Overfixing Social Security: the Importance of Honest Scoring
by Bruce Webb
And I could add honest definitions and honest framing to that.
In Dec 2005 three former staffers to Bill Clinton, John McCain and GW Bush respectively released the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan (9 pg PDF) or LMS. The authors proposed a package of changes to Social Security comprised of a 1.5% across the board payroll tax increase, an adjustment of the payroll gap back to the 90% level (it had drifted down to 84%) for the equivalent of another 1.0% of payroll, and adjustment in retirement age scored at 0.62% of payroll, and a change in indexing of initial benefits that scored at 2.08% of payroll for a total worker financed ‘fix’ of 5.2% of payroll. Interestingly enough in that year the total 75 year actuarial gap was scored at 1.92% of payroll, meaning that an immediate hike of that amount would deliver 100% of scheduled benefits over the 75 year window traditionally used to score Social Security solvency. So why a 5.2% solution to a problem scored 1.92%?
Well therein lies a tale, and an important one when we are faced with a so-called Deficits Commission whose leaders make it clear that Social Security is front and center, as workers and future retirees we owe it to ourselves to understand what problem ‘reformers’ are actually addressing. Because LMS at least is not focused on retirement security, not at least in the dollars and cents sense. Much more under the fold. (It wouldn’t hurt to bring along your tin-foil hat).
My first introduction to LMS came the summer before publication when co-author Prof. Andrew Samwick outlined it in a guest post at DeLong. In the course of discussion he casually claimed that the payroll gap was 3.5%. When in comments I asked “Whence 3.5% Samwick?” and pointed to the standard 1.92% 75 year number reported by the Trustees, both he, and by e-mail DeLong, informed me that he was referencing the gap projected over the Infinite Future Horizon and pointed to Table IV.B7 in the Report. Well sure enough alongside the $3.5 trillion dollar 75 year gap was a $10.5 trillion Infinite Future one.
Well I had been reading and comparing Trustees Reports since 1997 and never heard of such a thing, was I just a sloppy reader? Well no, it turns out this particular measure was relatively new having been introduced with the 2003 Report. Why was it so introduced? And why should we prefer it to the previously satisfactory 75 year window? Well a tale within a tale. From the Report, bolding mine
Consistent with practice since 1965, this report focuses on the 75-year period from 2003 to 2077 for the evaluation of the long-run financial status of the OASDI program on an open group basis (i.e., including both current and future participants). Table IV.B7 shows that the present value of open group unfunded obligations for the program over that period is $3.5 trillion. Some experts, however, have described the limitations of using a 75-year period. Overemphasis of summary measures (such as the actuarial balance and open group unfunded obligations) for the 75-year period can lead to incorrect perceptions and policy that fails to address sustainability.
In order to provide a fuller description of long-run unfunded obligations of the OASDI program, this section presents estimates of obligations that extend to the infinite horizon.
Hmm, “some experts”, “incorrect perceptions”, “address sustainability”. What the heck is sustainability in context? Why should workers care? Got a name for any of those experts or an explanation of why an alternate perception that focuses on outcomes within our own lifetime and not on retirement of people not yet born is somehow “incorrect”? Why so? Well I suggest that the answer is that retirement security for current workers is simply not the focus of these unnamed “experts”, and that somehow the Trustees in 2003 rather silently adopted that same focus for reasons unstated.
Returning to LMS. In the description of the authors we get the following, once again bolding mine:
Andrew Samwick is Professor of Economics and Director of the Nelson A. Rockefeller Center for Public Policy at Dartmouth College. From 2003 to 2004, he was Chief Economist on the staff of President Bush’s Council of Economic Advisers, where his responsibilities included Social Security.
Well “responsibilities” is a broad term, but you would expect that an implicit change in the focus in Social Security from 75 year solvency to Infinite Future ‘sustainable solvency’ might suggest the involvement of the CEA Chief Economist, and certainly Samwick qualified as an “expert”, but Prof Samwick has informed me personally that he was not in fact responsible for this particular change. And Andrew is a truly nice guy and is often described along with Bruce Bartlett as one of a small number of “honest conservative economists” by people like Brad DeLong, still it is interesting to me that the introduction to LMS starts off with these sentences:
The three of us – former aides to President Clinton, Senator McCain, and President Bush – did an experiment to see if we could develop a reform plan that we could all support.
The Liebman-MacGuineas-Samwick (LMS) plan demonstrates the types of compromises that can help policy makers from across the political spectrum agree on a Social Security reform plan. The plan achieves sustainable solvency through progressive changes to taxes and benefits, introduces mandatory personal accounts, and specifies important details that are often left unaddressed in other reform plans.
So while Prof. Samwick was maybe not the engineer here, he certainly was willing to board the train in time to draft LMS.
To which we return once again with an examination of Table 2 on page 7 along with this accompaning text:
Sustainable solvency is achieved – The Social Security actuaries find that actuarial balance would improve by 2.14 percent of taxable payroll over the 75-year projection horizon. The current Social Security deficit is 1.92 percent of payroll. Therefore, the changes in the plan would lead to a 0.22 surplus. Trust fund balances in the last year of the actuaries’ projection period are positive and increasing. (See http://www.ssa.gov/OACT/solvency/Liebman_20051117.pdf).
Okay we have a 1.92% payroll gap and a 2.14% solution, reasonable enough. But what was this about a 5.2% solution? Where is the extra 3.06%? Well 1.56% percent of it is accounted for in the Table, that amount gets diverted to a new PRA, Private Retirement Account, leaving us missing only 1.5%. And where is that? Well buried in the text on page 1, LMS proposes a mandatory deduction of 1.5% credited directly to the individuals PRA and so not properly speaking contributing to Actuarial Balance and so excluded from Table 2.
