What IS the Social Security Crisis?
Well the answer is in the above figure, or actually answers because the post title actually hides multiple questions depending on your view of Social Security generally. This is going to get kind of long so I will take it below the fold right away.
There are actually three lines represented in the figure: scheduled benefits (top thin line), payable benefits (middle thick line), and income excluding interest (bottom thin line). A close examination shows that tax income exceeded scheduled benefits up until 2009, meaning Social Security was in surplus by anyone’s definition, that tax income dipped below scheduled benefits this year, but are projected to rise again to meet the schedule in 2012 only to go permanently below the schedule in 2017. But the figure also shows that payable benefits continue to be paid until 2037, the difference representing the draw down of first interest on and ultimately principal from the current Trust Fund.
Which is our first point of departure. Current critics of Social Security often maintain that Trust Fund assets are not ‘real’ or where they concede they are in fact real, maintain that they are not affordable. Now they couch these arguments in different terms that sound reasonable enough to them but which come across to supporters of Social Security as a confession along the lines of “Yes we are thieves and congenital liars and you were fools to believe us all along. And what are you going to do about it?”. Needless to say arguments that start from these very different premises often don’t end well.
So laying aside the ‘thief and liar’ element for the moment how do these opponents interpret ‘crisis’ based on the above figure? Well for them the redemption of the Trust Fund interest and principal is a pure burden starting essentially immediately and extending to 2037. At which point if nothing is done they get a huge tax cut. In constant 2010 dollars one in excess of $300 billion a year. Forever. After that Social Security limps along paying what it can from current tax dollars or between 75% and 78% of the schedule. Which isn’t their problem, instead 2037 is a get out of jail free card.
http://www.ssa.gov/OACT/TR/2010/VI_OASDHI_dollars.html#180555
But as almost the flip side of opportunity, in this case tax cut, is danger. The biggest danger for this group is that retirees demand that the schedule be maintained ANYWAY, and worse that the gap be largely or entirely financed by taxes on people earning over the current payroll gap. Under this scenario the wealthy not only pay enough in taxes to keep benefits flowing but also to keep the Trust Funds in actuarial balance (100% of next year cost) meaning that they will ALSO HAVE TO CONTINUE PAYING INTEREST. It’s like a double nightmare.
Now oddly the Northwest Plan for a Real Social Security fix we push here at Angry Bear numerically works out as a medium term break for this group. By putting the burden of extra FICA on workers it reduces the role of the General Fund to just enough debt service to stabilize the Trust Funds at their mandated level, instead of having to pay 20% plus of Social Security costs during the last phase of redeeming the Trust Fund (the 2030s) they ultimately settle out paying around 5% of those costs servicing the debt. But instead they are rolling the dice in hopes of a better deal.
If Trust Fund Depletion in 2037 represents a potential tax cut for income tax payers what does it mean for retirees? Well under current law an immediate cut in benefits of 22%. And no argument from that Bruce Webb based on Rosser’s Equation is going to make that sticker shock go away, people don’t think that way. (For example the lack of a COLA for 2009 and 2010 actually is the result of retirees getting that increase EARLY and under a system that doesn’t allow for clawback. In reality they are all dollars ahead on net. Trust me they don’t get this. At all.)
So in the face of this psychological sticker shock that certainly would spark demands for ACTION. DAMMIT. YESTERDAY. how do the wealthy preserve their long term tax cut? Simple get retirees to take those cuts gradually starting as soon as possible and hope they don’t recognize that their resulting 2038 check still ends up as small or smaller than a plan of ‘Nothing’ would provide.
None of this is about long term deficit reduction, if it was the wealthy would just work to enforce ‘Nothing’. After all that 22% 2037 reset in benefits also has the effect of wiping out all those trillions in ‘Unfunded Liability’ the PGP/AEI folk like to tout. Under current law there is no unfunded liability, it is instead a theoretical construct that assumes that future retirees will demand that some or all the current benefit schedule is maintained. Which in the end is a political argument and not an economic one at all.
Returning to the figure the solution for current critics of Social Security is to get the ‘Scheduled’ line down to the ‘Income line’ while supporters are focused on getting the ‘Payable’ line up to ‘Scheduled’. Even within the confines of this simple figure we are using two different sets of lines (a fact obscured that for the 2012 to 2037 period that ‘Scheduled’ and ‘Payable’ overlap). No wonder consensus seems unreachable, we don’t even agree on the nature of the Crisis.
For a period up to 2009, which started the great recession, the US experienced SS surpluses depressing the deficit while debt rose accumulating in the SSTF.
From your chart, around 2015 SS payables will increase the deficit while reducing accumulated debt in the SSTF.
Interesting how deficits did not matter when they were increasing debt held by the SSTF, and then matter when they are decreasing debt held by the SSTF, with cash raised by deficits or taxes.
The terrible crisis arises because this debt restructure is not for the owners’ benefit, but for the 98%, and the oligarchs don’t like it that way.
typo:
and worse that the gap be largely or entirely financed by taxes on people earning over the current payroll gap
Speaking of payroll caps, the first order of business is determining the actuarial imbalance that high earners are over-drawing due to their longer lifespans.
Now, SSI isn’t that hot a deal for those getting capped out, so maybe it’s a wash and there is no actual imbalance. But if there is, we should raise the cap to rebalance and see where that gets us.
By happenstance I’ve been overpaying my FICA exactly since the SSTF went over actuarial balance (in 1992).
While letting the interest on my overpayments ride past 2037 sounds great and all in the abstract, I am going to be in my 70s then and would like to see more of MY money being spent on ME, not just accruing interest. But I’m willing to be persuaded on this, and not that it matters one whit anyway.
Also, I’m curious why there isn’t a variable SS withholding rate depending on one’s age. We have computers now so it wouldn’t be hard to tune the contributions to better match expected payouts.
Instead of talk of raising the retirement age, we should be looking at increasing FICA taxes to LOWER it. Whatever happened to the idea of progress in this country ???
Bruce,
That’s just the outlook for the Old Age benefits right? Problems arise for the Disability and the Survivors parts of the program earlier, or am I wrong about that?
Why endorse a 22% cliff in 2037 as opposed to phasing this in over a period, say 2015-2036?
Ah, ok, your Northwest Plan does implement a phase in over time. Apologies. Now the real question is, how and when do you get this plan through Congress?
Definitely do not try to get it through Congress during a recession when they should be dealing with jobs.
Wait until the Trust Fund starts shrinking (about 2022) and then it is time to say we want it to shrink, just not too fast. There is still time to have the changes take effect after the following election and also maintain a smooth transition.
