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No sooner was the fiscal cliff averted (with a patchwork detour) than I read in The New York Times that the Social Security system is worse off than many people thought. The trust fund could run short of money two years sooner than the current government projection of 2033 — only 18 years hence. This revelation came not in a front-page news story, but in an opinion-section article by two professors, one from Harvard and the other from Dartmouth. Their peer-reviewed research focused on how the Social Security Administration calculates people’s lengthening life spans and how much in future benefits will be paid to them. They found “that the government’s methods for forecasting Americans’ longevity were outdated and omitted crucial health and demographic factors. Historic declines in smoking and improvements in the prevention and treatment of cardiovascular disease are adding years of life that the government hasn’t accounted for.” Thus, they write, “More retirees will receive benefits for longer than predicted, supported by the payroll taxes of relatively fewer working adults than projected.” Noting that the system’s forecasting procedures haven’t changed much since 1935, the professors give the process a flunk grade. “We learned that the methods are antiquated, subjective and needlessly complicated — and, as a result, are prone to error and to potential interference from political appointees,” they write. Among other things, they recommend “adding statisticians and social science methodologists to help [the system’s actuaries] institute more formalized quantitative and statistical procedures.” The more important issue, of course, is how to change the rules to ensure the solvency of Social Security. The professors have little new to offer on this score: Raise the retirement age, take the wage cap off payroll taxes, limit cost-of-living benefit increases and reduce benefits for people who earned more while working than the national average wage. Their one novel suggestion is conducting research into whether retirement itself is such a desirable social goal that government policy should encourage it. In my view, the biggest problem is how to endow our political leaders with enough guts not only to tackle the Social Security problem but also to compromise their way to a sensible solution. If ever a situation cried out for leadership, this is it. Anything less is irresponsible.
2012 Economic Growth Fellow
John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.Full Bio