Well I have to cry foul here. We have a problem scored 1.92% and a solution that includes a package of tax increases totaling 2.5% between the across the board increase and the payroll cap increase, that is more than enough to deliver 100% of scheduled benefits if simply applied to the Trust Fund. But we ALSO have an additional package of benefit cuts totaling 2.7% which itself would have closed all of the gap and then some. On the other hand the individual comes out of this with a PRA funded with a total of 3.06% of his wage income over that period. Perhaps the end result is a BETTER than 100% of scheduled benefit? Well no, a look at Table 1 shows that a retired couple can expect to get a result from 85% (low earner one worker) to 109% (high earner two worker) compared to the baseline schedule.
Well but what about Ownership Society? You have your PRA, surely you can pass those assets onto your heirs? Well no. Not unless you die quickly.
All payments from PRAs would be paid as annuities, which would initially be required to be fixed, inflation-indexed annuities provided by the Social Security Administration as part of a beneficiary’s regular Social Security benefit. Full annuitization by age 68 is required, but beneficiaries can choose to spread annuitization between 62 and 68 if so desired. Married beneficiaries would be required to purchase joint and two-thirds survivor annuities. Annuities would be 10-year certain annuities to provide payouts to heirs of those who die soon after annuitization. The total balances in the accounts of the two spouses in a married couple would be split equally in the case of divorce.
So what would workers see out of LMS? Well a joint survivor fixed income, inflation indexed annuity paid out monthly by the Social Security system. Which sounds identical to what happens today, except the result in the case of LMS is exposed to the market, the results in Table 1, bad as they are, assume “Expected Yield on Mixed Portfolio”. Meaning it is kind of a crap-shoot.
Does LMS do some good things? Well yes, but none of them particularly rebound to the benefit of most workers and certainly not lower earning workers. Instead they are asked to chip in a combination of 1.5% in ‘contributions’ (they obviously would not be exposed to the cap increase) and take a guaranteed 2.7% cut in benefits hoping to make up around half of that through returns on their PRAs. How did the authors possibly proposed to sell that?
Time to put that Tin Foil Hat on. If you bury the 1.5% increase in the text and address all the other changes you have workers giving up 3.7%, or 2.7% for those earning under the old cap. Which is a lot to only partially solve a problem scored at 1.92% over 75 years. But not a lot to solve a problem scored at 3.5% over the Infinite Future. It is really the odd coincidence to have a new number pop up in the 2003 Report so useful for the purposes of selling a Privatization Plan that on one accounting requires just that amount of offset. How do you sell a plan that proposes a 5.2% solution to a problem scored 1.92%? Easy hide 1.5% of the solution and re-score the problem by 1.58%. Tin Foil Hat off.
As we confront the work of the new Deficit Commission it will be important for workers to firmly keep their own self-interest in mind and ask some serious questions. One what problem is the Commission actually addressing. Two how much of that problem if any was actually caused by Social Security. Three if the solution to that problem only calls for sacrifices by workers in the form of benefit cuts where is the equity. We know the way the problem will be framed, it will be expressed in dollar terms over the Infinite Future Horizon, it will be blamed on excessive Backward Transfers to previous generations, there will be attempts to blame Boomers for ruining the whole world with their greed. Because that is what the ‘reformers’ have been doing for years, trying to find some way to stick workers with the tab.
Make them honestly define the problem they are solving. Make sure they use honest scores. Don’t let them frame this as some problem created by workers when it is nothing of the sort. And above all don’t let them bill you 5% for a problem that in 2009 was scored 2.01%. Social Security faces a real actuarial gap much as it has in various years past. And given that it is a plan financed for workers by workers it is incumbent on workers to suggest a solution. Dale, Arne and I have proposed a solution that delivers 100% of the scheduled benefit via a phased in set of payroll tax increases. Other workers might decide that it would be better to combine a lower set of increases with some changes in indexing or retirement age, or throw in some increase in cap levels. All of which is legitimate enough. What isn’t legitimate is for some Commission to use some bait and switch tactic like LMS does.
you might add that the solution you and I and Arne have offered delivers 100% of the scheduled benefit without needing to predict the infinite future.
for a cost that amounts to a tax raise that averages 20 cents per week per year, if and only if it is actually needed at the time… real time, not science fiction time.
but don’t be too optimisitic. the “experts” are not interested in fixing Social Security at all… except in the sense that one gets his dog fixed. and the people don’t understand what’s happening to them
So here we have yet another excellent review of the “Social Security In Crisis” meme, exposing it for its deceptive content. Yesterday we had Matthew Skomarovsky providing us with an informative expose of the ideological tilt of Obama’s so-called bi-partisan Debt Commission. It certainly is bi-partisan in that it has representatives of both wings of the Corporatist/Elitist Party. Again we have a vivid display of the two parties playing their good guy/bad guy routine for the Rubes of America Party. That’s the one the rest of us seem to belong to.
So what to do? Get local. Write a letter to three people. Your two Senators and your Congressperson. Go a little beyond simply expressing your concern for the fix that is in store for the “fix” of the unbroken Social Security program. Include a link to at least one article, like the one Bruce has just provided us. Include a definitive statement of your intention to pay attention not just to how they vote, but also how they express themselves publicly during what debate may occur prior to any voting. They should begin taking the side of the hands off a working system agenda now. Explicitly state that you intend to multiply the value of your vote by influencing your relatives, friends and neighbors in regards to the positions taken and publicly expressed by the elected representatives. And lastly, actually share the content of that letter with everyone in your individual email account address book, and encourage all of those people to repeat the process. There has to be an out pouring of public sentiment and that sentiment has to be woded in a strong and forthright manner. “I won’t vote for you if you don’t take an early stand against the attempt to raid the Social Security program.”
The thing to keep your eye on is an attempt to use Trust Fund exhaustion and its subsequent theoretical 24% cut in benefits as a reason to move on Social Security and yet solutions that end up delivering less than that if and when.
For example LMS proposes a solution that gives low earner one income couples a 15% cut. Well we could just raise FICA by 1%, 0.5% employer/employee and return about that same result. Or throw a limited increase in the cap on top of that and close the whole gap.
We need every proposal to be as easily and openly scored as LMS, because give them credit, with a little careful reading you can figure out where they hid the pea, unlike plans like Ferrara which work on the Magic Underpants theory of Free Market as Free Lunch.
