SOCIAL SECURITY: IT’S JUST MATH
Update: By Dale Coberly (was inadvertently omitted as author, although regulars know and the label names him)
SOCIAL SECURITY:
IT’S JUST MATH
or how to lie with numbers
“Math doesn’t lie” seems to be the new focus group tested mantra about Social Security that Congressmen and their journalists are so proud to repeat. What it really means is “we put a lot of money into finding ways to make the numbers sound big enough to scare the children.”
Here is a recent example, which I found in http://www.slate.com/articles/news_and_politics/intelligence_squared/2011/09/stop_obsessing_over_entitlement_reform.single.html
“Slate:Of course, old people today are no longer poor because of Social Security. But recently, GOP presidential contender and Texas Gov. Rick Perry called it a “Ponzi scheme.” And last month, the economist Laurence Kotlikoff said this in an interview with NPR: “We’ve got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000–you’re talking about more than $3 trillion a year just to give to a portion of the population. That’s an enormous bill overhanging our heads, and Congress isn’t focused on it.” But you’ve written that Social Security will be only a small contributor to the future budget gap. Are Kotlikoff’s worries unfounded?
A look at the 2011 Trustees Report Table IV.B2 shows that, sure enough, in 2025 there will be about 78 million beneficiaries to OASDI. To find the “$40,000 per person” is not so easy. Look at Table VI.F7, Cost of OASDI (“Social Security”) in 2025 will be $1213 Billion, not 3 Trillion, for a per person cost of about $15,551 in “constant 2011 dollars” , not $40,000. Hmmm, maybe he means “current dollars, that is inflated dollars. Well, table VI.F8 gives $1626 Billion for 2025, still not $ 3 Trillion, or $40,000 per person.
Wait, maybe he is talking about Social Security PLUS Medicare (HI). Getting closer. Table VI.F9 gives the combined cost for OASDI AND HI, in current (inflated) dollars as $ 2237 Billion. Not 3 Trillion. Not $40,000 per person.
So where does Kotlikoff get his scary numbers? Perhaps from the (Table VI.F9) “High Cost” estimate for 2025, in current dollars,for Social Security plus Medicare, of $ 2737 Billion. Close enough, if you don’t mind rounding up by 10%.
It is not honest to start out by talking about Social Security, then skip to talking about (mumble) “socialsecurityplusmedicare” without bothering to mention that you have done so, or pointing out that Medicare is a very different kind of problem than Social Security. And it is not honest to use a “high cost” estimate which even the Trustees regard as “unlikely,” without even mentioning that that’s what you are doing. Nor is it honest to talk about inflated dollars without telling people that’s what you are doing and giving them a basis for understanding what the numbers mean in terms of the money they have in their wallet today.
Table VI.F4 gives GDP in current dollars for 2025 as $ 30 Trillion dollars. And the combined “high cost estimate” for the combined costs of Social Security and Medicare as 8.96% of that. Table VI.F4 gives the intermediate (most likely) estimate of the combined cost of Social Security and Medicare to be 7.66% of GDP.
But even staying with Kotlikoff’s misleading estimate, a “high cost” estimate of feeding and housing, and basic medical care, for 78 million people, over a quarter of the adult population, may reach 10% of GDP.
Kotlikoff is pretty sure this is an “enormous bill overhanging our heads”….”just to give to a portion of the population.”
But “we” are not giving it to them. They will have paid for it.
And every one of us will one day be in that “portion of the population.” Kotlikoff appears to be suggesting we just ask old people to step out into the blizzard, so “we” don’t have to pay for “them.”
But “we” will be paying for ourselves… just in case, you know, we don’t want to go into the blizzard. “We” are “them.”
With pay as you go financing “we” pay for our future benefits over a forty year period, an average of 30 years before we will need to collect. This is no different than “saving” the money. Because of inflation people cannot afford to just put the money under the mattress. Before Social Security they would take it to a bank and hope the bank would pay it back, with enough interest to stay ahead of inflation. Or they would “invest” their money in hopes of getting back more than they paid in by taking advantage of the growth in the economy. The success of this would depend upon picking the right investment on the right day.
Social Security avoids both the risk of inflation, and the risks of investments that go bad at the worst possible time. By using your money to pay back the people who paid for their Social Security before you, they are able to pay those people with money that is worth more than the money the older people paid in. This is very simple: Those older people paid a tax on an income that was a lot smaller than yours. You pay the same tax on a larger income. This makes more money available to pay the benefits due to the older people.
