Intergenerational Real Benefits in Social Security (Rosser Equation Illustrated)
In 2003 CBO published an Issue Brief illustrating the relative contribution of Aging and Real Benefit Growth to future Social Security spending called The Future Growth of Social Security: It’s Not Just Society’s Aging with results graphed above:.
Approximately 55 percent of the higher spending is due to an expected increase in the number of beneficiaries, as the number of new claimants grows and as life expectancy rises. The Social Security trustees estimate that the population age 65 or older will increase from 37 million today to 75 million in 2035 and to 95 million in 2075.
Life expectancy for people currently age 65 is estimated to be 83 years. In 2035, it is estimated to be 85 years, and in 2075, 87 years.
The remaining 45 percent of the rise in spending is due to a projected increase in the real value of Social Security benefit checks. Under the trustees’ assumptions, the purchasing power of the average earner’s benefits at retirement is expected to nearly double between now and 2075.Source: Congressional Budget Office.
This increase in purchasing power is the result of adjusting initial retirement benefits by real wage increases over the worker’s lifetime. The end result is that retirees share in both the upside and downside of economic growth, if Real Wage for workers is stagnant so do will be initial benefits, if on the other hand workers gain Real Wage increases in line with the traditional relation found between Productivity and Wage (something that broke down some the last decade) then the rising tide really will lift all boats.
A couple of further notes. If retirement benefits are projected to increase in real terms by close to 100% over the next 75 years, then a projected cut of 20-25% on Trust Fund exhaustion would STILL see those future workers with larger baskets of goods than similarly situated retirees (this is what we call ‘Rosser’s Equation’).
But this real term increase doesn’t come at the expense of younger workers still in the work force, at least not without some forced special pleading. The goal clearly shown in Fig 2 is to keep overall replacement values steady with each future generation just able to hold onto its share of the overall societal increase. This seems fair to me.
There are some that insist that if you ‘really’ look at the numbers you will see that Social Security was simply too generous to earlier generations. How you reconcile this with these graphs showing that each generation will be able to afford a bigger basket of goods than their predessessor would seem difficult. Because arguments from ROI (but I could have had EVEN MORE, and screw Grandma) seem pretty hard-hearted and selfish. But perhaps someone can make the moral case in comments.
Reality no longer has any bearing on the actions of our deranged ‘leaders’. If Obama can say with a straight face that the ‘Federal Government will be there until the Gulf is back to where it used to be….’ if the same ‘leader’ can commit to more Trillions down the ratholes of Iraq and The Stans. If President ‘Clueless’ and his posse from the bought and paid for Congress can cut off U.I. extensions and advocate drug testing for recipients what makes anyone think they can take effective action to preserve Social Security? No, we need a whole new set of folks ‘in charge…’ and I do believe we are going to get them.
Good post. A. Citizen seems a little deranged himself.
here is not “the moral case” but the selfish case.
You can get the same replacement rate… that is increase in real value… of retirement benefits by raising the payroll tax 0.025% per year. In today’s terms, that would be about 20 cents per week per year. This is not an amount of money that any sane person would notice.
What it means is that when you retired you would have a benefit roughly equal to 40% of your average lifetime real earnings on a monthly basis. What that means is that you could expect to retire at roughly the same standard of living as you had had while working, the same standard as your neighbors…at that time… have. [if 40% seems to you not the same standard as your 100% while working, consider that the kids are grown, the house is bought. If you want more… well there are other retirement plans that depend a little more on luck, and you really ought to consider one. But keep that Social Security. It’s insurance and you may need it. Turns out that most people do.]
Consider, if the “real” value of retirement benefits was held constant, say, since 1936, retirees would be living in a world without cars, or refrigerators, or washing machines, or indoor toilets.
Now, if we hold the “real” value of retirement benefits at the 2010 level, we may assume that retriees will have cars etc, but they won’t be able to buy whatever the people of 2085 consider “essential” to a reasonable standard of living.
So while Rosser is right, and it’s a point worth making, the point is perilously close to “solving” the Social Security “crisis” by pegging initial benefits to “inflation” instead of to average wages.