With no recession and a shorter time over which we are trying to forecast, we can have a better chance of getting the right amount of change.
heywood
i don’t mean to be mean, but you don’t know enough about social security for you opinions to be worth much. really, that is just a simple statement of the problem. i think you are probably a good guy, but how do we go about teaching you how it works one sentence at a time.
without getting into the details, earners at the cap currently get their money back plus about 2% real interest. not great interest, but then there was the insurance factor. and some reason to believe that without ss the great majority of workers would fall into poverty and that would affect their willingness to spend and that would affect your high earners ability to earn.
the payout is progressive, so there is no need for the “tax” to be progressive as well. there is no need for a variable rate… the constant rate works fine. you are, i think, like all the other players who don’t understand the game just looking for a free lunch.
but i agree with raising the tax and lowering the retirement age. that would be progress, and it would “create jobs.”
the interest the trust fund is earning helps keep your tax rate lower than it would be for the same benefit rate. it IS your money being spent on you.
mike
di and oasi paid as a unit give teh 2037 depletion date for the trust fund. di by itsel would run out of it’s trust fund considerable earlier. but a one tenth of one percent increase in its tax this year and half a tenth of a percent next year would put it in the black until about 2050, then another half a tenth of a percent would put it in the black as far as the eye can see. oasi by itself would not use up its trust fund for maybe an extra two years (working from memory)… in other words not enough of a difference to measure from here. but raising the oasi part of the tax one tenth of one percent in about 2026 and essentially for each year after that for ten years, would come very close to putting oasdi in the black forever. i can give you exact numbers, have given them, but they are all based on the Trustees projections, which is a guess that far out. and the assumption that our leaders are not insane criminals, which they are.
coberly,
Thanks. So just to be clear, you’re saying there is some internal bookkeeping differentiation between the revenues that go towards funding Old Age, Disability, and Survivor benefits but there’s just one Trust Fund and it will pay out on a first come first served basis to beneficiaries of any of those three benefit programs whenever there’s a revenue short fall in one of them.
cmike,
actually there are separate trust funds, but the assumption has been that OASI will make up for losses in DI. don’t ask me what the legal reasoning behind that is. i haven’t a clue.
yours truly proposed raising the DI share of the tax to make DI “actuarily solvent”, but your president just cut the tax on accounta the deficit. i knew you’d understand.
old age and survivors insurance is one program. disability is another. and health insurance (medicare) is a third. they all get called social security, though i think medicare has been messed up by all the recent reforms until only an expert knows exactly what’s in and what’s out, and all the experts i hear haven’t got a clue what the programs actually do.
arne
just for the record, i don’t know. my guess is that it won’t exactly go down, but the wage adjustment multiplier for this year will affect the final calculation… so that if in 2020, say, you retired, your wages for this year would be compared to the average wage for this year, and that percent would be mulitplied by the average year for your index year (the year before you retire.) play with it a bit and see if that makes sense. the wage index isn’t used in the same way as the cpi index.
sorry, didn’t answer your question about the cap. again, i don’t know. my guess is it will.
Dude
i agree with Arne, but not for his reason. you can’t get it through congress because they can’t think straight. they will think a tax raise, even a tiny one in the future will “hurt jobs.” but it won’t.
we can’t get it through congress because we can’t get a traction with any interest group. even aarp and the ncpssm prefer the fantasy that social security is welfare and the only “fix” they are interested in is one that raises taxes on the rich.
i tried to talk to my senator (D.Ore.) about it. can’t get a straight answer. the talk to you like they think you are a mental patient. i had better luck talking to my republican congressman (about another issue). he didn’t agree with me, but at least he talked like a human being.
Coberly
Thanks for the second response to my questions. I’m starting to get the picture.
That said, certainly Medicare is not going to share in the Social Security Trust Fund so I think that should be looked at as an entirely separate program.
Can you provide a link to the “northwest plan”? FWIW it seems to me that some relatively small tweaks can eliminate the 2037 cliff-dive. Raising the cap (by about 20%,) a 1-2 year increase in the retirement age, and, if necessary, a small fractional increase in the tax rate (like 0.2%) would bring the system back into balance. Or some combination of adjustments like that. This has all been done before – in the 1980s a little from each of these sources was passed into law, staving off the problem, in theory, until 2046. Mind you the 2% tax holiday for 2011, if passed, will put an unexpected dent in the system. Anyway, what’s the alternative?
But SS is in crisis and it’s immediate! Okay, I actually don’t think this, but it’s not hard to see why politicians scream “crisis.” For them, the Reagan-era SS system (government using SS money to fund other things) has ended and the post-Reagan-era SS system (general revenues paying money back to the SSTF) is almost here–SS has now lost it’s one small budgetary value and is now absolutely nothing but a big drain to these people.
Well Coberly covered this but I have slightly different takes.
One is that OAS includes Survivors. That is the ‘S’ part.
Two the chart is for combined OASDi. OAS is roughly 10 times the size of DI which makes combined OASDI a pretty close proxy of OAS in isolation, the relevant dates move by months and not years between them.
Three the assumption amongst the Big Names I rub up with is that the current differential between DI and OAS depletion dates is most like to made up, as it has been in the past, by rebalancing current FICA between the two to bring them into temporal agreement. Though some of them were intrigued by our pointing out that literally all of the gap in the first 25 year sub-period was due to DI and that by disaggregating the two issues you could undercut much of the ‘Greedy Geezer’ narrative, it being marginally more difficult to demonize quadriplegics than seniors in Lexuses.
I just know what my scheduled benefits are vs the amounts that are being taken out.
As a capped payer, doesn’t seem like that great a deal to me but I’m willing to take one for the team as it were.
the deal with the SSTF balance is that 2035 happens to be my full-benefit retirement age. It looks like I’m going to be maximally screwed if the SSTF isn’t run down 2020-2035 since I’d rather get the benefits of 15 years of principal loss 2020-2035 than the expected 15 years of interest gain 2035-2050. (I’ll be over 80 in 2050.)
Well if the ultimate result is a 22% or bigger cut in 2038 then all you have done is steal benefits from those people who will be retired during those years without giving anyone in 2038 or after any benefit.
There is an a argument for targeting an intermediate result, for example a sustainable 89% of the schedule so more or less splitting the difference, but the cost of that kind of fix is so small and the impact on recipients equally so that it doesn’t serve the larger interests of the crisis mongers.
I have no reason to believe I will even be alive in 2038, yet I am willing to pay for a 100% fix by taking a 0.15% hit (0.30% combined) hit today and then more under current projections in 2026 (although if alive I should be out of the workforce by then anyway). But I see no reason to take a guaranteed cut in benefits from my early retirement eligibility in 2019 to 2038 if my nephew isn’t going to get a better check out of the deal. And I am not seeing any proposals that actually promise him that better result, except for ones that use a much more optimistic set of future assumptions than the ones that generate that 22% cut number.
So I would turn the question around. What about a phase in benefit cut would actually add utility/equity to anyone now or in the future?
Most of the AB posts relating to the Northwest Plan are indexed on the following cleverly titled page on my website:
http://bruceweb.blogspot.com/2009/05/angry-bear-social-security-blogging.html
Angry Bear Social Security Blogging: Northwest Plan edition
There is merit to the kind of cafeteria approach you suggest. But starting with Bush’s CSSS (Commission to Strengthen Social Security) guidelines ANY across the board increase in rates has simply been ruled out of order in favor of A)raising retirement age, B) indexing benefits (i.e. cuts), and C) raising the cap.
The point of the NW Plan is that if you put this forbidden D) across the board FICA increases, back on the serving table that a lot of people would choose it is the main course. I mean who WOULDN’T buy back three years of retirement for an initial premium of less than a dollar a week.
Personally I would be perfectly happy with a proposal to restore the basic FICA take back to the 90% of covered income level it used to be from the 83% it is now.
http://www.angrybearblog.com/2010/07/cbo-scores-social-security-policy.html
Per CBO that would close 0.2% of the 0.6% of GDP gap.