This is effectively the same as “interest”, and because it comes from the growth of the whole economy it is not subject to the same risk as individual investments. And because it is paid in “current” dollars, it always keeps up with inflation.
And when it’s your turn to retire, you will get the same advantage the older generation got. And when your children retire, they will get the same advantage you got. And so on, forever.
But please note, it is YOU paying for your own retirement. It is NOT you paying for granny. She already paid for her own retirement.
Don’t be confused by the pay as you go feature. It is really not different from what happens when you put your money in the bank or buy stocks and bonds.
Your money goes, the same day you deposited it, right out the door to pay for the current uses of some other person. And when you are ready to cash out your savings, or stocks and bonds, the money would come in the door, that very day, from some other person, presumably someone looking for a safe place to save for his retirement.
To get a more honest picture than the one Kotlikoff is trying to scare you with, look at Table VI.F7, and see that the intermediate (best guess) cost of OASDI in 2025 is projected to be $ 1212.8 Billion in “constant 2011 dollars”… dollars worth as much as the dollars in your wallet today. Divide $1212.8 Billion by 78 million and you get $15,549 per beneficiary.
Table VI.F2 says this is 15.67% of “taxable income. The same line gives the SS income rate as 13.15%. This is the amount of money available to pay the benefits. It comes from the current payroll tax rate of 12.4% and additional income… mostly a part of the income tax that IRS collected on income from benefits and kicks back to SS. This means a tax increase of about 2.5% (15.7 – 13.2) would be needed to close the gap.
The best way to increase the tax this much by the year 2025 would be to raise the payroll tax about one tenth of one percent per year for each the boss and the worker.
But it turns out the need for the raise has long been anticipated and the workers have been “saving up for it” by paying a tax rate higher than needed for the usual pay as you go. This gives SS a savings account (the Trust Fund) to draw on to ease the transition to the higher tax rate. The Trust Fund will still have about 2.6 Trillion dollars in it by 2025, helping to pay the increased costs (Table VI.F7).
We could just let the Trust Fund make up the difference between the tax rate and the cost rate, but this would not be prudent. It turns out that a gradual increase in the tax rate of ONE FOURTH of one tenth of one percent per year for each the boss and the worker will keep Social Security “solvent” forever. This is about 20 cents per week per year for each.
Actually no increase at all would be needed to keep Social Security “solvent.” The increase suggested here is what it would take to maintain the current “replacement rate”.. that is the percent of your pre-retirement earnings that you collect from Social Security on a monthly basis, AND retire at the same age as current retirees. It’s pretty certain you would want to do both of those things, and as we have seen, the cost is not even high enough to notice.
While your tax is going up one quarter of one tenth of one percent per year, your income is projected to go up over one full percent per year. That means, essentially, that each year your tax is twenty cents more per week (forty cents if you are your own boss) and your income is 8 dollars per week more than it was last year. Leaving you with MORE money every week than you had before, PLUS having paid for a longer, richer, secure retirement.
So Kotlikoff’s 3 Trillion dollar “enormous bill hanging over our heads,” just to “give” to a “part” of the population (you) turns out to be a need to raise your own tax… really your own savings… less than a tenth of a percent per year over the time between now and then.
Remember this is your own money. Not “the government’s.” It’s not welfare. You pay for your own retirement. There is no deficit or debt. Just a need to pay for what YOU will need. And it won’t cost enough to even notice.
It’s just math.
[note…
The numbers I give above are for OASDI, Social Security proper, not Medicare, because Medicare’s problems are best addressed by controlling medical costs (not by cutting benefits).
But even if costs can’t be controlled, we may decide we want to pay for the medical care anyway. The cost of this would be about a fourth of the cost of Social Security. So the same logic applies. Instead of raising your tax 40 cents per week each year, you might have to raise it 50 cents per week each year. You are still going to have more money after paying the tax than you have today. And you will still be paying, in advance, for your own needs… not some other “portion of the population.”]
The logic fallacy of ‘ambiguity’ is at play here: start with one definition and use another to deliver a false conclusion.
The logic is unsound.
Standard for republicans,, and Rupert Murdoch’s agitprop outlets.
Just free up $500B a year from the war machine to pay back SS trust fund special treasuries.
We the People see the lies.
wall st will change
Among those paying attention, I don’t think there are very many people asserting that the numbers *can’t* work.