And when you consider that you can insure your retirement at the present “replacement level”, that is the future standard of living, for twenty cents per week, you’d have to be pretty stupid to join the stampede to “save Social Security” by cutting benefits or raising the retirement age or taxing the rich, or means testing.
A little off topic. You might drop by Mother Jones-Kevin Drum, he has a set of posts that seem to once again show a lack of understanding about SS and the recent report. I thought you would be able to provide some good commentary and maybe link back to AB. KD gets lots of hits. (I have read him since his Calpundit days)
I will also point out that my favorite illiterate blogger, Yglesious, has also a few but his commentary on SS is so off the charts idiotic, that you may lose some IQ points going and fixing his misconceptions…But he does provide a glimpse into the “village blogger” mindless Obama supporter thought process. For me he just provides comic relief! YMMV
Nice post BTW.
Islam will change
The post is interesting, as is all of Bruce’s SS work, but I have a question about his statement that “The end result is that retirees share in both the upside and downside of economic growth, if Real Wage for workers is stagnant so do [to] will be initial benefits,”
Over my 40 years of full-time work (1968 to 2008) hourly real wages were essentially flat. Was the real value of Social Security benefits also flat over that period? If not, why is Bruce so confident that the future will be different if real hourly wages continue to be flat for an extended period?
It occurred to me yesterday, when reading the AP stories about how retirement age needed to be increased, that the Deficit Commission (and all the other groups creating the “consensus” about Social Security ‘reform’) has no members who actually will rely on Social Security for a majority of their retirement income. It really hasn’t occurred to anyone in the administration, media or pundit-klatura that the people most impacted by the proposed Social Security changes should even have one voice in determining the sacrifices they will make for the “greater good”.
Of course, there never will be a Deficit Commission convened that would have less than a majority of the members belonging to the top 10% in income.
A. Citizen–I would agree we should throw the bums out, but for the fact that only bums will apply for the politician jobs we make vacant. Politicians have always been for sale in this country. It used to be WORSE– believe it or not. Think of all the little counties and county seats out there in America Land named for once famous local worthies. Those people were the real estate developers, the mining investers, the logging companies who generously supported the guys up in the state capitol in their runs for Congress. In return, Congressmen graciously helped their benefactors with favorable tax treatment and other considerations such as development support in their efforts to, say, sell lots in part of North Florida now known as Orlando.
If you want to make money by the literal ton, then there is nothing better than zero income taxes. Then, with a little help from your federal friends, your State government will also waive extraction fees, mineral lease royalities and other inconvenient drains on your profit. All of this to provide employment for people in rural areas of the South, for example, without the inconvenience of cash wages. Script would do, if you just paid a small tax on the script (10 cents on the dollar, say). No need to pay out any cash to the workers who cut your timber or dug your coal.
So, I don’t really have any faith in politicians of any party. I do have a certain confidence in those horrible bureaucrat persons who abound in government agencies. Give ’em a law and a regulation to guide ’em and they’ll actually do what they’re supposed to. Unless, of course, a politician gets involved. Then, watch out. Nancy Ortiz
It is rather astonishing the entirety of the worlds Banco-Politico Complex has concluded they can simultaneously sell a world wide ‘Austerity’ program AND a cut in taxation of capital.
Of course that has been the agenda all along, still it is one thing to try this in 1995, when after all the wealthy actually had taken a largish tax increase, and in 2010 when they are going all out to prevent those rates from returning with the Bush tax cut sunsets. And all with 10-20% unemployment (depending on your preferred measure).
The whole thing has gotten so out of control that even Larry Summers has started expressing some buyers remorse. At this point i see only one outcome that could plausibly extract us from this: a direct and sweeping repudiation of the Tea Party and a better than expected showing by progressive and liberal Democrats. I don’t mean that the Dems are perfect, but Blue Dogs aside have not as a group simply abandoned all notions of collective social responsibility, or in simplest terms the fact that we are all on this planet and in this country together.
Thanks Rdan for the link. I beleive there is another post a few down from that one also.
