Dean Baker on the Urgency of ‘Nothing’ for Social Security
by Bruce Webb
A year and a half ago I put up a post here called The Fierce Urgency of ‘Nothing’ whose conclusion was:
“Nothing”. The numerically proven plan for Social Security since 1997.
So you can imagine my gratification at running across the following by the co-author of the must read book from 1999 Social Security: the Phony Crisis, economist and co-director of CEPR (Center for Economic and Policy Research) Dean Baker.
Action on Social Security: the Urgent Need for Delay
There is enormous public confusion (much of it deliberately cultivated) about the extent of Social Security’s projected shortfall. Many policymakers and analysts point out that projections from the Congressional Budget Office and the Social Security Trustees show the program to be out of balance in the long-term, therefore we would be best advised to make changes as soon as possible. This paper argues that supporters of the existing Social Security system should try to ensure that no major changes to the core program are implemented in the immediate future. It points out that:
There is good reason for believing that the public will be better informed about the financial state of Social Security in the future, in part because of the weakening of some of the main sources of misinformation;
Many more people will be directly dependent on Social Security in the near future. These people and their families will likely be strong defenders of the program;
The group of near-retirees, who may be the victims of early action, will desperately need their Social Security since they have seen much of their wealth eliminated with the collapse of the housing bubble; and
The concern over “maintaining the confidence of financial markets” is an empty claim that can be used to justify almost any policy.
The full paper in PDF can be found at this link The Urgent Need for Delay. And if I say so myself goes a long way towards explaining the justification of my previous post from Sept. Why ‘Nothing” is STILL the 2nd Best Plan for Social Security. I am doing what I can here at AB to make sure that “the public will be better informed about the financial state of Social Security in the future”, but you could do worse than taking the word from the Leader of the Pack. Because Dean has been on this beat even longer than I have, and is a real economist to boot. Go Read!!
If I remember correctly some thought the idea quite radical.
It amazes me to see the spectrum of views on SSA. One group sees no problems at all. The other sees chaos and an end to SSA. Some thoughts on the topic from your “pal” Ron Paul.
http://www.zerohedge.com/article/ron-paul-calls-end-americas-welfare-state-choice-opt-out-social-security
I say nothing, becuase the alternative would mean getting screwed by the political class for their gain, and our loss. Nothing is the BEST plan period.
Ron Paul knows nothing about Social Security.
“With regard to entitlements, the 2010 Social Security and Medicare Trustees report tells it all. It paints a stark picture of two entitlement programs that cannot be sustained under even the rosiest scenarios of economic growth. No one, regardless of political stripe, can deny the fundamental problem of unfunded future liabilities in both programs.
We should understand that Social Security was intended primarily to prevent old widows from becoming destitute.”
First of all the Low Cost alternative that shows a fully funded system is not all that ‘rosy’. Optimistic yes, out of the realm of probability, not at all.
Second Social Security initially had no survivors’ component, that had to wait until the 1939 amendments. The only person more ignorant that Paul is the douche who introduced the piece who claimed that Social Security would soon stop paying out benefits at all.
And the only people who would know enough about their future economic prospects to opt-out of Social Security initially are trustafarians who mostly wouldn’t be called upon to pay into it in the first place.
Typical glibertarian drivel.
The best plan to implement is triggered tax increases; the unfunded liability “magically” becomes zero and the anti-SS crowd gets its legs chopped. Unfortunately, you can’t there by compromising and politicians can’t do anything without compromising. There probably are compromises worth making, but they are so far away from what is being talked about that Nothing is the most reasonable thing to do.
Absolutely, hence the “Second Best Plan” post.
Look, the courts have emphatically ruled that SS taxes and payouts are simply unrelated. The facade of continuing this ruse is what is causing the problems…..It is fraud to keep pretending this is true…SS is not a pension….clearly Prudential or Met Life would have done a much better job for people retiring now…So set some nice retirement payments, perhaps wealth dependent, and come up with efficient taxation…such as the wonderful flat tax. Make it broader, lower marginal rates…everybody happy. SS is not a pension. Stop the fraud.