The problem with essays like this (and like yours, coberly) is that they neglect the negative externalities on behavior and the historical lack of discipline with our spending habits.
A better question is one for the social and resource economists: how can we provide a safety net while mitigating the moral hazard and disincentivizing of savings and how can we convince people not to raid the funds to pay for other capricious desires?
Matthew,
The truth…………………………..
Matthew
you are wrong about just everything here.
no one is paying attention to anything except the hysterical predictions of doom.
the congress and the media have gotten pretty smug about saying “it’s just math” looking down their noses at those who say there isn’t really much of a problem and we “promised” the old people.
the “negative externalities on behavior” that you cite as gospel are the fantasy of Ayn Rand and other Scrooge types who comfort themselves by justifying their insane greed with moral fairy tales about the “lack of discipline” in the working class.
social security takes care of the “lack of disciplne” by collecting the “savings” as a “tax.”
this “safety net” works just fine by giving the people back their own money with interest created by the miracle of pay as you go financing with wage indexing.
and no one has raided the funds. the Trust Fund has not been raided. like any other trust fund ever created, the “money” has been lent… or “invested” in very secure securities. those securities are called government bonds, and like all the other money the government has borrowed .. by selling bonds… it has been spent. that’s what you borrow money for. the only issue is “will it be repaid.” as a mater of fact it is being repaid right now.
so, if you choose to guide your life by a fairy tale, that’s your privilege. the terrible danger is that Mr Peterson’s billion dollars is telling that fairy tale to a lot of people who don’t have the resources to find out the truth, and will just stand there stupidly while he and his friends .. not so much rob their piggy bank, as take away from them their right to save their own money in a place safe from inflation and the risks of the market.
coberly,
I’m not talking about people speading gloom and doom, nor am I taking issue with the math of how this can all balance out. Like I said: it can, and it does.
I don’t think you can say that negative externalities are fantasy. In fact it’s pretty naive to think so. Do you think the availability of auto-financing has no impact on the price of a BMW?
I don’t limit that concern to the working-class either. People lack discipline at all levels.
As for the “SS tax” eliminating the lack of discipline… that’s painfully myopic. Certainly you mitigate the issue of *paying into a “savings” plan for forcing it as a tax* but I’m talking about the lack of discipline with regards to the rest of the federal balance sheet and how that impacts SS in general.
You repeatedly talk about the fund being “borrowed” from and being invested into “secure” government bonds. Consequently the viability of these funds is doubly exposed to government instabilities. Without a sustainable government practice *at all levels* we cannot consider such bonds secure. Furthermore, they are “inflation protected” at levels which I think we can all agree are manipulated below actual COLA.
There is feedback here, coberly. When the government gets into trouble their “way out” is typically via inflation and borrrowing. When they are financed by the debt of their own citizens in bonds their inflationary policies simply wash on their “inflation protected” debt to citizens… contrast this with a typical fixed-rate private loan which is impact *in favor of the borrower* with inflation. SS does not operate this way.
The bonds are only as stable as the government, and lacking discipline at all levels (from the poor to the super-rich!) impact the viability of SS.
This very year we saw the government renig on its COLA adjustments *and* its SS reinvesment obligations to fund it’s other debt. We then had our president come on TV and tell us he couldn’t guarantee SS checks unless we were able to borrow from somewhere else. Now, I understand this is FUD… but it demonstrates our government’s willingness to use this “fund” as a political tool.
If we don’t keep government responsible at *other* levels, whether it’s defense spending, welfare programs of whatever… that impact the viability and sustainability of SS which is “loaned” to those other programs via the vesting of bonds.
Mathew
the inflation protection that SS provides has nothing to do with COLA. it is an automatic benefit of “wage indexing.” that sets the “initial benefit”.
subsequent benefits are affected by inflation and presumably protected from it by a COLA adjustment, which as we are seeing is a political artifact. I don’t think the manipulation so far is very important. but i will take this opportunity to describe the “chained – CPI” as a “more accurate” inflation adjustment that observes that when the price of groceries goes up and granny switches to cat food, her cost of living has actually gone down, so her pension needs to be cut.
as for the rest of your description of the follies of man and government, i tend to agree. but SS is a protection against that, not a cause of it.
your understanding of SS finance is a little shaky.
Coberly,
I used “COLA” in a descriptive fashion of what it does, not in terms of what the “official COLA” is. I’m talking about how much cost of living is changing, not the indexed value which carries the same label… sorry for the confusion.
