Money and childhood understandings

by coberly

A reader at Economist Mom offered the following story on her daughter wants a trust fund post.

“… this post reminded me of an exchange I had with our five-year-old. I fronted him $10 for something he wanted when he forgot his wallet. When it was time to pay his allowance I told him he actually owed me money, so he got down his “monkey bank” and I started taking coins. He looked horrified, then he broke into tears”

This story broke my heart because I understand the way the five year old felt, and I was once as stupid as the parent. Five year olds cannot understand “paying your bills” and “robbing my piggy bank” feels like a betrayal of trust.

Grownups should understand the relationship between “their money” and “their bills.” But probably most of them are not much better at it than that five year old. Most of the horrified sounds coming from the Entitlements “debate,” are due to a complete failure of people to understand that they need to spend their own money in order to pay for their own food and medical care after they are too old to work. When you collect their payroll tax they cry. Actually most people don’t notice until someone tells them that the tax is going to go up fifty percent! or a hundred percent! or whatever misleading number the hystericizer thinks he can get away with today.

Let’s look at the most alarming number: The Trustees say that by 2085, Social Security and Medicare will cost 30% of payroll… this is greater than your entire tax bill today, it is a hundred percent increase in “the” tax. It is a crushing burden on “the young.” And of course, “We’re all going to die.” I forgot all the exclamation marks, so here they are: !!!!!

One thing that always bothers me is that when I point out the worker will only “see” half of that 30%, someone always tells me that “economists agree” that the other half is “really” the employees money.
Well, of course it is, and you know better than I do if you would ever see that money if the government didn’t force your boss to pay it to you (to you? to you!), but I know the bosses think of it as “their” money when there are no workers listening.

But here is something: If the other half is really your money, then your income is not 100% of your paycheck before deductions. It is 115%. The extra 15% is the boss’s contribution to your “entitlements.”
But then, wait a minute, if I am paying 30% of my paycheck before deductions, I am actually paying 30% of 115%, or 26% of my “income.” And here I have to realize that no one will understand what I just said.

Suppose your before taxes pay is 1000. you pay 150 dollars in payroll tax and your boss pays another 115 dollars. But he says that is “really” your money. So your “real” pay was “really” 1150 dollars. And your “real” tax was “really” 300 dollars. 300/1150 = 26%. Your “real” tax is “really” 26%

I don’t know if this helps you feel better. I should stop and let you rest, but below the fold, I’ll pick up on the five year old and the piggybank story.
This one written by coberly

There you are in 2085… of course you are going to get there. And everything is going to be just the same as it is today. Except that you will be paying this huge “entitlement” tax. If you will let me call it 15% I will agree to remember it’s really 30% and the boss’s half is “really” your money. But it’s easier to keep track of if we just talk about the numbers printed on your paycheck. And leave the “what if” questions to those economists.

What the hystericizers always leave out is that the Trustees… the very people who are saying that Social Security and Medicare will be 30% of payroll … also say that incomes will be going up 1.1% per year… this is real income… income to employees, leaving the rest of the 1.7% of real productivity growth to find its way to your boss. (oh! that’s where the boss’s share comes from.) But lets see, 1.1% compounded for the next 77 years is 232%. Your wages will be 2 and one third times as big as they are today.

And now, gentle reader, lets stop talking in percents because they are confusing to most people.

Average income today is about 700 dollars per week. 232% of 700 dollars is $1,624 dollars per week. That’ what an average worker will be making in real dollars in 2085. Out of that he will be paying 244 dollars for his Social Security and Medicare, leaving him 1380 for his other bills, including other taxes. How’s he doing compared to today? Well today he pays about 7 and a half percent for Social Security and Medicare… 700 time 0.075 equals 53 dollars a week. leaving him $647 dollars per week for his other bills, including other taxes. That means that in 2085 he will have 1380 – 647 = 733 dollars per week after paying payroll taxes MORE than he has today. Or about twice as much.

Well, so what? Why should he settle for 205% when he is making 232% more than he was 77 years ago? Well, because the extra money is going into a piggy bank to pay for his food and shelter and clothing and medical care after he retires… in case he wants to, or has to, retire when he is 65 instead of working until he is ready for the feeding tube.

Wait. Why are you crying?