The Strengthen SS Coalition shows ‘Reform’ in One Graph (h/t Ezra)
by Bruce Webb
Strengthen Social Security a coalition of progressive organizations determined to protect and strengthen Social Security, coordinated and hosted by Social Security Works (or maybe by now SSW is hosted by SSSC) produced the above graph. I didn’t see it on their website and so grabbed it from Ezra Klein’s post (which does credit SSSC) The Future of Social Security in One Graph
This doesn’t tell the whole story, for one thing it shows wage indexed results which would seem to discount the actual gains in real benefits under the current schedule, and for another it would be interesting to see the results on the “if nothing is done” trendline if we added in the revenue effects alone of the other plans. But however you slice it clearly the goal of ‘reform’ is not to deliver an appreciably better result for workers, at best they are being asked for a significant giveaway from the current schedule.
Okay, so why if nothing is done and the “current law” proposal, do benefits fall over the next 10 years?
Terry
they don’t.
if nothing is done, and the Trustees Projection turns out correct, benefits will fall abruptly in 2036 by about 25%.
That is because by then enough people will be living longer that the benefits they paid for under the current level of taxation will have to be stretched out over more years, requiring a cut in the monthly benefit.
On the other hand, raising the payroll tax one tenth of one percent if and when an actual shortfall is in the offing, would keep the monthly benefit the same… as a percent of average lifetime earnings… with no other chages whatsoever. one tenth of one percent of an average workers wages today is eighty cents per week. The Trustees project this will occur about 17 times over the next 75 years, leading to an average increase of twenty cents per week per year. The boss would have to contribute an equal share, raising his taxes a jobs killing twenty cents per week per year per employee.
Bruce, friend and ally, I think you cloud the picture by insisting on making your point about the growth in “real” benefits. The real benefits will take care of themselves, and just as today’s retirees have more real benefits than folks in 1936, they also have refrigerators, cars, and indoor plumbing. By 2085 there will be “real” needs that people will have that they don’t have today, and they will need those increased real benefits. In any case by reminding people that not increasing the tax will still leave the future retiree with more “real” benefits is to invite those people who want to kill Social SEcurity to kill it by indexing benefits to the CPI instead of wages. And you can be sure the Mike Boskins will be out proving that the CPI “really” measures “improvements” and not “inflation.”
I understand Rosser’s point, and it needs to be made at times. But it doesn’t need to be made EVERY time.
Focus on the important fact: with a tiny tiny tax increase people can keep benefits at their present level in “replacement rate” and their present retirement age, and not turn SS into welfare where it will be easy pickings for the people who hate welfare.
And the first installment of the tax increase doesn’t have to be made until a shortfall actually appears on a realistic horizon (ten year) and that won’t be until 2026.
BTW
lest anyone mistake..
Bruce is doing heroic work keeping up with this issue. And the graph he gives us today is critical in understanding what it is the “reformers” are really up to. They are out to destroy Social Security and make old people’s lives desperately poor and anxious. This has nothing to do with any deficit: not the budget deficit, not the projected SS internal deficit. It’s all about hurting people.
coberly: “what it is the “reformers” are really up to. They are out to destroy Social Security and make old people’s lives desperately poor and anxious”
Oh, no! Soylent Green, anyone?
I am not happy with this graph and have some questions into the ostensible authors, but as Dale notes it serves a reasonable comparative perspective.
The graph mirrors pretty much this one from CBO showing replacement ratios:
http://4.bp.blogspot.com/_fjW71B3WLTQ/TDr-dGhrUkI/AAAAAAAAAYg/_NuX8l3Dw70/s1600/SocSecAging+Fig+2.jpg which does show that average dropping from 42% to 37% over that period before flattening out. On the other hand how that would translate to real benefits can be seen in this one:
http://4.bp.blogspot.com/_fjW71B3WLTQ/TDr-cgLV4GI/AAAAAAAAAYY/Mpy8KECHBig/s1600/SocSecAging+Fig3.jpg
The more I think about it the more it seems like whoever compiled this graph started from the assumption: discount the effect of real wage increases over the next 20 years to zero for display purposes. Why this would be the best representation of the actual reality on the ground is a little baffling. As I said I put the question into a group that includes the leadership and communications people of SSSC, if I get an answer I’ll update the post.
from comments at Ezra Klein:
Even under current law, benefits for people aged 65 are going down because the normal retirement age is now at 66 and will reach 67 in 2022.
…
Posted by: WarriorWonk | November 23, 2010 1:26 PM
Min: Or you could just drink the potion that Edward G. Robinson consumed.
I would not have posted this graph. People do not think in term of wage adjusted income.
It also does nothing to indicate which plans use increased taxes (everything except Nothing and Ryan), so it makes comparision meaningless.
