guest post by coberly
WILL YOU STILL FEED ME IN 2041?
I use rounded numbers below. The point will not change if someone wants to use the precise numbers.
It has been argued that by the time the Trust Fund runs out of money, Social Security can continue to pay benefits without a tax raise because even the reduced benefits would be more in “real value” than today’s: “Projected benefits will be 40% higher in real value; after a 25% cut caused by the projected shortfall, they would still be more in real value than today’s.” Let us see what this means.
Today the average income is 3000 dollars per month. . In 2040 average income is predicted to be about 4300 dollars per month… a 40% increase in real income.
Current Social Security tax is 6% (rounded remember?) for about 180 dollars per month. In 2040 this would be 6% of 4300, or about 260 dollars without a tax raise.
Current Social Security benefits are targeted to replace 40% of lifetime real average income. So an “average” worker today would expect to get 40% of 3000, or 1200 per month.
In 2040, if nothing changed, he would expect to get 40% of 4300, or 1720 per month. But something will have changed: that worker in 2040 is expected to live about 33% longer than the worker today… from fifteen years in retirement to twenty. In order to make his contribution to Social Security last for his whole expected retirement, the monthly benefit has to be cut by 25% to 1290.
Aha, they say, 1290 is more than 1200, so the retired worker in 2040 is “better off” than the retired worker today. So there is no need to raise the tax. And we all know that how well off a person is has nothing to do with the standards of the people around him.
But consider, if we were to raise the tax by 2% to about 8%, or a tax increase of about 86 dollars per month, we would also increase the money available for benefits by 33%, raising that 1290 back up to 1720 per month. So that is the trade off, give up 86 dollars a month when you are making 4300, or give up 430 per month when you are retired, and try to live on 1290 when you could have had 1720.
Now those were for the “average” worker. For a low income worker, consider:
Let our low income worker go from 7 dollars per hour today to about 10 dollars per hour in 2040, or say from 14000 per year to 20,000, or from 1200 per month to 1700 per month. Today that low income worker pays 72 dollars per month payroll tax. In 2040 they would pay 100 dollars per month with no change in the tax rate.
Now the expected retirement benefit for that low income worker would be about 600 plus .3 times (1200 – 600) or 780 dollars per month today, or about 930 dollars per month in 2040 (600 plus .3 times (1700 minus 600)). Notice this is not the 40% increase expected, because the payroll benefit rate is progressive and our poor person has gone from a 65% replacement rate to a 54% replacement rate. And since our lower income worker is expected to live about 33% longer than today, his benefit would have to be cut 25% per month in order to stretch to cover his life expectancy. So he could only get about 700 per month in benefits (75% of 930). This is in fact less in real value than the lower income worker gets today.
Okay, well, ahem, lets rejigger the benefit formula and pretend that the worker will get that 40% real increase and go from a 780 per month benefit today to a 1092 benefit before we adjust for life expectancy by cutting it 25% to 819 dollars per month… more in real value than the worker today. (I hope you have noticed the increase in real value of pensions is a function of the increase in real value of wages.)
But wait, he could have kept the 1092 just by paying an extra 2% tax. That would be an extra 34 dollars per month or about 8 dollars per week. So we see that the low income worker can save himself 8 dollars per week at the cost of 273 dollars per month when he is retired, lowering his retirement income from 1092 a month to 819 a month.
And we know there is no way that a lower income person could ever get another 8 dollars per week, by a raise, say, of 20 cents per hour, or an extra 8 dollars in food stamps.. or get by on 1666 per month when he was used to living on 1200.
So that, essentially, is the trade off. In order to avoid noticing that we have come around to agreeing with the bad guys that Social Security should be indexed to the CPI, we can hang on to our notions of diverting 300 dollars a month from the elderly poor and use the money to pay for universal health care… because, of course there is no other way to pay for universal health care.
Only we better not tell that working poor person that we are not going to even give him the chance to decide if he would rather give up 8 dollars a week today in order to have 273 dollars more per month when he is old and trying to live on 800 dollars a month. After all, we have our principles to think of.