Islam will change
You would need to be a little more precise about “essentially”. While that period was marked by increasing economic inequality workers were allowed through 2000 or so to share some. Real wage in five year sub- periods http://www.ssa.gov/OACT/TR/2009/V_economic.html#188118
The policy of adjusting initial benefits to Real Wages started in 1979 in direct response to the stagnant growth Wage from 1971-1980. Before 1979 all benefits were adjusted for inflation through the political process and benefits for retirees simply outstripped contributions leading pretty directly to the crisis of 1982-83.
The graphs shown here are based on the Trustees Intermediate Cost alternative that places medium to long term Real Wage at 1.0%-1.1%, surely numbers that are on average reachable. Given some changes in representation in DC and Geneva that is.
My finger and foot prints are already pretty heavily seen on KDs post. I got on it when it went up.
I gave up on Yglesias, as in took him out of my Bookmarks. If he has something truly interesting to say someone will link to him, but the guy went from relatively interesting and well written college kid (though from a pretty privileged background) to full fledged Village Status in record time. It is kind of like reading Sally Quinn but instead of dinners and receptions you substitute trendy foodism, Indy bands and basketball.
Meaning he ended up right where a typical mid-westerner probably would have predicted five years ago, just another Eastern elite who swapped that shared shabby college apartment for a Condo in the sky.
BTW if Real Wage does stay dead flat going forward you could and I think would end up with the same Replacement Ratio, it would just be 45% of a smaller gross economic pie. The system seems within limits self-adjusting. Absent revolution in the streets.
I agree. The problem (for the left) is he seems to be a named ‘face’ and is usually posting something incredibly stupid on its face (from either side of the isle). When people look for the privilidge elite you can point at Y as example #1.
Matt Y is the reason I won’t let my kids apply to the Ivies. If this is the kind of thinking that graduates from our elite institutions I sure am not going to pay for them attending.
Totally off topic – if you ever get to College Station (College visit to Texas A&M) leave yourself 2 hours to tour the Bush Sr Presidential libray. Regardless of you feelings on Bush the library is fascinating for adults and kids. Best of the ones I’ve been too (Clinton, LBJ, and Reagan). My 9 year old thought it was great and didn’t want to leave!
Islam will change
I listened to CNN Sunday AM in a hotel room……………….
Zakaria, my favorite interrupter of Krugman had on the Chancellor of the UK Exchequer.
The CE was ranting incoherently about (unfounded) fear of the moneyed bond buyers getting afraid of the credit worthiness of certain governments. While he advocated cutting UK expenditures he also seemed interested in raising revenues. Unlike the US model.
I was especially impressed with the fear of an unfathomable fear he was reacting to.
Is it possible that policy could be made based on the fear that some undefined group of wealthy cash holders, might begin to fear that G8 countries might become Argentina?
And what about the monetary authority coming in and buying sovereign debt to raise M1? Is that a problem with no inflation and lacking demand? I guess Krugman going all Milton Friedman is unnerving me.
Oh yeah fear of unreasonable fear has been going down in the pentagon all the time, leads to big mistakes.
A decent article on the commission from teh Washington Post. The article definitely gives me the feeling that the commission’s findings/recommendations will just get buried after the mid-terms and never see the light of day…a quote:
“[Commission Co-Chair Erskine] Bowles pointed to steps taken recently by the new coalition government in Britain, which also faces an acute budgetary problem, as a guide to the formula the commission might use in its recommendations. That would mean about three-quarters of the deficit reduction would be accomplished through spending cuts and the remainder with additional revenues.”
DOA in my humble opinion
Islam will change
IF wages stay flat, benefits will stay flat. That is not a tragedy. All it means if that if we don’t get richer, we don’t get richer. The reason benefits will stay flat is that they are indexed to wages.
I was thinking about why the cost savings from raising the retirement age was so low, and it would largely just be a conversion from a tax transfer to a wage transfer, the larger workforce from those delaying retirement holding down wages of those in the workforce. The increase in efficiency would be small and lower real wages would be more competitive internationally but there isn’t much cost savings to be had.
Also – How the he$$ did Bowles get on the commission??? What a hack.
it’s not a case of “collective social responsibility”. The rich do not pay for Social Security. The workers pay for it themselves.
what the rich are doing here is not refusing to take care of the poor. They are stealing from the poor. They may be stealing the Trust Fund. That’s trivial. What they are stealing is the ability of the workers to retire at a reasonable age even though they can pay for that retirement themselves. The rich don’t want the poor to have that much independence. It’s hard enough to get good help nowadays.
