by Dale Coberly
“SOCIAL SECURITY POLICY OPTIONS” JULY 2010
A USER FRIENDLY GLOSS ON THE CBO REPORT
The first thing that strikes me about the CBO report is that the language is unnecessarily negative. They tell you that Social Security is running out of money. They tell you this three times in three ways. They don’t tell you that this means a whole lot less than you think it does.
They say “for the first time since…1983…outlays will exceed…annual tax revenues.” They don’t tell you that in 1983 the tax was increased exactly so that revenues would exceed outlays, increasing the size of the “Trust Fund,” in order to create a bigger reserve to carry Social Security through times, like the present recession, when outlays exceed revenues.
It has long been known that through this increased Trust Fund the baby boomers have paid in advance for their own retirement. But CBO just forgets about the Trust Fund and says “starting in 2016…the program’s annual spending will regularly exceed its revenues.” Forget about the two and a half trillion dollars the program has in the bank.
CBO tells you that “the trust funds… will be exhausted in 2039.” But they don’t tell you that Social Security can go right on paying benefits on a “pay as you go” basis, just the way it was designed to do. This could require a reduction in the “replacement value” of benefits, but not a reduction in their “real value” as compared to today’s. The “replacement value” is the amount of the monthly benefit as a percent of the worker’s adjusted average lifetime monthly income. (The “adjusted” income includes an effective interest that is equal to inflation plus the increase in average national per capita real incomes for each the year since the tax was paid on that income.) The reason the reduction would be needed is that the next generation of retirees are expected to live longer than the last. To avoid a reduction in monthly benefits, the same replacement rate could be paid, over the longer life expectancy, with a payroll tax increase at that time of about 1.9% of payroll for each the worker and his boss.
They do manage to tell you in a footnote that to bring Social Security “into actuarial balance over the 75 years, payroll taxes would have to be increased 1.6%.” This is about eight dollars per week for a worker making 50,000 dollars per year. They are not in a hurry to tell you that there is no need to increase the tax that eight dollars per week today. There is no need, and much harm in raising the tax too soon. All it would do would be to increase the Trust Fund… increase the amount of money that Congress “borrows” from Social Security and then blames Social Security when it doesn’t want to pay it back: “you should have taken the bottle away from me. you know I can’t be trusted.”
The eight dollars doesn’t need to be paid today. It can and should be phased in over about forty years. A rate that would never be “felt” as more than 80 cents per week. but would average twenty cents per week per year while incomes were going up an average of ten dollars per week per year. (Again, these amounts are in today’s money.)
I don’t quite know what to do about people who would think that saving an extra eight dollars per week so they can retire “on time” is an intolerable burden. And for those who think the eight dollars the boss would contribute is really “my money,” all i can say is, you aren’t getting it today, so you won’t miss it if the boss puts it in a savings account for you.
If you work for yourself, and pay both shares, and make near or over the top of the SS-taxable income, you would be looking at an extra 32 dollars per week. This is not an insignificant amount of money, but it is a good investment as insurance, especially as you will almost certainly get all of it back, with interest, when you retire. And remember it is 32 dollars out of about 2000 dollars per week….or more, depending how much over the cap you earn. It’s not something you would actually notice unless you obsess about what you “might have gotten” by investing, and risking, it on the market.
My guess is that if you are going to make big money on investments, you can find something other than your Social Security money to invest and risk. Then if the unthinkable happens and your investments fall through, or you become disabled, or your job becomes obsolete, you would still have about 2000 dollars a month (in today’s money) Social Security to live on. Not a lot by your standards, maybe, but a hell of a lot better than living out of a dumpster.
CBO tells you that the “gap” between revenues and scheduled benefits is 0.6% of GDP.
They don’t tell you that this is not a lot of money to pay for feeding and housing and providing modest comforts for about one fourth of the population. Or that the people getting the benefits will have paid for it themselves. That is, the people paying the tax will get their money back with interest. Perhaps they don’t want to have to try to explain “pay as you go” to people who think that money they put in a bank is kept in a locked box for them, growing interest by spontaneous generation.
A lot of people don’t realize that 0.6% is 60 cents out of a hundred dollars.
Surely the workers of America can find a better use for that kind of money than to save it for their own retirement.
THE POLICY OPTIONS
Page xi of the summary gives an overview of the effect on the actuarial gap of various policy options. The chart is poorly labeled. It is not clear that the values given are in “percent of GDP,” so you would have to know, for example, that a value of 0.6 on the chart is actually 100% of the actuarial gap.
Then you would have to be careful about reading the policy options. For example the second option “increase the payroll tax rate by 2 percentage points over 20 years” actually closes the actuarial gap entirely. Why then does the third option, “increase the payroll tax rate by 3% over 60 years, only close the gap by .5%of GDP (which is 83% of the entire gap)?