Do you think that more, less, or the same amount of elderly are able to live on their SS “suppplementary” income than last decade? Funny thing about cat food… it’s more expensive than a lot of the “human food” I eat….
SS increases savings’ exposure to government behavior (which is driven by capricious and myopic voters). This is probably very good for some people who would otherwise have *no* savings to expose.
Please explain how SS “savings” is less exposed to unsustainable government practices than all other global-diversified market options?
Unsustainable or otherwise reckless government actions risk SS viability, NOT because SS “doesn’t add up” but because other things don’t add up and they depend (in part) on vested bonds to fund other activities…. Or are you contending I’m wrong about what bonds are used for?
For an example of what I’m talking about we need look no further than the poster-boy AIG. An otherwise great company imperiled by a comparably small part of their business.
Is it your assertion that government is immune from the same principle? Does an infection in the legs have no impact on the core?
Generally agree, and appreciate the hard work. but I think the statements about Medicare – recgonizing it’s not the focus – are over generalized. The main ways to “control medical costs” will in fact “reduce benefits” either directly, by (a) increasing copays and requiring the consumer to have more skin in the game, or (b) making some treatments unavailable due to bureaucratically determined lack of cost effectiveness or indirectly, by pricing reimbursement at a level where providers provide less services.
“The main ways to “control medical costs” will in fact “reduce benefits” either directly”
Or reduce the profits being taken in the system. Our per-capita healthcare cost is $8000, while the rest of the world is $3500-$4000.
$1000 of our cost is pharmaceuticals, $1500 on physicians and clinical services, and $2500 on hospitalization. It’s the hospital costs that are out of line with the ROW, along with drug costs.
http://en.wikipedia.org/wiki/Economic_rent
Government doesn’t have an infection.
Trillions of paper wealth has been created and transferred but the physical wealth and productive capacity of the US is not under attack.
Policy has gotten us into several major imbalances, and policy can get us out.
Not that the policy-makers are moving in the right direction now.
The imbalances are clear as day to me, but the system has been blinded such that nobody sees it.
http://en.wikipedia.org/wiki/Progress_and_Poverty
Troy,
Our medical care in this country is rationed different than in other countries. Additionally, we have a medical “insurance” system which puts a chasm between consumers and payers for health services.
Couple that with the rapid increase in imaging and other diagnostic medical practice, and a system which burdens the hospitals with the costs of care for uninsured and the results are clear.
Because of the “insurance” model we’re using, which hospitals compete on price?
“The bonds are only as stable as the government, and lacking discipline at all levels (from the poor to the super-rich!) impact the viability of SS.”
Compared to what? The (recently baild-out) banks? If someone needs to save some money, earn a decent rate of return, and have it be as secure as possible, they invest in US government bonds, just like SS does. There is nothing else comparable in terms of security. In fact, the worst threat to the stability of government bonds is people yelling “the sky is falling!” and trying to force unnecessary action. I know why Pete Peterson is doing it; shame on him.
http://www.angrybearblog.com/2010/06/we-learn-why-they-hate-social-security.html
Well, Matthew, I guess there is just no way around it but that we repudiate our internal debt to ourselves (that’s the $2.6 trillion bucks in the TF) and instantly impoverish the domestic economy by some $700 billion a year. Great idea. What do you think would happen then? You correctly point out that people’s wellbeing is directly affected by government activity and over-exposure to debt liability. Having said that do you think that this country won’t, can’t and shouldn’t pay its debt to its own citizens? I think you would deny meaning any such thing. But, a little reduction here and there would be alright, right? Wrong and the majority of people who are SS beneficiaries agree with me. We could also be right, couldn’t we?
You also say that the government is imperiled by risky borrowing just as even the great AIG was endangered by a small part of its business. And, the government could be endangered in the same way by over-promising its SS beneficiaries returns that might otherwise be realized privately. Anything else you can think of that might imperil the govt? I mean, how often can we afford to bail out the GM’s, Goldman’s and AIG’s of the world? We know that businesses can and do fold all the time, but these were too big to fail.
So, why is SS a greater risk to the financial integrity of the govt. when AIG et al. aren’t? One way or another, you can say whatever you want, but this country isn’t poor. Not even close. True, people don’t want to pay their taxes and some people in fact don’t pay any federal income taxes. When you don’t have enough income to pay taxes, that’s one way to know you’re poor. Another way not to pay IRS taxes is to have non-taxable income from municipal bonds or just write your income away with various tax loopholes. That works, too.