What courts? When? If you are referencing Fleming vs Nestor you have a fatally flawed understanding of what the Supreme Court actually was saying. http://www.ssa.gov/history/nestor.html
Nor is there any evidence that Prudential or Met Life would have done a better job in providing an inflation protected annuity that came complete with disability and survivors’ insurance. Still less that this evidence is “clearly” obvious. Can you point me to a policy that delivers those benefits WITHOUT a medical exam or other disqualifying tests?
You are simply repeating stale right wing talking points without any apparent signs that you understand the first thing about Social Security finance. And speaking of fraud that is a better word for the Flat Tax. Once people find out the range of services that would need to be subject to it to keep the rate from being ridiculous on its face they lose interest. The flat tax is simply another right wing attempt to reduce taxes on billionaires while raising them on everyone else. It is not a coincidence that its most prominant promoter Steve Forbes is himself a billionaire or close to it. It is a bait and switch confidence game.
TX just re-elected our radical governor who keeps making noises regarding his own ideas about doing something about SS and medicare. We may be about to find out how bad the non-nothing plans are.
Gentlemen, at least most of you, I believe this is spot on, that the information presented needs to be heard by a continually increasing % of the population, re: educating the masses, but, it’s crucial that the temper rise to offset the nonsense taking place today. As we have witnessed these past 2 years, it’s hard to figure out where “O” & the current thinking is? One has to wonder real hard just why he allowed this “Cat Food Commission” in the first place. Keep up the heat, so those who are false profits won’t be able to stand it, sort of like; “if you can’t stand the heat, get out of the kitchen”.
I strongly agree that it’s the second-best plan, but it’s a distant second. On top of your reasons, add one political and moral/ethical reason that nags at me. The last group of Americans who should suffer the consequences of three decades of wrong-headed economic policies by elected officials is the under-30 group, who’ll be approaching retirement in the 2030s when SS may/may start to have a funding problem. Their parents should bear a price to avert this, in particular those who have “won” economically in recent decades. That means hitting them (us) up now for some cash. Automatic indexing would be good, but first raise the earnings cap on them (us). Now.
Krasting
there is a “spectrum of views” because people who know absolutely nothing are free to make up fantasies. and the liars are glad to help them. there is nothing published in the mainstream media about Social Security that is not a lie. and that should scare you even if you don’t care about Social Security.
the problem for ordinary people is they have no way to find out the truth. that would involve reading for about an hour and following some simple arithmetic.
and then to have the brains to hold in mind what they had learned the next time someone tells them a really scary lie.
the facts are these:
social security is not welfare. the workers pay for their own retirement. it’s not “government spending.”
the cost of paying for the expected increase in life expectancy, with no other changes in Social Security would be a tax raise of one half of one tenth of one percent annually. this is the CBO option number three. one half of one tenth of one percent for an average worker today is 40 cents per week. and the boss pays half of that.
Pete Peterson is spending a billion dollars to keep the people from understanding those two facts.
He gets lots of help from very clever liars, and complete idiots.
Bruce and Arne
well, actually the second best plan is the first best plan. it is really “Nothing. until and unless an actual shortfall presents itself. then the triggered tax increase would be a tenth of a percent for each the employer and the employee. this is expected to happen about one year out of four over the next 75 years… averaging out to the CBO option number three: half a tenth of a percent (combined) per year.
even if this is not accepted as a “plan,” it should be understood as the actual cost of the projected deficit in Social Security… that is, it would be too small to feel. and to save ourselves from that we are willing to cut benefits below survival levels and to force old people to work until they are ready for the nursing home. or collect welfare (which would be paid for by “the rich”) or to just die of exposure and hunger.
pete
you simply don’t know what you are talking about. whrere do you get your “facts”?
never mind, i know. the pete peterson lie machine.