Senator John Kerry, Chairman of the Sub-Committee on Social Security
My Senator: http://kerry.senate.gov/contact/email.cfm
Come on Bruce–no politician wants to “fix” social security–they want the money that has been saved intentionally or unintentionally by the Boomers and used to hide the deficit spending. No one wants to have to increase the deficits by paying off the special treasuries. They will sell it as getting control over the unsustainable unfunded manadates and will combine social security with medicare and medicaid and the BFD to scare everyone they can. They will not increase payroll taxes, they will cut benefits through means testing and raising the retirement age. The single most important number you have at your finger tips is the unfunded $3.5 trillion over 75 years. That used to be a scary number, but when you have deficits of 1.5 trillion, the idea that you are short $46 billion a year is a lot more palatable.
One way or another, if one approach doesn’t work to turn SS into a welfare program, guys like Skomarovsky just come up with another one. It is patently absurd to compute ANYTHING on an “infinite horizon.” Why people swallow that little piece of science fiction boggles the mind. It’s like telling someone who would like to have children that s/he’d better come up with every nickle those offspring would cost for their whole lives in advance. Or, no kiddies for you!
This is America. It is NOT ok to tell people they have to pay FICA out of every paycheck for 45 or 50 years and then say, Oh, well, you saved money over $X bucks and have $Y bucks in 491k earnings, so we’ll whack your check commensurately for the good of the National Debt. You know, you’d just have to be crazy to think this is fair. I was was going to say not crazy, but a fool. But, this is a family blog. “Fool” is just too harsh a word.
Also watch the combining of SS with medicare/medicaid to make the numbers look worse and lump SS into a “comprehensive” fix. If you keep the discussion just to SS, in isolation, you have a winning argument. You will get killed if they start lumping other crap into the fray.
Also, never forget to remind them that redeeming the SS T-bills is a no brainer – you no, full faith and credit thing. Or will they go on record actually saying the T-bills are not good or there is no ‘trust fund’? That would be illuminating…
And don’t forget a camera. If its not on tape no one will beleive you (for lots of good reasons).
Islam will change
Well there are politicians, or at least policy people who want to fix Social Security, many have just been convinced it is impossible to do so via a straight fix on the tax side. Bush successfully made that one of the seven guiding principles of his CSSS commission and for whatever reason it stuck.
The problem for ‘reformers’ is that they cannot come right out and say “Yes we borrowed your money, and yes we promised it pay it back, but the truth is we are a bunch of liars and thieves” Political reality forces them to frame it in such a way that it looks like they were forced into it.
The key is that we have been given two sets of numbers by the Trustees. One set tells us the amount of benefit cuts needed for an immediate fix as opposed to the cut needed at Trust Fund exhaustion if nothing were done: 13.3% today vs 26% in 2037. The other set gives us the cost of a payroll tax fix: 2.01% today vs 3.86% in 2037. And of course the two can be mixed, matched and phased. What we need to make clear that any change that results in taxes increased or benefits cut to points outside that range will be considered outright theft, that would clearly be over-fixing SS.
Social Security has to date not added to the deficit, quite the opposite is true. On the other hand by the numbers the cost of financing the drawdown of the Trust Fund between 2026 and 2037 is significant. Which is why we have proposed to take the Trustees numbers at face value and have workers just take the tax hit, or at least be open to some combination of taxes and small adjustments to the formula. But we should not accept any ‘solution’ that would maintain the Trust Fund Ratio on their current upward bound trajectory. Under the NW plan that trajectory stops going up and then settles out into constant relatively flat state. And with a surprising result. Under the NW Plan only $133 billion of principal ever needs to be paid back over the life of the loan, and that only in a nine year period from 2026 to 2034, after that the Trust Fund reverts to an interest only loan, and since some of that comes in the form of a credit in the form of a Special Treasury a discounted interest free loan.
What could be fairer than that?
Column I represents General Fund transfers, if you adjust the numbers after 2038 for inflation you will see these are fleabites in relation to projected GDP in those years. And in any even only represent about 1-1.5% of program costs, which is not far from total Admin costs to start with. Workers are or should be happy to pay our way, but we don’t need to get screwed over by people who are blaming us for things that just are not our fault.
Skomarovksy is defending Social Security. I don’t think his article even touched on Infinite Future. Two different topics entirely.
it’s worth pointing out that 1% (of payroll) of the ultimate projected gap between social security tax and promised benefits is due to a hidden tax CUT… as employers shift compensation from wages to non taxed benefits.
they don’t tell you that half the projected social security deficit comes from a tax cut that benefits mostly the higher end employees.
well, they have been saying that for years and none of the elite reporters and columnists who cover them has called them on it.
you should also note that while the projected 24% cut in benefits means you would lose 240 dollars out of the thousand dollars the benefits average per month..
they will scream about a 33% rise in taxes… which is what they call a 2% rise in a 6% tax. This would cost the average worker making 3500 per month an extra 70 dollars per month. the reason in balances is first because the employer contribution doubles it. then the fact that tne number of months you will be retired will be less than half the number of months you worked allows them to double the monthly rate again.
so your choice… 70 bucks a month when you have 3500 or 2400 bucks a month when you only have 1000.
of course they don’t stop there. they will say that social security and medicare are “bigger than the rest of the federal budget.” this means you are supposed to be real sad that you pay more for your own groceries rent and medical care than you do for your share of beautiful new submarines for the war on terror.
ask your senator if he still sees social security as the modern answer to “honor your father and your mother.” i’d be interested to know.
You’re absolutely right to suggest that we go beyond our own elected officials. I’m including here the letter which I’ve sent to mine, copy to Kerry, and copies to all the people in my address book. If everyone here does the same thing (no, you don’t have to usemy template) it will help to initiate some popular activity. Remember to stress that every one receiving your copy should take similar action. The only leverage the average voter has is that elected people like to be re-elected. They have to know you want to hear them supporting the position against tampering destructively and that you’re not a rube on the issue. They have to kknow that you will vote against nay sayers and that you will influence your large circle of friends.