Nice point, and one that I hadn’t thought of, but is it enough to explain an 18% drop overall? ($17k to $15k). In the face of a schedule that has real benefits rise with real wage?
Well I got an answer. With names deleted (not that you couldn’t figure them out by visiting their website):
“(X) of our staff made the calculations, on which the graph is based, under my supervision. He used the following method which he developed and which the actuaries at SSA approved. For the annual benefits of a medium earner aged 65 under Bowles-Simpson proposal, he took the monthly scheduled benefits (wage indexed 2010 dollars) for a scaled medium earner as listed in the first table “Fiscal Commission plan 2a: Tax-Light Plan For Worker Retiring (Stops Working) at age 65 with indicated Career Earnings Level” of Steve. Goss’s memo to the Fiscal Commission staff, and multiplied it by 1 minus the total percentage decrease under the Bowles-Simpson proposal. He then multiplied both the currently scheduled monthly benefit and the Bowles-Simpson monthly benefit by 12, in order to get the annual benefit amounts.
He did the same to get the numbers under the Rivlin-Domenici proposal and the Deutch proposal. The Schakowsky proposal didn’t change current law benefits. For the Ryan proposal, Daniel used Table 2 in the Center on Budget & Policy Priorities’analysis of the Ryan plan, which tabulated both the percentage decrease from currently scheduled benefits, and the monthly benefit under Ryan’s plan. He then multiplied the monthly benefit by 12 for the annual benefit For the numbers in the event that Congress takes no action, SSA provided us with the exact percentage reductions in the decades after 2036.”
I would just note that actions Congress takes or doesn’t take after 2036 don’t address Terry’s questions about benefit levels under current law between now and 2020 (or 2030 as in the graph). But for what its worth this is the stated methodology used.
Arne I am regretting posting it more and more as the day wears on. its heuristic value, despite the good intentions of the author, seems more than limited. But in the age of Google caching it is rarely useful to try to put the genie back in the bottle.
OK, just a general comment. We get really wonky here, and I love it. However out in the real world, even one of my nearly-left liberal friends is still giving me the “ponzi scheme” argument. He thinks since private pensions must (now) be fully pre-funded, so should social security, the SS bonds are mere “IOU”s because they’re not tradeable (and therefore not subject to that part of trading law). This is the kind of mindset (and worse) that we’re actually dealing with for the Tea Party, Republicans, and banksters like Pete Peterson. We shouldn’t forget the underlying narratives (and develop them further) of why Social Security is a good (IMO brilliant) idea. I start from the basics that SS is primarily a pay-as-you-go system, with trust fund modification added in 1983 along with 50% increase in tax to cover the troublesome baby boom/bust demographic. What follows is my basic story:
Private investments or retirement pools are risky because any one company, etc., can go broke. You might think there will always be a GM, but that isn’t necessarily true. And even if there is a GM, it might have far fewer workers at some point in the future.
Social Security is not a ponzi scheme because it depends on only one thing financially: future workers in the USA earning taxable wages. That is not a pool with a limited horizon, we hope. If it ends, there’s no hope for anything else either.
Only the whole country can do that. And given that only the whole country can do that, it must, because it’s by far the most efficient and acceptible way to do it.
We hope that paid work in the future never ends, for if it does end, then everything, no matter how many layers of CDS you have wrapped around it, will fail also. Because everything, ultimately, depends on paid work. Even the values of land and gold would collapse.
Now there is one other risk: the political risk that the program will become unpopular, or be canceled or drastically cut despite it’s popularity because of the other dimension of politics: big money.
That is precisely why SS must be funded exclusively as it is now and be seen as a social insurance program, not as welfare. Welfare programs are trashed by those are taxed but see no benefit from them. We have seen that happen since 1935; social security (a program that ultimately benefits the payees) has kept getting better while welfare programs (unemployment and AFDC) have been decimated or eliminated.
Though SS has a defined benefit, I personally have no problem with small adjustments. Small adjustments over time are exactly what is required to keep a pay-as-you-go system running (as well as a non-ending pool of future workers) running forever.
Nothing else gives guaranteed numbers either.
Now back to the trust concept. First, from where we are now it is virtually impossible, almost unimaginable to fully fund SS, unless you were thinking you could get $30T overnight by knocking over Wall Street (they don’t have the money either in their smoke and mirror system with quadrillions in nominal value). So to go from here to fully funding would require drastic cuts in benefits or drastic increase in taxes, neither to any good end.
A(x)=(x.E)(x.E), where A=Assumptions and E=Error
CharlesPeterson
without getting into all the complications that are unecessary and confusing..
you can fully fund SS by raising the payroll tax one half of one tenth of one percent per year. that’s40 cents per week in today’s terms.
that is not a drastic increase.
otherwise your view is very similar to mine.
charles
my computer is dying and i may not be here if you come back with a question or doubt.
if you are interested maybe you can leave your email with dan and i can send you a pdf that proves the point. or you can look up CBO option number 3 and think about it a bit.
