Last week, I argued that this Center on Budget and Policy Priorities graph comparing the cost of the Bush tax cuts to the cost of fixing Social Security is more confusing than helpful, because it compares two numbers that don't really match up very well if you look at how they evolve over time.
Present value calculations are an important way to measure our fiscal obligations. But cash flow matters too. Here is a graph comparing CBPP's projections of the upper-income tax cuts to Social Security's shortfalls as measured by the Trustees:
As you can see, the Social Security shortfall begins to exceed the value of the upper-income tax cuts at the very beginning of next decade, and is projected to be significantly larger over the course of the following quarter century.
So why do the cash-flow numbers make Social Security's shortfall look so much larger? Well, there are two major reasons. First, by their very natures, present value estimates favor the near-term over the far term. This is logical, since a dollar today is worth more to us than a dollar tomorrow. But it also means that the first decade of relatively modest deficits (and brief surpluses) in Social Security weigh heavily on the calculation.
Secondly, these calculations include the value of the $2.6 trillion Social Security trust fund - and weight those heavily since we are holding that money today. If we were looking at the present value of Social Security's future shortfalls, as opposed to accounting for its past surpluses (which have accumulated in the trust fund), the program's unfunded costs would be closer to 0.9 or 1 percent of a GDP, rather than 0.7 percent. (That 0.7 percent isn't irrelevant, since most reform plans would rely on the trust fund, at least for a while. But looking out to the end of the 75-year window, the gap will reach 1.4 percent of GDP.)
Aside from these cash-flow issues, we also have some concerns about CBPP's methodology for projecting forward the value of the tax cuts - which appears to be highly sensitive to a few uncertain assumptions.
Essentially, CBPP assumes that the growth rates in revenue loss from 2017 through 2020 will continue forever. Over time, the compounding effects of these growth rates are significant -- increasing the value of the cuts to about 1.1 percent of GDP by 2080. Yet tiny changes in some of the numbers they use can drastically alter this number.
For example, they estimate that the tax cuts will cost $99 billion in 2017 and $120 billion in 2020 based off of a combination of Treasury and TPC estimates. We used some TPC tables to estimates these numbers at $102 billion in 2017 and the same $120 billion in 2020. When we tried to roughly apply their methodology using our $102 billion instead of their $99 billion (in other words, a nominal growth rate of about 5.6% instead of 6%) we found that the shortfall only reaches about 0.65 percent of GDP rather than 1.1 percent.
This is not to say that our $102 billion is right and their $99 billion is wrong - both are plausible and surely both will be wrong. The point is that tiny changes in these numbers cause wild swings in the ultimate cash flow results. (Though the magnitude of the present value cost wouldn't swing nearly as much - under the scenario we presented, the present value of the upper-income cuts would be between 0.5 and 0.6 percent of GDP rather than 0.7 percent).
We also tried projecting forward two other ways: assuming that the upper income tax cuts remained a fixed proportion of total revenue under CBO's extended baseline scenario and assuming bracket creep for the upper-income cuts in line with the total bracket creep we estimate in our CRFB baseline.
Here are the results:
To sum up: as I said in my follow-up post, the only reason the two numbers look even remotely similar is that they're using a present value calculation and a very long time frame. The present value calculation weights very near-term revenues and expenditures much more heavily than later ones; as a result, even though the expenditures on Social Security over the next 75 years are much larger than those on the Bush tax cuts for the wealthy in almost every time period, the early small surplus/small deficit of social security, and the fairly steady size of the Bush tax cuts, makes the present value much closer than the cash flows.
This might arguably be a good way to do the calculation for a corporation--though no corporation would forecast anything over such a long time frame. But since the government doesn't really have any mechanism to save, it's not very helpful to compare present values, because current cash flows can't actually be stored up to use in the future. The present value of social security's liabilities is perhaps a good way for us to understand the magnitude of the obligations we're undertaking, but it is not a good way to think about paying for the program.