As coberly says, the conseqences of triggered tax increases do not make anyone suffer. Average and median projected to grow faster than the tax increase needed = no suffering as everyone comes out ahead.
pjr
social security is designed to stand outside the consequences of economic policy as much as it is possible to do so. with SS all that happens is people pay in (tax themselves) a percent of their income which is the least possible to generate enough money to support themselves when they can no longer work.
generally that percent will stay more or less constant. if workers aren’t making much, neither will retirees… but usually “not much” is “enough.” and it’s “fair.” the workers paying the tax are just as certainly paying for their own retirement as they are paying for the current benefits of the now retired.
a better way to understand it is that “the bank” takes in your money and promises to pay you back in your time of need. it uses your money immediately to pay back those currently retired the money the paid in all those years ago. as long as each new generation understands what “their money” is being used for, and that means that they will get “their money” back when they need it… well, there simply isno place for anyone tobe suffering the consequences of bad policies that favor one generatioin over another.
there may some room for modest tweaking of the income tax, but not nearly enough to make up for the need to raise taxes to provide for longer life expectancies. and worse, it would tend to turn SS into welfare by taxing those who do not expect to get their money’s worth in benefits.
really, good mental hygiene requires that you think of SS as you paying for your own retirement. that is the way the system works, even if the pay as you go details are a little hard to understand. (they aren’t really hard to understand unless you have a false idea about what “money” and “savings” are.)
please note that most people are not going to live long enough to pay the full expected increase in the payroll tax. so that twenty cents per week per year is never going to amount to enough to notice. especially if your pay increases more than ten dollars per week per year as predicted. and you still get your money back, with interest.
pjr
i am not sure i was absolutely clear. it you were to pay the extra twenty cents per week each year, you would be paying for your own longer life expectancy in retirement.
it’s true that your money would be needed to go directly to pay for those already retired. but those people paid their share in their turn. the “economics” of Social Security is such that each generation gets back more than it paid in… due to the rising level of wages and the generally rising number of people paying the tax. the baby boome looked like it might cause an exception to that general rule because of the very large cohort of people who would be retiring … requiring a sharp increase in the tax on the baby busters. to avoid that “generational inequity” (it wouldn’t have been much) the tax was increased before the need, to allow the boomers to prepay a more equitable share of their own retirement costs. that created the trust fund… which is to be used to help pay for the boomer retirement.
krasting and his ilk think it’s a catastrophe to use the money the boomers saved to pay for their retirement. he wants to cut benefits, or means test retirees, so the trust fund can be used to make bond traders richer than they deserve to be.
note that the increase in life expectancy is gradual, so that while you are paying for the increase with small tax increases while you are working, by the time you retire you will be one of those living even longer, and collecting more from the increased taxes on the following cohort… who will in turn live longer, and collect more than they paid in. this process does not go on increaseing forever, but starts to level off about 2030 and is essentially dead flat by 2070.
i could try harder to make this clearer, but too many words for a blog… and folks really need to do their own thinking or it doesn’t matter how clear i try to be.
Coberly (and Arnie), thanks for your concern about my angst and it is helpful As someone who hasn’t been following this blog and issue for as long as you–and I have appreciated your expertise–perhaps you can link me to your analysis regarding one question: why should I believe that, forty years from now, the average new retiree will be better-off with three-quarters of what SS should be paying based on the current formula? I’m missing something, or misunderstanding something, that probably has been explained in the past, and certainly this is counterintuitive to me. (First, because real median hourly wages haven’t increased over the past thirty years, I wonder about assumptions on that metric when I’m not confident of change we can believe in. Second, I wonder about the relative size of post-retirement drop in income, which of course is large under the formula with full funding.)
I keep wondering when the actuarial impact of 20+ years of substituting corn sweetner and saturated fats for actual food will be factored in. If I believe the scare stories coming out of the CDC re: the coming epidemic of diabetes quite a lot of the baby boomers aren’t going to live long enough to collect much.