Dear Senator or Rep.,
I want you to know that your position on the sanctity of the Social
Security system as it is currently structured is of great importance
to me. I will be watching and listening very closely to what each
elected official from my geographic area has to say on this issue. To
be clear, there is no crisis in regards to the Social Security
system. The only crisis is the intent of some influential people to
dismantle that system by what ever means possible. Social Security is
one of the last retirement systems available to the vast majority of
workers that has not yet been eviscerated by economic turmoil or a
bankrupted employer. Projections for the future balances of the
Social Security system are little more than predictions that in the
past have not been shown to be very accurate. Even in the worst case
scenario of those projections it would be necessary to increase FICA
percentages by extremely small amounts to over come any such
imbalances that may occur. And those imbalances are only future
occurrences. Don’t agree to “fix” now what may only need minor
revision in the future.
I will vote against any candidate for office who does not fight the
effort to make changes to Social Security within the next five years.
I will be vocal to my friends and family to follow my lead in this
regard. There is no crisis in Social Security other than the crisis
of distortions regarding the system’s balances. Educate yourself in
regards to this issue by reading the extensive materials provided at
Thank you for your attention to this letter.
and it’s a lot more palatable when you realize it’s only unfunded because no one has told the people they can pay for it — their own retirement — themselves at a rate of increasing the payroll tax about 20 cents per week each year.
You’re confusing Bruce’s reference to the Skomarofsky article yesterday with the reference to the L-M-S paper above. Skomarosky’s article is more of an expose outing the financial ties of the so-called reformers on the Obama Debt Commission and the banking and finance industry. Read it again so that there is no confusion and forward the link to as many people as you know.
Alternet: Obama Packs Debt Commission with Social Security Looters?
Nancy made a reading error, but her point is essentially that the infinite horizon is mind boggling science fiction. And i agree with that.
I have forgotten exactly what the deficit reduction numbers impiied by the “northwest plan” are… but Bruce is at least reasonably close. Without worrying about the high finance, the bottom line is that people can have their Social Security benefits unreduced and their retirement age not increased for the current tax level plus twenty cents per week, increased another twenty cents per week each year while wages are increase ten dollars per week.
Medicare is a bit more expensive, but the fix there is to find a way to cut the growth in medical care costs. it makes no sense to cut your medical insurance (medicare) because prices are going to go up. and the good news is that even if they do go up, the rising wages will go up much faster in absolute terms (but not percent terms) so that if you do not suffer from percentage paresis, you will realize the choice is not between medicare and food on the table, but between medicare and a new lexus on the table.
and fool is not too harsh a word… for the people. liar and @#$%$$!! is the right word for the people promulgating this.
oh, and while we’re here
the northwest plan assumes that the debt TO social security will be paid. not paying it is theft. it does bring down the published numbers for that debt somewhat because the published numbers assume that we are going to just keep on borrowing more money to pay “promised benefits.” but the people can pay for their own damn benefits. that is what social security was designed to do. by paying an extra twenty cents per week each year they bring that “projected deficit” down a huge amount. (in fact to zero… but the debt already owed to Social Security remains.)
and just to be clear: social security doesn’t cost the treasur a dime.
beyond repaying what the congress already borrowed from social security.
but (shhh) congress could default on that debt with no real injustice to anyone. IFF the payroll tax were raised immediately to pay as you go levels. it would be a little more money than the post boomers expected to pay, but it would not be more money than they will get back in their own longer retirements. this would be far better for them than to have their benefits cut or retirement age raised.
You’re right, Jack and y’all. Apologies all round. NO
“if and only if it is actually needed at the time”
This is a key part of the plan. Only change when it is clear that a change is needed.
Projections change dramatically with the current state of the economy. They should not. We all know there are going to be recessions (and booms) over the next 75 years. But the results 75 years from now are not going to be much different if there is a recession in 2032 instead of in 2038.
Metaphorically, we are still storing up energy like going up a hill. We are going to get it back when start going down. People are complaining about what’s on the other side and they have not even seen it yet. The models say it is a smooth downward slope. Do you believe it won’t have bumps? Or that it really matters just where the bumps are?
2.02 percent (or 1.92 percent or another number from a different year) is analogous to the level of the ground 75 years out. That is someone’s guess that there is a 50 percent chance it will be that high. That means they are also telling us there is a 50 percent change it will be lower. If we let reformers apply a 75 year fix (and this is true of tax increases as well of benefit decreases), there is a 50 percent chance they will have to reverse the fix because they went too far. (If the current assumption that life expectancy will always rise is correct, I suppose they can wait and let reality catch up to an over-fixed reform, but many experts say bad nutrition will kill that assuption too.)
I am fine with changing SS now, but reformers MUST understand that a permananent fix is meaningless, that a good fix must include triggers, and that living longer naturally costs more. When they do understand, the only changes will be small and will be limited to things that happen more than 10 years from now and less than 25 years.
They might want to “overfix” it because it is an easier sell for a tax hike. (Sort of a reverse of “It’s for the children” or coberly’s “its for your own retirement”).
That’s what they did for the last 20 years, take in more than they needed and spend it on other things. It’s all one animal, and you continue to focus on it as an entity discrete from the rest of the Federal budget.
Duh!! Because that is what it is by law. Now there are many wealthy people hoping to create the myth that all those payroll taxes were just taxes just like income taxes. They didn’t like paying much income tax so now they want the far less progressive payroll tax to be seen as just one more pot of gold that the very wealthy can point to as a source of general fund revenue. That way they won’t have so much pressure put uppon them to pay their fair share of the general budget.
i am not sure i got your point, but I at least am against any tax hike on the rich to pay for social security. the whole point of social security is that the workers pay for it themselves.
when the rich are taxed to pay for it, it becomes welfare. and that is bad for both the rich and the poor. worst of all for the workers.
if there are very poor people who need welfare, well i am for that too, especially if it is designed in such a way as to bring those people out of poverty if possible. i just don’t think that Social Security should be made to carry the burden of ALL the needs of poor or old people.
