by Dale Coberly
Fareed Zakaria on Social Security
Fareed Hearts Pete Peterson
Disses your mom
Fareed Zakaria wrote an essay for Time, The Baby Boom and Financial Doom. Dean Baker responded to Zakaria with Fareed Zakaria is unhappy that the American left chooses arithmetic over Peter Peterson. Baker makes the point that the increase in the number of people over age sixty five has always been accompanied by an increase in productivity that makes everyone richer despite the costs of feeding the old.
Baker is far too kind to Zakaria. Zakaria’s article is a compendium of lies designed to fool people in order to lead them to their harm. The lies are not original with Zakaria but are the same lies we have been hearing from Peter Peterson sponsored think tank “non partisan expert” liars for years.
I hope that by taking a little harder look at those lies people will learn how not to be fooled by them and others like them. [Note: I have been told that I need to find another word for "liars." I understand that people are put off by it, but they need to understand that is exactly what we are dealing with here: lies and liars: words designed to deceive you by people who mean you harm. It is almost possible to believe that Zakaria doesn't know he is lying, but has merely been fooled by Peterson. But the selection of "facts" presented by Zakaria suggests he knows exactly what he is doing.]
Here is what Zakaria says: (under the fold)
The facts are hard to dispute. In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays.
Well, the facts may be hard to dispute, but they don’t have anything to do with Social Security, and Social Security doesn’t have anything to do with the deficit.
The short answer to Zakaria’s Baby Boom and Financial doom scenario could be put something like this:
Social Security is paid for by the people who will get the benefits. It is their own money. It has nothing to do with the federal budget. The population numbers that Zakaria offers sound scary because they are meant to sound scary, but the fact remains that the workers can continue to pay for their own Social Security by simply raising their own payroll tax by what amounts to forty cents per week each year. This is an “undisputable fact” that can be clearly demonstrated. And it takes into account all the baby boomers, and the increasing life expectancy, and the poor growth in wages the Trustees project over the next 75 years. It also takes care of the “infinite horizon” which the Big Liars like to trot out when the numbers for the next seventy five years don’t sound scary enough.
In particular, the Baby Boomers have already paid for their retirement. That is the Trust Fund you hear about. It’s real money, paid by the Boomers. It needs to be paid back to them for their retirement. Paying back money that you owe does not increase your debt; it decreases it. The Trust Fund is not “going broke.” It is paying for the Boomer retirement, as it was created to do. After the Boomers have been paid, the Trust Fund will return to a normal reserve fund and Social Security will go back to “pay as you go” as it was designed.
An average worker today might be making, say 50,000 a year, and paying about 3,000 a year for his Social Security, leaving him 47,000 for other uses, including other taxes. His boss contributes another 3,000. And because there are today about three workers for each retiree, those three workers contribute a total of about 18,000 dollars per year, which is about what the average Social Security benefit is.
In another forty years or so, the average worker will be making twice what the average worker today is making… so, say 100,000 dollars (inflation adjusted). If nothing else changed, he would pay about 6000 a year in payroll tax, leaving him 94 thousand dollars for other uses, and his boss would contribute another six thousand, making 12000. By then there might be only two workers per retiree, so there would be 24000 available for that retiree’s Social Security benefit. But 24 thousand a year might feel like poverty in a world where the average wage is 100k. So those workers… who know they will soon become retirees themselves … might agree to pay 8000 each per year, leaving them 92,000 per year for other uses. Their bosses would contribute another 8000 (don’t worry about the poor boss: “most economists agree” that this is “really” the workers money). So 16 thousand, times the two workers per retiree, results in a SS benefit of 32000 per year. Enough to live on in reasonable comfort. (Please note that with a real income of 92 thousand a year, those workers would have plenty of money to “invest in the market” to try to raise their standard of living in retirement. But the SS would be there “in case all else fails.”)
And that’s it. Please note that the poor worker staggering under his load of one retiree for every two workers has 45000 dollars more in his pocket after paying his payroll tax than he has today, and he can look forward to a retirement with 14,000 more dollars per year than today’s retiree. That is, in spite of the staggering load of only two workers per retiree, the future worker will be about twice as rich after paying his payroll tax, and will be able to look forward to being twice as rich in retirement.
It is hard for me to see the gloom in this picture, much less the doom. You may note that the workers could have decided to not raise their payroll tax, keeping the extra two thousand a year for “now,” at the cost of 8000 a year when they are retired. I think this would be a foolish choice, but if it were made honestly, with everyone knowing what they were doing, I would not have an objection.
But Zakaria and Peterson try to keep the people from knowing what their honest choices are.