The answer is that 2% over 20 years is a full tenth of a percent per year, while 3% over 60 years is a tax increase of half a tenth of a percent per year. This means that after 20 years the second option has raised the tax 2%, while the third option would only have raised it by 1%. By year 40, when the third option catches up to 2%, the higher tax phased in earlier by the second option would have had its effect on the 75 year gap enhanced by the interest it has been earning from the excess it collected over what was needed to pay expenses in the earlier years.
On the other hand, by reaching a tax rate of 3% instead of 2%, the third option is much closer to closing the actuarial gap for “the infinite horizon,” which would require a total tax increase of 3.6% over 75 years.
It needs to be noted that this is the “combined” tax, so the workers’ share would be half a tenth of a percent per year in the second option, or half of a half of a tenth of a percent per year in the third option. In today’s terms that amounts to about 40 cents per week per year for the second option, and 20 cents per week per year for the third. These are not staggering burdens.
As it turns out, these increases “only” balance the trust fund for 75 years. To balance SS over the “infinite horizon” would require that the second option be run for about another 17 years, or the third option would need to be extended for another 15 years. A better answer would raise the tax one tenth of a percent whenever the Trustees report “short term actuarial insolvency.” This would average one fourth of one tenth of one percent per year (about twenty cents per week) for each the employer and the employee for 64 years and would leave SS fully paid for, and fully “funded,” able to pay all benefits for the “infinite future,” with no reason to anticipate a need for further tax raises after that time.
So when you look at the other policy options, you need to keep in mind that what you are being asked to do is to substitute another “solution” for part or all of the staggering cost of twenty cents per week per year for the workers to pay for their own benefits.
In this regard, you could:
RAISE THE CAP
Eliminate the taxable maximum (the cap), raising the tax on people making over 106,800 a year by 12.4%. These are people who would not expect to benefit from Social Security. You can see why they might think this is a poor idea compared to raising the tax of the people who will actually get the benefit by one fourth of one tenth of one percent per year.
Or you could raise the cap to cover 90% of earnings. This would raise the tax on some, but not all, income over 106,800 by 12.4%, and would save the workers about one third of that one fourth of one tenth of one percent per year. This is about six cents per week for the workers who get the benefits vs about 24 dollars per week, or 1200 dollars per year, for each ten thousand over the current cap, on a worker who will not see any benefit. Sounds like great politics.
Or you could cut benefits. CBO offers a variety of options. which save the worker from 3 cents per week to 20 cents per week, at the cost of cutting his retirement benefit (in today’s terms) from about a thousand dollars a month (note: “month”) to about 700 dollars a month, or even to 500 dollars a month. Talk about your penny wise, pound stupid.
RAISE THE RETIREMENT AGE
Or you could raise the retirement age to 70. this will save the worker 10 cents per week per year. If you can’t imagine what having to work an extra 3 years would do to someone with a hateful job, or declining health, declining physical or mental abilities, or a life expectancy somewhat shorter than what we are being told “we”… mostly the rich and well fed and lightly worked… can “expect”, you need to do some serious thinking. That future old person might be you. Or, if you can imagine this, your child:
“Here my child, my darling, I saved you ten cents per week. Only now that you are old, you have to work another three years to pay for it.” “But dad, my arthritis! But dad, I really wanted some time for myself before I have to go to the old folks home.”
But hell, what do you care? So what if the cop that answers your 911 call is seventy years old. No doubt the guy with the gun breaking in downstairs will be seventy too.
AND IN CONCLUSION
The last paragraph on p xii invites another kind of stupid thinking. It is true that gradually phased in tax increases will have a bigger lifetime effect on younger workers than older workers. But younger workers are going to be making a lot more money and living a lot longer. The phased in tax will actually proportion the larger share of the tax increase to those who will get the most benefit from it… by living longer in retirement at a higher standard of living.
The question you should be asking yourself is not, “Will I get a few tenths of a percent better or worse deal than my parents?” but, “Will I be getting a good value for my money?” The answer is that yes you will.
You are paying for insurance… an insurance policy that will pay you if you get disabled, pay your family if you die, pay you enough to retire if you otherwise reach old age without enough to retire on, and pay you back everything you paid in, with interest, if you are among those lucky enough to earn near the top of the income ladder for a whole lifetime.
What pays for this magic insurance is the difference between what the high earner “might have” gotten on his “investment” and the “average increase in wages” over his lifetime. That high earner will have plenty of other money to invest to chase those higher returns at higher risk.
Judge it as an investment and you miss the point that it is insurance. Judge it as welfare and you fail to understand that the workers pay for it themselves. It was deliberately designed NOT to be welfare.
I have only covered the Summary. But this is a good place to stop for now. Looking ahead, what I see is more clever writing that never lies exactly, but is carefully designed to lead you to arrive at false conclusions and hurt yourself, or stand silently by while they hurt your children