Are Social Security and Medicare benefits a sinking Titanic?

How social insurance for old age might become market driven and not a guarantee.

The RMS Titanic sank in the early morning hours of 15 April 1912 in the North Atlantic Ocean, four days into her maiden voyage from Southampton to New York City.

In a one-sided editorial argument lambasting “old-age benefits,” Denver Post editorial writer Chuck Plunkett employed the metaphor of a sinking Titanic. The ship’s designer recognized that too many watertight chambers had been breached by an iceberg and that the ship would sink: “a mathematical certainty.” This vivid analogy buttressed Plunkett’s argument that with similar certainty, old-age entitlement programs, a.k.a. Social Security and Medicare, will “bring down the world’s greatest economy.”

Generational accounting, the iceberg of this argument, tends to be one-dimensional: it’s about the numbers. Accountants look at past taxation, productivity, and consumption patterns, coupled with demographics, to develop their scenarios. It’s by no means an exact science, but entitlement program critics present their foreboding numbers as if “the gospel.”

For example, on page 97 of his book, The Coming Generational Storm, author Laurence Kotlikoff explains how uncertainty interacts with economic scenarios:

“So current decisions depend on future outcomes, but future outcomes depend on current decisions. The only way to solve this problem is to solve for both current decisions and future outcomes simultaneously — hence the term simultaneity problem. In practice, the solution begins by simply guessing future outcomes. These guesses are then used to determine current decisions.

“Next, the current decisions are used to update the guesses of future outcomes, which are then used to generate a new set of current decisions, new updates of future outcomes, and on and on until the model has converged. Convergence here means that the procedure has found a set of current decisions that generate the same future outcomes as had been guessed on the previous round and that were used to determine the current decisions.”

In other language, ominous prognostications being proposed are based, just as Kotlikoff suggests, on guesses. They might be intelligent guesses, they might be guesses based on sophisticated computer modeling, with convergence of current public policy decisions and future anticipated outcomes, but they are nevertheless, guesses.

Generational accountants are modern-day soothsayers. Their science is an art, and they do not command mathematical certainty with the same engineering precision as a ship designer. Predictions are based on their perceptions of a future that may or may not happen as many as 40 years from now. How much reliance should we place on their assumptions?

Look at this way: Show me a generational accountant who, in writing, successfully predicted two of the most significant business and technological changes in the 20th century just ten years before these transformations. Show me someone now predicting economic disaster in the mid-21st century who in 1975 predicted the way microcomputers would transform everything in business by 1985. Show me a generational accounting expert who in 1985 predicted the ubiquitous advent of the Internet in 1995.

Looking over our shoulders today, we can see many historical precursors harkening forthcoming societal revolutions around desktop computers and distributed digital networks, including their concomitant economic transformations.

If the entitlement soothsayers could not predict these major changes ten years before they happened, how reliable can they be at predicting our future 30 or 40 years from now? What possible future transformations in genetics, robotics, information, and nanotechnologies have they not considered? How do they predict impact of a generation committed to staying engaged in economic activities across the lifespan?

Soothsayers read crystal balls. They want you to believe they see clearly into a future that nobody can truly see. They substantiate their predictions by analyzing the past and projecting today’s demographics into the future. As Marc Freedman, author of Encore: Finding Work That Matters in the Last Half of Life observes, “This is scenario planning in the rearview mirror.”

Frankly, Kotlikoff’s predictions do not show much sociological imagination about how Boomers can and will transform the future.

In his book, Kotlikoff also offers a number of recommendations for addressing his perceptions of the fiscal challenges of Social Security. His most dramatic proposal is to eliminate the Old Age Insurance component of Social Security and replace it with equivalent compulsory contributions to PSS (Personal Security System) accounts. How would these accounts be managed? By investing them “in a single market-weighted global index fund of stocks, bonds, and real estate.” In other words, social insurance becomes market driven, not a guarantee.

Do you want to be wealthy? Make sure Kotlikoff’s proposals become law, and then be sure you’re in senior management for one of the private-sector investment companies that will service and oversee these investments, handing taxpayers their transaction costs.

Other than destroying the social insurance programs that have been an unqualified success in lifting this nation’s older adults out of poverty and untimely sickness, some solutions to the alleged forthcoming “generational storm” touted by Plunkett and Kotlikoff include:

1. Bag the big elephant in the room: age discrimination in the workplace. Bias against older adults has been well documented by The New York Times, AARP and other organizations. Yet, according to recent MetLife and AARP studies, over 70% of the Boomer generation wishes to keep working past age 65. The longer a greater majority of this generation remains economically active, the less impact on Social Security’s “unfunded liabilities” (which have, in reality, been funded through mid-century, but that’s another story).
2. Focus national R & D investments on genetic, robotic, information and nanotechnologies. So-called GRIN science can invent new strategies to “engineer negligible senescence” in older adults, thus allowing them to remain vital longer into old age, increasing our collective healthspan. These technologies will have worldwide value and thus create rich new markets for U.S. industries focused on vital life extension.
3. Declare war on waste, fraud and abuse in the Medicare system. Also, create favorable policies for global competition in healthcare services and health insurance. So-called medical tourism can deliver equivalent surgeries for chronic conditions in accredited hospitals overseas for as much as one-tenth the cost of similar procedures in the U.S.
4. Attack media, marketing messages, and editorial opinions that denigrate aging adults. This social revolution needs the same force and clarity as when the nation confronted gender and racial inequities. Once it becomes economically debilitating to portray aging adults as of lesser value, then society will become much better equipped to address multi-generational problems from an inter-generational perspective.

Professor Kotlikoff is making a name for himself with inadequate arguments that this nation faces an “old-age benefit” crisis. With very little investigation, it becomes quite clear his acolytes include financial services companies that can’t wait to capitalize on privatization of Social Security and Medicare.

Imagine the implications if today’s 65+ adults had had their old-age benefits tied to financial markets of 2008 and 2009. The implications, according to Washington-based Center on Budget and Policies Priorities: 47.6 percent of the 32 million elderly people in the United States could now be living in poverty.