I have gotten paranoid enough that every time i hear a glimmer of reasonableness from the usual suspects i think its just a little bit of sugar to help the medicine go down.
Once they have you anaesthetized on the table, they’ll cut off the parts they want to cut off.
Bruce–This morning on NPR Diane Rehm’s program was little more than an infomercial for the Tea Party and the Banco-Political Complex. Ms. Rehm asked reasonably intelligent questions of her guests, a political analyst specializing in study of the Tea Party and a political analyst who sounded like a staffer from the Cato Institute. The guests didn’t address Ms. Rehm’s questions but stuck to their respective scripts. So, the Tea Party lady said that their goal is to take over the Republican Party and purge it of those who are insufficiently fiscally conservative. The Cato guy chimed in periodically with dire warnings of Deficit Doom and Disaster. Everyone but me seemed satisfied with the conversation. Pretty standard fare these days on NPR.
The highlight of the program was a call from a 67 year old woman who identified herself as an active Tea Party member. She receives SS for which she had worked since age 14. She favored SS reform, not for herself (“I am happy with my SS”), but for the young people. She thought it wasn’t fair to them to contribute to the program as it was. She didn’t explain why and no one asked her. The Cato guy chimed in immediately that SS contributed greatly to the debt and had to be reformed to prevent “inter-generational inequities.” No way the kids get any benefit from future retirement benefits because the Trust Fund is bankrupt and they won’t get any benefits at all. Right, said the Tea Bag lady. “It’s just not fair to put this burden on young workers when they won’t get anything themselves.”
You know, used to be you could get such wildly left wing claptrap on NPR it’d make your eyes roll. Now you get such wildly right wing claptrap on NPR it makes your eyes roll, but the other way. Goes to show you how much accurate information is out there on this subject. So, I suspect people are willing to let the per capita income to shrink by 10% for 37% of the population so that the DOD can continue to produce absolutely no permanent contribution to the infrastructure. Sounds good to me. Nancy O
Workers typically pay only a fraction of their kids educations, certainly during those school years. And a large part of Medicare Part A is paid from direct taxation with another large chunk from having lifted the cap. And there are even parts of Social Security, such as the Supplementary Security Income (actual SSI) that are not funded on an insurance system, as indeed neither was the Social Security Title 1 program that was only gradually phased out by Title 2 in the fifties.
I understand the strength and importance of the “workers pay for it argument”, but in the cold light of day it is only a partial explanation even of the operation and does not get to the motivation which I find somewhat deeper in a joint and more encompassing Social Democratic project than you do.
For example I would be happy to phase out Social Security in favor of a true National Pension System, our current system of simply tying most aspect of full citizenship to work status is in the long run (I mean decades and centuries). Assuming we can navigate our way through the dangerous shoals of natural resource limitations and environmental disaster there is no reason we can not get to an end-stage where we can guarantee a living income to all. Not all productivity needs to be tied to compensation, there is value in art well done and gardens well maintained and books well written.
A hundred and two hundred years ago places like England had a system like that in place. For the rentier class that had access to labor productivity extracted not just in the form of rents but in mandatory titles which overwhelmingly were suctioned off to the interest of the upper classes (they provided much of the funding for early Universities).
I am not asking you to give up your argument, only to understand that some of us see the New Deal as a totality and driven by fundamental principles somewhat separate from the operational decisions that went into the design of Social Security specifically.
link is to older post. doubt the comments will be read.
Bowles was a prime driver of the 1994 Kerrey-Danforth Entitlements Commission (also inspired by Pete G Peterson and on which PGP served).
If you look at the Advisory Boards and Honorary Chairmen of all of PGPs organizations you see the same pattern, retired senior statesmen deficit hawks drawn equally from both Parties but equally devoted to the cause. So there is no surprise that Simpson and Bowles were chosen, they fit the standard profiles of leaders of “Non-Partisan (or Bipartisan) Deficit (or Entitlement) Commissions. I don’t know of that many other ex-Clintonistas at that level who are not already tied up with something else.
you can have your workers paradise paid for by the rich if you can get it. meanwhile it would help if we focused on the fact that currently Social Security, OASDI is paid for by the workers.