Throw in the Obama proposal to tax income above $250,000 at 4% (the midpoint of the range on his campaign issues page) and you close another 0.1% (not the panacea some think, but something).
And then adopt Option 1 and boost payroll tax by a combined 1.0% in 2012 and you close the other 0.3%.
I am willing to hear arguments why this would be a better approach than a worker only, no change in cap formula, phased in increase of 2.0% over 20 years (0.1% combined per year) which CBO scores as backfilling the whole 75 year gap.
Or to hear arguments why either of those are better than the NW Plan which installs a somewhat bigger increase in a more complicated way over a longer time period but similarly accomplishes the goal.
But we are not hearing any real discussion of the best ways to deliver the scheduled benefit, only various ways of making people accept the inevitability of benefit cuts that are not inevitable at all.
Plus none of this gets to the uncertainties in the economic projections and the possibilities of targetting such things like long-range employment and real wage that mathematically get you the same result.
So Doug I would love to play your game. But the other side is working from a rule book that privileges their particular plays.
There is a easy way to fix the social security problem and that is to increase the payments made by workers by increasing their paychecks. Instead of cutting benefits you do two things 1) Double overtime pay for everyone other than executives. 2) Raise the minimum wages aggressively 3) Change corporate tax policy from anti-American worker to pro-American Worker.
My take is even more cynical.
In 1996 Social Security WAS in crisis. In fact after the overall system had emerged into Actuarial Balance with the 1993 Report the long term prospect started slipping. But that process reversed itself starting with the 1997 Report, had improved so much by 1999 that Dean Baker could name his book ‘Social Security: the Phony Crisis’. That marked improvement continued right through 2001 and in most respects continued right through to the 2005 Report.
But by the time Bush launched his Social Security Tour campaign with his “I’ve got capital and am going to use it” comment in November 2004 he was already committed to a narrow range of plans that did not allow discussion of tax tweaks or economic targetting. Instead it was Private Accounts or Nothing. And under the numbers then in play it was Now or Nothing, under the economic projections being freely predicted by Bush people from his tax cuts Social Security would have been fine as is.
But I don’t really buy into the idea that it is the switchover from surpluses to deficits that are driving this current push. First except under special pleading that switchover hasn’t really happened yet, the costs of debt service for Social Security are basically miniscule until the late 2020s. Instead the current downturn gave the opponents certain rhetorical openings to make one last run at a goal they had thought impossible after their defeat in 2005 and loss of the Congress in 2006.
Circumstances have delivered THEM capital and THEY are going to use it if possible to finally win the 75 year war on Social Security. But the battle has never been at its core one of economics at all. Sure they don’t want to pay back the money they borrowed, and equally Wall Street wouldn’t mind the fees, but the hatred of Social Security by Movement Conservatism exhibited by folk like Reagan, Bush, Norquist and Ryan draws from deeper roots. These folks never accepted the New Deal on principle, and direct class and economic interest is only part of that.
ilsm your second paragraph interests me. Because the conclusion seems right enough but could only by accident be drawn ‘from your chart’.
The only thing I can think of is that you are reading the vertical axis as some measure of GDP instead of it being what it actually is which is annual SS cost rate. The bend point you are seeing in 2015 is more a change in rate of growth of the TF due to greater percentages of interest being drained away to meet costs and so not available to pad principle. Which over time has some reverse compounding effects (if that is a acceptable term of art). But gross debt held by the SSTF continues for some period after 2015, in fact for almost ten years.
Thanks for the link. A bit complex but if I’m reading it right it’s a proposal to raise the contribute rate significantly but in a phased manner, while avoiding an increase in the retirement age. Seems like much the same thing could be achived by bumping the cap in a phased manner, while keeping the rate increase smaller. I don’t know why you refuse to consider raising the retirement age. Heck, my age cohort already took a hit from 65 to 67, no one’s talking about rolling that back. So what, in principle, is wrong with that as a means of avoiding outright benefit cuts?
FWIW I don’t like the 4% high-earner surtax, it would push the marginal tax rate north of 50% in high-tax states where many if not most of those who’ll be subject to it live. That’s a higher rate than is faced by Canadians. I think it’s likely the revenue won’t materialize – you’ll drive down productivity in a number of ways that will add up (early retirements, two-earner couples dropping the lower income, those with variable incomes working less hours, etc.). Not to mention the numerous groups of folks who’ll dodge it – lawyers using the S-corp loophole, hedge fund managers exploiting the carried interest loophole, etc. etc.
Sorry MG I was working from memory and used dates for OAS (Table IV.A1) instead of OASDI (Table IV.A3). Feel better now?
I hate to point this out but the President isn’t doing anything he proposed. In fact, he is creating a 2% payroll tax holiday which, like all tax cuts, is hard to expire. Now, I seem to recall that Bush’s desire was to “privatize” that same 2%. So what good is the NW Plan now?
Bruce, I was just surprised. I wondered if I had missed something in the other tables. And I couldn’t find the 2017 reference.
You just don’t make mistakes. You’re the best researcher and blogger I have ever encountered.
I’ll write this very minor oversight off to distractions related to your move to Seattle. Hopefully for the better, of course.
Thanks for clearing it up. Whew.
Please send us a billion dollars Anna Lee, and I promise it will be used in an advertising campaign for the NW plan, and Bruce can lead the charge. The billion represents only a fraction of the Peterson advertising. I will put in a paypal button just for that. 🙂
Rdan,
That 7:44 comment is hilarious. I’ll send my check for a cool $1 Billion so you can get started. Whats the conversion rate for my $1 Billion Zimbawean Dollar note?
Bruce and coberly,
I educated three of my collegues about SS yesterday. Made three converts! Also made them thing Obama and teh Dems are even more incompetant than they already beleived…
Islam will change
Heywood
you are about to be screwed by the “fix Social Security” mania sweeping the village. but there is nothing in Social Security as it now exists that would hurt you…. unless you are fixed on the idea of what you “could have gotten” if your investments all came in and you had no other really bad luck re money or your ability to earn it.
the interest on the TF is really not a factor for your personal roi. (not much, not measurable, not significant).
if you look at the Trustees Report you can find a table that shows “replacement rate” for people at various income levels. keep in mind that the assumes wages are wage indexed. that means they already reflect an effective interest that is equal to inflation plus the average per capita growth in the economy. then note that a worker who earned at the cap his entire life will get a monthly return that is just over twice as high as the tax rate he paid in. if he lives half as long as he paid taxes, he will come out “even”… plus that effective interest. that works out to about 2% real interest. i have my doubts about how easy it is to do even that well with reasonably safe investments, not counting the insurance value of the tax, and, as i keep saying, the effect of “security” on the economy generally (it’s good. it may be very very good.)
then, without endorsing “screwed,” i’d say yes, you are better off if the TF is “run down” as it is supposed to be. that money sitting in the TF earning interest isn’t doing anyone any good. it’s just numbers in a book. but that money is not “excess taxes” that you paid. your tax was just about sufficient to cover your expected benefits. what was excess about it is that because of the large cohort of boomers, the boomers would have paid less, per person, on a pay as you go basis, than would have been a reasonable contribution for their own retirement, and the baby busters would have had to pay more than the boomers, but not more than their own expected benefits would justify.
so you could just forget the Trust Fund and it would have no material effect on your well being at all.
doesn’t mean i am willing to sit by and let the bastards steal it. because they are not content with stealing it. they want to kill the victim as well. we could absorb the theft, but we are not going to be able to absorb the “fix.”