Thanks for the effort Bruce. I do not exactly follow the official explanation. I do get the point about the retirement age increasing during the span when I thought real benefits would be flat under current law, but like you would not expect it to be that significant. I am all in with rejecting everything but Coberly’s proposal, but remain extremely fearful that our President Chamberlin will have peace in our time with the GOP that will compromise social security. Hopefully there are still 40 real Democrats in the Senate. Even the center right newspapers are in on the disinformation campaign. They published a special editorial page on the deficit and called it “knowledge is power” They then proceeded to tout the following falsehoods: There can be no serious discussion of defict reduction without considering changes to social security. Out of the combined 42K in payroll and income taxes paid by a couple earning 200K a year, $8000 goes to social security. I figure it is either $12K or $6K depending upon whether they both work. I suppose you could concoct a scheme where the employee share would work out to $8K if they both worked and one earned much more than the other, but that was not what the paper was doing. It simply divided reciepts by payments made by the government. Next they had a retired couple with a limited income and limited taxes contributing $1700 to social security. If they are retired they are not contributing anything to social security or am I missing something? The American people do not understand social security . The politicianns who do either are members of the GOP–do you have to swear a blood oath to try and kill social security to join the party? or the most milqutoast Democrats I have experienced in the last 50 years. Keep up the good fight, but this is going to end badly if our President does not get the transplant referenced by Carville.
Terry
yes. and my apologies for failing to note that the current chart showed the decline in benefits under current law. i would not have thought of the raise in the retirement age already baked in, even if i had noticed it. and i am not ready to do the calculations that would show whether or not this is a correct result.
if i have to i will, but i am pretty sure my simple way of putting it is not materially wrong. in my opinion the current (1983) raise in the retirement age is/was a mistake. but i can only fight one battle at a time.
and there is a great benefit in putting it simply. people are being told a simple lie and they believe it. if i, or bruce, try to tell the whole complex truth in one mouthful, people’s attention wanders. there is such a thing as the essential truth.
I think we could add to productivity by solving the obesity problem. This is mainly a behavioral issue that will certainly help to bend the healthcare cost curve. It is very interesting that no one talks about individual responsibility. Individual responsibility also includes eliminating illicit drug abuse, reckless driving, smoking, and the spread of STDs. Did you know there may be a retrovirus (other than HIV) that may be in the blood supply, contributing to chronic fatigue in a large number of people?
We also need to stop rewarding bad behavior, whether it is poor health choices or financial decisions. Good behavior (diet and exercise, saving money wisely, hard work) should be rewarded.
I’m willing to quote the Beatles and just say “Let it Be”.
Any chance that Webb/Coberly can draw in their plan on the graph? I think you would be up there with “Current Law”. Of all the things that might happen I think that is least likely. A plan that has no shared sacrifice (both cuts and tax increase) is just dead in the water. You don’t see that?
Min
i should learn to keep my metaphysical speculations to myself and just stick to “facts.”
But I can’t imagine anyone following this subject and not coming to believe the Peterson gang are evil. not just greedy, but evil for the pleasure of causing harm.
oops, there i go again.
Krasting
“my” plan would essentially be “current law” as far as benefits. only a tiny tax increase to pay for those benefits.
whether that is a “sacrifice” or not would be in the eye of the beholder. since the taxpayer gets the benefits I can’t see who is sacrificing anything. your young self “sacrifices” a tiny percent of his present income in order to have enough money to live on when he is old.
guest
i am inclined to agree with you. but not a good idea to conflate that with the funding of social security.
certainly your ideas would be an important part of bringing down health care costs including medicare, but meanwhile even if nothing is done the cost of medcare, while high, is not going to be an unreasonable burden. it will be a question of paying for health care or having an EXTRA lexus in the garage.
second thoughts:
i can’t really read the present graph and don’t have time to study it. “my” plan would provide the benefits as described in the current Trustees Report in constant dollars. That does involve some decline in the replacement rate already baked into the 1983 rise in normal retirement age.
but it does not include the “fall off the cliff” cut in benefits that would be required in about 2036 if there is no increase in the payroll tax. the Trustees do not report this as a cut in benefits in their tables, but as an “actuarial deficit.” seems even they leave room for the possibility that we will be sensible enough to pay for the benefits we will need.
the amount of the required tax increase, according to CBO is one half of one tenth of one percent per year. one half of one tenth of one percent of an average workers pay today is forty cents per week.
over the very long run this would add up to about a 2% increase in the workers share of the tax and 2% in the boss’s share. if wages go up as much as predicted this will be far less in actual dollars taken out in tax than the increase in wages. far less. even if wages don’t go up, you are still going to need to pay for your retirement so it would be a question of whether you want to give up an extra six pack a week while working in order not to have to eat cat food when you are old. to me the choice is rather obvious, but it’s been a long time since i was young and stupid.
