Update on Social Security’s Financial Condition

     The Social Security Board of Trustees[i] recently released their annual report on the financial condition of that system.  The report showed a small improvement in the system’s performance from last year, but underscored the longer-term challenges it faces.
     With improved employment, Social Security’s total income increased from $920 billion to $957 billion. It paid $916 billion of benefits and had expenses of $6 billion.  The result was a $35 billion positive cash flow, up from $23 billion last year.  This surplus increased the fund’s reserves to $2.85 trillion.  These trust funds are invested in U.S. government bonds.
     The current projections show that Social Security will continue to have a positive cash flow through 2021.  After 2021, Social Security will have to start dipping into its reserves to pay benefits at the current level.  The negative cash flow accelerates after 2021 as the full brunt of the baby boom retirees is felt.  The reserve is projected to be completely exhausted in 2035.  After the trust fund is depleted, the ongoing income will only cover about 77% of the current benefits.
     I generally find that there is a lot of confusion over the state of Social Security’s finances and its future prospects.  Young people frequently tell me that they are assuming they will never get any Social Security benefits because the system is going broke.  That is clearly not the case.
     Some of that confusion comes from a fundamental misunderstanding of how the system works and some comes from politicians’ hyperbole about the system’s condition.
     One of the fundamental issues when analyzing any retirement system is whether it is a “pay-as-you-go” system or a “funded” system.  In a pay-as-you-go system, no money is set aside from a worker’s current income to pay for future retirement system.  Instead the benefits are paid by future workers.  In a funded system, sufficient income is set aside by each worker to fund his or her retirement.  In other words, retirement systems either rely on income transfers between generations or on savings set aside during the worker’s productive years.
     For most of our history, societies have relied on systems that were essentially pay-as-you-go, with the burden of caring for the elderly mostly being organized by families or tribes.  But as the demographic age pyramid began to steepen and there were fewer younger workers to support a growing number of retirees, we have increasingly moved to systems that rely more on savings and less on intergenerational transfers.  Defined contribution pension plans represent the ultimate expression of the savings model.
     Social Security has some elements of both, but is fundamentally an intergenerational transfer model.  Most of the money we have paid into Social Security has not gone to create a savings account for us, it has gone to pay benefits to our parents.
     However, it was also designed to have a bit of financial cushion to make sure it could weather financial downturns.  So, in most years, Social Security has collected more than it has paid out, which has created the current $2.8 trillion reserve.
     I have never been able to find a calculation of the Social Security’s “unfunded liability” as that measure is calculated for regular pension plans, i.e., the present value of future benefits that have been “earned” by workers less the current reserves.  That is probably because future Social Security benefits are subject to adjustment by Congress where we generally assume that earned benefits in pension plans are sacrosanct (although as public employees are painfully learning, less so every day).
     Social Security has estimated the amount that the present value of its benefits exceeds the present value of its future receipts and current reserves over a 75-year horizon.  The report currently estimates that shortfall at $12.5 trillion, up from just over $11 trillion last year.  In other words, if there is no change in the future to taxes or benefits, we would need to contribute $12.5 trillion to Social Security today to pay the scheduled benefits.
     Of course, making 75-year projections is folly, especially when you consider that very small changes in the assumptions can make enormous differences in the outcome.  But it is clear that we are on an unsustainable course and are either going to have to increase payroll taxes or decrease benefits at some point in the future.
     The report gives some idea of the scale of the needed changes.  It found that payroll taxes would need to be increased from the current 12.4% to 15.2% or that benefits need to be cut by about 17% (or some combination of the two) to close the $12.5 trillion gap.  Those are not inconsequential changes, but they certainly do not amount to a catastrophic burden.
     The report does make clear that the longer we wait to begin implementing changes to Social Security to make it sustainable over the long term, the more painful it will be.  But having an adult conversation with the American people about Social Security and the changes we must make to it is something that our spineless politicians from both sides of the aisle are loath to do.  Much easier to just continue to promise lower taxes and no reductions to benefits.
     You can review a summary of the new report [here] or for a deeper dive the entire report is available [here].