Don’t make Social Security carry the load for your other worthy aims.
Number 1 son did not get into Harvard, took til late Apr to get reject letter, nor MIT.
He is PhD today, better second tier school did just fine!!
ilsm won’t change
Buff–I thought that the point of the Commission is that it gives Peterson another bite at the apple (a bite he bought and paid for, it appears) and won’t pass in any Congress. However, no one knows what kind of majority, if any, the Dems will have after this coming election. I doubt that the majority will completely disappear, but in 2007 little happened in Congress because their majority was slim in the House and nonexistent in the Senate. It may be that Obama’s gambit will backfire. We’ll have to wait and see. Nancy O.
Medicare Part A is paid via FICA, it is Medicare Part B that is half paid from the GF.
Bruce–The problem with the national pension systems and social programs in place in other countries is that they are based on socialist principles. The first thing out of the mouth of any SS beneficiary asked about his/her view of the SS program is, “I worked all my life and paid into SS. I earned my check.” Ask people what they think about welfare and get set to listen a long, long time to a litany of complaints about undeserving, lazy people who refuse to work; welfare queens who have endless babies to get bigger checks; cousins who brag about getting disability while working under the table, and on and on. Give that same person an SSI check, and it becomes his Social Security check. For which he worked his whole life.
True, the exact funding mechanisms don’t matter to people all that much. SSI is 100% general revenue and so is much of Medicare, but they are firmly connected in peoples’ minds as being something they worked and paid for. Why? It’s because people like me who work at your local SS store take everyone’s claims and treat claimants just like people who worked all their lives deserve to be treated–with respect.
My point is that in the US, people derive not only their livelihoods but also their place in society and sense of worth through their work. SS has survived 75 years despite bitter, apparently unconquerable opposition on the right for that reason and that reason alone. I agree with you intellectually. But, if you want to see SS disappear in a puff of smoke, make it just another income transfer program like “welfare”. Look at what happened to AFDC. Now, imagine SS being a short-term public assistance program renewed from year to year by the Congress. I’ll come down with Coberly on this point. Nancy Ortiz
In today’s terms, that would be about 20 cents per week per year. This is not an amount of money that any sane person would notice.
So what does that do for the average retiree? Put something like 60 cents a week in their pocket. That comes out to around $30 for the entire year. Seems like you’re talking chump change here.
What is growing: interest and medical expenditures these can be worked between now and 2040.
What is staying the same to 2080 as % GDP is corporate welfare and the war machine both roughly twice the part of GDP as other developed nations spend.
If you need to cut health, to endure hungry kids you need to cut corporate welfare and the war machine.
That means don’t buy the needless tankers and a lot of other militarist welfare.
ilsm won’t change
But the aggregate total and the benefits paid out per contemporary worker would still be going up because of the greater number of retirees. At least until the BB cohort dies. That’s the 55% in the beginning.
Actually, in the face of increasing income inequality, average wages are increasing faster than median wages. That means that even though your wages seem stagnant, SS benefits are increasing.
the bane of my life is people with no mathematical intuition who think they do.
over 75 years that 20 cents per week per year adds up…. it adds up in fact to 2% of wages.
in today’s terms that 2% of wages would be about 20 dollars per week. you work three weeks for every week you will be retired. so that’s 60 dollars per week. your boss matches that, so that’s 120 dollars per week. your 20 dollars per week comes out of an income of 1000 dollars per week. that 120 dollars per week in benefits would come out of a benefit that would otherwise be about 400 dollars per week. The only chump here is the one Peterson and company is playing you for.
i point out the 20 cents per week per year, because in fact no one here is ever going to see the full 2% raise in their taxes unless they are going to be still working when they are a hundred and five. and while your taxes are going up 20 cents per week per year, you wages will be going up ten dollars per week per year. Trouble is with most of you, telling you that your taxes might go up 20 dollars per week produces paralysis of the brain. You are physically incapable of comparing that to wages that have gone up a thousand dollars per week meanwhile, or realize that none of this is going to happen in your lifetime.
