Cooking Social Security's 'deficit'

I discovered in 1974 that cooking numbers is routine in Washington.

I had estimated that the new individual retirement account legislation would generate a federal tax loss of about $2.5 billion annually, while a congressional report cited a loss of only $200 million.

A senior IRS researcher laughed when I asked about it and said not to tell anyone. But that's how things are done: To promote legislation, the public will be given bargain-level cost estimates, while to scotch legislation, the reverse is true.

My curiosity was thus aroused several years ago by the widespread publicity coming from those wishing to privatize Social Security, who argued the program was going bankrupt. Saving it, they said, required that it be privatized and that benefits be substantially cut.

This concerned me deeply, since companies rely on Social Security as a base pension plan, as do most workers and their dependents. I therefore began an intensive investigation, reviewing the annual reports prepared by the trustees of the program's trust funds with the technical support of the Social Security Administration's actuaries.

I was surprised to learn that, contrary to the impression these actuaries give that they dictate the crucial economic and demographic assumptions underlying their financial projections, the choice is actually made by the politically appointed trustees.

Briefly, the actuaries provide the trustees with a preliminary report containing financial projections on the basis of recommended assumptions about the future (wage increases, gross domestic product, mortality rates, etc.), along with the projected deficit or surplus, for periods of up to 75 years.

The 75-year projections have yielded their largest deficits in recent years: more than 2 percent of the Social Security taxable wage base since 1994.

The trustees would then ask questions such as, "What if we lower the fertility rate by 5 percent?" And the senior actuary would then quickly estimate, based on rules of thumb, a deficit of, say, 2.2 percent. At some point, the trustees tell the actuaries the deficit level they desire. The actuaries will then put together the appropriate assumptions and computations for the trustees' annual report.

This procedure is, of course, improper, because it opens the system to political manipulation by the trustees. They are able, for instance, to make Social Security look as if it is in serious financial trouble and requires radical change to save it.

There is now sufficient evidence to conclude that this manipulation has, in fact, occurred.

A look at the actual projected 75-year deficits from 1980 to 1998 bears this out.

If one focuses only on those deficits, which stem mainly from changes in the discretionary actuarial assumptions and methods each year to meet the deficit goal of the trustees, one would find a continuous annual downward movement. The changes by 1998 added up to a total deficit of 2.29 percent. Compensating for this would require an increase in the payroll tax of about 1.15 percent each for workers and employers.

The explanations given by the actuaries in the annual reports have little credibility; they ignore considerable actual experience and rely, instead, on highly pessimistic speculation about the future. Also, of the 101 changes made in assumptions and methods from 1980 to 1998, 68 were negative and 33 positive, indicating a strong bias.

The Social Security actuaries also do not state in the trustees' annual report, as they are required to do, that key decisions are made by the trustees in what is basically an actuarial function.

The preliminary reports of the actuaries have been declared secret at a level reserved for the hydrogen bomb. We will thus never know how the trustees' deficit differs from the one initially calculated by the actuaries.

What motivates the powerful political push to privatize Social Security and cut its benefits? Briefly, the enormous potential wealth that privatization would bring to many financial institutions, who have contributed in excess of $50 million to campaigns. Further, cutting benefits raises the budget surplus - expected to reach a few trillion dollars - under the federal "unified budget." This reduces the national deficit and allows the government to spend that much more on favorite programs without the need to raise taxes.

The political trustees clearly had the motivation, opportunity, and means to advance the spurious concept of Social Security bankruptcy, and the evidence suggests they used their strategic position to further their goals.

From the public's point of view, Social Security has been thrust into the political arena in a way that is not desirable to workers and their dependents or to most employers. The solution is to avoid the accumulation of excessive reserves by reverting to a pay-as-you-go basis, under which surpluses are kept minimal and actuarial gamesmanship is more difficult.

*David Langer, a consulting actuary, is chairman of David Langer Company Inc., in New York.

(c) Copyright 1999. The Christian Science Publishing Society