nearly four times the value of all individual federal income tax receipts from 2003.
$5.2 trillion[2]: This is the net present value of Social Security’s cash-flow shortfall through 2078. In other words, this is the amount of money that the government would need to have on hand and invest today so that it could pay Social Security’s promised future benefits through 2078 and pay back $1.5 trillion for the Trust Fund’s bonds.
Still this number extends only through 2078 and represents the amount of money that the government would need to collect and invest today. It is more than twice as big as the entire federal budget and is often referred to as the “75 year shortfall net present value—budget perspective.”
$5.8 trillion[3]: This is the sum of the payments, in 2003 dollars, that the government will have to repay to the Trust Fund between 2018, when Social Security’s cash flow goes negative, and 2042, when the Trust Fund’s bond holdings are finally spent. In other words, this is the total cost to keep Social Security going even before the Trust Fund is empty.
Without any changes in Social Security, these payments will come out of general revenues via higher taxes, increased borrowing, or spending cuts elsewhere. So what’s wrong with this number? It doesn’t account for Social Security’s deficits after 2042. This number is called the “sum of trust fund payments.”
$11.9 trillion[4]: This is the net present value of Social Security’s cash-flow shortfall: in other words, the amount of the money that the government would need to collect and invest today so that it could pay Social Security’s promised future benefits forever. This estimate uses a controversial infinite time-horizon. On the one hand, it doesn’t ignore what happens after 2078. But on the other hand, it is an uncertain business to project so far into the future.
Like other budget-perspective estimates of Social Security’s burden, this number represents the amount of money that the government would need to invest today to pay back the Trust Fund and fill the future shortfall. Excluding these Trust Fund payments, this measure drops to$10.4 trillion[5], the number that the President often cites to describe Social Security’s future burden.
Though an imprecise exercise, projecting Social Security’s shortfall so far into the future does illuminate several points. First, the difference between this measure and the analogous 75-year budget-perspective shortfall is $6.7 trillion. In other words, assuming standard returns, it is the amount of money the government would have to have on hand and invest today, and not touch at all for 75 years, and then use starting in 2079 to cover promised benefits. This demonstrates the danger of relying on estimates that stop short in 2078 and look no further.
The enormity of this number leads to a second point. Small changes in Social Security, such as have been made in the past and such as some propose now, are not enough to put the program on a permanently stable footing. At best, small changes push the problem of Social Security’s financing into the future. This number is as big as the entire U.S. economy and is often referred to as the “infinite time horizon net present value.”
$27.168 trillion[6]: This number is Social Security’s total negative cash flow through 2078, in 2003 dollars. It does not account for Social Security’s continuing shortfalls after 2078. Still, this number fairly represents, in today’s money, the future stream of payments that will be required to fill the deficits so that Social Security can make its promised benefit payments through 2078.
Moreover, without reform, those payments will have to be made up somehow: from higher taxes than under current law, spending cuts elsewhere, more borrowing, or lower benefits. This number is more than six times the total federal debt held by the public and is called the “sum of the deficits.”
Conclusion
An understanding of Social Security’s future burden makes the need for reform all the more apparent. Specifically, it demonstrates clearly the great value of reform that would retire more than $27 trillion in future deficit expenses while also protecting the benefits of today’s seniors and helping families to build nest eggs.
While each of the different ways of measuring Social Security’s future burden tells us different things about the program’s future costs, they all reveal the huge problems that Social Security faces if it is not reformed soon. By any measure, Social Security’s burden is heavier than we can conscionably pass on to our children and grandchildren.
Andrew Grossman is Senior Writer and Editor at The Heritage Foundation.
I thought the part where he stated that having $3.7 trillion invested now (we have $0 invested now in actuality) is deceptively small is very disturbing. Obviously the system has to change and I still wonder how it can be deemed very successful when in the end it will bankrupt this country if nothing is done. Also for those that decry the risk in privitized accounts, there's a risk in not having one as well and that risk is if the economy has a severe downturn, Social Security could suffer greatly i.e. payments could be drastically cut. Since the system is based on today's workers funding today's retiree's, a severe loss of government revenue would threaten Social Security payments.