Always Read the Footnotes First
If you open the Trustees Report hereThe first page to turn to is page 256 (which is actually after the index of the report - could it be buried further?) so that you can read the statement of the Actuary who signed off on the report. Actuaries have ethics, unlike political appointees or other politicians, so they are bound to tell the truth, the best the can ascertain it. A few quotes from that part:
"Medicare Trustees Report, which states, “The trust fund perspective does not encompass the interrelationship between the Medicare and Social Security trust funds and the overall federal budget.” The reader of this report should consider this “overall” federal unified budget perspective with care because the assumptions underlying unified budget accounting are inconsistent with the assumptions of trust fund accounting. In particular, trust fund accounting accurately reflects the law, under which benefits cannot be paid in full on a timely basis after reserve depletion. In contrast, unified budget accounting assumes that full scheduled benefits will continue to be paid through transfers from the General Fund of the Treasury, thus representing “a draw on other Federal resources for which there is no earmarked source of revenue from the public.” Not only are such “draws” not permissible under the law, no precedent exists for a change in the Social Security Act to finance unfunded trust fund obligations with such draws on other Federal resources."
- You can summarize that part as "this report is based on illegal assumptions"
Next:
"However, budget analysis frequently refers to both trust fund reserve redemptions and trust fund obligations not payable under the law after reserve depletion as factors that increase the federal debt held by the public in the future. This assertion is not consistent with a full assessment of the investment and redemption flows of the trust funds or with the limitations in the law on paying benefits after trust fund reserves are depleted."- Much the same... but reader beware... things are not as they seem, you just have to read page 260 first to understand the twisted meaning of terms. :-)
Next, Consider the Assumptions
As David Stockman points out in his analysis, the economic factors underlying the Trustees Report seem divorced from recent reality. They are "goal seeking" in that it seems like the numbers were chosen to produce a more positive outcome than is warranted by current conditions in the economy. For example, the GDP forecast associated with the recent White House Budget shows a GDP forecast of the next 10 years at 2.3%,
However, the factors used by the Trustees estimate GDP over that same period to be 5.1%. Wow!!! A 2.8% difference in annual GDP or more than 100% difference in estimates is HUGE. You'd think we could get the White House and Trustees on the same page, but apparently not.
And, if we stay on the current 2.7% GDP growth rate based on the past 7 years, we get:
"If we stay on the current 2.7% growth track, then GDP will come in at $24 trillion in 2026. Since OASDI payroll taxes amount to about 4.5% of GDP, it doesn’t take a lot of figuring to see that trust fund income would be dramatically lower in a $7 trillion smaller economy. To be exact, the untrustworthies have goal-seeked their report to generate $1.425 trillion of payroll tax revenue 12-years from now. Yet based on a simple continuation of the deeply embedded GDP growth trend of the last seven years, payroll revenue would come in at only $1.1 trillion in 2026 or $325 billion lower in that year alone."So, that is a huge gap in funding for Social Security and for SSDI, which is projected to go bankrupt later this year. Of course, there are proposals to let SSDI borrow from the Soc Sec funds... which should be illegal, but Congress will probably find a way to do it rather than taking the risk of raising the tax rate in the upcoming election year despite repeated warning from the Trustees that this day was coming.
The Trustees report also has other dubious assumptions, such as:
"... the 2015 report says that the OASDI funds will earn $1.2 trillion of interest income during the next twelve years. To be sure, the nation’s retirees and savers might well ask how Washington’s bookkeepers could manage to get the assumed 3.5% interest rate on the government’s assets compared to the 0.3% ordinary citizens earn on a bank account or even 2.2% on a 10-year treasury bond."
Bottom Line
Here is the impact even using the dubious projections of GDP growth in this report:"For the combined OASI and DI Trust Funds to remain solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.62 percentage points (from its current level of 12.40 percent to 15.02 percent, a relative increase of 21.1 percent); (2) scheduled benefits during the period would have to be reduced by an amount equivalent to an immediate and permanent reduction of 16.4 percent applied to all current and future beneficiaries, or 19.6 percent if the reductions were applied only to those who become initially eligible for benefits in 2015 or later; or (3) some combination of these approaches would have to be adopted."
The net effect of this is expressed in the Stockman article:
"... instead of a cumulative total of $13.2 trillion of payroll tax revenue over the next 12 years, the actual, demonstrated GDP growth path of the present era would generate only $11.2 trillion during that period. That $2 trillion revenue difference not only ionizes most of the so-called trust fund assets, but also reduces the ending balance so rapidly that by the final year interest income computes to only $25 billion, not $100 billion as under the current report."So, while the Trustees keep saying things like this year after year, the can keeps being kicked down the road...
"The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits. Social Security will play a critical role in the lives of 60 million beneficiaries and 168 million covered workers and their families in 2015. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations."So, if you think that Social Security, SSDI, Medicare and Medicaid are going to last until 2034, think again. If you're under age 45, expect that these programs are not going to exist and that you should take as many private precautions as possible.
I encourage you to read the full report here - footnotes and all.
http://www.ssa.gov/OACT/tr/2015/tr2015.pdf
