by Dale Coberly
CHUCK BLAHOUS FINDS THE ANSWER FOR SOCIAL SECURITY AND LOSES IT.
Charles Blahous is one of the politically appointed Trustees for Social Security. He has written “A Guide To The 2013 Social Security Trustees Report” at e21 Economic Policies for the 21st Century http://www.economics21.org/commentary/guide-2013-social-security-trustees-report .
Blahous tells us
“Social Security faces a large and increasingly immediate financing shortfall necessitating prompt legislative corrections.”
This is arguably true, but a cautious reader will recognize that “large” and “immediate” and “prompt” may be subject to differing opinions and lead to unnecessary hysteria.
From that point Blahous descends into a misleading presentation of Social Security’s finances.
First he offers a graph showing the projected decline in the number of workers per beneficiary. The graph is truncated to give a more alarming picture than the facts warrant. Moreover Blahous fails to note that the current tax rate has been until recently more than enough to pay for current benefits, so the “3.5 workers per beneficiary” in 2000 gives no idea what the ratio of workers to beneficiaries needs to be for the present tax rate to be sufficient. It turns out that the 2012 ratio of about 2.8 taxpayers per beneficiary very closely provides enough to pay 2012 benefits at the current tax rate. Comparing this ratio to the projected 2035 to 2040 ratio of about 2.1 workers per beneficiary suggests that a tax increase of about 33% would be sufficient to cover the benefit expenses of those years and after (note that the line flattens after 2035). But this is a 33% increase of a 6% tax. So a 2% increase in the tax will pay for expected future benefits at the expected ratio of workers to beneficiaries. Blahous fails to note this. Moreover, we have 20 years before we need to reach this 2% increase. The graph shows the needed increase will be gradual over that time. A one tenth of one percent increase each year reaches the needed 2% in 20 years without any shortfall along the way. Again, Blahous fails to note this.
Second, Blahous provides us with a graph showing the Per Capita Payments Rising Under Current Benefit Formula. He shows benefits rising from about 20,000 dollars per year today to about $45,000 in year 2090. He does not bother to tell us that the reason benefits are projected to rise under the present formula is because benefits are tied to wages, and wages are expected to more than double over the same time.
Please note that this doubling of wages is working at the same time that the above discussed 2% increase in the tax is taking place. This means that ultimately, while the payroll tax rate has increased, the worker will have twice as much money in his pocket AFTER paying the tax. Moreover he will get the money back to pay for his longer retirement at a benefit rate that will also be about twice today’s in real value . (The reason the worker to retiree ratio discussed above is changing is because retirees are living longer.) The reason “per capita payments are rising” is because we are getting richer and will want to keep the standard of living we helped create after we retire.
In other words, the increase in the “cost” of Social Security represents a quite reasonable decision on the part of workers (future retirees) to put aside a little more of their larger paycheck to insure a better retirement. Most financial planners would say this was the smart thing to do.
And finally, third, Blahous descends into blatant misdirection:
“And third, the program is financed on a pay-as-you-go basis, meaning that each generation’s benefits are paid for the most part from the tax contributions of the following generation, rather than saving those contributions to finance future payments. Such a financing method is very sensitive to changes in the ratio of taxpaying workers to recipient beneficiaries.”
Blahous fails to explain how workers’ contributions can be “saved,” or how “saving” differs from pay as you go. The fact is that financially there is no difference. Your contributions are saved the same way a bank saves your savings: by writing the numbers down in a book and using the money to fund other people’s needs.
Pay as you go is what enables workers to save their own money safe from inflation and market losses. The next generation is no more paying for the older generation’s retirement than the next generation would be paying for your retirement if you saved the money in a bank and then withdrew it after forty years. The difference between the bank and Social Security is that “pay as you go” guarantees the money will be there, adjusted for inflation and growth in the economy. A bank, or stock, cannot make that guarantee, but even a bank, or stock, has to get the money it eventually pays you from “the current” generation. There is no way around that. But people who think “money” is something you can keep in a drawer…. indeed, MUST keep in a drawer… have trouble understanding this.
Blahous is confusing Social Security with a private savings or investment plan. Either because he doesn’t know any better, or because he is sure you won’t:
“…finally, even with our current tax rates, benefit schedules and demographics, the system would be sustainable if individuals’ tax contributions were saved to finance their own future retirements, rather than tapped to pay benefits previously promised to older generations.”
If I put my money in a “retirement plan” there is no reason that the “plan” has to further invest that money in stocks and bonds in order to be able to pay my money back to me, plus interest. All it needs to do is be able to attract new customers who want the same safe place to save money for retirement. Because retirement costs are going up with inflation and the real interest paid to beneficiaries, the plan would need to charge more each year.. a rate that would correspond to the increasing incomes of the new savers, which is a function of inflation and the growth in the economy. This is not a Ponzi scheme. The finances are transparent. The reason it would not work for a private business is that the private business could not guarantee it would always have enough customers to pay the savers back plus interest. The government can guarantee that it will.