So i try to focus on what needs to happen this year, and the year after, and how you will “feel” it. Because I know damn well you can’t understand it, no matter how hard i try to explain it.
with all respect, you comment is incoherent. could you try again?
Bruce–Yep. Shoulda said something. But, I let it go. NO
I’m not interested in hearing your describe social security as if its saving and you are saving for your own retirement. This is not how the system works. You pay for current retirees and retirees are paid from current workers based on how much they paid in social security taxes. 20 cents a week out of my pocket does not put much more than $30 year (and probably less) into the pocket of a retired person. Your math does not work.
Owl. Short version-you are innumerate. A 2% phased in increase over 20 years prevents a 26% cut in benefits at Trust Fund Depletion. Per SSA. Per CBO it prevents a smaller cut of 80% a few years later.
Thatyou don’t understand the actuarialaccounting is your problem, Coberly and I are just using official numbers.
Dale examine Fig 4. If you subtract out changes due to Real Wage indexing you still see an increase from 4-5% of GDP between now and 2037 or so simply from the BB effect I think Jim is referencing.
Cut to 80%.
your lack of interest probably has something to do with your inability to understand. hard to tell which came first.
the fact that you can’t understand that “you pay for current retirees” is exactly what happens when you put money in a bank, just tells me you are not capable of understanding much of anything.
your 20 cents per week this year puts 60 cents per week into the pocket of a retired person this year. your ‘nother 20 cents per week next year puts ‘nother 60 cents per week into the pocket of a retired person next year. keep doing this for 75 years. don’t forget to make allowance for the fact that the 20 cents grows with inflation and the general increase in real wages (that’s why i mentioned the 0.025% per year. though i hated to do it, because most people like you can’t tell 0.025 % from 25%). you will find that by 2085 that 20 cents plus another 20 cents plus… has grown to something like 20 dollars per week (though i hated to tell you that because i can already hear your brain grinding on the idea of raising your tax 20 dollars a week this year instead of 20 dollars a week in 2085 when your pay will have increased about a thousand dollars a week more than it is today). and then i didn’t think you would be smart enough to have noticed that by 2085 you will not be PAYING the 20 dollars per week but collecting the 120 dollars per week… though i did try to show you how the numbers get there. but i never actually expected you to understand it.
Matt is a very intelligent guy and a good writer.
But his proven skills didn’t translate entirely from Harvard Philosophy major to MSM culture/politics blogger. If he stuck with an analysis of John Rawls rather than that of whichever clown is no power forward for th Wizards he would probably still e worth reading.
Bruce–Also please note this link
http://seminal.firedoglake.com/diary/59272 which informs us that no less a luminary than Jagadeesh Bokhale, newly appointed member of the SSA Advisory Board thinks that the TF will be exhausted in the next 5-4-3-2-1… Bingo! Now! The TF is bankrupt and we can’t live without privatizing the system and not only that but also means testing any remaining SS/Medicare benefits into the bargain.
Just to cheer you up, Dorcas Hardy, former Commissioner of Social Security, is also on the SSAB. She made her mark on SSA by cutting its staff by something like 30% over a period of 3 or so years right at the beginning of the recession that followed Volker’s hiking interest rates. She also advocates privatizations. To balance things out, however, the SSAB’s current Acting Chairman is former Congresswoman Barbara Kennelley, a vocal, and well-regarded SS advocate. Confused? So am I, but, then again, I don’t hold with bipartisanship when it looks, and walks and quacks like a right wing put up job. Nancy Ortiz
Arne true enough.
But you would have to adjust that to discount that portion wage increases above the current cap.
i skipped a step this time:
you pay an extra 20 cents per week. your boss matches that. now it’s 40 cents per week. there are 3 workers for every retiree, so your 20 cents per week today is an extra 1.20 per week for the retiree.
now add that up over seventy five years. and don’t forget to notice that that extra 20 dollars per week comes out of a pay that is an extra thousand dollars per week bigger. and that the 120 dollars per week to the retiree keeps a benefit of 400 dollars per week from being cut to 280 per week.
there may be some confusion remaining keeping track of what is in “today’s terms” and what the actual numbers will be in 75 years. i leave that as an exercise for the reader.
could be true. i don’t know. have you accounted for the fact that “average” wages only means average wages below the cap?