[i] The Board of Trustees is comprised of the Secretaries of Treasury, Labor and Health and Human Services, the Social Security Commissioner and two public members appointed by the President.  The public member seats are currently vacant.
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Houston Chronicle Editorial Board Calls for Governor Abbott to Add Storm Surge Protection to the Special Session

     Kudos to my former colleagues at the Chronicle editorial board for calling on Governor Abbott to add action on a storm surge protection system to the special session.  [click here to read].
     Many of us had hoped the Legislature would make some progress on a storm surge protection system for our region this session.  But little was accomplished.. Nothing is as critical to our state than protecting our coastal region from the catastrophic storm that will inevitably show up one day.  And certainly nothing on the Governor’s call even comes close to the gravity of this issue.
     So please contact the Governors’ office and ask him to get this project moving.  If we start today, it would probably take a decade or more to have a functioning system.  Every year we go without taking action we are adding a bullet to the revolver with which we are playing Russian roulette.
     For additional background on the effects of a major hurricane making landfall just to the west of Galveston (referred to by researchers as the “Scenario 7 storm”), click [here] to view the outstanding Texas Tribune multi-media presentation and article on the consequences of a a Scenario 7 storm.
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The Tale of Two Transit Systems: The Folly of Rail in th 21st Century

     Metro is in the process of re-examining its long-term strategy and mission.  It is an examination that is overdue.  In considering where Metro goes from here, we should look carefully at the comparison between its experience and that of Dallas’ DART.
     At around six million people, METRO and DART have roughly the same population in their service areas.  However, DART’s service area is only about half the size of METRO’s (1303 sq. mi. vs. 657 sq. mi.) making its population density considerably higher, which is a significant advantage when developing a transit system.
     Shortly after their formations in the late 1970s and early 1980s, METRO and DART took very different routes to build out their transit systems.
     DART made an early commitment to rail, snagging federal grants and investing heavily with local funds, eventually building 119 miles of rail transit.  Houston, on the other hand, has been slow to commit to rail, only recently completing its 43-mile network.
     Conversely, METRO has continued a much more robust bus service, operating a fleet of nearly 1,400 buses while DART’s fleet is light less than half that number.
     By almost every objective measurement, METRO’s strategy of relying more on buses has worked out much better than DART’s reliance on rail.
Ridership
     In 2016, METRO carried about a third more riders than DART (89,000 vs. 66,000).   Both organizations have struggled to attract new riders.  Since 2000, DART’s ridership has only increased by about 10% notwithstanding its extensive investment in rail.  METRO has lost about 12% of its ridership since it began investing in rail in 2000.
     In 2012, DART completed a significant expansion of its rail system, yet its ridership has since declined almost 10%.  METRO recently opened the expansion of its light rail system and rolled out a new bus schedule.  Initially, the new light rail and revised bus schedule had little effect, but the 2017 monthly ridership so far has seen some modest improvement.  We will have to see more data to assess whether the improvement continues and whether it is the result of METRO’s changes or a firming up of the local economy.
Financial Costs
     The most dramatic difference in the agencies’ comparative strategies has been the effect on their finances.  METRO’s revenues and expenses are about 15% higher than DART’s.  But METRO has a significant advantage in the overall cost per rider at $9.27 versus DART’s $11.28.  Fares pay less than 10% of the cost of the service at both agencies.  (Why taxpayers should pay 90% of the cost of transit is another question for another day!)
     The differential on the balance sheet is stunning.  DART now carries over $4 billion in debt, more than double METRO’s.  That works out to a debt per daily rider of about $62 for DART compared to $21 for METRO.  The debt DART has incurred to build its rail system will be an albatross around the necks of Dallas taxpayers for decades.
Conclusion
     For years rail advocates have told us that if we build a robust rail system it will attract riders and reduce congestion.  They rarely discuss the costs because rail systems are so hideously expensive.
     But the DART experience clearly disproves their argument.  DART had every advantage to develop a successful rail system.  It began early when federal grants were paying a higher percentage of the costs.  Its service area is smaller and considerably denser than METRO’s.  It had local support to incur billions in debt to build out the system.  And yet, its ridership has only marginally improved since it began its massive investment of taxpayer funds and it has actually begun to decline in the last few years.
     Interestingly, transit ridership nationally also stalled out about a decade ago and has also declined for the last three years, very similar to the DART experience.
     Notwithstanding the massive investment in rail over the last two decades made throughout the country, only about 4% of the total daily trips made by Americans are on any form of transit, and less than 2% on rail.  Bus ridership has been unchanged for the last two decades.  It would be interesting, but ultimately impossible to know how bus ridership might have improved if even a fraction of the billions spent on rail had instead been invested in improving the bus service.
     With the advent of disruptive transportation technologies like ride sharing, self-driving cars and the electrification of transportation power systems, any further investment in this highly inflexible technology would be folly.  We need to be building a transportation system for the next century, not the last one.
    But there is something akin to a religious belief in rail that I have never been able to understand.  The late, great Bob Lanier best summarized it:
"First, rail's supporters say 'It's cheaper.' When you show it costs more, they say, 'It's faster.' When you show it's slower, they say, 'It serves more riders.' When you show there are fewer riders, they say, 'It brings economic development. When you show no economic development, they say, 'It helps the image.' When you say you don't want to spend that much money on image, they say, 'It will solve the pollution problem. When you show it won't help pollution, they say, finally, 'It will take time. You'll see.'"
     Dallas’ multi-billion dollar experiment with rail has proved Mayor Bob right.  Sorry to all my friends that continue to believe rail is the solution to our mobility problems, but time is up.
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Fact Check before Forwarding/Sharing