You may not like the “mandatory” aspect of this. But that is different from claiming that there is something “wrong” with the financing that portends looming catastrophe. Most people “don’t like taxes.” But it’s also true that most people “don’t save enough,” and private “investments” have a way of going bad for most people. By the age of sixty or so most people understand this better than they did when they were young.
Blahous may not like “government” and he may not like “mandatory” savings. But he is being disingenuous pretending that there is something wrong with SS financing that would be magically cured by private saving.
Having got this far, it was a surprise to me that suddenly Blahous gets it right:
“We are running out of time to fix Social Security’s finances without abandoning its historical financing structure. Continuing Social Security’s historical “earned benefit” construct and self-financing structure is only possible if lawmakers are willing to assess payroll taxes at levels sufficient to finance scheduled benefits. If they aren’t willing to do that then another financing mechanism will need to be found, such as doing away with the program’s contribution-benefit link altogether and directly subsidizing the program with income taxes from the general fund.”
This is exactly true. But what Blahous does not say, and may not realize, is that the cost of assessing “payroll taxes at levels sufficient to finance scheduled benefits” is so tiny no one would notice it. One tenth of one percent increase in the tax for each the worker and the employer would solve the “actuarial shortfall” essentially forever.
That’s less than eighty cents per week per year over about the next twenty years, while wages will be rising more than eight dollars per week per year. The tax increase needed essentially stops at that point while wages should keep rising.
“We are already at the point where it is open to serious question whether Congress and the President will prove willing to balance the program’s books without turning to such changes. If and when such changes occur, Social Security will no longer be quite the same program it has been; instead of one in which it is perceived that workers in the aggregate have paid for their benefits, it would more likely become a means-tested program, as are other general revenue-financed programs such as welfare and parts of Medicare.”
This is exactly correct. And it is the mistake the “progressive” “defenders of Social Security” are making. Instead of teaching the workers that they can continue to pay for their own Social Security for a cost too small to notice, they are calling for a “scrap the cap” tax on the rich. This would turn SS into welfare as we knew it. Even if everyone keeps calling it Social Security, it won’t be the successful program it has been for over seventy years: A payment you get that you paid for.
But instead of realizing this, much less seizing it, Blahous goes on to another misleading claim:
“The Trustees’ Report explains how the problem will essentially become insoluble if lawmakers wait until 2033 draws near to address it. By 2033, scheduled benefits could only be paid by raising tax revenues by the equivalent of an increase in the current tax rate from 12.4% to 16.5% — an increase of nearly one-third in worker tax burdens. “
The “one third in worker tax burdens” is, again, one third of a six percent “tax”: money that they get back with interest in order to have something to live on when they are old.
That’s an extra 2%… eventually… to pay for about an extra five years of life expectancy without having to work for the boss until you knees and mind give out. And it comes while your wages are going up an extra 100%.
Blahous gets apocalyptic:
“Avoiding a tax increase would require cutting costs by the equivalent of a 23% across-the-board benefit reduction – one that would apply regardless of the beneficiary’s income level or whether she had been already been dependent on benefits for decades. If alternatively Congress does not want to slash benefits for everyone already receiving them, even 100% elimination of benefits for those newly eligible in 2033 would be insufficient to close that year’s shortfall. In sum, by 2033 the game is basically over. The window of opportunity to deal realistically with Social Security finances is actually in the process of closing now.”
Part of this is true: avoiding the 2% tax increase (he calls it “one third”) would require a 23% cut in benefits. Unlike the tax increase, this is a real cut of about a quarter of benefits. For someone living on Social Security that would mean not having enough to eat or pay rent, much less pay for all the new “deductibles” being called for to “save Medicare.”
But even waiting until 2033 would not mean “the game is basically over.” We could raise the tax 2% all at once at that time, and the workers would never notice it except for all the shouting by people like the Petersons convincing them that the world was coming to an end. We restored the payroll tax from the “tax holiday” by raising it 2% at once… and no one noticed except the politicians telling us it would crash the economy, and plunge the poor workers into poverty. It didn’t. And it won’t.
[Blahous talks quite a bit about “DI”, Social Security disability insurance, but apparently fails to realize that most projections combine the old age and survivors program with the disability program in forecasting The Death of the Trust Fund.
This is because the most likely solution will be for DI to “borrow” from OASI.
I think it would be wiser to simply increase the DI tax right now. It would amount to a one time increase of three tenths of one percent. DI’s financial problems are smaller even than those of Social Security proper, but Blahous’s friends think that the earlier projected exhaustion of the DI Trust Fund helps them make Social Security look even shakier. So he would be glad for you to shift your attention to that… without of course realizing that it too can be fixed for a long time just by raising it’s tax a dollar or two per week at once. And not again for another fifty years. They don’t want you to be thinking about why you need Social Security and how cheap it would be to fix it if we do the unheard of thing and just pay for it. Ourselves. Just like mom and dad did.