Bruce’s
take is not really different from mine. but it’s good that he explains it with different words. and i tend to be a bit sloppy with details when writing off the cuff. i have a poor memory. but when i do the actual arithmetic and write it down, i usually get it right. and when i am sloppy i am usually materially correct.
i hope… wish… the Big Names really understood the program. I don’t see that they do. And I wish they had more effect on the policy being hammered out by the crazies and clueless in Power.
Dude
note that a benefit cut is a real, material cut in standard of living of people who have no more options left. the tax raise that avoids the benefit cut is so tiny you would never notice it except for the crazies shouting from the rooftops.
that tax raise is the equivalent of 20 cents per week per year for most workers. forty cents if you are your own boss… or think your boss would give you “his share” if he didn’t have to pay FICA… we are seeing the truth of that now with the “tax holiday” idea…. if you earn near the cap, the tax increase approaches a dollar a week per year. staggering, i know, for rich folks. of course if something happens to them, they may be glad to get those uncut benefits when they find themselves old and unable to work and their investments didn’t come in. but you can’t tell them that today.
yes, that forty cents or so adds up, but it levels off at about 2% of wages so far in the future you won’t see it, and even 2% of wages is a small price to pay for being able, if you have to, to quit working, or looking for work, in your early sixties and try to remember what life was for.
Doug
write me at coberly@peak.org and i will send you a pdf that pretty much explains it. i like my explanation better than the one on Bruce’s Website, but it’s the same plan.
Yo, Buff! Way to go! NancyO
doug
i agree about taxing the rich… it’s a bad bad bad idea for Social Security. turns it into welfare as we knew it. i’m fine with taxing the rich to pay down the deficit… different problem entirely.
bumping the cap a little as Bruce suggests would not be a completely bad idea… i think there should be a lifetime cap, but someone who makes windfall wages for a few years might be expected to pay a share of that to SS on the assumption that other years he will be paying at much less than the cap… but in today’s environment it is simply brain damaged to call for increasing the tax on the rich to pay for SS. fer chrissake that’s what they are screaming about. they are afraid SS is going to cost them money. lt doesn’t need to. i have always been a poor person. it never bothered me to pay for my own social security. i prefer that. FDR thought it was a good idea. Me and FDR, what a team.
Bruce’s
take is not so cynical that i see anything wrong with it except
it is perfectly insane to talk about the eventual exhaustion of the Trust Fund as a “problem.” The Trust Fund was never intended to last forever and pay for your retirement out of “earnings.” It is simply a bridge fund to take care of times when pay as you go income is not adequate for pay as you go benefits. The basic idea of Social SEcurity is pay as you go… not earnings from capital.
peter
easy for you to say.
i’m in favor of all those changes. but we won’t see them. ever. meanwhile you can pay for your own retirement insurance at a rate of about an extra forty cents per week per year.
Anna
the nw plan is still good. but you do need to get that 2% back.
the point of the nw plan was to avoid the criminal insanity that is taking place today.
thanks buff.
i do pretty well one on one myself. but can’t seem to start a mass movement.
OK, soon as Bernie is out of jail, I’ll have him transfer a billion from my account.
OK, soon as Bernie is out of jail, I’ll have him transfer a billion from my account.
The problem is not the Trust Fund going away. The problem is ever being in the position where the TF is supplying 22 percent of the funds required to cover costs. If the TF is only supplying 1 percent the year before it disappears, then its disappearance won’t be noticed.
Except, of course, that only applies to tha way the TF has been tasked with managing the Baby Boomer bulge. The TF is still needed to cover business cycle variations in receipts.
actually my comparisons are just comparing SSI to buying the treasury bonds myself.
the insurance aspect seems to pale compared to the fact that my SS contributions are not savings and my interest gains are not being compounded over 40+ years.
I agree that forced, untouchable pension plans are a very good idea. Tho I wonder if Norway’s (which owns 1-2% of global equity now) might not have been a better deal. The again, their hip deep into Greece etc. too so maybe treasuries are the best.
heywood
then you are not doing the arithmetic right. i don’t think you can get a treasury bond that will pay 2% real interest guaranteed.
your contributions are effectively earning compound interest.
and, hate to say it, but while it is possible you could “beat” the SS roi, you are not the only person in the country. and the dubious “if only” earnings you might have gotten on your SS tax otherwise, are a small price to pay for living in a stable country in which people do not starve to death when they are too old to work, and the young are not afraid of starving to death when they get old.
Bruce,
I have long considered the issue of the SS crisis is/are the deficits each year from cashing trust funds assets to pay beneficiaries, the cash over and above payroll tax receipts coming from borrowing (deficts) or taxing (un American).
I recognized that the y axis was receipts, but I also believe they are proportional to GDP at a rate that changes slowly, and possibly mostly in times like the great recession we are suffering.
As the distance between the cap and income above the cao grows maybe the ratio of payroll receipts to GDP might get different.
Deficits are not a problem when the borrowed money, i.e. excess cash outlays over revenues, is not going to the war machine.
F-35 program reveiw soon to be announced, more overruns, less airplane and longer before this unneeded airplane starts pillaging the DoD repair accounts for contractor provided maintenace.
If the SSTF were still providing cash for F-35 everything would be fine!
I will be in my upper 80’s when this becomes a problem, by then if the floor pushes back when I get up from a nap, I will be over joyed.
The problem with that formulation is that the OAS Trust Fund is even now not cashing in assets to pay beneficiaries, nor was the DI Trust Fund until last year. Instead since 1983 each has rolled over ALL principal and until DI went cash flow negative in 2006 took ALL their interest in the form of new principal.
Nor in a perfectly Pay-Go system would principal EVER need to be cashed in, instead a certain percentage of interest would have to be paid in the form of cash transfers which might or not have to be financed by borrowing. But in either case your tense is wrong, to this point you are mostly talking about a series of future events.
And the y-axis is not receipts but instead income and cost ratios. Which are indeed related to GDP but not in any straightforward manner.
I am looking at this graph with they eyes of a 25 year old. This person is either in or coming into the work force. We should expect this person to work and contribute to to SS for 40 years or so.
So this poor young bastard is being asked to pay full boat on SS, but we are telling them right up front that they will not get what all the others before them have gotten. Sorry Webb, no sale.
This graph will alienate younger workers to the system. It should. It is ‘unfair’ that things just fall off a cliff in 2037. Without the support of the next few generations SS will come to an unpleasant end.
I know that Webb does not really think that a 20% cut in benefits between 2036 and 2037 is a good plan. There has to be a better transition to Paygo then this crash landing. The only option to achieve a smoother (fairer) transition is to phase in the cuts in the years prior to 2037.
That would imply that some cuts would have to come starting in about 5 years. You boys on board for that?
There’s no statistical or mathematical support for seeing a crisis but we are transitioning in a way that some people don’t like. SS’s regressive tax system covered sometimes a third or a half of the onbudget deficit (more often much less, of course). That’s all but gone. Instead, SS’s progressive benefit system will soon add to the onbudget deficit. Those are true statements regardless of your political views. If you don’t like SS, you prefer the old ways (if we must have SS) and recoil at the new ways. If you are a SS-supporter, you don’t see the world this way at all, because that would be insane. I may fall into the latter category, but not everyone does.
