Defusing the Fiscal Time Bomb

May/​June 2010 • Policy Report

For three decades, Cato Institute scholars have fought to reform the enormous entitlement that is Social Security. This third rail of American politics faces a looming crisis. How to fix it — how to balance the economic realities with political practicalities — is no easy task. Yet it is a crucial one, as Social Security threatens to consume a staggering portion of the country’s GDP — a problem exacerbated by our aging population enjoying longer post‐​retirement life expectancy.

What began in the first issue of Cato Policy Report in 1979, with the article “Social Security: Has the Crisis Passed?” by Carolyn Weaver, and expanded a year later with Cato’s first policy book, Social Security: The Inherent Contradiction by Peter J. Ferrara, continues today with the release of a new book by Cato senior fellow Jagadeesh Gokhale. Social Security: A Fresh Look at Reform Alternatives offers a detailed analysis of the fiscal future of this massive entitlement, and does so through the use of a fresh model that offers a considerable increase in accuracy over what came before.

The typical models used to analyze Social Security’s future are inadequate, Gokhale argues. Those built by the government are based on broad group averages, whereas models used by nongovernment researchers are more detailed, but are limited to the few details of interest to the particular researcher. In Social Security, Gokhale offers an alternative, “a microsimulation of U.S. demographic and economic features” he calls DEMSIM.

The result of running the data through Gokhale’s more robust model is grim. “DEMSIM’s baseline assumptions suggest that Social Security’s financial condition is significantly worse compared to official projections by the program’s trustees,” Gokhale concludes. He is also able to examine several reform options.

His goal in writing the book, Gokhale explains, is to “convince the reader that independent checks of official reform scoring exercises are useful;” that his microsimulation model approach brings advantages over the current practices; and that analysis of reform options should be based on measures of the program’s long‐​term finances, as well as measures of how individuals will fare under both the current Social Security program and potential reformed programs.

Without taking such measures, Gokhale warns, lawmakers and the public will remain uninformed, lacking the data necessary to make meaningful and effective adjustments to what is otherwise a doomed system. Gokhale’s Social Security: A Fresh Look at Reform Alternatives, published by the University of Chicago Press, is a powerful continuation of Cato’s long‐​running mission to correct.

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