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Is Warren Buffett right about Social Security?

September 22, 2017

Warren Buffett earned a dime or two on his investment and insurance underwriting decisions.  He thinks, decides and acts with an independent streak that often discounts prevailing opinions -- especially in manias and panics.

Back in late 2008, while confidence in the financial world was imploding amidst one of the worst financial and economic crises in U.S. history, Buffett penned a wonderful op-ed in The New York Times.  “Buy American. I Am” was the headline.  Buffett argued that too many people were losing their heads and discounting long-term value during the developing panic.

“… In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price. … Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.” …”

Dialing ahead about a decade, after a massive stock market rally, Buffett offered similarly optimistic views about America’s future in his annual shareholders letter. 

“Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. … The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. … For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did. …”

How does our federal government account for Social Security, in light of these observations?  What are the implications for “America’s kids?”

The federal government has a massive unfunded position in Social Security, but chooses not to report it as a liability on its balance sheet.  For justification, officials have stated that the government controls the law, and can change it any time. 

This may not sound so good for future Social Security benefits.  But while the federal government may not include the present value of its unfunded Social Security obligation on its balance sheet, it does provide it as part of another financial statement, the “Statements of Social Insurance.”

The net present value of future Social Security expenditures, net of the present value of Social Security (tax) revenues, comes to $14 trillion – negative, because the present value of future expenditures swamps the value of future revenues.

In reporting this amount, the Statement of Social Insurance breaks the present values down into three groups -- participants who have attained eligibility age (62), participants who have not attained eligibility age, and ‘future participants’ (the young and the unborn).

The massive $14 trillion shortfall in Social Security arrives despite a huge positive net present value contribution from future participants.  Which would seem to imply a negative position for the future participants themselves – and one that is sharply higher than what was reported just four years ago.

Does Mr. Buffett think these government actuarial calculations are wrong?  He certainly is expert on these types of calculations, given the successful insurance enterprises at the financial heart of the Berkshire enterprise.

Perhaps Mr. Buffett thinks US economic growth potential is so high, it will raise Social Security tax revenues higher than currently anticipated.  Or that the growth potential is so high, it will overwhelm the negative position period.

Or, perhaps, the young and the unborn really do have reason to be concerned.

What do you think?

 
 
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