I don’t think so, but walk me through it. I may catch on.
SS as a share of GDP is going up because of baby boom retirement. That will gradually phase out, but meanwhile people are living longer and the two trends result in an initial increase in SS as share of GDP that plateaus at around 6% for the forseeable future.
By cutting the benefits… changing from wage indexing to inflation indexing, you can bring down the SS share of GDP, but only by making retirees poorer.
This may be what Jim is saying. I don’t get the “55%” bit. Meanwhile the early rise in SS as percent of GDP is paid for by the Trust Fund… that is the BB already paid for it.
and while i know you know better, i wish the rest of the audience would understand that this does NOT mean that the contemporary worker is paying for it. if anything, the contemporary worker is paying for the money congress spent on other things the last 30 years. the fact that the money was borrowed in part FROM social security is an irrelevant detail. if it had been borrowed from China, the “contemporary worker” would still have to pay it back. probably in the form of hidden price rises and pay cuts as the high end tax payer shifted costs onto the worker.
The 55% is from the first sentence quoted from CBO which shows a 55/45 split between impact of demographics and real wage on the calcs.
If Arne did I am thinking he is right and I am wrong on this point.
Or let someone else do it for me.
My reading is that the AWI calculation is not modified by the cap. Either way it is an obvious result of the statistically non-normal distribution of wages.
thanks. and tell Jim A for me that he was NOT incoherent. i was just a bit slow.
i think that without the demographics (baby boom plus longer life span) the real wage has no effect on the SS percent of GDP. by killing the real wage adjustment you cut benefits back to present levels as the baby boom peters out, but the longer life span is not being paid for, so the lack of an increase in SS/GDP is an illusion that hides less money per person per month.
I like Barbara. But she fails to understand that SS needs a focused defense that the Congress and the people can understand. Generally waving your arms and saying “the poor poor” does not let the Congress or the people know that the “Social Security problem” can be fixed for twenty cents per week.
I know that there are “progressives” with bigger credentials than i have, who want to save the poor poor from that crushing burden by taxing the rich. They will destroy Social Security quite as effectively as Peter Peterson.
masaccio @ FireDogLake is reporting that Alan Simpson is saying that Social Security should default on the Trust Fund bonds:
Whoa, whoa, whoa, Big Fella! Out here in the Big Boy world stealing some one else’s trade mark is not acceptable. Fair warning here. If I see a PSHAW outa U, then the wars on!
Owl: “Seems like you’re talking chump change here.”
Bruce and coberly get a little too testy. You have correctly identified that it is chump change. Nonetheless, that is all that is needed to keep it going forever. So taking your observation to its natural conclusion, there is simply no need to be concerned about adjusting taxes to “fix” Social Security. It’s only chump change after all.
Google Searches at Dawn.
Cause I doubt your copyright holds here.
Yes thanks Arne.
But it is not 30 cents to the recipient.
Bokhale is dishonest. Which has drawn in people like Bruce Krasting.
Bottom line shitty over extrapolation of DI numbers and projecting rates of change to OAS based on superficial changes to OASDI.
And I like Barbara. But she grants too much good faith to the bad guys. Probably due to her “My Dear Colleague” days as a Congressperson. They couldn’t possibibly be Evil Bastards? Cause they were so nice in the corridors and elevators!
With Social security rising from 5 to 6 percent of all U.S. GDP I thinks its going to cost a bit more than 20 to 30 cents a week. The low ball figure is not believable.
I’m not going to take as credible original research from non professional economists. To be credible they need to write with references to other economists and well known analysts.
You can figure it out however…the numbers are available.