“The facts are hard hard to dispute…”
but the facts Zakaria chooses are meant to deceive. Please note “the facts are hard to dispute” adds nothing to the argument but does tend to set up in the unwary reader’s mind… “no point arguing with this… these are the facts.” And it is pretty much the standard of excellence among “non partisan expert” liars to use “facts” which are “strictly true” but nevertheless designed to mislead.
“ In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65.”
Does this sound like it means something? It’s meant to. Something like, “Gosh, the population of old people is soaring. It’s going to cost me five times as much to pay for “the old” if we don’t do something.”
Well, maybe not. In 1900 people had large families because a lot of their kids died. This by itself would tend to make the ratio of under sixty five to over sixty five larger than it is today. Add to that the fact that people over 65 also tended to die “young” because they couldn’t work and ran out of money for food and shelter. But perhaps Zakaria doesn’t really want to return us to the dear old days of high infant mortality and a short but miserable old age. Maybe he’s only pointing at the problem… “how are we going to support all these old people.” But in fact he is not. He is pointing away from how we are going to support these old people: We could continue to support them the way we have since 1936 when Social Security was invented: Allow them to save enough of their own money in a way that is safe from inflation and bad days on the market.
And the fact is that unless we decide to kill off the old, we are STILL going to have to “support” them, even if there is no Social Security at all. When they cash in their stocks and bonds, it will be “the young” who are providing the cash.
“Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications.”
Well, maybe not. Workers pay for their own Social Security “off budget.” So Social Security has no budgetary implications whatsoever. Medicare has some “budgetary implications” because it was made partially “on budget” in what I think was a misguided attempt to make the rich pay for more of it. Ordinary workers could pay for all of their own expected medical care in retirement through Medicare, but eventually a serious effort would need to be made to bring down the cost of medical care or no one but the very rich will be able to afford it. This is a problem Zakaria… and Peterson… carefully do not address. Because Peterson’s agenda is ENTIRELY the destruction of Social Security, despite what he says.
Medicaid is entirely on budget; it is welfare. But again, unless you want to go back to high infant mortality and people dying in the streets, this is a problem we are going to have to address. And the way to address it is not to begin by cutting the programs and throwing sick people into the streets. It would help if you knew that the budget deficit has not been caused by medicare and medicaid, but by unreasonably high defense spending, wars of dubious value to America, and the massive fraud of “bankers and private equity billionaires” that brought down the economy in 2008. America can still afford to take care of “the least of these.” And for those who think money is the measure of all things, a case can be made that taking care of the sick now ultimately makes the country richer.
“ In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. “
This does not mean what it seems to mean. You might ask, if you knew to ask, why Zakaria leaves out “the fact” that today the ratio is three working Americans for every retiree. Perhaps that makes the jump to “two working Americans” seem less scary. Perhaps that might make you ask “how can only three of us support each retiree? The answer turn out to be that “we” are not supporting those retirees. They paid for their Social Security themselves. But this ratio of retirees to workers scare “fact” is a perennial, and I want to take some time with it. It will be a little bit (not much) mathematical, made harder by the fact that I don’t know how to draw pictures on line: you will have to use your imagination and draw them for yourself.
First there is the original version: “there were 40 workers per retiree in 1940” or “16 workers per retiree in 1950”… or some such.
This is a meaningless artifact of how the Social Security system was phased in. Imagine if you will a country which has recently experience hard times which have wiped out the life savings of everyone.
The people get together and decide to create an insurance pool to keep this from happening again. Imagine there are forty million people in the pool, one million aged 25, one million aged 26, one million aged 27, and so forth to one million aged 63 and one million aged 64. So far no one has retired so the ratio of workers to retirees is 40 million to zero. The next year the one million aged 64 turn 65 and retire. The one million aged 25 turn 26 and “move up a year” as does everyone else, with one million new workers who turn 25 and enter the insurance pool. So the number of workers remains the same while the number of retired people increases by one million. Now the ratio of workers to retirees is 40 million to one million… or 40 to 1.
Next year another million people retire and another million young workers enter the pool, and the ratio becomes 40 to 2, or 20 to 1. And the next year another million… etc, and the ratio becomes 40 to 3 or about 13 to 1. And so on.
First note in passing that those first cohorts who retire “only” paid their insurance premium for a year or two… far less than they will collect in benefits. But the people knew this when they designed the insurance pool. They reasoned that the first retirees were people who had lost the most savings in the depression; the first retirees had worked their whole lives paying taxes, supporting their own elders, and supporting the children who would be directly paying their benefits, as well as building the infrastructure that made it easier for those children to make money than it had been for their elders. They also noted that none of the later retirees.. people who paid the premium “tax” for a full forty years … would lose anything by the deal. They would collect the benefits they paid for in their turn… benefits that would equal what they paid in, plus an interest that takes care of inflation and about two percent real interest on top of that. Plus any “insurance” benefit they would collect if they died with dependents, got disabled, or just never made enough money to have saved enough for retirement.