Krasting
how long have you been suffering from alcoholic brain syndrome?
we have been over this time and time again. you never hear. you never remember. the “nortwest plan” raises the tax a tiny amount and avoids the “cliff” entirely… paying full wage adjusted benefits into the infinite future.
moreover, even the fall off the cliff graph would have today’s workers paying for exactly the benefits they are going to get. don’t get stupid about a picuture. add up the contributioins over that forty years and then add up the expected benefits over the projected longer life expectancy.
there is no problem at all paying people the benefits they paid for. the problem is getting them to understand they will have to pay more if they want more benefits in the form of the same monthly replacement rate over a longer life expectancy.
please stop posting stupid comments. it wastes my time to have to keep answering them, and you help to confuse the people who don’t already know the answer.
pjr
no, they are not true statements. social security will never add to the on budget deficit.
the “budget” has borrowed from social security. that is what created (part of) the budget deficit. paying it back is not creating deficit… it is reducing deficit (debt).
you can’t stiff your creditors and claim the moral high ground.
Tks MG. I need some help in battling with Coberly. He thinks his NW plan is the cats meow. It isnt. It does not stand a chance.
The Coberly plan has two strikes against it. The first is that it adds up to a big increase over time in PR taxes. That is not going to sell anywhere today. D.C. is in tax cut mode not tax increase.
But for me the worst part of the Coberly plan is that it is a long term kick the can down the road approach. He wants to raise taxes a little bit every year for 20. The hurt of this plan is a decade away as a result. So the plan looks like it is desirable because there is no pain in the short run.But that is the definition of a “kick the can down the road” plan.
Coberly and Webb can pound the table all they want. The NW plan is D.O.A. Better they should position themselves for the cuts that are coming as more taxes are not going to be part of the solution.
“the Coberly plan is that it is a long term kick the can down the road approach”
I like the plan because it does not kick the can down the road. It detemines the root cause of the problem and applies an adjustment that addresses that cause. As an engineer I find that very encouraging.
People are/will be living longer. It costs more to supply benefits for a longer time.
There is no reason to think that people want a smaller benefit, so premiums should be increased.
How much? Enough to maintain the current schedule of increases in concert with increases in overall GDP (approximated by increases in AWI).
When? When they are actually needed. When it is clear that the beneficiary of the increase will be those same young people you say would be worried.
If you apply the recommended chages, there is no cliff. The graph you would be presenting would present no reason for anyone to be alienated.
MG
Krasting has been around and heard from us before. we have discussed this over and over. either he has a memory problem or he is being dishonest.
i respond to SS comments on this thread because i know the right answer. you can stop pretending to give me advice.
krasting
this is bullshit and you know it, saving the possibility of brain damage. the tax increase is not high. unless you are too dumb to compare it to both the need and the ability to pay.
you are telling us to stop telling the truth so the liars can get on with hurting millions of people for no good reason except they like to hurt people.
MG
your approach, and Krastings, is a bit like a chicken who is running from a dog and comes to a fence. other chickens run through the gate into the barn where they are safe. but MG keeps saying, but, but , look at the fence. can’t you see the fence? there is nothing to do but die here. look at that fence.
Coberly, the unified budget deficit (which is what people call “the deficit”) is the on budget deficit minus the SS budget surplus; or the on budget deficit plus the SS budget deficit. A SS deficit adds to the on budget deficit to make the unified budget deficit larger; a SS surplus covers for the on budget deficit, reducing the (unified budget) deficit. When you’re talking about the unified budget where most people live, the situation looks different. Not that I like looking at it this way–it ignores the intra-unified budget borrowing–but it’s not exactly an unheard of perspective that influences people’s thinking.
Thank you Arne.
coberly,
Krasting wasn’t discussing the NW plan in his original comment. It’s not more complicated.
You’re obsessed with dominating all of the thread discussions whether they involve the proposed NW plan or not. There is life beyond that plan and discussions as well.
coberly – “MG your approach, and Krastings, is a bit like a chicken who is running from a dog and comes to a fence. other chickens run through the gate into the barn where they are safe. but MG keeps saying, but, but , look at the fence. can’t you see the fence? there is nothing to do but die here. look at that fence.“
coberly, I have always voiced my support for the two plans that Bruce posted, one of which is the NW plan. So, stop telling more of your usual lies.
The difference between you and the majority of participants on this economic blog is that they have interests and knowledge beyond just two of the three Social Security programs that consume your thinking. You have no working knowledge of the Federal budget nor do have any interest in improving your ignornance on such matters. Your participation on other issues raised on this economics blog is a bit of joke.
You just don’t know much and that responsibility falls back on your personal laziness, not on anyone else. Participants here have heard your one beat song far too many times. There is no telling how many readers you have driven away from this economics blog, particularly when you wreck endless comment threads that have no focus on Social Security issues.
coberly – “MG your approach, and Krastings, is a bit like a chicken who is running from a dog and comes to a fence. other chickens run through the gate into the barn where they are safe. but MG keeps saying, but, but , look at the fence. can’t you see the fence? there is nothing to do but die here. look at that fence.”
coberly, I have always voiced my support for the two plans that Bruce posted, one of which is the NW plan. So, stop telling more of your usual lies.
The difference between you and the majority of participants on this economic blog is that they have interests and knowledge beyond just two of the three Social Security programs that consume your thinking. You have no working knowledge of the Federal budget nor do have any interest in improving your ignornance on such matters. Your participation on other issues raised on this economics blog is a joke.
You just don’t know much and that responsibility falls back on your personal laziness, not on anyone else. Participants here have heard your one beat song far too many times. There is no telling how many readers you have driven away from this economics blog, particularly when you wreck endless comment threads that have no focus on Social Security issues.
coberly – “MG your approach, and Krastings, is a bit like a chicken who is running from a dog and comes to a fence. other chickens run through the gate into the barn where they are safe. but MG keeps saying, but, but , look at the fence. can’t you see the fence? there is nothing to do but die here. look at that fence.”
coberly, I have always voiced my support for the two plans that Bruce posted, one of which is the NW plan. So, stop telling more of your usual lies.
The difference between you and the majority of participants on this economic blog is that they have interests and knowledge beyond just two of the three Social Security programs that consume your thinking. You have no working knowledge of the Federal budget nor do have any interest in improving your ignornance on such matters. Your participation on other issues raised on this economics blog is a joke.
You just don’t know much and that responsibility falls back on your personal laziness, not on anyone else. Participants here have heard your one beat song far too many times. There is no telling how many readers you have driven away from this economics blog, particularly when you wreck endless comment threads that have no focus on Social Security issues.
Bruce Krasting – “But for me the worst part of the Coberly plan is that it is a long term kick the can down the road approach. He wants to raise taxes a little bit every year for 20. The hurt of this plan is a decade away as a result. So the plan looks like it is desirable because there is no pain in the short run.But that is the definition of a “kick the can down the road” plan.
Coberly and Webb can pound the table all they want. The NW plan is D.O.A. Better they should position themselves for the cuts that are coming as more taxes are not going to be part of the solution.”
