The trustees of Social Security and Medicare recently estimated that the retirement trust fund would run out of money earlier than they estimated last year.
That estimated stimulated considerable discussion and analysis, much of it centered on how accurate the estimate is likely to be.
There was a particularly good analysis from the Center for Retirement Research at Boston College (CRR).
The CRR report praises the trustees for acknowledging that a couple of its longstanding assumptions were too optimistic. In the trustees’ latest report, those assumptions finally are changed to make the projections more realistic.
The CRR report then points to a couple of other assumptions in the latest report that were changed from previous years. The authors believe the new assumptions are too optimistic.
Fertility in the United States has declined for decades. In 1957, the fertility rate was 3.68 children per woman. The rate bottomed at 1.74 in 1976, then it rebounded modestly and held just above 2.0 for about 20 years.
But the fertility rate fell sharply after the financial crisis of 2007-2008 and continued to fall.
In recent years, the trustees acknowledged that for an extended period the actual fertility rate had been below their assumed rate.
The trustees maintained that lower rate was temporary. They expected the fertility rate to rise after the economy improved.
This year, the trustees conceded the fertility rate is not likely to rebound.
They lowered the long-term fertility rate assumption from 1.90 to 1.75. Even the new assumption is above the most recent rate of 1.59.
The lower fertility rate worsens the estimate of Social Security’s long-term financial position. Lower fertility means that in the future there will be fewer workers to help fund the retirement benefits of older people.
Another important adjustment recognizes that national immigration policies have changed.
The trustees make separate assumptions about two categories of immigrants.
One category is lawful permanent residents. The other category is residents who are temporarily or unlawfully present in the United States.
The latest trustees’ report changes several assumptions about immigrants.
The trustees reduced the estimates of the number of temporary or unlawfully present immigrants from the estimates of recent years. Using recent data, the trustees also reduced estimates of the number of lawful immigrants.
The third change was to assume that more unlawfully present immigrants would leave the United States by 2030.
These changes on immigration all increase the projected deficits in Social Security by reducing the amount of taxes paid into the system.
The CRR report said the new estimates about fertility and immigration make the trustees’ projections more accurate.
The CRR report then questions a couple of assumption changes that improve the financial position of Social Security.
One change assumes productivity will increase and that would lead to an increase in workers’ earnings. The higher earnings would result in more tax revenue for the program.
The discussion in the trustees’ report presents arguments on both sides of the productivity issue without stating a conclusion. Yet, this year’s projections use a higher productivity rate than was used last year.
The productivity rate used this year was 1.62%, which exceeds the 1.30% rate used by the Congressional Budget Office (CBO) in its economic forecasts.
In another change, the trustees increased the mortality rate, meaning life expectancy will be lower than was assumed last year.
This year’s report from the trustees assumes that life expectancy at birth will be 81.8, down from 82.0 last year.
The new assumption is lower than the life expectancy of 82.3 used by the CBO and 83.8 used by the Census Bureau.
Lower life expectancy means benefits are not paid for as many years. That reduces the cash outflow from the program and makes it more financially viable.
I have long argued that Social Security is in worse shape than the trustees’ projections indicate because of assumptions that are too optimistic. The projected for inflation and economic growth seem too optimistic.
This year’s report from the trustees makes a couple of longstanding assumptions more realistic. But those changes are offset by other assumption changes that probably are too optimistic.
What is clear is that in a few years the Social Security program will not have enough money to pay full benefits. Congress needs to seriously consider its options and take action.
