It’s all about asumptions and changing circumstances. Unfortunately when the press reports on something like Social Security it doesn’t bother delving into the actuarial assumptions and rather report on what makes news – in this case inaccurate good news.
It’s similar to reporting – based on a questionable assumption – a very high 2023 Social
Security COLA generated by one organization each month.
By Mark J. Warshawsky
When the 2022 Social Security Trustees’ report was released last week, media coverage celebrated a slight improvement in the short- and long-term financial conditions of the program. The exhaustion date for the trust funds was moved back from 2034 to 2035 and the 75-year actuarial deficit was reduced from 3.54 percent of payroll to 3.42 percent.
A deeper dig into the report, however, finds these improvements based on an unrealistically low short-term inflation forecast and an overly optimistic long-run forecast of a fertility bounce-back. More realistic estimates explained below show that the exhaustion date will instead be 2033 and the actuarial deficit is about 3.9 percent.
The trustees said that they based their 2022 assessment of improved conditions on two main factors — an improving economy affecting the short-run, and lower rates of disability affecting the medium- and long-run. In particular, that the economy emerged out of recession quicker and more fully than expected last year, thereby raising employment and wages, and increasing payroll tax revenues. And that disability claims and awards continue to fall below prior projections, despite the recession and initially high unemployment.
The generous pandemic payments from the government, as well as temporarily expanded access to Medicaid, and closed Social Security field offices during the pandemic, might have been thought to explain the recent lull in disability claims, as people had other sources of support and health insurance and found the claim process more difficult.
Nevertheless, the trustees decided that longer-term trends in increasing workplace accommodations and easier work conditions were sufficient causes to lower the disability assumption. The trustees also assumed that the cost of living adjustment (COLA) for benefits, based on third quarter to third quarter changes in the consumer price index, would only be 3.8 percent next year (it was 5.9 percent this year) and 2.5 percent the year following, before returning to the assumed long-term rate of 2.4 percent.
While the trustees say that their 2022 assumptions were made in mid-February, the high rate of inflation experienced in late 2021 and early 2022 can only be reconciled with a 3.8 percent annual forecast if it were thought that inflation would rapidly fall later in the year, an unreasonable forecast even at the time. In any event, the chief actuary of Social Security now says that eight percent is a better forecast for the next COLA, which will be announced in October.
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