Enron accounting and the collapse of Social Security: “It is going to be insolvent before everyone thinks”


Social Security Administration forecasts vastly overstated warns new report

By Alex Thomas

(INTELLIHUB) — Rumors of the collapse of the Social Security program have long been a topic of discussion with many believing that the program will collapse much sooner than the government claims, in turn leading to the start of civil unrest when Americans both young and old realize that a program they have put money into their entire life is gone.

Now, a new study has found that demographic and financial forecasts by the Social Security Administration have consistently overstated the health of the programs trust funds.

The study, conducted by researchers at Harvard and Dartmouth, found that since the year 2000 there has been an increasing amount of bias in the forecasts, all in the same direction.

CNBC reports:

“These biases are getting bigger and they are substantial,” said Gary King, co-author of the studies and director of Harvard’s Institute for Quantitative Social Science. “[Social Security] is going to be insolvent before everyone thinks.”

The Social Security and Medicare Trustees’ 2014 report to Congress last year found trust fund reserves for both its combined retirement and disability programs will grow until 2019. Program costs are projected to exceed income in 2020 and the trust funds will be depleted by 2033 if Congress doesn’t act. Once the trust funds are drained, annual revenues from payroll tax would be projected to cover only three-quarters of scheduled Social Security benefits through 2088.

Researchers examined forecasts published in the annual trustees’ reports from 1978, when the reports began to consistently disclose projected financial indicators, until 2013.

Then, they compared the forecasts the agency made on such variables as mortality and labor force participation rates to the actual observed data. Forecasts from trustees reports from 1978 to 2000 were roughly unbiased, researchers found. In that time, the administration made overestimates and underestimates, but the forecast errors appeared to be random in their direction.

“After 2000, forecast errors became increasingly biased, and in the same direction. Trustees Reports after 2000 all overestimated the assets in the program and overestimated solvency of the Trust Funds,” wrote the researchers, who include Dartmouth professor Samir Soneji and Harvard doctoral candidate Konstantin Kashin.

The study notes how important the forecasts are for the solvency of the Trust Funds, revealing that all of the errors are in the same direction, in turn making the Social Security Trust Funds look healthier than they actually are.

The accuracy of U.S. Social Security Administration (SSA) demographic and financial forecasts is crucial for the solvency of its Trust Funds, government programs comprising greater than 50% of all federal government expenditures, industry decision making, and the evidence base of many scholarly articles.

“Forecasts are also essential for scoring policy proposals, put forward by both political parties, in order to quantify their effect on the program and the budget. Because SSA makes public little replication information, and uses ad hoc, qualitative, and antiquated statistical forecasting methods, no one in or out of government has been able to produce fully independent alternative forecasts or policy scorings.”

Yet, no systematic evaluation of SSA forecasts has ever been published by SSA or anyone else. We show that SSA’s forecasting errors were approximately unbiased until about 2000, but then began to grow quickly, with increasingly overconfident uncertainty intervals. Moreover, the errors all turn out to be in the same potentially dangerous direction, each making the Social Security Trust Funds look healthier than they actually are.

We also discover the cause of these findings with evidence from a large number of interviews we conducted with participants at every level of the forecasting and policy processes. We show that SSA’s forecasting procedures meet all the conditions the modern social-psychology and statistical literatures demonstrate make bias likely.

When those conditions mixed with potent new political forces trying to change Social Security and influence the forecasts, SSA’s actuaries hunkered down trying hard to insulate themselves from the intense political pressures.

Unfortunately, this otherwise laudable resistance to undue influence, along with their ad hoc qualitative forecasting models, led them to also miss important changes in the input data such as retirees living longer lives, and drawing more benefits, than predicted by simple extrapolations.

Boston University professor of economics Laurence Kotlikoff is also sounding the Social Security solvency alarm bell. Kotlikoff and the 17 Nobel Price winning economics who have endorsed his views are pushing the administration to use the “infinite horizon” model when calculating unfunded obligations.

Using this system, the liabilities would be over 24 trillion dollars rather than the 10 trillion that is currently projected in 2088. The professor even went as far as to compare Social Security accounting to that of the infamous Enron scandal.

“We have a situation that is like Enron accounting,” Kotlikoff told CNBC.

A collapse of the Social Security program could easily lead to civil unrest within the country as angry Americans realize that the government hasn’t taken care of the money that they have put into the program their entire lives. Millions of Americans contribute to the program each year with the belief that when they reach a certain age they will receive their fair share.

Sadly, this may not actually end up being the case for an untold number of Americans.

About the Author

Alex Thomas is a reporter who has worked in the alternative media for over three years. His work has been featured on numerous news outlets including Infowars and RT. Alex is an exclusive weapon of Intellihub.

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