The first thing you need to understand is that initial benefits rise with increases in wages, not with the COLA.
The second thing it that the starting point for all analyses is the annual report. The annual report includes a set of projections called the Intermediate Cost model. Even where we have doubts about the ability of the trustees (or anyone) to predict accurately, we start the analysis from the IC projections.
coberly’s analysis assumes you raise taxes to cover the current formula, so the three-quarters question is not meaningful. The formula provides income replacement that varies with income, but the replacement rate at the mean is unchanged.
Using SS report projections, CPI is projected to be 2.8 percent and average wage index (AWI) is projected to be 4.0 percent. By 2040 average income is up 348 percent and CPI is only up by 225 percent, so buying power is up 52 percent. If replacement rate is then dropped to 75 percent of the formula, buying power is still up 14 percent. (152*.75=1.14)
Your concern about income inequality is valid, but the formula for replacement income actually takes care of that. The current replacement rate at a $35K annual income is 47 percent. If that median income went up by CPI rather than AWI, the replacement rate would go up to 73 percent. Your benefit would actually be the same.
NOTE: I have not done the replacement rate calculation until today and I find the result a little surprising, so I would be happy for someone to check me. I got the bend points from http://ssa.gov/pubs/10070.html but I ignored proper calculation of indexing over a career.
I don’t know if Met and Pru could “clearly” do it better but annuities don’t have medical exams. Even those which have disability and survivor features. Now you’re getting into a subject you don’t know too much about.
AH! Lightbulb, Arne! The median real hourly wage today is about the same as 1980 (lower than 1973’s high) BUT the AWI went up about 0.8 percent per year over the CPI during that time. Has to be reflecting an increase either in average hours worked per year per worker, or ininequality among these wage-earners (inequality seems to have increased at every level). Trustees assume continued real AWI increases for some combination of reasons. (They do apparently assume it will be greater in the future than in the past three decades, but I think your explanation works very well as long as real hourly wages, work hours, and/or inequality among wage earners increase sufficiently.)
Regarding the replacement rate, I’m also “not sure” because of your switch between real median hourly wage and real AWI (which I apparently caused). If you assume AWI for the worker, the cut is a cut.
The Trustees actually project LOWER real wage increases over the next forty years compared to the last forty and Arne’s calculations still hold. You can find the Real Wage, Real GDP and productivity numbers in Tables V.B1 and V.B2. Using perfectly plausible assumptions the date of Trust Fund depletion pushes out and the percentage of the cut gets smaller. For example under CBO assumptions the system stays fully funded until 2040 (from memory) and the cut is 16% compared to the 22% of the 2010 Report ( itself an improvement from the 25% of the 2009 Report). There is a lot more contingency in the models from year to year and between SSA and CBO than the fatalistic MSM reporting would have you think.
am socialist
no, but they’ll make it up in dialysis expenses.
Projections for CPI and AWI are in Table VI.F6.—Selected Economic Variables, Calendar Years 2009-85 of the report.
I found the error in my calculations at the replacement rate for someone in in 2040 making $76K/yr ($35K in 2010 dollars) would be 56 percent. The increase in buying power of his benefits would be 18 percent over the 2010 retiree.
pjr: “real AWI” is a meaningless phrase. If AWI is less than CPI, then real wages decrease. I am not sure what you are looking for instead.
