Sunday, March 10, 2013

Misleading Information On Entitlements

The LA Times features the 5 biggest lies about entitlements.  This was the most interesting one for me:
Lie No. 3: Social Security and Medicare are $60 trillion in the hole.
As efforts to cut Social Security and Medicare gather steam in the budget wrangling in Washington, you'll hear these mega-trillions being thrown around more and more. Beware. They're numbers designed to terrify, not edify.
The assertion comes from something called the "infinite horizon" projection. It's a calculation of funding gaps projected out to the limitless future and then converted to present value — meaning what the cost would be if we had to pay it all today. For Social Security, the figure was $20.5 trillion, as reported in the program trustees' latest report. For Medicare, the number comes to about $42.7 trillion.
Even professional actuaries say this calculation is bogus. In 2003, when it was first inserted into Social Security's annual report, the American Academy of Actuaries warned the trustees that the infinite projection provides "little if any useful information" and is "likely to mislead anyone lacking technical expertise ... into believing that the program is in far worse financial condition than is actually indicated."
A big part of the lie is that these projections aren't applied to the other side of the ledger — the programs' revenues and growth in the U.S. economy projected out to infinity. The latter, the trustees calculate, would be about $1.5 quadrillion. (How's that for a big number?) For Social Security, the infinite gap accounts for only 1.3% of infinite GDP, which would bring it about to the level we spend today on defense and veterans affairs.
In the end, we're really talking about the distribution of the economic pie.  Most people understand not having enough money to pay for things they need, so throwing out big sounding numbers is a good way to scare the bejeezus out of folks and convince them to give up part of the social insurance safety net.  With the Postal Service, Congress actually goes even farther to make things look bad.  They are actually requiring them to pay their long-term obligations on a vastly shorter timetable than necessary.  In other words, they are requiring the $60 trillion number up front.

However, I don't have much confidence in projected growth in the U.S. economy.  I doubt that there is anybody, in or out of government that isn't a little overly optimistic.  And any projections which show growth in medical costs continuing to rise faster than inflation over that time span don't reflect what is really possible.  Like housing prices rising much faster than wages, compounding growth of medical costs will blow things up much sooner than 75 years from now.  We aren't too far away from a total rethinking of our healthcare system and how we pay for it.

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