Terms

Infinite Horizon

The administration frequently refers to a $10-$11 trillion shortfall in social security. (The actual figure, according to the 2004 trustee's report, is $10.4 trillion.)

It is a misleading number for all but the most informed (actuaries and others used to working with long term benefit programs). So misleading, in fact, that the American Acadamy of Actuaries wrote to the trustees on December 19, 2003 that:

The Social Insurance Committee [of the American Acadamy of Actuaries] disagrees with Recommendation [to include aninfinite horizon estimate in the Trustee's Report]. Rather, the Committee believes that the new measures of OASDI’s unfunded obligations included in the 2003 report provide little if any useful information about the program’s long-range finances and indeed are likely to mislead anyone lacking technical expertise in the demographic, economic and actuarial aspects of the program’s finances into believing that the program is in far worse financial condition than is actually indicated. Thus, we believe that including these values in the Trustees Report is unnecessary and is, on balance, a detriment to the Trustees’ charge to provide a meaningful and balanced presentation of the financial status of the program.

Yet the administration rouytinely uses a figure that is "likely to mislead anyone lacking technical expertise in the demographic, economic and actuarial aspects of the program’s finances" in talking to the very people are likely to be misled by the figure.

What is the figure and what does it mean? Simply, it is what it would cost today to convert the current system to a fully funded system. It is calculated by taking the total benefits yet to be paid to anyone over age 15 and subtracting the contributions they will make to the system (and the existing surplus). The resulting figure ($11.2 trillion) is then reduced by the projected excess (over benefits) received from those those currently under 15 -- including the as yet unborn ($0.8 trillion) to arrive at the final figure.

The greatest problem the Committee noted was the uncertanty of any long range projections and that, even 75 years ago, no one would have predicted World War II or the baby boom that followed it. (We'd add the increase in the percentage of women who were employed outside of the home to that list of unpredictables.)

While the figure has value to those who fully understand its import, the Social Insurance Committee noted in the same letter that a number of anomolies occur in extending figures out over an infinite horizon. For example, because the assumptions used include no increased participation in the work force as life expectancy increases, extending the projection to infinity means that, eventually, workers will spend more years in retirement than they spend working.