Median real hourly wage is affected by the change the types of jobs available. SS is designed around full-time workers, so I usually look at median real annual wage for men, which has gone up faster than CPI (but only about half of AWI over the longer term).
pjr
i think i disagree with bruce, and perhaps arne, about what “better off” means. with no tax increase, and it’s a tiny increase, SS benefits would have to be cut about 25%. the analysis that says that this will “really be” a benefit increase because the wage base will meanwhile have increased about 60% is both true and flawed.
people measure their “wealth” in comparison to their neighbors. the idea that you can cut the replacement rate from about 40% to about 30% without severely implacting the quality of life for the recipients is based on taking numbers more seriously than people. I’ll call it the Boskin fallacy: you can’t start claiming that every increase in prices you see are “really” increases in the value of the product. you can’t, like Boskin does, claim that new cars are more expensive than they were twenty years ago because they are “better.” well, they may be better or they may not. but if you need a car you are going to pay more whether they are or not. Professor Rosser was making a valid point: even if we do noting about SS, there is no “looming catastrophe.” But his friends make a mistake if they allow the Rosser equation to justify CPI indexing, which is just one of many ways to cut Social Security benefits, and reduce recipients to sever poverty, that are on the table.
I don’t think you (pjr) are right about the “no increase in real wages.” over the past 30 years, but you might be. SS would still be returning about the same replacement rate in real value… not what we wanted, but not a disaster. if the real wage does not increase as the trustees project, it’s still not a disaster. you would have to pay a higher tax to pay for your longer life expectancy in retirement. the higher tax would … assuming no increase in real wages… indeed reduce the amount of money you have to spend every month… by pennies. you’d have to decide whether doing without a few pennies today is worth it to be able to retire with “enough” when you want/need to.
Coberly: you’re right, it’s the real median hourly wage for MEN that hasn’t changed–women’s real hourly wages have risen. This also helps explain the real growth reported and forecast in the tables that Arne and Bruce pointed to.
pjr
bruce and arne and i tend to emphasize different things about SS, though I think we are in substantial agreement about the facts. the facts are that there is no real problem. certainly not one that needs to be addressed as an emergency any time soon.
but the point i wish i could make clear to people is that with SS you are essentially paying for your own basic retirement. no one else is paying it for you. and no one else is stealing from you. and you are not measurably worse off or better off than your grandparents and need not be either worse off or better off than your grandchildren.
you simply set aside about (i am a firm believer in the importance of ‘about.’ none of the five decimal place self delusion for me) ten percent of your paycheck every month so you will have at least enough to retire on when you are about 62, if you have to, if you will want to.
the way the system works is simple enough, but for some people it is impossible to understand because they keep insisting it is something that it is not. it’s not an investment plan. it’s not welfare. it is an insurance policy.
if the economy doesn’t do especially well, both workers and retirees will have less than they expected, but neither of them should have “not enough” unless something has been allowed to go very wrong indeed. as far as SS is concerned the only way something could go so badly wrong is if we let them change it…
right now it looks as if a tiny tax increase will be needed because we are going to live longer and spend a larger percent of our lives retired. if later on it turns out that we do live longer but most of us don’t want to retire (this would be insane… you can always find something better to do with your time than make money for your boss)… the payout formula can be adjusted to still allow those who want to retire “early” to do so with a minimum livable pension, while the rest of you supermen living long and prospering can keep working making the big bucks and high job satisfactioin and don’t need to have quite as high a payout…. but that can wait until we actually see how things are developing. we don’t need to panic and lock ourselves into something stupid and painful because the Big Liars are going around telling us how things are going to be a half a century from now.
Maybe. Fresh air had an interview yesterday about what a disaster the Medicare dialysis program has turned into. http://www.npr.org/templates/story/story.php?storyId=131167638
And if this bit from the 2nd paragraph bears out the expenses may not be so great:
“The cost of treatment is among the world’s highest, while the U.S. mortality rate for dialysis patients is one of the world’s worst. One in four patients will die within 12 months of starting treatment.”
A real horror show – turns out 2 chains dominate the providers go figure.
Catfood Commission recommendations:
http://documents.nytimes.com/draft-proposal-from-the-national-commission-on-fiscal-responsibility-and-reform?ref=politics#document/p43
Actually, this is a co-chairs recommendation – chained CPI, gradual increase in retirement age to match increase in life expectancy, new 50th-percentile bend point and flattening above it (reduced benefits for upper 50%), increase in taxable income to cover 90% of total income.