untitled

President Bush and Vice President Cheney have told audiences that Social
Security faces an $11 trillion shortfall if nothing is done to fix the
current
system. But they fail to mention that this is over the course of the
"infinite future." Over the next 75 years -- still practically a lifetime --
the shortfall
is projected to be $3.7 trillion.

The "infinite" projection is one that the American Academy of Actuaries says
is likely to mislead the public into thinking the system "is in far worse
financial
condition than is actually indicated," and therefore should not be used to
explain the long-term outlook.

Analysis

In a roundtable conversation on January 11, the president said the Social
Security system "is going to be short the difference between obligations and
money
coming in, by about $11 trillion, unless we act."

President Bush

Remarks at Andrew W. Mellon Auditorium, January 11, 2005

Bush: Now, I readily concede some would say, well, it's not bankrupt yet;
why don't we wait until it's bankrupt? The problem with that notion is that
the
longer you wait, the more difficult it is to fix. You realize that this
system of ours is going to be short the difference between obligations and
money
coming in, by about $11 trillion, unless we act. And that's an issue. That's
trillion with a "T."

Vice President Cheney echoed this claim in a January 13 speech at Catholic
University when he said, "Again, the projected shortfall in Social Security
exceeds
$10 trillion."

Both are correct -- but fail to mention that nearly two-thirds of that
colossal bill doesn't come due until after the year 2078.

The Trustees Report

The projection comes from the 2004 Social Security Trustees
report
which estimates that the system's unfunded obligations are $10.4 trillion
over the course of what they call the "infinite horizon." Historically, the
infinite-horizon
projection has not been included in the annual report, and was only added in
2003.

Previously the Trustees had used only a 75-year projection to estimate the
system's long-term deficits, roughly the length of a human lifetime.
(Average
life expectancy at birth has now increased to just over 77 years, up from
just under 75 years as recently as the 1980's, according to the
National Center for Health Statistics .)
The Social Security Trustees' 2004 projection shows a $3.7 trillion
shortfall over this 75-year period.

The Trustees reasoned that the 75-year window should be extended to the
infinite future to give policymakers a better idea of the changes necessary
to keep
the system sustainable indefinitely -- especially beyond 2078 when they said
Social Security's deficit will be increasing even faster than during the
next
75 years.

Vice President Cheney

Remarks at Catholic University, January 13, 2005

Cheney: Another argument against Social Security reform with voluntary
personal accounts is that the so-called transition costs would be too high.
Yet focusing
merely on transition costs is to overlook the greater cost of doing nothing.
Again, the projected shortfall in Social Security exceeds $10 trillion; that
figure is nearly twice the combined wages and salaries of every single
working American last year. There will be no -- there will be costs no
matter what
we decide.
A
technical panel
set up to advise the Social Security Administration later said that
infinite-horizon model is useful but "it is difficult to understand." The
panel recommended
that the infinite-horizon calculations be expressed more prominently as a
percentage of the taxable payroll rather than the actual dollar amount.
Referring
to the 2003 trustees report, the panel said:
Block quote start

Technical Panel on Assumptions and Methods: The Report also briefly mentions
the infinite horizon actuarial deficit of 3.8 percent. This figure is more
informative that the dollar value of the infinite horizon unfunded
obligations, and should be presented more prominently..

While the.information is useful, it is difficult to understand. The $10.5
trillion is a large figure, but it needs to be seen in the context of the
present
value of taxable payroll over the infinite horizon, which is on the order of
$275 trillion.
Block quote end

Later, in the 2004 report issued last March, the Trustees updated those
figures to a $10.4 trillion deficit and a $295.5 trillion taxable payroll.

Social Security Deficit and Payroll Taxes

The percent of taxable payroll is the portion of an employee's payroll tax
that goes toward Social Security and is currently set at the rate of 12.4
percent,
half of which is paid by the employer and the other half by employee. Over
75 years, the Trustees estimate the actuarial deficit is 1.8 percent of
taxable
payroll. This means that for the system to be completely solvent over the
next 75 years, without adjusting benefits, payroll taxes would have to go up
to 14.2 percent immediately. And to be solvent for the "infinite future,"
the $10.4 trillion shortfall equals 3.5 percent of taxable payroll, or a tax
increase to15.9 percent of wages.

The Infinite Horizon - Is it useful?

Contrary to the technical panel's endorsement, the American Academy of
Actuaries, a nonpartisan organization that sets standards of practice for
actuaries
in the US , disputes the value of the infinite horizon projection. In fact,
they said it probably would mislead anyone lacking technical expertise and
that it provides "little if any useful information" about the system's
long-term finances. In a December 2003
letter
to the Social Security Advisory Board, the Academy wrote:
Block quote start

American Academy of Actuaries: .The new measures of the unfunded obligations
included in the 2003 report provide little if any useful information about
the program's long-range finances and indeed are likely to mislead anyone
lacking technical expertise in the demographic, economic, and actuarial
aspects
of the program's finances into believing that the program is in far worse
financial condition than is actually indicated.
Block quote end

The Academy states that there is already much uncertainty using 75-year
projections, and that extending estimates into the infinite future only
increases
that uncertainty, producing results that "are of limited value to
policymakers." They point out that changes which took place over the last 75
years were
unforeseeable to actuaries in 1928, such as the Great Depression or the baby
boom, and therefore have no reason to doubt that unforeseeable changes will
not occur in the future.

Demographic and economic assumptions have always been a controversial issue
among demographers predicting the long-term sustainability of Social
Security.
Significant advances in life expectancy have taken place over the last
century, which exert more pressure on the system's finances as people live
longer
lives. Whether future mortality rates will continue to slow or increase
with medical technology, the Academy of Actuaries argues that the
inconsistencies
which arise from such long-range assumptions are "inevitable" when making
projections over the course of infinity. For this reason, they conclude that
the infinite-horizon measurement is a "detriment" to the Trustees Report.
They write:
Block quote start

American Academy of Actuaries: Thus, we believe that including these values
in the Trustees Report is unnecessary and is, on balance, a detriment to the
Trustees' charge to provide a meaningful and balanced presentation of the
financial status of the program.
Block quote end

One final note: The Trustees and actuaries give the $10.4-trillion figure
and others what is called "present value," a theoretical lump-sum figure
that
takes into account expected future inflation and interest rates. Otherwise,
any continuing deficit projected into the infinite future would
automatically
become an infinitely large sum.