But note that people don’t live forever, so by, say, year ten, the number of retired people increases by another million but decreases by say half a million who die that year. This means that the ratio of workers to retirees will not continue to decline forever. It will stabilize at some level that reflects the death rate of retirees, or what is the same thing, the average life expectancy of retirees.
If, say, the average death rate was 10% of each cohort of retirees each year, then after 10 years (in our model… real life is a little more complicated) the number of people who die each year is the same as the number of new retirees. This would also mean that the life expectancy… you have a 50-50 chance of living to this age… of new retirees would be five years.
Draw a picture. Make a bar graph: write ages on the bottom axis, and population on the vertical axis. For every age from 25 to 64 the bar is “one million” high. For every age after 65 the bar is shorter by 10% or 100 thousand. So you have 40 million workers, and 900 thousand plus 800 thousand plus 700 thousand… and so on … retirees. The sum of those retirees is four and a half million (9 plus one, 8 plus 2, 7 plus 3, 6 plus 4, and 5). So the ratio of workers to retirees is about 40 to 4 1/2) or about 9 to one. And this is a ratio that will not change over time unless there are changes in death rates, or birth rates, or immigration. Note that the life expectancy is about four and a half years. This means that each worker works for forty years and can expect to collect 4 and a half years of benefits. So, oddly, the ratio of workers to retirees is the same as the ratio of working years to retirement years for EACH retiree.
If the death rate was 5% per year for each cohort of retirees, the bar graphs would decline at a slower rate.. taking 20 years to reach zero at age 85, with the life expectancy now ten years. One million retirees still die each year, but now there are ten million of them alive at any one time . This makes the ratio of workers to retirees 40 to ten or 4 to one. It also makes the ratio of working years to retirement years 4 to one.
Now, finally, let us give those retirees a life expectancy of twenty years… half of them will die by age 85, and (most of) the rest of them by age 105. This would result in a population of retirees of twenty million… or a ratio of workers to retirees of 2 to 1. It also means that workers will work two years for every year they expect to be retired.
But wait, if they are going to be retired, they are going to have to buy groceries for those twenty years. Where are they going to get the money?
Well, they could save it from their earnings if we could solve the inflation problem for them in a way that didn’t expose them to the risk of ending up with nothing at all from investing in stocks that fail. And this is what Social Security does.
Note that they don’t need to save enough in protected savings to have the same income in retirement as they have while working. They could decide, say, that since the kids are grown and the mortgage paid, if they had to they could get by on, say, one third of their working wage. Since they will be working 40 years and expect to live 20 years, they would need to set aside about 16% of their wages to have enough. (16% times 40 equals 32% times 20.)
And if they put that money into an insurance pool, they can expect to keep collecting that 32% even if they live longer than 20 years. This is made possible by the money paid in by the people who don’t live as long as the twenty years.
But Zakaria doesn’t know that and Peterson doesn’t want you to know that.
You are making well over twice as much money as your grandparents made… and they struggled to save 10% of what they made to eke out a retirement that would only last about ten years. But you, twice as rich as they were, are being told you can’t be expected to save 16% of your wages to pay for a retirement that will last twice as long or maybe a lot longer?
Or maybe you can. But the only way to do this is through Social Security, and Peterson doesn’t want you to, because even though its YOUR money, its a “government” program. And that drives Peterson crazy. Literally insane.
But wait, it’s better than that. While you are paying your 16% every year, wages will be going up so that by the time you retire real wages will have about doubled. That means that the 16% workers are paying in each year will be worth twice as much as the 16% you paid in (this is a simplification). That means that instead of living on about 33% of what you were making while working, you will have about 50% or more. Because Social Security is insurance, the effective interest on your premium (payroll tax) is a lot higher if you were a low wage earner than if you were a high wage earner. The high wage earner is not hurt by this. He still gets a reasonable “return on investment” plus the insurance value of Social Security “in case” things had not turned out so well for him. The interest on your Social Security “investment” is not high. It depends on the growth in the economy, but it is always higher than inflation. And whatever happens, you will get “enough.” And that’s priceless.
The “facts are not in dispute.” And the facts are that all the scary language about the looming booming number of old folks “we” have to support… turns out to mean that we can easily afford to support OURSELVES out of our own savings, protected by Social Security, but not “paid for” by the government.”
And if you are going to live longer.. become one of those looming booming old people… you are going to have to find a way to pay for those extra years. Social Security provides a very secure way to pay for at least “enough.”
That is if you don’t let the Big Liars scare you into letting them “save” it.