US Social Security Budget Deficit: False Alarm Or False Hope?

By: Ronald_R_Cooke

A recent Wall Street Journal MarketWatch column by Dr. Irwin Kellner entitled “False Alarm” concludes Social Security is not likely to run out of money any time soon.

Kellner's conclusion contradicts the findings of the fund's Trustees in their 2008 report   “Status of the Social Security and Medicare Programs”.   As described in their summary: “ The financial condition of ..  Social Security …. remains problematic. Projected long run program costs are not sustainable under current financing arrangements. Social Security's current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires. ….  Growing annual deficits are projected to exhaust …. Social Security reserves in 2041.” Furthermore, his conclusion also disagrees with the findings of the Congressional Budget Office which estimates Social Security insolvency will occur in 2052. 

Kellner points out the Fund's Trustees assume an average annual growth rate of 2.3% per year in making their intermediate projections of American economic growth. He compares this rate of growth with the 3.4% per year America experienced from 1960 through 2005, and concludes the lower figure must be labeled as “conservative”. Furthermore, Kellner believes the Fund's low cost projection, which assumes an average annual GDP growth rate of 2.9%, is more realistic because (we presume) it is closer to his historical benchmark of 3.4%. With this growth rate assumption, Kellner believes Social Security will never run out of money. There will always be sufficient funds to keep the fund solvent.

I disagree.  Predicting Social Security solvency is not an easy task, and it is not simply a mathematical exercise. We must consider both the economic and the cultural environment within which these estimates are made. By way of illustration, let's look at two problems – one economic and one cultural.

First.  Conventional economists frequently fall into a credibility pothole because they project the future based on the past. With a little tweaking here and there, they believe the mathematical extrapolation of dead economic data can be used to predict future economic performance.

But this assumption is absurd. Life is not a catatonic repetition of events and circumstances. Cultures evolve. Lifestyles change. Immigration shifts the balance of political power and changes the economic landscape. Technology creates new products. Technological change destroys old markets. Once powerful institutions stumble and fade away. Life is a dynamic process. Credible economic analysis must be equally dynamic.  

For example, conventional economics does not handle resource depletion very well. Economic theory assumes increased demand will bring about higher prices; higher prices will stimulate additional production; and when production exceeds demand, competition will force prices down. That works just fine if we are forecasting the market for door knobs. It doesn't work very well if there are serious limits to the addition of new production.

Nowhere is this anomaly more evident than in the case of oil depletion. Absent a bad recession, demand will soon exceed supply. Prices have already started to increase. Oil companies are responding with new drilling and recovery projects. But supply will not grow enough to overcome the increase in demand (again absent a bad recession). First of all, the nations that own most of the world's oil resources are non to anxious to make big increases in production. They like high prices and modest increments in volume. Secondly, there are serious limitations on the availability of places to drill for oil.  So.  What is the result?

The fact that world oil demand will soon exceed production is going to have a dramatic impact on the American economy. Higher rates of inflation and unemployment will decrease the real rate of economic growth. It should not come as a surprise if the average annual increase in GDP, adjusted for inflation, is less than 1% from 2006 through 2030. If this happens, Social Security will be in trouble long before 2041.

Second. Conventional economics ignores people. It assumes human behavior will not change much in the future, or at least not enough to alter the results of an mathematical extrapolation based on dead data.

This assumption is also false. If the average annual Social Security payout is $12,000, then a couple can expect to have $24,000 a year to spend (less Medicare). If the median income for an American couple is $48,500, and they need 70% of that amount to maintain their current lifestyle, then they need an annual income of $34,000 upon retirement. To this amount, one must add annual increases to cover the cost of inflation. That means, on average, American couples must fund $10,000 a year, plus additional sums to cover the cost of inflation, from other sources. Since the basis of projected Social Security benefits is projected to decline, and Medicare premiums are projected to increase, the spread between your Social Security benefits and the cost of living will increase over the years.  Because the Federal Government underestimates the rate of inflation (see – CPI: Sophisticated Theory, Terrible Ethics on my blog at www.tce.name ), no sane person should anticipate annual increases in Social Security benefits will actually keep up with the rate of inflation.

Unfortunately, less than 50% of married couples (or domestic partners) will have additional income from pensions or annuities. More than 40% of all retirees will see their annual income decline by more than 30%. Really dumb agricultural policy is currently focused on increasing the price of food (thank you SENATORS Obama, Clinton and McCain), and gasoline ain't going to be cheap.

Baby Boomers (all born between 1946 and 1964) are not going to be happy when they retire and the reality of their desperate financial situation finally sinks in. These people are going to be really, really depressed when they have to sell their comfortable 2400 square foot middle class suburban home in order to scrape together enough money to rent a 420 square foot mobile home, endure unbearable cold in the winter because they can't afford the cost of fuel, and eat dog food for meat.  No.  Baby Boomers will do what they have always done.

Protest. 

And politicians, ever mindful of the next election, will increase Social Security payments to help them out. That means current estimates of Social Security fund solvency are inherently bogus because they fail to consider the possibility of some unknown, but definitely probable,  increase in benefits.

Conventional economic research frequently yields inadequate conclusions based on irrelevant or obsolete data that has been interpreted using algorithms of questionable relevance. In other words - we play with the numbers. It's a great academic exercise.  Cultural Economists, on the other hand, must have a strong sense of the cultural matrix within which economic phenomena occur. Culture, in this sense, includes everything we are: our political systems,  economic psychology, mores, traditions, sciences, and education. These all play a role in how we make purchase and investment decisions. (For more on Cultural Economics and Social Security, go to my blog www.tce.name ).

As for the Social Security “Trust” Fund, it's in more trouble than anyone can guess.

Ronald R. Cooke
The Cultural Economist
Author:  Detensive Nation
www.tce.name

Cultural economics is the study of how we interact with economic events and conditions. Culture, in this sense, includes our political systems, religious beliefs, psychology, history, customs, arts, sciences, and education. The term "Economics" refers to the extent and process of how we employ capital, labor and materials. If human existence is dynamic, then economics – as a science – must be able to characterize the interaction of culture and economics in contemporaneous terms.

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