Crash course: Social Security is crashing faster than you think

Another indicator of Social Security's growing weakness is the appalling rise in its actuarial deficit, the amount by which future outlays exceed revenue and the value of the trust funds during the next 75 years. In 1990 the combined deficit was projected to be $5.8 trillion under intermediate assumptions. That figure rose to $10.2 trillion in 1993 and $10.4 trillion this year. Significantly, about half the deterioration in Social Security's actuarial position in the last three years has been due to improvements in methods of projecting costs and income. That is, the more accurate a view of its future the actuaries achieve, the worse that future looks.

A. Haeworth Robertson, Social Security's chief actuary from 1975 to 1978, warned us about these actuarial deficits in 1992. "Only the foolhardy would continue to ignore the longer range financial problems projected for the Social Security program," he wrote in Social Security: What Every Taxpayer Should Know, published by the Retirement Policy Institute. "It is not a question of whether future costs will be higher; it is a question of whether they will be so much higher as to be unaffordable. It is a question of whether we are making promises we will not be able to keep."

The Case for Pessimism

ALTHOUGH discussion of Social Security typically uses the intermediate assumptions, there are compelling grounds for using the pessimistic ones instead. Robertson has argued convincingly that the pessimistic assumptions for productivity, fertility, and mortality rates--the variables that "have the greatest impact on long-range projections of future income and outgo"--are more realistic.

Social Security's long-run cost as a share of payroll varies inversely with the fertility rate; the more workers supporting retirees, the lighter each worker's burden and the sounder the program. Surveying the long decline in fertility rates here and throughout the developed world, and their current very low levels (1.6 in Western Europe, 1.8 in Northern Europe, and 1.9 in the U.S. in 1988), Robertson concluded that the 1990 report's intermediate assumption of 1.9 (the same as in the 1994 report) seemed optimistic and that the pessimistic assumption of a future fertility rate of 1.6 births per woman (used in both 1990 and 1994) "is probably quite appropriate to use as an intermediate assumption, and it could even be optimistic."

Brisk productivity growth increases Social Security's tax base faster than outlays by causing wage increases to outstrip benefit cost-of-living adjustments. By the same token, stagnant productivity impairs Social Security's ability to pay its way. The 1990 report assumed future long-term average annual productivity increases of 2.2 per cent (optimistic), 1.7 per cent ("most likely"), and 1.4 per cent (pessimistic). Robertson pointed out that the annual increase for 1968--1988 averaged only about 1.1 per cent; he concluded that the "pessimistic" 1.4 per cent was a suitable intermediate figure, and perhaps even optimistic.