It does what it does very well: insurance against poverty in old age for workers paid for by workers.
Peter Orszag thinks it needs to be made to repair any difference between what your grandfather “might have gotten” for his money and what your grand children “might get” for their money. Because of course everything else in life is already equal. And by pretending that Social Security is an investment club we can make sure that every generation gets exactly the same return on his money, just like in the real world.
Meanwhile, every generation will get a quite fair and reasonable return on his money from Social Secruity.
Sorry, I am beginning to rant. But it’s NOT “all one animal.”
the whole point of social security is that the workers pay for it themselves.
This is not true for a lot of recipients. For example, you only need $5,000 per year in gross earnings to qualify for max benefits at retirement. http://www.ssa.gov/pubs/10072.html at 16% tax rate that is only $800 per year in inflow. Times 40 years = $32,000 in total FICA taxes. That person would be eligible for $2,000/mo in retirement, so he/she would only “earn” about 1 1/2 years of his retirement. Someone else pays for the rest. That is why SS can be looked at as welfare or an entitlement (not that that is necessarily a bad thing).
no. that’s why it can be looked at as insurance. I don’t know the details of the hypothetical case you cite, but a workers benefit is calculated based on his contribution. and while lower earning workers over a lifetime get a better return than higher earning workers, in priniciple you can’t tell when you start out, or even half way through whether you will be one of the higher earning workers or the lucky lower earning workers. the “windfall” is not enough to be worth gaming the system for in any case.
BTW a worker earning 5000 per year (real equivalent) for forty years would have his benefit calculated at something like 400 dollars per month. not the 2000 you cite.
but you raise an interesting point: Peter Orszag is all flustered to equalize the “returns on investment” between generations, and completely fails to notice that Social Security is structured on purpose to give unequal returns within each generation so the poor get a boost, and the rich pay for it.. in the form of an insurance premium they paid in case they turned out to be one of the poor. It never seems to occur to Orszag that the rather small difference in rate of return from one generation to the next is much smaller than the difference in rate of return within generations. And it seems very likely that “poor” next generation getting the slightly lower return will in fact be much richer than our grandparents who got the higher rate of return.
the sad fact is that none of these people think any further than they need to to justify the crime they are about to commit. and they rely on the fact that neither will anyone else.
I believe Sammy is making a supportive point in that if they raise SS Withholding high enough, it creates surplus revenue going into the General Funds which disguises the true deficit within the Unified Budget.
I agree it is a tad late to correct what was given out in years past beyond what was taken in from these retirees. We need to set the base for the future with a forecast of what is need and not adulterate it with Infinity Horizons, Private Retirement Accounts, and talk of SS going broke. But then, I am preaching to the experts; am I not?
I am disappointed with the tack of hiding private retirement accounts withing the SS fix forthe next 75 years. Guess I will have to pen another letter to Stabenow and Levin. Mike Rogers (Congressman) is an idiot and a waste of time.
Wrong. Epic fail.
No one qualifies for maximum benefits with a minimum contribution. Under your formulation everyone would qualify for the max, an obvious absurdity.
Wrong. Epic fail.
Yes, pretty much. I was using an incorrect calculator.
Using earnings of $10k per year from 1978-2029 (50 years) said example person would have paid in approx $60K (12%), into SS and his benefit would be $1,154 per month or $13,848 per year http://www.ssa.gov/cgi-bin/benefit6.cgi giving him 4.3 years of benefits before he exhausts the amount he contributed.
I agree with your premise that Social Security should not be structured in such a way as to have it appear that the wealthy are supporting the poor. On the other hand the wealthy seem to have no compunction when it comes to reducing their tax liablities to the general budget by using the Trust Fund surplus to reduce the apparent deficit. This game has been going on for thirty years. I’d put a bit less emphasis on the rich not paying higher payroll taxes, and a bit more emphasis on the rich simply paying taxes on all of their income streams in support of the general budget. If the Treasury could get the general budget under control in a direct and appropriate manner there would be less need for all the focus on Social Security’s Trust Fund as the solution to budgetary insufficiencies. In short, don’t fight the rich man’s battles for him. He already has us beat on the field with his inordinate control over our elected officials.
Fight your own battles. Let the wealthy fend for themselves.
I believe Sammy is making a supportive point in that if they raise SS Withholding high enough, it creates surplus revenue going into the General Funds
This is true. SS is a pretty popular program, so it will be relatively easier to sell the tax hikes than just a general income tax increase. Not that I want that, but Obamao the spender needs dough.
i don’t want to keep Social Security insurance for workers paid for by workers because i am so fond of the rich. it just works better that way.
but you are absolutely right, the rich need to pay their own goddam bills.
no, this is a little confused.
they already raised the “withholding” (i assume you mean FICA payroll tax). they are using the panic about repaying the money as an excuse to cripple social security by some method we have not yet seen.
but sammy is probably right that O is using this to screen a general tax hike… maybe by making the rich pay through the nose for Medicare… that could be what he is saying. but its all a scam whichever way it falls out.
your calculation is still incorrect. at 10k per year, about 800 per month, the benefit would be about 600 per month. And it’s still insurance. No one earns 10k per year for a lifetime because he wants to.
there is a good chance someone whose earnings are that low is not very healthy and will die before he uses up his contribution.
you really need to stop looking for special reasons to fault social security and look at what the plan does for most of us. the workers who get enough to retire on, and the rest of us who don’t have to pay for welfare, or try to make money in an economy where half the elderly are too poor to pay rent, and half the workers are desperately afraid that’s how they’ll end up.
Bruce, Reform plans have been aiming for sustainable solvency since the 1994-1996 advisory council, which included plans both with and without personal accounts. It’s just wacky that you see anything dishonest about this. The 1994-96 council adopted a principal that social security’s solvency shouldn’t be affected simply by the passing of time, meaning that if you pass a 75-year fix (cost 2% of payroll) it will be out of 75-year balance the next year. A plan that’s sustainably solvent, by contrast, won’t become insolvent as the years pass. It’s as simple as that and I can’t understand how you portray this to be a bad thing. Isn’t fixing the whole problem better and more ambitious than fixing only part of it?
