Column: How a Wharton professor grossly inflates Social Security’s deficit to argue for a ‘fix’
Olivia S. Mitchell is a professor of business economics and public policy at the University of Pennsylvania's Wharton School of Business. Lately she's been pushing a plan to "save" Social Security by allowing some benefits to be taken as a lump sum.
On the surface, the proposal has some virtues. But that only makes it more perplexing that Mitchell would back it up by describing the program's fiscal condition in a way that's flagrantly misleading and arguably discredited.
I am deeply concerned that my children and grandchildren...will inherit a huge unfunded liability via Social Security.
Wharton economist Olivia S. Mitchell
Mitchell comes to the Social Security debate with gilt-edged credentials as a pension and retirement expert. She's executive director of Wharton's pension research council; has consulted for the Japanese government, the World Bank, the U.S. Treasury Dept., and the Social Security Administration; and holds a shelf-load of international awards and honorifics. Her statements about Social Security might well be taken as pronouncements from the cathedral. That's what makes it so worrisome that she profoundly exaggerates Social Security's fiscal problem to support her proposal.
Mitchell described her would-be fix in a column at Marketwatch.com published over the weekend, though she has been talking about it at least since February. It's aimed at retirees pondering whether to start taking benefits as soon as they're eligible, at age 62, or to wait as long as possible.
Retirees often are advised to defer claiming, because every year of deferral increases monthly benefits until one reaches the ultimate deadline at age 70. Under Mitchell's plan, those who put off claiming benefits until, say, 66 or 70 could get the same monthly benefits for life they were entitled to at 62, plus a lump sum payment representing the benefit increases they earned by waiting those extra four or eight years. The payment could be $60,000 or more, she estimates, a sum that could be useful for some retirees. For example, some could use the lump-sum check to pay off debts, reducing their expenses in retirement.
Mitchell says she and her Wharton colleagues are planning a study to determine how much should be offered to produce an incentive to defer claiming. Her feeling is that lump sum payments could be so attractive to some people that they might be willing to accept a little less than the equivalent of what they'd be owed in monthly payments, in order to have a bird in hand. That would "actually save the system money," she said in a video distributed earlier this year by Wharton, which called her solution "painless." And that's important, she said, because the system is in such bad shape that it needs all the help it can get.
It's in supporting that rationale — that Social Security desperately needs radical surgery — that Mitchell arguably goes off the rails.
The questionable part of her article appears near the bottom, where she writes:
"The Social Security shortfall is enormous. Actuaries have estimated that it’s on the order of $28 trillion in present value. That’s twice the size of the gross domestic product of the U.S. So a small delay in claiming won’t solve the problem. We’re also going to have to change the benefit formula. We’re going to have to make changes in the retirement age." (Emphasis added.)
Most Social Security experts view that $28-trillion figure as a red flag. That's because many people who cite it are ideologues aiming to scare the public into thinking the program's finances are far worse than they really are. Let's see what makes the statistic, and Mitchell's use of it, so misleading.
The figure is an estimate of the present value of Social Security's unfunded obligation not as it exists today, but as if it were calculated out to infinity. Economists find the so-called infinite horizon model useful in some contexts. But as it's typically applied to Social Security it's beloved by ideologues because it produces a really big, and really scary, estimate of the accumulated deficit.
The infinite projection appears in the annual Social Security Trustees Report, but its placement there is controversial. The Social Security Advisory Board's 2015 technical panel of economists, actuaries and demographers recommended dropping the infinite projection from the trustees reports altogether, for two reasons. One is that it incorporates enormous uncertainties. Estimating costs, revenues and policy changes for Social Security's conventional 75-year forecasts is hard enough; the influences playing on the program hundreds or thousands of years into the future are literally unimaginable. That makes the infinite projection "unhelpful as a guide to policy-making," the panel reported.
The second reason is that it's so vulnerable to misinterpretation. As an earlier technical panel observed, the projection is sometimes "quoted in policy discussions without including its relation to corresponding GDP, which is both misleading and shifts the focus from more useful metrics."
Interestingly, that's exactly what Mitchell does. (We should mention in passing that Mitchell actually gets her numbers wrong. The infinite projection deficit, as published by the trustees in their most recent report, was $25.8 trillion as of Jan. 1, not $28 trillion; U.S. GDP, according to the Bureau of Economic Analysis, was $18.2 trillion as of the end of 2015, not $14 trillion as Mitchell implies.)
In her MarketWatch article, Mitchell doesn't disclose that the figure she's citing is the infinite projection, which could lead some readers to think she's talking about Social Security's current deficit. (In current terms, Social Security actually runs an annual surplus and is expected to do so until 2020.) Even worse, she juxtaposes it with current gross domestic product by stating that it's "twice the size" of GDP today. The unwary reader might be led to think that a Social Security "crisis" is on the verge of bankrupting the U.S. in the here and now.
What's the proper context for the infinite-horizon deficit? Plainly, it's the corresponding calculation of GDP to the infinite horizon. That calculation shows that the deficit is nowhere near as scary as Mitchell makes it out to be. In fact, according to the Social Security trustees, the $25.8-trillion obligation amounts not to twice GDP, but only 1.3% of GDP. That's because the present value of GDP over the infinite horizon is projected to be $1.95 quadrillion.
How big is 1.3% of GDP? If applied to this year's GDP, it would come to about $237 billion. That's just over one-third of President Obama's $616-billion defense budget request for 2016.
Mitchell told me by email that she uses the infinite projection because she thinks the conventional 75-year time frame is too brief. "I am deeply concerned that my children and grandchildren...will inherit a huge unfunded liability via Social Security," she wrote. "Arbitrarily cutting the projections short at 75 years essentially says that their futures are worth nothing in current generations’ calculations."
She acknowledges that "obviously, no one would propose paying off all Social Security promises in a single year," but says that her purpose in "comparing the [present value] of Social Security future liabilities and the GDP is to provide a metric that people might be able to understand — otherwise these numbers with multiple zeros seem just too unreal to grasp."
Does she achieve this? One might argue that she achieves the opposite. A figure like $28 trillion is exactly what a layperson finds hard to grasp, and placing it in the context of this year's GDP only confuses the issue. A nice graspable figure is 1.3%, the share of future GDP consumed by all those trillions, with the added virtue that it's more appropriate. But of course it doesn't raise panic, either.
Mitchell also told me that she stands by her position in the MarketWatch article that her proposal, which encourages people to weather a small delay in claiming Social Security, isn't enough to solve the program's problem, and that "we’re also going to have to change the benefit formula. We’re going to have to make changes in the retirement age.”
One might argue that the myriad uncertainties about America's economy and demographics in the future argue in favor of moving very cautiously to change in Social Security. Mitchell disagrees. "Uncertainty means that action should be accelerated rather than delayed," she wrote me, "to lessen the likelihood of very large benefit cuts or tax increases in the future."
Yet she's expressing certainty here, not the opposite. She's assuming that economic growth will be so poor that Social Security revenues will fall short of benefits, and by a widening gulf, and that U.S. policy makers won't find ways to increase revenues instead of cutting benefits. She's assuming that cutting benefits piecemeal over time is preferable to doing so all at once; but why that should be so isn't at all clear, especially when the necessity of any cuts remains unproven. Accelerating changes is exactly the wrong approach when one can't know these things.
Mitchell's lump-sum plan might be a useful element in a Social Security fix if it were entirely clear that a fix was necessary. But the fact that she relied on an exaggerated statistic to make her case suggests that there may not be such a strong case, after all.