But, taking SS as an example, the federal govt. has a track record of paying its debts, even those it owes to its own citizens. I can’t see a reason to change that because at some indefinite point in the future we could see another fit of irrational exuberance and suffer from a wave of crushing inflation. You can go ahead and invest in private markets if you want. Some people just like to gamble. I want a reliable, secure retirement income and if I had relied on a 401k, I’d be broke now.
I don’t see anything wrong with investing in SS as opposed to the private market. Especially if we break up the TBTF financial companies. Hmmmm. We’d save a lot of money right there, wouldn’t we? Because if there’s anything we know, it’s that banks or the stock market or the bond market or some multinational investment firm is gonna dream up another scam, and I and all my neighbors down here in pokey little South Georgia are gonna see billions of our tax dollars fly out the window to bail them out. I’d like it if the government acted to prevent investment fraud. Until then, I’ll leave the market to you. NancyO
Two quibbles . . .
The first is I doubt there will be $2.6T in the SSTF in 2025. That’s what there is in there now, and I think drawdowns will exceed income this decade again.
Payouts are up 25% 2005-2010 but income is only up 11%.
The second is that’s OK. The $2.6T is largely the overtaxation of the baby boom / Generation X, 1991-2009. Spending it down by half by 2030 is fair to those who overpaid into the system. Not spending it down is effectively theft.
Matthew: “The problem with essays like this (and like yours, coberly) is that they neglect the negative externalities on behavior and the historical lack of discipline with our spending habits.”
That’s an interesting viewpoint, Matthew. Resolved, that we should not have a national retirement and disability insurance because of its negative externalities on our behavior, given our historical lack of discipline with spending.
I do not believe that I have ever heard anyone argue that.
“which hospitals compete on price?”
LOL. It’s not economically efficient for hospitals to compete like that. Too much fixed costs.
Kinda like K12 schools in that regard, better to establish catchments and run such social infrastructure publicly.
That’s how it’s done most everywhere else.
Right, Troy. Paying SS beneficiaries current benefits is paying a debt. Therefore, paying out SS reduces the national debt. If we need more money to pay benefits, we can just raise FICA about 3% of payroll. Turns out it’s not a lot of money compared to expected wage increases. Anyhow, the future is unknowable. If the world ends, there’s nothing to worry about. Otherwise, if you want to do the right thing, do it and if it costs more, pay for it. NancyO
Troy
the reason the amount will be the same in 20 years is that the amount being drawn down is less than the interest being paid on what’s already there. and this will be true until about 2026.
mark
cutting benefits is NOT controlling costs. it’s depriving granny of the chance to spend an extra one percent on her insurance so she won’t be hit with costs she can’t pay when she is retired.
in other words is a cynical and stupid way to kill a program that is working fine.
you may want to read the following article on controlling costs.
http://prospect.org/cs/articles?article=the_medicare_bind
“Payouts are up 25% 2005-2010”
Comparing 2005 to 2010 and projecting that forward is not good math. It is know that in 2009 and 2010 the economy caused more people to retire. That is an event which creates and blip and does not have major ramifications for the trend.
“drawdowns will exceed income this decade again”
If you count interest income (and you must for the question you are raising) SS is still in a surplus and will be until 2017 (approx). In 2025 it will be back down to the level (approx) it is now.
“overtaxation”
The deviation from a slowly rising trend to match how a paygo system supports a slowly changing demographic is pretty small. If you read the 1967 report, even as they were allowing the TF to shrink, they did not properly project what would happen within just 20 years. From 40 years later I could suggest changes which fit my own perception of “better”, but the frequent adjustments that were made from the very beginning have actually been within limits that a structural engineer could readily accept.
Hi, You wrote quite a lot about something I didn’t really say. You could have called me re the numbers. I’m not your enemy. I’m not a Democrat or a Republican, so calm down. I was referencing Medicare plus Medicaid plus Social Security expenditures per adult. I was not referring just to Social Security. The problem in this country is everyone wants to be angry. If you think someone’s math is wrong, contact them and check. The math here isn’t wrong. best, Larry
Larry,
Thanks for coming by, but reguardless of your math, your ‘framing’ isn’t correct. You cannot discuss SS on this blog without first acknowledging that SS benefits you recieve have already been paid for and all your getting is your money back. Go against this paradigm and you get this response. If you continue you’ll get a bunch of personal attacks, just the way this blog is operated.