The dishonesty is in pretending first that Social Security has anything to do with the current debt/deficit. And in pretending that Social Security itself faces any kind of funding crisis.
You can’t just come in and utter “a principle that social security’s solvency shouldn’t be affected simply by the passing of time” and pretend that that means anything. You can fool the rubes with clever sounding nothings like that. But “solvency” is always going to be affected by circumstances that change with the passing of time.
Under current law with no changes at all Social Security looks like it would be solvent forever if one accepts the Rosser formulation that a 33% benefit cut in the future is in real terms a 20% increase in benefits compared to today. Or, if people are going to live longer and are smart enough to realize they will have to pay for it one way or another, they can tax themselves an extra 2% and keep the same replacement rate so their benefits will keep pace with the standard of living of their times.
And if you insist that this is “really” a 4% raise, because the boss’s share is “really” the employees money, i’d point out that then the employee’s pay “really” includes the bosses share so he is being paid more than he thinks he is, and after he pays both shares of the payroll tax, he still has the same take home pay as when he pays only his own share.
There is so much bullshit work gaming and number gaming in this “debate” that I have no shame calling the people on your side liars. Because that’s what a liar is… someone who tries to deceive people to their hurt. The good ones, like you, can do it without ever saying anything that is strictly contrary to fact, but it’s still a lie. Dishonest, I think, is the word you were objecting to.
Okay, why don’t you give up your career of telling lies for your boss, and come over to the good guys side. You know enough.
BTW in case you missed it, the “northwest” plan will NOT “be out of balance the next year.” your friends at the Trustees office put in that “out of balance the next year” in order to make the finances look worse than they are. Yes indeedy the “75 year fix” of 2% combined only works for 75 years… and increases the deficit while it’s doing it. But by gradually raising the tax 2% each, or 4% combined.. or, gasp, 16% total, while wages are increasing 240% you not only solve the 75 year problem, you solve the “infinite future” problem as well… allowing for the possiblity of another tenth percent or so more or less as conditions change “simply by the passing of time.”
Really, Andrew, have you been lying for a living so long that you cannot even tell when you are lying to yourself?
oh hell, while i’m being rude
the “bosses share is really the employees money” has lately given way to “its a jobs killing tax.”
so is it the employees money or is it a tax?
is there any imaginable reason why “fixing the whole problem is better and more ambitious” is not a damned lie to distract from the fact that it doesn’t need to be fixed at all now, and “fixing it forever” is impossible. but a pay as you go , adjust as you go sane approach would come as close as humanly possible. it’s the difference between trying to drive to chicago by pointing the car in the “right” direction and shutting your eyes … because you fixed it forever…. and just driving down the damn road with your eyes open and adjusting the steering and gas and braking at need.
no, the only reason we have “fix it forever” “fix the whole problem” “the infinite future” is because the big liars need an excuse to fix it to death.
Sorry Andrew, if there is a human being under there whose feeling i have hurt, i implore him to come out of hiding, because the slick lies really make me mad and while i’m kicking his suit he might feel the pain. though, to tell you the truth, i am a little sick of “poor me” liars complaining about people being rude by calling them liars.
In the face of (only somewhat predictably) growing lifespans the only way to make the program sustainably solvent is to include adjustments based on economic and demographic results. Growing lifespans lead to growing costs, so it is obvious that income (taxes) need to go up. While I understand the case for paying those increased taxes by working longer, I think coberly is right that people want to retire sooner, tipping the balance in the favor of increasing payroll rates.
The CBO’s report (2008) shows SS taxes going down as a percentage of GDP even though those taxpayers can expect to spend a longer time in retirement than today’s taxpayers. That is silly.
The fact is we have no clue what the infinite future will look like. Making assumptions is just a wild guess. The same could be said for the 75 year horizon. We can only look at a 10 year horizon with any degree of predictability. Unfortunately that time frame does not look good.
My read of the YTD numbers point to a non interest deficit of $60b. About double the CBO number. Where does this take you? It means that in 2012-13 the fund will have a deficit including interest. It will be small at first. An average of $25b.
That math takes you to an asset base of ~2.5T in 2020. The CBO has this number today at $3.8T. Over the next six months this ‘hole’ will become clear. So you tell me, what is the the right fix for a shortfall of $1.4 Trillion over projections? Bigger than you are counting on.
The numbers today are highly skewed by the recession. A significant number of people chose to begin their benefits early. Mathematicallly, it is now necessary that there will be fewer people (than previously predicted) taking early retirement for a while because it has to even out. Projecting short term numbers is a gross error.
If you look beack over the lst twenty years you will also see a systematic bias toward predicting current short term conditions persisting. During booms we have over prediction. During busts we have underprediction. I still believe ten year results are likely to be between Intermediate and Low Cost.
there are two possible “fixes” to the problem you see.
The first is just to pay back the money borrowed from the Trust Fund as promised.
The second would be to raise the payroll tax now to cover the cash flow shortage. This would be cheating the workers a bit, but far far better for them than cutting benefits or raising the retirement age or means testing.
No, the economy will not fall if the rich pay their debts. We are not talking about robbing the rich to give to the poor. We are talking about not letting the rich rob the poor to feed the lies they have been telling themselves.
I think Arne is right
but there is NO prediction, and I can’t imagine the circumstances that would justify such a prediction, that the costs of providing for a basic retirement will EVER exceed a reasonable level of “tax” on the people… who will become the retired… while they are still working.
The beauty of Social Securiyt.. and it is a great beauty indeed… is that for the first time in history it gives ordinary working people a safe way to save part of their own earnings so they can retire while still young enough to enjoy a bit of life before they become too old.
Look how this has been elevated in the past few weeks. The reason? Because of the 2010 deficit. It has got everyone into this act. The charge to “fix the broken SS” has gotten strength from the recent numbers. You watch the press. The 2010 deficit story from the Times and AP is now in every newpaper in America.