     Like most of you, I regularly get emails and social media posts from friends forwarding a “news story” that turn out not to be news at all.  Two, in particular, stand out.
     Just before the election I received an email forwarding a story that then Chairman of the Joint Chiefs of Staff General Joe Dunford had resigned and written a letter to President Obama essentially accusing the President of treason.  There was just one problem.  General Dunford had not resigned and had not sent any letter.
     The second was an email forwarding a supposed story from People magazine claiming that Donald Trump in a 1998 interview had said the Republican voters were stupid and he could lie to them and they would “eat it up.”  But same problem, the interview never took place.
     Both of my friends who sent the emails are intelligent, well-read, well-intentioned individuals.  But in both cases, the emails they received fit nicely into their predisposed beliefs about Obama and Trump.  It is human nature for us to embrace validations of what we believe and to discredit facts that are at odds with our beliefs.
     Before cable news and the internet, we had a more balanced national conversation.  We were all exposed to a more or less similar set of facts from which to inform our beliefs.  But today, information outlets are highly compartmentalized.  Our outlet selections and targeting by advocacy groups make it more likely we will only hear “news” that reinforces what we already believe to be true.
     Of course, the pursuit of truth requires exactly the opposite.  Science has taught us that we validate theories by testing them objectively and actively looking for data that contradicts the theory.
    I was skeptical of both of these emails and so I ran them through www.snopes.com.  Within a few seconds, I had determined that both were hoaxes.  If you are not familiar with Snopes, it is a website devoted to debunking fake internet and email stories.  There are several other sites that perform similar research such as www.FactCheck.orgwww.TruthorFiction.com, and www.Politifact.com.
     I “replied to all” to both emails, politely pointing out that each of the stories had been debunked.  I only received two emails in reply, one from each instance.  Both asked me to never email them again!
     Here is my suggestion.  If you receive an email of see a social media post that you are inclined to share with contacts, before you hit “forward” or “share”, run the story through Snopes or one of the other fact checking website.  I think you maybe surprised how often the “news” you receive in your inbox or on your social platforms are complete hoaxes, or at least, hugely taken out of context.  Let’s all endeavor not be part of this problem.
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