Bruce,
I disagree with your assertions about the NW plan. It’s one of the best approaches listed at the SSA website. Had the “do nothing” crowd embraced that type of trigger plan a couple of years ago instead of letting two of the three Social Security programs get swept up in the ongoing fiscal crisis and related plans to resolve that mess, those two programs should have survived the pending round of cuts. There would have no reason to challenge the operation of the two Social Security programs other than concerns about the growing combined trust funds’ balance.
I agree that any proposal of raising tax rates across the board for the two Social Security programs is most likely DOA at this point. There is no likelihood of that happening right now.
Timing is everything and the window for implementing a viable trigger plan was missed.
I have no idea what the final package of changes for the mandatory spending programs will involve, but we can rest assured that many people across the nation will not be please. Many blogs might go off the deep end, but that’s not going to change anything.
The choices faced by the Congress in addressing the medium term and long term fiscal year deficit issues will be difficult. It’s likely that another $1 tillion will be piled on the debt fire if the Congress passes the pending tax package in the House chamber at this time. That effort, though, is better than dealing with a possible double dip recession.
Operation of two of the three Social Security programs is but one piece of the Federal budget progress under the microscope. Frankly, it didn’t have be in the log pile had action been taken a few years ago. So much for foresight and timely action to avoid the blow of the Federal spending and revenue axe.
I like the NW plan, too (it’s clever and well thought-out and accomplishes the objectives, as if designed by a good engineer!). But I am not an engineer and must agree that the Plan is not likely to be adopted as-is, in part because the Congressional mood is not to increase tax rates. Even Dem support for increasing tax rates on low-income workers, albeit gradually, would be very difficult to obtain without something else in the deal. That’s not an insurmountable hurdle, but it’s definitely a hurdle.
I don’t know how politicians have reacted to the NW Plan. I’ve thought that a Dem politician “pitched” on the NW Plan might request two things, without knowing whether either is feasible: smaller tax increases that would be made-up by increases in the wage cap, and some simplification. The former would mean less taxes on the poor (than in the NW Plan) with the funds made up by expanding SS more into middle class. The simplification is only needed to the degree necessary to make this more understandable to people. (We used to have a “Dan Quayle Test” to pass–can you explain it briefly in a way that even he would fully grasp and accept it?)
A similar chart of Annual Scheduled Benefit Amounts might be the better one to use.
http://adastra1960.blogspot.com/2010/12/scheduled-social-security-benefits.html
“can you explain it briefly in a way that even he would fully grasp and accept it?”
You are going to live longer than your parents did.
Your insurance is, therefore, going to cost more.
You need to pay for it.
PJR – “can you explain it briefly in a way that even he would fully grasp and accept it?”
Arne – “You are going to live longer than your parents did. Your insurance is, therefore, going to cost more. You need to pay for it.”
Arne,
Sorry to say that I have concerns with your explanation or should I say justification. Perhaps you can clear up a few matters after reading this comment.
An individual can retire at any given age beyond the Social Security beneficiary minimum contribution quarters requirement and maintain Social Security beneficiary eligibility.
Raising the FICA tax rate to cover a program funding gap which is not life expectancy driven is a separate issue. I don’t consider a population bulge to fit your explanation.
Currently, the Congress and the Social Security Administration have not changed the eligibility criteria for Social Security benefits. Living longer isn’t an issue for eligible beneficiaries under current law nor does it drive up the FICA tax obligations of the employee or employer. In other words, it’s a non-issue to beneficiaries or those paying into the programs unless the FICA tax rates, programs’ eligibility ages, or beneficiary formula payout levels are changed.
Pushing out the eligibility age based on an expectation that individuals will live longer or a desire by Congress to reduce the annual cost of a given program doesn’t mean that an employee or self-employed individual will necesarily pay more in monthly or overall FICA other than that subject to wage increases under the cap.
Granted, excluding the consideration of wage increases, an individual will pay more into FICA if they elect to work longer than would have been the case under the previous program eligibility age if it was a younger eligibility age. Otherwise, an individual wouldn’t pay any more into the program than the individual does today, excluding the consideration of wage increases, if the FICA tax rate wasn’t changed and the individual elected to retire at say age 55 just as he or she might have elected to do under an earlier version of the program which allowed for a younger benefits eligibility age.
An individual can retire much earlier than the Social Security beneficiary eligibility age and that doesn’t affect one’s eligibility. There is no reason to expect that all individuals will be working more years just because they may live longer. That’s an individual choice based on one’s financial capability or decision to retire for whatever reasons.
An individual may live longer in the future, but there is no guarantee that the individual will have the desire or sufficient physical/mental health at older ages deemed necessary to satisfy future work requirments. Who knows, a company may require an employee to run two miles in twelve minutes in the future.
The Social Security Administration explains:
“During your lifetime, you probably will earn more credits than the minimum number you need to be eligible for benefits. These extra credits do not increase your benefit amount.”
” Your average earnings over your working years determine how much your monthly payment will be.”
PJR – “can you explain it briefly in a way that even he would fully grasp and accept it?”
Arne – “You are going to live longer than your parents did. Your insurance is, therefore, going to cost more. You need to pay for it.”
Arne,
Sorry to say that I have concerns with your explanation or should I say justification. Perhaps you can clear up a few matters after reading this comment.
An individual can retire at any given age beyond the Social Security beneficiary minimum contribution quarters requirement and maintain Social Security beneficiary eligibility.
Raising the FICA tax rate to cover a program funding gap which is not life expectancy driven is a separate issue. As an example, I don’t consider supporting a population bulge to fit your justification. That is a separate issue.
Currently, the Congress and the Social Security Administration have not changed the eligibility criteria for Social Security benefits. Living longer isn’t an issue for eligible beneficiaries under current law nor does it drive up the FICA tax obligations of the employee or employer. In other words, it’s a non-issue to beneficiaries or those paying into the programs unless the FICA tax rates, programs’ eligibility ages, or beneficiary formula payout levels are changed.
Pushing out the eligibility age based on an expectation that individuals will live longer or a desire by Congress to reduce the annual cost of a given program doesn’t mean that an employee or self-employed individual will necesarily pay more in monthly or overall FICA other than that subject to wage increases under the cap.
Granted, excluding the consideration of wage increases, an individual will pay more into FICA if they elect to work longer than would have been the case under the previous program eligibility age if it was a younger eligibility age. Otherwise, an individual wouldn’t pay any more into the program than the individual does today, excluding the consideration of wage increases, if the FICA tax rate wasn’t changed and the individual elected to retire at say age 55 just as he or she might have elected to do under an earlier version of the program which allowed for a younger benefits eligibility age.
An individual can retire much earlier than the Social Security beneficiary eligibility age and that doesn’t affect one’s eligibility. There is no reason to expect that all individuals will be working more years just because they may live longer. That’s an individual choice based on one’s financial capability or decision to retire for whatever reasons.
An individual may live longer in the future, but there is no guarantee that the individual will have the desire or sufficient physical/mental health at older ages deemed necessary to satisfy future work requirements. Who knows, a company may require an employee to run two miles in twelve minutes in the future.
The Social Security Administration explains:
“During your lifetime, you probably will earn more credits than the minimum number you need to be eligible for benefits. These extra credits do not increase your benefit amount.”
