When Strawmen Collide: Biggs v Lind

by Bruce Webb

Michael Lind wrote an interesting article for Salon that was picked up by the New America Foundation under the snappy title Let’s Cut Social Security to Pay for Banker Bailouts!. In it he outlines arguments that will be familiar to followers of Angry Bear’s Social Security coverage, notably pointing out the ‘message’ campaign outlined by Stuart Butler and Peter Germanis in 1983 with the publication of ‘Social Security Reform: Achieving a ‘Leninist’ Strategy’, something discussed here last May. What does Lenin have to do with it? Well this caused Andrew Biggs to strike back at what Biggs calls “lefty claptrap” in his own article The Strawmen of Social Security. In the course of this he refers us to this SSA Actuarial Note with its own snappy title INTERNAL REAL RATES OF RETURN UNDER THE OASDI PROGRAM FOR HYPOTHETICAL WORKERS He summarizes it as follows:

First, fairness: Social Security’s treatment of different generations of Americans is declining, such that those who retire in the near future will receive much higher benefits relative to their taxes than those who retire later. For instance, this study from the Social Security Administration shows that a typical couple retiring today will receive around a 2.3 percent rate of return from Social Security, while a typical couple retiring in 2050 will receive around a 1.7 percent return. Compounded over a full career of paying taxes, these differences amount to a lot. By acting today, we can lower returns a little for near-retirees so we do not need to hit future retirees as hard.

Is that a fair summary of the Note? Well no, that is in fact a strawman so flimsy that you don’t know if it will burn up or simply blow away. For example what the hell does ‘typical’ mean in context?

To answer that we need to look at the data tables. Reproduced below the fold.

So where is our typical couple? Well you won’t find them, in fact the whole point of the study was to see how Social Security performs for all couples across generations. And it turns out that depends a lot on where that couple is situated. For example for our hypothetical couple retiring today if either husband or wife have incomes classified as ‘low’ or ‘very’ low their Internal Real Rate of return ranges from 3.0 to 4.6%. In order to get a return at Biggs’ level you would have to have a combination of ‘medium’ and ‘medium’. Now while it is possible that medium + medium = median = mean and so ‘typical’ is how Biggs read the situation. But aan examination of Table A shows that ‘medium’ is defined as $38,651 meaning a household wage income of $77 thousand which is significantly above median household income. For Biggs it seems that ‘typical’ means comfortably middle class (and yes, yes, yes I know people say you can’t live in LA or NY on less than $300,000, that doesn’t make them ‘typical’).

So when I look at these tables I take away a very different lesson. Social Security has been a really good deal for those making under the median and a great deal for those nearer the bottom. On the other hand if you or your spouse or both have ‘high’ incomes defined as $62 thousand a year it is a only kinda good deal. If you restrict yourself to this narrow measure. But as the authors of the actual note tell us (bolding mine):

Because the Social Security program has operated on a largely pay-as-you-go (PAYGO) basis, the level of contributions of each generation of workers is not directly related to the benefits they will receive. Under a PAYGO plan, benefits are not based on the accumulation of individual contributions, as in a defined contribution plan, nor are annual contributions determined based on scheduled future benefits of current workers and beneficiaries, as in an advance-funded defined benefit plan.
Rather, the combined amount of contributions from workers and employers needed to fund the system is largely determined by the total amount of benefits to be paid for any year. Thus, internal rates of return for a PAYGO-financed benefit program are only theoretical indicators of the apparent value for contributions on an individual or cohort basis. On this
basis, with administrative expenses of less than 1 percent of total program cost, the real value of OASDI benefits is extraordinarily high.
Internal rate of return does not reflect the full value of insurance in reducing the risk for extreme outcomes, such as death or disability at very young ages or survival to very old ages. In addition, calculations of the internal rate of return from Social Security benefits are not fully adequate for making comparisons with private-sector plans, since many features of Social Security benefits are not typically available in private-sector plans. Examples include guaranteed cost-of-living adjustments
based on the Consumer Price Index, and benefits for life in the event of disability. However, internal rates of return are of value for exploring the relative value of benefits provided across generations and types of workers.

Oh and that future ‘typical’ couple retiring in 2050 who are only getting 1.7% per Biggs? Turns out that includes only those couples whose incomes BOTH score as ‘high’. If you both score ‘very low’? The new retired couple of today? 4.61%. The trampled on retirees of 2050? 4.54%. Man the intergenerational inequity just screams out here. Not.

So that funny smell is some combination of freshly picked cherries and straw burning up.