I am surprised Bruce made this error: “This increase in purchasing power is the result of adjusting initial retirement benefits by real wage increases over the worker’s lifetime.” That’s incorrect. The increase in purchasing power is a result of increases in wages from one cohort to the next, combined with a benefit formula based on the participant’s earnings. You need no indexing at all to get the increasing purchasing power. If you had an “AME” instead of the AIME – counting all past earnings at their nominal amounts, without adjustment – you’d have the same average rate of benefit growth (just lower level at any given time).
after some furious finger counting I agree that Arne is right. but the amount is not large, and not “obvious.”
i don’t know what Arne means by “the AWI calculation is not modified by the cap.” but it is. the average wage is calculated based on the averge “covered” wage. wages above the cap are not covered.
i should not have been surprised, because one point of wage indexing is to capture the “increase in average wages” as an effective interest rate, even for workers who don’t keep up with the average.
the ratio of median to average income over the 20 years in the chart Arne cites changes from somewhere in the high sixties to somewhere in the low seventies. not large. i expect it would have been much larger if the average of all wages (no cap) was compared to the median.
since benefits are calculated by “wage indexing”, i don’t think i understand your point.
The AIME adjusts the wages earned in any given year to reflect the change in wages between that year and the year of retirement. So that, say I earned 50,000 in 1950, when wages averaged 10,000, that would count more toward my retirement “indexed wage” than the 50,000 I earned in 2010 when wages averaged 50,000. [note these numbers are entirely made up]. The effect of this is to provide something very like “interest” on the contributions (taxes) made in the different years.
bullfighter seems to be saying that you don’t have to do this. just add up the workers wages and pay him a benefit based on the taxes collected that year. might work fine, but would be a little unfair to the guy who paid more taxes in the early years and might think he deserves a little “interest” for the time value of money.
coberly: No indexing would be unfair to people whose earnings are flat or declining through the career, but that’s irrelevant to the issue of benefit growth. Consider another similar worker, a few years younger. The ratio of the two workers’ benefits is the same (on average) whether each worker’s benefit was computed with or without indexing. Same if you make up any other kind of indexing. (The “price indexing” referred to by the proponents of gradual phaseout is not indexing at all. True price indexing would result a one-time reduction of benefits with a subsequent growth rate same as now.)
given your intelligence i can understand why you’d want to ask an expert. but, given your intelligence, how will you know which expert to ask?
i really am not understanding you at all. since i think i understand how indexing works and why, i’ll stay with that.
with social security you pay a “premium” (or tax) with every paycheck. since these payments are made over a period of roughly forty years, there needs to be a “fair” way to “count” payments made in early years as compared to payments made in later years. This could be done by simply adjusting the payments according to some percent-times-years as if the payment were the same as purchase of a fixed interest bond. But you can accomplish the same thing in a fairer way and allow for the variation in inflation and growth of the economy if you just record the payment as a ratio to the average wage in the year it was paid, and then multiply that ratio times the average wage in the year of retirement. Since the benefit will be paid out of the current payments of the not yet retired this wage indexing automatically balances not only the “fair interest” on your money over time, but also balances the benefits paid out to the taxes paid in at least for the first year.
After that, benefits are adjusted by a “cost of living” which is less than the wage index. saving the system some money at the expense of older retirees. this may or may not be ‘fair.’ the cost of living index does not reflect very accurately the actual cost of living of retirees, but probably neither would a wage index. in any case increasing the benefits of older retirees would require either raising the payroll tax (not by much) or lowering the initial benefit, so the “inflation index” after retirement may be as good a compromise as any. one thing you can be sure of is that it will never be discussed rationally by any politicians or highly paid non partisan experts.
your quote does not exclude the possibility that those wages etc are the “wages subject to the payroll tax.” certainly the chart you cited looks like those lower wages.
i have no doubt the result is “necessary”.. but to go from the increasing average relative to median, you have to go through some complications of how the benefit is calculated to reach the result that benefits will go up “with the average” and not “with the median.” it turns out you were right, but give this old slow finger counter a break. the answer was not “obvious.” nor, to my way of thinking, is it material.
Obviously you are not understanding. Read my comment again. Bruce made a mathematical/logical error. That’s a fact, not an opinion. Your discussion of fairness has nothing to do with it. I probably wouldn’t disagree with you about what is fair; I certainly agree with Bruce most of the time. But that could not be more irrelevant for the point that Bruce’s statement about indexing was plainly wrong.