FOX News chief Washington correspondent Jim Angle echoed but declined to correct Representative E. Clay Shaw Jr.'s (R-FL) grossly misleading claim that "Social Security will need $26 trillion over the next 75 years" to remain solvent. That number -- which has been touted by the libertarian, pro-privatization Cato Institute and the conservative Heritage Foundation -- vastly overstates the actual shortfall by using a so-called "constant dollar" estimate. The so-called "net present value" estimate, which the Social Security trustees themselves use and which is widely accepted, indicates a much smaller shortfall.
The "constant dollar" figure is vastly inflated because it fails to account for the so-called "time value of money," a fundamental concept in economics, which states that because money accumulates value over time, a dollar today is worth more than a dollar tomorrow.
From the February 24 edition of FOX News' Special Report with Brit Hume:
ANGLE: Clay Shaw, who has his own plan for personal accounts, warns students that Social Security will need $26 trillion over the next 75 years, and that today's young people will get the bill.
SHAW: [clip] How much is $26 trillion? It's $100,000 per family in this country. A hundred thousand dollars per family -- that's what we're facing if Congress does nothing.
Shaw's $26 trillion figure is apparently derived from a recent Social Security Administration (SSA) estimate of the program's 75-year revenue shortfall. But this figure, a so-called "constant 2003 dollar" estimate, is highly misleading because it represents a simple sum of the program's yearly shortfalls, in 2003 dollars, for each year until 2078. The Heritage Foundation explains: "If the shortfall is measured in 'constant' dollars so that a future dollar has the same value as a dollar today, Social Security's cumulative 2018-2080 shortfall is more than $27 trillion" (Heritage's $27 trillion figure is based on a slightly more recent estimate than Shaw's $26 trillion). But the "time value of money," one of the foundational laws of economics, states that a dollar today is worth more than a dollar tomorrow, primarily because today's dollar can be invested and will generate compound interest, rendering it more valuable in the future.
The Social Security trustees estimate the true 75-year shortfall at a more modest $3.7 trillion. This so-called "present value" estimate is more accurate because it represents how much money would have to be added to the system today to render it solvent until 2078. The $26 trillion figure appears nowhere in the trustees' report.
Indeed, in the course of a rather misleading explanation of the significance of various estimates of Social Security's long-term fiscal situation, Heritage Foundation senior writer and editor Andrew Grossman admitted: "Net present value is a financial measure that is commonly used to evaluate long-term financial decisions on a comparable basis."
The "constant dollar" estimate is relevant only if it is assumed that Social Security will suddenly cease to operate the way it has for the last several decades. Beginning in 1983, Congress intentionally "pre-funded" a portion of Social Security's future promises by setting payroll tax rates high enough to collect more revenue than necessary to pay benefits to current retirees. The plan was to accumulate a substantial surplus over time, which the system will begin to tap once new payroll taxes alone are insufficient to pay promised benefits (around 2018, according to the trustees). Under the current system, the accumulated surpluses, which constitute the Social Security trust fund, increase in value over time because they are invested in interest-bearing U.S. Treasury bonds. This process of compound interest is the primary reason why an investment of $3.7 trillion today would be sufficient to enable the system to pay all benefits promised under current law. Indeed, President Bush has argued that the need to address Social Security's long-term revenue shortfall is urgent precisely because "[e]ach year we wait costs an additional $600 billion." But the explanation for this alarming factoid is precisely what Angle and Shaw chose to ignore: that paying benefits for future retirees will be less costly if we begin to save today so that these new savings will increase in value due to compound interest.
Finally, it's worth noting that even the SSA estimate itself, though it apparently forms the basis of the misleading $26 trillion figures, does not actually calculate the sum of the yearly "constant 2003 dollar" estimates that Angle and Shaw cited, presumably because such a sum is meaningless and misleading. Rather, Shaw (or whoever provided him with the figure he cited) apparently calculated the $26 trillion figure himself by adding up the shortfall for each year as presented on the SSA's estimate table. Below is the relevant portion of the table. Values are in billions of dollars:
|Year||Estimate for Modified Present Law with |
Borrowing to Pay Scheduled Benefits
Net Amount of Cash Flow from the OASDI [Social Security]
Trust Funds to the General Fund of the
Treasury During the Year
|Percent of |
|Present Value |
|Intervening years are included in the actual table. We omit them here for space purposes.|
| || ||-4,910||The sum of the figures in this column is $26 trillion, but SSA left this cell blank, presumably because this sum is meaningless.|
|Based on Intermediate Assumptions of the 2003 Trustees Report.|
|Source: Office of the Chief Actuary|
Social Security Administration
February 11, 2004
Angle was reporting on Shaw's February 24 presentation on Social Security to students at Florida International University. Shaw is a former chairman of the House Ways and Means Committee's Social Security subcommittee.