9:00 AM PST, December 1, 2012
The question that normally comes to mind when someone claims to know the future is why he's out hustling rubes for pennies with his purported clairvoyance, instead of using it to make a fortune and retiring to the South Seas.
Of course, the answer is that nobody ever does know the future. And that leads to the question of why so much of the "fiscal cliff" debate in Washington is based on supposedly perfect knowledge of conditions that are 20, or even 70, years away.
We're talking about projections of the cost of "entitlements" — a noxious way of referring to Medicare and Social Security, excellent programs that most workers have paid for during their careers and that have kept millions of Americans healthy and out of poverty.
The customary talking point by the anti-deficit lobby is that the rising cost of these programs will eat us alive. That future, the argument continues, is coming at us like an onrushing train, so to avoid having to cut benefits when it arrives, we best cut benefits now.
The element of haste is a crucial element in this debate. That's because as real estate brokers and late-night TV hucksters know, pressure to Act Now! is what leads their marks to overlook that the basic premise is bogus.
Consider the prevailing assumptions about the future of Social Security and Medicare. One is that Social Security's trust fund will run dry in 2033, at which point the money coming in from payroll taxes will be enough to cover only about 75% of currently scheduled benefits. Will this happen? It might, but it might not:
The program's trustees, who are the source of the projection, don't bet the farm on it. They also project that under certain conditions of economic and employment growth — all of them perfectly plausible — it might never run dry. You don't hear much about that projection because it doesn't fit into the narrative that Social Security is "going broke."
Healthcare costs, with Medicare and Mediaid as big components, have been projected to rise to as much as 40% of gross domestic product by 2082 if not restrained. That's a fearsome prospect, but it's based on a long-outdated forecast by the Congressional Budget Office, which doesn't use the same methodology anymore. It was highly implausible, if not impossible, in the first place.
That CBO projection, like others employed by the anti-"entitlement" lobby to push for gutting the program, relied on projecting past experience into the future without adjusting for changes in behavior or policy.
This is a common fallacy well understood by pollsters. They know that if you ask people what the future will look like, they'll describe something that looks like today, except more so. If street crime is in the news, for example, they'll posit a future in which every community looks like Deadwood.
Investment experts try to moderate this tendency by reminding clients that trees don't grow to the stratosphere. To put it another way, just because your son is 4 feet tall at age 6 doesn't mean he'll be 12 feet tall at age 18. And just because the average American born today will live to the age of 78 doesn't mean that a baby born in 2032 will live to 100.
These questionable forecasts result in the nauseating spectacle of corporate CEOs such as Lloyd Blankfein of Goldman Sachs lecturing Americans that the retirement benefits and elder healthcare coverage they've paid for during their working lives are things we "can't afford."
Blankfein didn't worry about what the country could afford when Goldman pocketed $12.9 billion in taxpayer funds to cover its losses in the collapse of insurance giant AIG. But there he was on CBS on Nov. 19, saying, "You...have to do something to lower people's expectations — the entitlements and what people think that they're going to get, because they're not going to get it."
Blankfein proceeded to lecture his interviewer that Social Security "wasn't devised to be a system that supported you for a 30-year retirement after a 25-year career." This is fair enough, one supposes, though it's a mystery where Blankfein gets the idea that the average retiree today has spent only 25 years in the workplace, rather than 45, and lives to the age of 95. Does Goldman Sachs do all its math this way?
The Social Security projection is probably the most misused and misunderstood statistic in the fiscal-cliff debate. The trustees warn every year that its forecast is "inherently uncertain." They warn that it's a melange of projections of at least 17 factors, including fertility and mortality rates, economic growth, unemployment, wages and life expectancy, many of which are interrelated.
No one — no business, no government agency — makes plans today based on a vision of the world 20 years from now. IBM doesn't do it. Google doesn't do it. The Department of Defense doesn't do it. You and I don't do it. Not even life insurance companies, which might be said to live in the future, do it.
The reason smart people and companies don't make bets on the distant future is precisely because it's unknowable. Try the following thought experiment: Instead of looking ahead 20 years, look back 20 years, and try to list all the events that have had immense, material effects on today's economy, but were unimaginable in 1992.
Here's my list: 9/11. The Afghan war. The Iraq war. The housing bubble. The crash of 2000. The crash of 2008. The crash of Lehman Bros. The iPod. The iPhone. The iPad. The founding of Google. Hurricane Andrew, Hurricane Katrina, Superstorm Sandy. Obamacare.
What are the chances that another such list will make the U.S. economy in 2033 look utterly different from what we imagine in 2012? I'd say 100%.
Forecasting healthcare costs may be even more of a mug's game. In a 2008 paper, economists Glenn Follette and Louise Sheiner of the Federal Reserve observed that the CBO unwisely projected healthcare costs into the future by assuming that the trends of the past simply would continue.
But the trends of the past had included an unprecedented expansion of public and private insurance coverage, which cut average out-of-pocket spending from 51% of total healthcare outlays in 1960 to 13% in 2005. That created an explosion in demand.
Could the trend continue? Plainly not. The Fed economists also noted that any trend pointing toward healthcare consuming 40% of GDP would have such destructive effect on the rest of the economy that personal behavior or political action would change it before reaching that point. The CBO now acknowledges that.
Healthcare reform has made such projections even more uncertain today, in part because the reform act includes numerous cost-limiting initiatives, the success of which can only be guessed at. That's an argument against taking such radical steps as raising the Medicare eligibility age, as some fiscal-cliff pundits advocate.
Leaving aside that doing so would drive up costsfor employers, states and Medicare participants themselves by more than it would save the federal government (the Kaiser Family Foundation crunched the numbers), it's far too early to know if it's even necessary.
One might argue that the uncertainty of economic forecasts means there's no point in economic planning at all. But there are good reasons for looking ahead, just not good reasons for thinking your vision of the future is 20/20.
And there's a big difference between making a congressional budget and making fundamental changes in programs as complex as Social Security and Medicare. The life span of a congressional budget is two years, max, because no Congress can bind its successors. But changes in Social Security and Medicare are forever. So when you hear that we have to do it now, stat! or we're doomed, take it for the snake oil that it is.
Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at firstname.lastname@example.org, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.
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