” Your average earnings over your working years determine how much your monthly payment will be.”
MG,
You lost me.
“Living longer isn’t an issue for eligible beneficiaries under current law nor does it drive up the FICA tax obligations of the employee or employer.”
I don’t understand what point you are trying to make. I agree that living longer does not drive up the beneficiaries obligations (premiums) under current law. However, it does drive up benefits. A balanced program cannot pay higher benefits without getting higher premiums, so someone has to pay for them. Therefore current law needs to change. That is an issue.
The people who should pay for it are the people who will benefit – the people who are living longer.
What is the mystery?
On second thought perhaps the problem is with my statement:
“Your insurance is, therefore, going to cost more.”
The cost is the benefits paid out, not the premiums paid in.
Arne: That’s an excellent start–saying the NW Plan will raise SS tax rates and providing a simple, solid, understandable rationale–but he’ll also want to know “how much” before he can support the NW Plan. For example, if you said “double” he’d throw you out of the office. If you said “almost nothing” he’d think you’re another snake oil salesman, and out you go. An honest but simple rendering of the NW Plan is the challenge he’d pose in his follow-up question to what you said. (Remember, what you said so far is something he can believe and communicate to voters; he’s looking for the same thing in the follow-up.)
Arne – “The cost is the benefits paid out, not the premiums paid in.”
Yes, that is the issue. And your previous comment is spot on, but the solution may not be simple.
I may be wrong, but I don’t believe that the Congress and the SSA have worked through the issue as well as may be necessary. Let me provide a few examples.
1. An individual works for the State of California and retires at age 45 with full retirement benefits. The individual decides not to take another job and moves to the mountains of Arkansas where the cost of living is reasonable. The individual rides out his time, remaining fully eligible for Social Security benefits. His lifestyle is mostly stress free and his doctors tell him all is good for a long life expectency.
The U.S. Government and SSA lose money on that individual.
2. An individual, age 45, gets tired of working 8am-5pm and driving 20 miles to work. His friends convince him to become a stock market day trader. He becomes a day trader after a year of practice and quits his day job. Overall, his life is mostly stress free (well, no worse than what he was dealing with on the highway and in the office) and his doctors tell him all is good for a long life expectency. The individual rides out his time, remaining fully eligible for Social Security benefits.
The U.S. Government makes money on that individual’s stock transactions, but the SSA loses money on him.
3. An individual, age 55, retires from the company. He’s had enough. He has managed his finances well and can afford to retire, so he does retire. His doctors tell him all is good for a long life expectency. The individual rides out his time, remaining fully eligible for Social Security benefits.
The U.S. Government and SSA lose money on that individual.
4. An individual, age 67, is still working. He’s had enough, too, but he has to work to survivie. This poor guy is stuck under the a new Social Security eligibility age requirement of 70 (which hasn’t happened in our time…yet). He knows that he will have to keep working until he is eligible for Social Security. His doctors tell him that he will be lucky to see age 70.
The U.S. Government and SSA make money on this guy. They love him.
——
The point is obvious, right? What is the solution for the U.S. Government and SSA?
In the future, there is no way for the U.S. Government and SSA to know how long individuals will work. It may be the case that more and more individuals may fit the top three examples that I have provided above. If that is the case, what do they do?
Yes, pushing out the SSA programs’ eligibility age appears to be a solution, but I think it’s rather limited. I doubt that the U.S. Government and SSA are prepared for what would happen to the SSA programs should more workers retire along the lines of today’s workers or shift to financial earning capabilities whereby they didn’t have to pay FICA taxes.
I know quite a few individuals who are doing that right now including some day traders who are not wealthy yet comfortable in their lifestyles. Some of these individuals are in their ’40s. It appears to be working for them. And the SSA is losing money on that group.
Should the U.S. Government consider different FICA rates for different age groups? Yeah, that sounds unrealistic, but is it? Should the U.S. Government seek a different primary source of SSA funding, say […]
Arne – “The cost is the benefits paid out, not the premiums paid in.”
Yes, that is the issue. And your previous comment is spot on, but the solution may not be simple.
I may be wrong, but I don’t believe that the Congress and the SSA have worked through the issue as well as may be necessary. Let me provide a few examples.
1. An individual works for the State of California and retires at age 45 with full retirement benefits. The individual decides not to take another job and moves to the mountains of Arkansas where the cost of living is reasonable. The individual rides out his time, remaining fully eligible for Social Security benefits. His lifestyle is mostly stress free and his doctors tell him all is good for a long life expectency.
The U.S. Government and SSA lose money on that individual.
2. An individual, age 45, gets tired of working 8am-5pm and driving 20 miles to work. His friends convince him to become a stock market day trader. He becomes a day trader after a year of practice and quits his day job. Overall, his life is mostly stress free (well, no worse than what he was dealing with on the highway and in the office) and his doctors tell him all is good for a long life expectency. The individual rides out his time, remaining fully eligible for Social Security benefits.
The U.S. Government makes money on that individual’s stock transactions, but the SSA loses money on him.
3. An individual, age 55, retires from the company. He’s had enough. He has managed his finances well and can afford to retire, so he does retire. His doctors tell him all is good for a long life expectency. The individual rides out his time, remaining fully eligible for Social Security benefits.
The U.S. Government and SSA lose money on that individual.
4. An individual, age 67, is still working. He’s had enough, too, but he has to work to survivie. This poor guy is stuck under the a new Social Security eligibility age requirement of 70 (which hasn’t happened in our time…yet). He knows that he will have to keep working until he is eligible for Social Security. His doctors tell him that he will be lucky to see age 70.
The U.S. Government and SSA make money on this guy. They love him.
—–
The point is obvious, right? What is the solution for the U.S. Government and SSA?
In the future, there is no way for the U.S. Government and SSA to know how long individuals will work. It may be the case that more and more individuals may fit the top three examples that I have provided above. If that is the case, what do they do?
Yes, pushing out the SSA programs’ eligibility age appears to be a solution, but I think it’s rather limited. I doubt that the U.S. Government and SSA are prepared for what would happen to the SSA programs should more workers retire along the lines of today’s workers or shift to financial earning capabilities whereby they didn’t have to pay FICA taxes.
I know quite a few individuals who are doing that right now including some day traders who are not wealthy yet comfortable in their lifestyles. Some of these individuals are in their ’40s. It appears to be working for them. And the SSA is losing money on that group.
Should the U.S. Government consider different FICA rates for different age groups? Yeah, that sounds unrealistic, but is it? Should the […]
PJR
the honest answer is “twenty cents per week” this year, and an amount that will “feel like” twenty cents per week each year after that.
then here’s where it gets a little beyond the understanding of the average person: if you tell him that will eventually grow to two percent and then stop growing, he will immediately calculate what two percent of his current wage would “cost” him. he will not be able to hold in his mind that that two percent will arrive seventy years from now when his wages will be double what they are today, or that he is going to get that money back when he retires so it is not “costing” him anything, it is merely being saved so its there when you need it.
and then there are people like MG who can never understand that it IS life expectancy driven. that’s where the “population bulge” comes from. it’s not the baby boom population bulge… that has already been paid for.
but then you have to explain to people that, no, repaying the Trust Fund is not paying for Social Security… it’s paying for all the stuff they bought with the money they borrowed from social Security… and while people could understand that if they took the time to think about it, they won’t.
and Arne’s comment doesn’t seem to be recognizing that the cost of benefits paid out is supposed to be the cost of premiums paid in… with the understanding that in a growing economy the benefits received by any person will always be more than the taxes they paid in. and yes “always” is a bit too strong, but no less always, for sure, than the interest you get from a bank or bond or stock is always more than you paid for it.