So in this case short term developments have been very critical to the evolution of the current debate on SS. I would expect that to continue. So what is the probable time line? Answer: Sometime after the Fiscal Policy joke thing ends. So that makes a “real” debate on SS likely to commence in the 1st Q of 2011.
I say again, the short term forces undermining SS are getting worse. They should level out soon to last years income and this years expense.. So the recent numbers that will be discussed in 1st Q 2011 will be terrible. Worse than what we see today. That reality is likely to be the theme of the debate and that is likely to be the basis upon which the fixes are made.
Ignoring the short term will put those that argue for no change in the very worst light. The calendar is stacked up against you. Whether that is fair or not is not a question to debate. Nothing is fair.
The only possible rational for projecting something over an infinite horizon is that is has the capacity to exist over an infinite horizon (e.g., like a country).
No one would bother to project the performance of a toxic waste portfolio over an infinite horizon because it cannot sustain itself for longer than a few years.
Also, we have to project income and productive capacity over an infinite horizon, not just costs – its the old trick of using the nominal to hide the real.
If you’re wondering why money is getting scarce for any number of ways to use it consider that most of the money described in this NY Times article is barely taxed.
“Pay of Hedge Fund Managers Roared Back Last Year”
Then another part of the problem may be the scarcity of employment with either a decent pension package or even a decent annual salary that a worker can count on. Where have all the jobs gone to??? Try this article from yesterday’s NY Times.
“Ford Shifts and Gains Ground in Asia”
Any issues having to do with the Social Security program are only the result of major issues with the economy. The two articles noted above highlight two aspects of those major issues.
Income distribution is widening with the stratospheric incoomes of some, and the equally enormous incomes of those whose fortunes they manage, seeming to know no bounds and seeming to be less taxable than “earned” income. Do you suppose that capital gains and dividend income isn’t earned? That’s yet another issue that contributes to the over all problems of our economy. Then there are just fewer and fewer people with earned income from regular jobs, and those that still have such jobs can’t possibly bear the entire burden of government spending, but seem expected to do so.
So you see if the real economic problems are ever resolved then Social Security will be forever healthy because more people will have steady employment and those who earn obscene incomes might pay a fairer share of the budget burden. That’s the general budget. That way the general budget doesn’t have to rely on the Social Security Trust Fund to keep it afloat. Social Security deficiencies, real and imagined, now or years later, are only a distraction from the actual economic problems that this country faces.
the short term developments are only another excuse… another lie… to justify “fixing” Social Security. this has been going on for seventy years. in 2001 the short term development was the soaring stock market, and we needed to fix social security by putting the money into “personal” accounts. that doesn’t look so good now. and if we weather this storm, maybe even people like you will be able to look back and see it was just another lie.
social security has nothing to do with the deficit. the money congress borrowed from social security they knew they would have to pay back. the time has come. pretending that paying it back will cause the economy to collapse is just a lie to confuse the easily hysterical.
maybe nothing is “fair,” but some things are more rational than others.
I like the way “bipartisan” was defined — former aides to President Clinton, Senator McCain, and President Bush (2 reactionaries and a centrist) !
“meaning that if you pass a 75-year fix (cost 2% of payroll) it will be out of 75-year balance the next year”
Sorry that is simply wrong. If we had put in a 75 year fix based on 1997’s 2.23% payroll gap, it would not have been out of 75-year balance in 1998 or in 2008, it would have been actuarially over funded in the 76th year based on a revised gap of 2.01% today. A 2.0% fix might or might not even fix Social Security for 75 years, after all if we had put a 1.89% fix when the gap was set there it is likely, though not necessarily so, that the fix going forward would be inadequate. Everything depends on whether Intermediate Cost is too optimistic or too pessimistic going forward, the very variability of the 75 year gap year over year shows that.
If you do a straight line extrapolation of projected TF balances of the NW Plan you would see that the TF would maintain a Ratio above 100 until around 2097 or even later, making this 75 year fix actually an 87+ year fix.
If projected actuarial gaps in fact went up precisely by the 0.06% attributed to change in valuation period then you would be potentially correct at least in that year, but as a general proposition it just isn’t correct at all that the 76th year will always be out of balance after any given 75 year fix.
Krasting you are reversing cause and effect.
Cato has been pursuing Social Security ‘reform’ for many years and at least since their Summer 1983 conference, notably through what is now called the Cato Project for Social Security Choice, formerly the Project for Social Security Privatization (at which time Andrew was a senior staffer there). When they see a political opening through which to push their long-standing project they tend to take the opportunity.
This recession offered them precisely that opportunity as it allowed them to claim that an event not scheduled until 2017 had suddenly moved up to Feb 2009. This message was actively pushed by Kevin Hassett of AEI through the agency of Washington Post Reporter Lori Montgomery in March of last year and promoted on Andrew’s website Notes on Social Security Reform. Which in turn led to some pushback in comments there and in posts here.
But the issue did not just magically spring up like the daffodils, 10% unemployment both reduced revenues and increased claims for DI in a way that put 2009 and 2010 in primary deficit an event that most supporters of Social Security do not see as significant in the larger context.
Either way, this issue did not come to the forefront ‘because’ of the recession, it has always been floating right under the surface waiting to emerge when the time is right. Starting last February Social Security ‘reformers’ including Blue Dogs and Republicans started actively pushing Cooper-Wolf SAFE and Conrad-Gregg at every opportunity. It came up when the Blue Dogs had their early meeting with Obama, again as the first question at the Health Care Summit, and then the push for the Fiscal Responsibility Summit. But the agenda has never changed a bit, not in the near 27 years since the Greenspan Commission Compromise lost them their last greatest opportunity.
H-Bob if you examine those organizations that advertise themselves as ‘bi-partisan’, and examples are the Brookings-Heritage Fiscal Seminar, the Peterson Pew Commission, and the Concord Coalition you will find this is always true. The words ‘bi-partisan’ ‘non-partisan’ and ‘fiscal responsibility’ allways draw their working assumption that this is a center-right country and therefore that all ‘compromise’ has to be between the center and right. This is a feature and not a bug.
