To follow up on Alan’s previous Social Security post: one thing that jumped out at me from the New York Times Magazinearticle on Social Security is how much our view of the long-term financial health of the program is dependent on shaky assumptions about future demographic and economic trends: immigration rates, wage increases, and the like.
Chief among the uncertainties is how long future seniors will live—which, of course, determines how long Social Security payments will continue after they retire. And, obviously, nobody can predict how future medical advances and social conditions will affect lifespans, especially towards the end of life.
Take, for example, Washington state. As of 2002, a Washington woman who survived to age 65 can expect to live to 85; men, to just over 82. And as the graph below shows, lifespan at age 65 has increased for both sexes over the last two decades, but the pace of increase has been twice as fast for men as for women.
Now, with lifespans, as with stocks, past performance is no guarantee of future results. A simple exercise demonstrates the point: if you simply extend the above trendlines to 2050 (about the time that the Social Security trust fund may run dry, under some assumptions), men who survive to age 65 will outlive women. That simply seems implausible, since it’s essentially unheard of today. Which makes it a pretty sure bet that past performance won’t continue indefinitely—either men’s gains will slacken, or women’s gains will accelerate (as they have in Japan).
What this all means is that the demographers and actuaries whose job it is to peer into the future are forced, more or less, to guess, not just about life expectancy but about a host of other trends. The guesses may be well-informed, but they’re still just guesses. But even tiny gaps between the guess and reality can add up to a big difference over time—big enough, for example, to be able to claim that a reasonably solvent program is actually on the verge of bankruptcy.