As we await the release of the Social Security trustees report for 2015, it is worthwhile to consider an alternative viewpoint, from the Congressional Budget Office, about the future finances of Social Security programs. Also, we summarize a recent prominent critique by professors Konstantin Kashin, Gary King, and Samir Soneji of the financial projection methods and assumptions of the trustees and the chief actuary. As a point of reference for this discussion, we’ll first review some basic results from last year’s trustees report. 

Each year the trustees of the Social Security and Medicare trust funds report on the financial status of the two programs. In 2014 the trustees report projected that the combined trust funds for the old age, survivors (OASI), and disability insurance (DI) programs (collectively OASDI) would be exhausted of reserves in 2033. At that point, continuing tax revenue would be sufficient to pay 77 percent of scheduled benefits, declining to 72 percent in 2088. The DI trust fund, however, was expected to run out much sooner, by 2016. When that occurs, the government must by law reduce disability payouts to 81 percent of scheduled benefits. Because the primary source of revenue for Social Security is the payroll tax, the programs’ revenues and costs are traditionally expressed as percentages of taxable payroll — that is, the amount of worker earnings taxed to support the programs. The 75-year actuarial balance measure, which compares revenue with cost over an extended period, is also expressed as a percentage of taxable payroll. The balance (actually a deficit) represents the average amount of program changes needed (from benefit cuts, tax increases, or both) throughout the 75-year valuation period to achieve a zero balance on average. For OASI, the 75-year actuarial deficit was estimated in 2014 to be 2.55 percent of taxable payroll; for DI it was 0.33 percent; and for the entire program (OASDI) it was 2.88 percent.¹ 

 Comparison With CBO Projections 

The Congressional Budget Office does an annual independent projection of Social Security finances, and its 2014 projections were bleaker than those of the trustees of the Social Security and Medicare trust funds. The CBO projected that, under current law, the DI trust fund would be exhausted in fiscal 2017 and the OASI trust fund would be exhausted in 2032. If future legislation shifted resources from the OASI trust fund to the DI trust fund, the combined OASDI trust funds would be exhausted in 2030. According to the CBO, the projected 75-year imbalance increased from 3.36 percent in 2013 to 3.97 percent of taxable payroll in 2014. When mea- sured as a share of taxable payroll, the CBO’s estimates of long-term tax revenues are about the same as those produced in 2013, but the projections of long-term outlays are slightly higher than in 2013. Specifically, the 75-year cost rate — a measure of outlays — is 0.6 percentage points higher. Out- lays are a larger share of taxable payroll, primarily because of lower projected interest rates; the result- ing lower discount rate increases the present value of larger amounts late in the projected stream of spending. That change accounts for about half of the 0.6 percentage point increase in the 75-year cost rate. Changes to the CBO’s 10-year baseline projections account for another 0.2 percentage points, and updated data and other estimating changes account for the remaining 0.1 percentage point. While there are many reasons that the CBO’s projections are more dire than those of the trustees, an important part of the difference is the CBO’s assumption that the significant decline in mortality experienced over past decades will continue at the same rate. Also, the CBO anticipates lower overall interest rates and somewhat higher rates of disability in the future than do the trustees. 

The June 2015 CBO projection presents an even worse situation for Social Security as its main scenario.² The combined trust fund exhaustion date is a year earlier — in 2029. The 75-year financial shortfall is now projected to be 4.4 percent of taxable payroll. The outlook worsened because expectations of future interest rate levels fell, and the application of a new method lowered future payroll tax revenues. 

A Recent Academic Critique 

Recently, political scientists Kashin, King, and Soneji published two articles questioning important aspects of the projections and assumptions in the Social Security trustees reports, particularly during the post-2000 period since Steve Goss became chief actuary.³ They correctly note that there has never been a systematic and comprehensive evaluation of the accuracy of the trustees’ projections. By contrast, in most private and public pension plans, a periodic analysis of actuarial gains and losses (that is, the actual financial results of the pension plan com- pared with the prior projections) attributed by source (that is, by individual assumption, such as interest rates) is typically conducted to gauge the reasonableness and accuracy of individual assumptions. The Social Security Administration (SSA) does not do this. Kashin, King, and Soneji con- ducted major elements of this empirical analysis for the period since 1980. They conclude that the SSA’s forecasting errors were approximately unbiased until 2000 but then became systematically biased afterward, and increasingly so over time. They show that most of the forecasting errors suggest that the Social Security Trust Funds are in better shape than the true outcomes have revealed them to be in. They add that the report’s uncertainty intervals are increasingly inaccurate.

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