For example Andrew Biggs suggested a ‘compromise’ on his website. Let us just agree to take the Diamond-Orszag Plan as a representative of the Democratic position, Bush Model two as representative of the Republican position and come to a ‘sensible’ middle ground. The notion that Democrats might want to start from something closer to the Ball Plan being dismissed from the start.
It is a decades old trick, the Centrists simply asserting that by nature they were the Democratic Leadership Council, as if there were no leaders in the liberal wing. (Tough shit Teddy I guess).
i think what Andrew meant was that when the Trustees calculate their 2% (combined) actuarial fix over the 75 year window they are calculating exactly the cost, including interest from earlier overfunding, to pay benefits through that year. since by that year the actual cash difference between taxes and benefits is more like 4% combined, the next year, with the 2% fix, would indeed be out of balance.
but like everything else these guys say, this is a constructive lie designed to make you think the picture is worse than it is. a “2% now” fix doesn’t make a lot of sense since it increases the deficit by overcollecting social secrurity taxes and lending them to congress… and we have seen where that leads.
we could “fix it forever” by enacting a policy to increase the payroll tax .04% (combined) each year.. and that is 20 cents per week (each). and shut our eyes and hope for the best and meet Andrew’s pious goal of fixing it forever… as long as nothing ever changes. But they really want to “fix the whole thing”… which they would be just as glad to do by turning old people into Soylent Green when they can no longer make a profit out of them.
“Of course we’re non partisan. The real power always is.”
from That Hideous Strength, a book published in 1943… so you can see this has been going on for a long time.
I think the next lines say something about needing a right and a left to be always yelling at each other.. to keep the people fooled.
“They should level out soon to last years income and this years expense.”
NO, NO, NO.
Costs and income both go up every year. Costs went up more than predicted this year in such a way that they will go up less next year. Income went up less than predicted this year. It still goes up. It will probably still be less than (previously) predicted next year as well, but there will be a recovery. We will even return to surpluses – not that it matters much.
i could have said that a bit better,
the “lie” is not the 2% now “fix” but the implication that after 75 years Social Security would face exponentially rising deficits. and this is very much the implication of the dire tones in the Trustees Report.
In fact after 75 years another “2% now” fix would fix Social Security essentially forever as far as the eye can see. A one percent increase in your payroll tax (cost of retirement) this year. and another one percent increase 75 years from now might be too easy for the public to swallow, so they have to create an implication that the 2% now fix leaves Social SEcurity’s “problems” a vast and growing “burden on the young.”
the 2% “then” increase wouldn’t even have the “deficit” to worry about. and the 2% “now” increase would “increase the deficit” by allowing congress to borrow more money FROM Social Security, this would not be a bad thing considering the current budget problems IF Congress could be counted on to be honest enough to pay it back. Anyone still think Congress would be any more honest next year than they are this?
Or that people like Biggs won’t be around to help Congress tell the people “it’s your own fault for lending me the money.”
there is no case for paying those increased taxes by working longer.
maybe in fifty years if people ARE in fact living longer, stronger, healthier, happier lives and WANT to work longer, and we have a way to take care of the people who are not in fact living longer stronger healthier happier lives and don’t want to work longer and have paid for their own retirement.. maybe then we can “work longer.”
But it is not… sorry about this.. honest or smart to “fix” social security on the backs of old people we never met who have problems we never thought about. who are desperate to retire and have paid for their own retirement. or could have paid for their own retirement if people like Andrew and Peter Orszag weren’t fooling them with nonsense about backward transfers and legacy debts.
Yes, 50 years is a good guess.
From the SS Report IC life expectancy at 65 (and making the slightly wrong assumption of adjusting by the extra year or two)
1960 NRA=65 Life=15.9 years
1983 NRA=65 Life=18.6 years
2009 NRA=66 Life=18.3 years
2027 NRA=67 Life=18.3 years
2059 NRA=68 Life=19.1 years
The increases for 1997-20027 are already law. Spending one more year working to get about one more year in retirement is very reasonable (if, as you say, those extra years are healthy years). On top of that, if someone still wants to retire early at 62, the AWI adjustment is going to assure that that benefit is worth more than today’s benefit.
If I read the numbers correctly, it is not enough to close the IC gap, but this speed of NRA increase (which is a benefit cut for early retirees) could be the compromise for people who think the answer is always a compromise.
I should have noted that since I don’t think we should be making changes that are over 25 years out, raising the retirement age to 68 should not actually be enacted any time soon. I suppose that means it is not a useful compromise, but showing that raising it to 70 actually means fewer years in retirement may be useful.
I am a bit passionate about this. I have seen many 65 year olds too old to work, and I don’t trust the predictions. Especially as none of them address the issues I have brought up:
even if the average life expectancy increases, a very large number of people will not have increased length of life. most of those who won’t live longer are the poorer half of the population. nor is there any reason to expect longer life to mean longer health. you won’t get much fun out of living an extra two years because of the miracle of modern medicine keeping you alive hooked up to a tube. and most workers have crap jobs that they are literally dying to quit. and since they can and will pay for their own retirement who in the hell are we to tell them they can’t? This is a critical point, we all end up acting as if it was OUR money. IT’s not. It’s theirs. The goddam “balance sheet” is a piece of goddam paper. Stop and think about the human reality. NOt out of kindness, but just long enough to remember who is paying for their own retirement, and who is the “we” who have a right to tell them they can’t pay enough to retire while they still have some life in them.
For those of you who love your work, keep working. It only increases your benefits. But don’t tell the people who paid to quit that they can’t. It’s no “compromise” when you have no skin in the game.
actually the nw plan is a thousand year fix. there is no reason to repeal the “tenth of a percent increase when trustees report short term actuarial isolvency.” that should, barring the invasion from mars or the miracle drug that makes us live forever… keep Social Security solvent as far as the eye can see at a price that is perfectly adjusted to the circumstances of the times, and very unlikely to be a “burden” on the people paying for their own retiremetn while they’ve got the cash.