PBS reports that the Social Security surplus, once considered safe for a generation, now may disappear in two years, next year … or may already have vanished. According to Treasury’s website, we tipped over into deficit spending of SocSec in February of this year. The sudden disappearance of SocSec surplus will have dramatic impacts on budget-deficit projections, as the clip explains, since administrations use the surplus to make the deficits look smaller than they really are:
Four years ago, George Bush took the momentum from his re-election and announced an ambitious plan for Social Security reform. Despite having sounded the warning bell on SocSec stability in the Clinton years, Democrats suddenly discovered that the system was so sound that any attempt to reform it was “radical” and and attack on benefits for senior citizens. They attacked Bush for even considering reforms along the lines of optional privatization and dug their heels into Capitol Hill until they turned blue. Democrats like Robert Casey ran on the issue in the midterms. Harry Reid said the crisis didn’t exist. Nancy Pelosi concurred. Bush eventually had to drop the issue altogether.
Of course, Democrats had some help. People like Paul Krugman, who had warned about SocSec solvency, suddenly claimed that Bush was fearmongering on the issue. Ruth Marcus took Krugman to task on this point in November 2007. The NEA threw its union membership into the fray in opposition to reform.
But they were not alone. Peter Orszag, now Barack Obama’s budget director, produced a particularly rosy projection in August of last year while working at CBO, emphasis mine:
Today, Social Security’s revenues each year are greater than its outlays, but as the baby-boom generation (people born between 1946 and 1964) continues to age, growth in the number of Social Security beneficiaries will accelerate, and outlays will grow substantially faster than revenues. CBO projects that outlays will first exceed revenues in 2019 and that the Social Security trust funds will be exhausted in 2049.2 If the law remains unchanged, the Social Security Administration (SSA) will then no longer have the legal authority to pay full benefits.
Orszag has a history of rose-colored analyses that tend to benefit those for whom he works. For instance, this paper written in 2002 by Orszag and two others insisted that the risk of Fannie Mae failure was incredibly small — one in 3 million, actually (emphases mine):
This analysis shows that, based on historical data, the probability of a shock as severe as embodied in the riskbased capital standard is substantially less than one in 500,000 – and may be smaller than one in three million.20 Given the low probability of the stress test shock occurring, and assuming that Fannie Mae and Freddie Mac hold sufficient capital to withstand that shock, the exposure of the government to the risk that the GSEs will become insolvent appears quite low.
Given the extremely small probability of default by the GSEs, the expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and assuming that the government would bear the costs of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.
Two other points are worth noting. First, analysis of the risks posed by Fannie Mae and Freddie Mac must carefully consider the alternatives. In the absence of Fannie Mae and Freddie Mac, mortgage risk would likely be held by large banks and other types of financial institutions, which themselves benefit from the perception that they are “too big to fail.” Fannie Mae and Freddie Mac are among the largest financial institutions in the country. Even in the absence of a GSE charter it is likely that they would continue to benefit from their size, since the government has intervened on behalf of other large institutions in the past.21 …
To be sure, it is difficult to analyze extremely low-probability events, such as the one embodied in the stress test. Even if the analysis is off by an order of magnitude, however, the expected cost to the government is still very modest.
Who funded that incisive look into the risk of collapse at Fannie Mae? Er … Fannie Mae. How did that prediction work out? About as well as his Social Security projections from just seven months ago.
This is the quality of financial projections Democrats have provided over the last few years, and now we have Orszag in charge of the budget. Yesterday we pointed out the fact that even Orszag’s sunny predictions of the deficit over the next 12 years exceeds anything seen during the Bush administration — and now he’s lost the Social Security surplus for those years to mask even bigger deficits.