April 10, 2016
As we all know, one of the major recreational sports of media outlets is finding new and innovative ways to scare people about Social Security. One of my favorites is “infinite horizon accounting.” This is when you project out Social Security spending and revenue into the infinite future and then calculate the difference. It gives you a REALLY BIG NUMBER.
We got an example of the casual use of this infinite horizon accounting in a column by Wharton Business School Professor Olivia Mitchell. The column was actually on a different topic, but towards the end the piece tells readers:
“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.”
Note that there is no mention of the time horizon for the $28 trillion shortfall, so readers would have no way of knowing that it is for all future time. The comparison to current GDP is both wrong (GDP in 2016 will be over $18 trillion) and misleading. Why would we compare a deficit measured for all future time to this year’s GDP? If we compared the deficit to future GDP it would be 1.3 percent, a bit more than one-third of the annual military budget.
It’s also worth noting that the bulk of this deficit is for years after 2100. In other words, we are being cruel to children not yet born by writing down Social Security spending paths that exceed what they are projected to tax themselves. Can you envision anything so cruel? (The big problem is that the projections assume they will live longer and therefore have longer retirements.)
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