Marking Social Security’s Open Group Liability to Market

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.