MG
the government can do what every insurance company does. calculate the average life expectancy and set rates accordingly. doesn’t pay to examine everyone’s life style.
and all those guys who retire early or whatever get only the amount justified by what they paid in in taxes (premiums) so the government is not losing money on them… except of course if they live longer that “expected.”
try to understand that Social Security is insurance. covers a lot of unkowables. it’s not a life script provided by God and St Peter to make sure you come out ahead in the end, or the government makes or loses money on your particular case.
pjr
if you can find a way to explain this to people, there is still time.
MG,
An individual who retires at age 45 (after working 25 years) will have a smaller benefit than an indiviual who retires at age 55 (after working 35 years). Have you actually worked out the numbers by which you assert that SS “loses money” on him?
OK, I am an engineer, I sometimes look at numbers differently than other do, but:
Your benefits are going to cost more because you are going to live longer.
You are going to live about 10 percent longer (than your parents).
Your income is going to be about twice that of your parents – a 100 percent increase.
You need to put about 10 percent of that increase toward SS (to pay for “scheduled benefits”).
You will be both richer and more secure than your parents.
“Arne’s comment doesn’t seem to be recognizing that the cost of benefits paid out is supposed to be the cost of premiums paid in”
I thought that was obvious, but MG does seem insistant on connecting the dots in the wrong order and now finding other factors besides life expenctancy.
increased lifespan => increased benefit costs => increased premiums
Other things may be worth talking about, but they are secondary.
Coberly, your absolutely correct about the 2 percent number and I don’t see a way to avoid it completely. If I were writing to that VP, I’d start with Arne’s explanation of why people should and need to pay more into the system. (As Arne said, his wording could have been a little better, but it’s very close to what’s needed.) If I’m stuck with the 2 percent number down the line, so be it, although I’d think the “sell” would be easier if this number was lower (it’s a thirty percent hike in the percentage, or did I misread The Plan?). That’s why I wonder if this number could be lowered if the wage cap were raised, as I mentioned. If so, this could even be presented as an option. Regardless, I might try a couple brief sales points to soften the blow. One may be to somehow convey simply the NW Plan’s appealing feature whereby the hikes occur only as needed/warranted (again, I hope I understood), which would soften the blow a bit by making the hikes less certain and contingent on continued justification by the numbers. A second sales point might be to convey simply The Plan’s appealing feature whereby tax-growth would be slower than real wage-growth, which means it will cut into only your real future pay raises (again, I hope I grasped this correctly). I’m not the subject expert here, obviously, but somewhat familiar with helping experts to convey their ideas–and I learn each time one “corrects” my understanding of them, so please do so lol.
coberly,
You apparently fail to recognize that the individual who retires early or switches from an employee model of income to another source of income no longer pays any of the U.S. Government, state, county, and local deductions from one’s paycheck.
Of course U.S. Government is losing money on that individual. The individual is no longer part of the employee model revenue base that supports the government. The individual may or may not pay other forms of taxation to the U.S. Government once the individual is no longer a 8-5 employee, but revenue in support of the deductions on the individual’s paycheck is long gone.
MG,
Your hypothetical financial guru needs to accumulate enough in 25 years to be able to live on interest and dividends and be someone who wants to retire to a life of living on interest and dividends.
I think we can safely treat that as a negligible portion of the population.
An interesting concept though. I wonder if he saves more by not paying into SS or by taking advantage of the capital gains exclusion.
Arne,
I have a few friends who retired at age 40, 42, and 43. Each intend to work a second career for 10-12 more years and punch out. All will be retired again by age 55. They will have two pensions, one of which is full and the other based on years served plus whatever investment and annunity income streams they have established. One fellow is sitting on $4.8 million right now in his stock holdings.
I believe that many more college educated workers will not work for any many years in the future as has been the case in past decades. They may be in good shape if they didn’t lock into age driven retirement withdrawal plans subject to early withdrawal penalties. It’s not that hard to knock down two careers and punch out by age 55.
Those individuals who find other income streams to support themselves at age 52-55 and beyond can live off of the income streams and let the interest compound as well as build their previous portfolio gains. As for which source of savings is greater, well that’s a good question. What is clear, though, is that the individuals who abandon the employee model of income are no longer paying any of those deductions. That’s a lot of money each month. It’s not that hard to make up the Social Security income stream shortfall as the difference is likely to be small.
I don’t personally know anyone who is still working to improve their monthly Social Security benefits check that they won’t see for years to come. That never comes up in any conversations. It’s not on the radar, frankly. Many have already read their statements and rolled out the calculations. Not much a difference.
I have run quite a few different sets of calculations in the SSA calculator. If an individaul was high grossing for much of his career, he can make the jump to an alternate form of income sourcing and do quite well as far as I can tell. The amount of income that some day traders are knocking down and others running chapter S corps with minimum salary draw is pretty remarkable. They’re good to go.
Arne,
Let’s clean up what you stated at 2:14:04 PM.
coberly made this statement: “and Arne’s comment doesn’t seem to be recognizing that the cost of benefits paid out is supposed to be the cost of premiums paid in… with the understanding that in a growing economy the benefits received by any person will always be more than the taxes they paid in. and yes “always” is a bit too strong, but no less always, for sure, than the interest you get from a bank or bond or stock is always more than you paid for it.”
9:04:16 AM
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MG – “Living longer isn’t an issue for eligible beneficiaries under current law nor does it drive up the FICA tax obligations of the employee or employer.”
Arne – “I don’t understand what point you are trying to make. I agree that living longer does not drive up the beneficiaries obligations (premiums) under current law. However, it does drive up benefits. A balanced program cannot pay higher benefits without getting higher premiums, so someone has to pay for them. Therefore current law needs to change. That is an issue. The people who should pay for it are the people who will benefit – the people who are living longer.”
Arne – “On second thought perhaps the problem is with my statement:
“Your insurance is, therefore, going to cost more.”
The cost is the benefits paid out, not the premiums paid in.
12:54:38 AM
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Arne – “The cost is the benefits paid out, not the premiums paid in.”
MG – “Yes, that is the issue. And your previous comment is spot on, but the solution may not be simple.” Plus my examples.
1:49:12 AM
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Now, you have said this: “increased lifespan => increased benefit costs => increased premiums”
2:14:04 PM
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Monday, December 13:
First, there is no evidence that that will be the U.S. Government’s solution. Instead, we have a couple of recommended fiscal year deficit/national debt reduction plans that propose raising the retirement age and undoing the cap. That’s not the same thing as raising premiums for all workers. There no indication at this time that raising premiums across the board will be adopted by the U.S. Congress.
Second, my examples show that there may be cases whereby the approach of raising premiums for all workers may not be the only solution due to its ineffectiveness in capturing more and higher premiums from all workers. This is why I raised the real world examples.
Third, I didn’t connect “the dots in the wrong order” as you now claim. I simply addressed other factors not being addressed.
It wasn’t more complicated than that.