I look at this deficit reduction hoax this way. Reductions in future beneficiaries’ SS benes does not disadvantage the Villagers and those whose income is derived from financial markets. It is absurd to suggest that upper-income people will do anything but prosper in the near and mid-terms, if current CEO compenstation and corporate profits are any guide to the future. So, the sacrifices described will fall solely on middle and lower income earners.
The MOTU’s quite naturally assume that ordinary people should not be consulted on such matters. After all, the MOTU’s own the government and have dispensed very a generous share in the profits of industry, banking and business to workers in the past. Since this is no longer convenient, it is necessary to reduce the generally distributed share of profits by lowering wages indefinitely, cutting off the supply of easy consumer credit, keeping interest rates for consumer credit high and increasing fees on credit cards and banking services generally.
When all is said and done, the losses that the middle and lower earners have suffered could have been much, much worse. So, that alone should be sufficient to satisfy whatever complaints the mass of voters may make about paying having their retirement savings and investments whacked, having higher taxes for fewer SS benefits in the future, and losing 30% of the equity in their pathetic little hovels. Or, that’s how I interpret Simpson-Bowles, Rivlin and the Peterson gang’s positon on the future of SS. SS is connected to the deficit in these peoples’ minds because whatever ordinary people earn or save for the future is theirs to dispense as they will.
Contnd, Or not. And, as it happens, now is the time for the not. NancyO
I find it very hard to believe that change from current modified-pay-as-you-go to full-prefunding would be small. IIRC Krugman had $45T ($15T for each of 3 decades, so this included an inflation factor). I rolled this back armchair-like to $30T at present.
This is for the very hypothetical case in which SS would be funded so that even if the program were ended abruptly at some point, so that no new taxes were collected, it would be able to pay all benefits for current recipients forever with COLA, and benefits to people who had already paid in something proportionate to their payments upon their eligibility date. Isn’t that the way private pensions have to be funded now? Of course defined-benefit plans of any kind are very hard to find anymore.
I’m not merely talking about filling in the 75 year gap. I recognize that’s easy (and that the media/etc never wants that fact to be revealed). I’m talking about full prefunding.
I think it’s absurd/insane to even think about this, but some people (who may have ulterior motives) do; they simply don’t like the system as it is or anything like it is.
Charles
“funding” SS simply means dedicating a tax stream to pay for it.
lots of people come to grief when they try to compare SS to a private retirement fund.
“prefunding” SS, as in putting enough money in the “bank” to let “interest” pay for all future benefits is an absurd idea. a delusion at best. a failure to understand what money is and where it comes from.
I totally agree it’s an absurd idea, and a misunderstanding of what money is about and where it comes from. People have these ideas because they don’t understand how a credit money economy (by far the most efficient kind) differs from a barter economy. Money isn’t stuff it’s claims on stuff, mostly in the future. The pay-as-you-go part of Social Security is also claims on stuff in the future, but made in a much more efficient and transparent way than money-in-the-bank. That’s what I try to explain to people (as I’m trying to come to grips with it myself).
Anyway, here is the article I was thinking about, and the privatization cost (which may be similar to prefunding cost) is $15T over 45 years (from 2005). Krugman’s intent is to show that full privatization is essentially impossible, and that privatizer’s claims that it would just cost a couple Trillion over a decade are wrong. We’d be busted long before getting to the fool’s paradise of privatization, money in the bank, and then probably only to see everything eaten up by fees and/or losses.
http://www.nytimes.com/2005/01/11/opinion/11krugman.html?_r=1&th
The definition of “fully funded” you are trying to use is that there would be enough funds to cover obligations if the insurer went broke. There is probably a corresponding level of funding which is not quite absurd (as a hypothetical), but the legal definition is not applicable to SS since the federal government cannot go broke.
Charles
Arne
I am pretty sure I agree entirely. I am not absolutely sure we understand the fundamentals the same way. Wish there was a way to talk about it without rancor. Wish there was a way to tell the people that SS is their best bet for a fail safe hedge against all their best laid plans… if nothing is done to “fix” it… beyond installing a modest trigger to keep payments up with needs. Other fixes in the payout schedule might make sense in the future… when we know what the future is. There is absolutely no need to make changes now in anticipation of what we think will happen in 30 years.
still trying to get the new computer to work. and have a little concrete to pour, so i may not be here to continue the conversation for awhile.
happy thanksgiving.