Marking Social Security’s Open Group Liability to Market
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Abstract
This paper marks Social Security’s open group liability to market taking into account the riskiness of its aggregate benefit payments and tax receipts. The open group liability references the present value of the system’s net cash flow from now through the indefinite future. We treat the growth rates of the system’s aggregate benefits and taxes as implicit securities that are spanned by the returns on marketed securities. Our pricing of Social Security’s infinite horizon net liability builds on prior independent work by Blocker, Kotlikoff, and Ross (2009) and Geanakoplos and Zeldes (2009). Our results, which we view as preliminary, suggest that the market value of Social Security’s open group liability may be many times larger than the $15.1 trillion stated in the Trustees’ Report. Unlike Blocker, Kotlikoff, and Ross (2009), this discrepancy between our financial valuation and Social Security’s does not reflect differences in the value assumed for the safe rate of return. To control for this factor, we simply follow Social Security (and Geanakoplos, et. al., 2009) in assuming a 2.9 percent safe real rate of discount. We also find that the precise marketed assets used to price future Social Security benefits and taxes can significantly alter the estimate of the open group liability.
Key Findings
- We find that the market value of Social Security’s open group liability may be many times larger than the $15.1 trillion stated in the Trustees’ 2009 Report.
- The open group liability refers to what it will cost to keep the system operating as is indefinitely.
- We treat the growth rates of benefits and contributions as returns from a hypothetical security.
- We achieve mixed results — some show the unfunded liability to be much larger than the Trustees’ Report, while some scenarios feature positive numbers.
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Paper ID
WP 2009-217Publication Type
Working Paper