Cap'n Arbyte's

Advertisements


Blogroll


Local interest


Other sites

The Cost of Opt-Out, part 2

Let's try this again. It's so much easier to blog on weekends. :)

What would happen to Social Security's finances if people were allowed to opt out and a bunch of people did so?

As I planned last time, I've used the Trustees Report to estimate the number of workers entering the Social Security system over time. Upon seeing a few negative numbers from historical years, and noting that those years had net immigration, I realized that this data doesn't track the unemployment rate! Rather than try to adjust for this, I decided to only use five-year-interval data so this effect is smoothed out.

I need an age distribution for those who would opt out. I arbitrarily decided that 50% of the opt-outs would be 20-24, 30% would be 25-29, and 20% would be 30-34. I verified with census figures that these age groups have similar populations.

I assume constant average incomes for everyone. No adjustments for age, and no income impact on the decision to opt out or not. I assume people are 20 when they become part of the workforce. I assume all workers face the same likelihood of death, and all retirees face the same likelihood of death, regardless of age. I don't do anything special with immigration, in effect assuming that all immigrants immigrate at age 20.

My results are, at least, not ludicrously wrong. The numbers I'm calculating seem to be roughly reasonable. If any actuary sees these and has the urge to help, I would certainly appreciate that. I think the most serious error is in the mortality assumptions. People don't die at a steady rate like I've modeled. The error is obvious by noticing that the percentage of contributors opting out doesn't settle to the correct value.

The most interesting number — in what year would the trust fund be exhausted if opt out were allowed? — remains elusive. I haven't found the data set from which the current expectations are based. I have, however, created a projection of the income and cost rates.

My calculations are all on this spreadsheet. Here are some graphs based on the Trustees' 2005 Intermediate Forecast with my dubiously-accurate numerical hackery assuming 50% of new workers will opt out of Social Security:

Projected OASI Contributors and Beneficiaries with Opt-Out
Projected OASI Opt-Out Percentages
Projected OASI Contributors vs. Beneficiaries Ratio with Opt-Out
Projected OASI Income and Cost Rates with Opt-Out
Projected OASI Balance Rate with Opt-Out

From these estimates it's fairly clear that the trust fund would be exhausted sooner under my assumptions for individual opt-out than for the existing system. This is expected, of course, because the existing system is breathtakingly unfair to those under 30, who expect to pay full contributions all their working years yet see benefits slashed 25% by the time they retire. This injustice would be moved forward to members of the Baby Boom generation who, given their greater numbers, would individually be hurt less by it.

Tiny Island