Also, lumping SS in with Medicare and Medicaid (M/M) is unwise. They are seperate programs. SS is fiscally sound in isolation to everything else. M/M on the other hand is in big trouble. It’s fairly easy to seperate them and I recommend it in the future.
Come on bye some more or guest post. Dan’s pretty liberal about posting articles if you’ll send him something.
Islam will change
“Comparing 2005 to 2010 and projecting that forward is not good math.”
Actually, the baby boom is aged 46 ~ 64. The retirement wave is just getting started. Peak birth year was 1957, so early retirements will peak in 2013 and the wave will grow from there.
“If you count interest income (and you must for the question you are raising) SS is still in a surplus and will be until 2017 (approx). “
Yes and no.
http://www.ssa.gov/oact/STATS/table4a3.html
and
http://www.ssa.gov/OACT/ProgData/tsOps.html
show that from 1H10 to 1H11 assets rose $60B, which is good, but I think this surplus is going to be taken out sooner rather than later.
“but the frequent adjustments that were made from the very beginning have actually been within limits that a structural engineer could readily accept.”
Overcollection of FICA ranged from 15% of receipts in 1989 to 25%+ in 2002 & 2006.
If the payers of that (or their heirs) don’t see any benefit (eg that overpayment just sits collecting printed interest) then that was a form of theft.
“Turns out it’s not a lot of money compared to expected wage increases”
Thing is, I don’t think those rosy wage forecasts are accurate.
And I also think inflation — in housing, energy, and medical care — is going to eat even real wage increases that do miraculously appear.
Larry
Thanks for the speedy reply. I think that if you review the transcript of the original interview
http://www.npr.org/2011/08/06/139027615/a-national-debt-of-14-trillion-try-211-trillion
you will readily see that the key statment, as quoted above and in my message, implies, or may be mistaken to imply, that the reference is to Social Security alone. The reference to Medicare and Medicaid is made briefly and several paragraphs above. Also, there is no mention of the dedicated revenue stream that pays the benefit costs of Social Security. Nor is there any mention of the Trust Fund asset pool which supplements that revenue stream. All in all a bit misleading even if unintended. Details matter, especially in the context of nation wide media exposure.
Matthew
I am not contending you are “wrong”. I am contending that I can’t follow what you are saying.
As far as SS being less exposed to unsustainable government practices than all other global diversified market options…. compare SS benefits over the last ten years to returns on various market choices a person might have made.T
“I was referencing Medicare plus Medicaid plus Social Security expenditures per adult”
Well, Medicaid as written now will cover everyone up to 133% of FPL, so your divisor is a bit off.
Medicare simply can’t grow on a per-patient cost basis as the projections project. As the Germans say, the trees don’t grow to the sky.
Arne
i think that is a point i have been trying to make:
small adjustments as called for are not likely to be a problem. we get in trouble when we “project” small adjustments out to 75 years and call it a “prediction” and then get hysterical every year when the prediction changes.
speaking of which… every year the Trustees Report comes out and announces the NEW DEATH DATE OF SOCIAL SECURITY… ertheturstfund. The Trust Fund is of course not Social Security but I keep thinking it’s really funny that they are so worried we are going to run out of these “worthless iou’s” they keep telling us about.
Troy
The SSA actuaries have really accounted for all the things you worry about. They really have. Things could change, but not likely by very much. And even if by very much, the fundamental structure of SS assures that benefits can always be paid and they will always be “reasonable” in terms of what the population of workers can afford and what the population of retirees will need.
And the people who paid “extra” FICA will get, and are now getting, the benefits they paid for.
Their “heirs” will benefit first by not having to have their mother in law move in with them, and second by getting their own Social Security when they need it.
But yes, that’s why the Trust Fund needs to be “paid down” so that it doesn’t just sit there collecting printed interest.
Larry
I worried about that a bit. But in the context in which I read your comments, it sounded like the standard mantra… huge costs … we’re all going to die.
I hope if you take Buff up on his offer (for Dan) that you will help correct the hysteria about Social Security.
coberly, we can agree than 99% of what is printed and said about Social Security is sheer fear-mongering BS.
“Nor is there any mention of the Trust Fund asset pool which supplements that revenue stream”
Indeed. At $2.6T it’s the largest sovereign wealth fund that I’m aware of.
At today’s 2% rates that’s $52B/yr in interest (hmm, as an aside I see SSA is actually collecting over twice that now, there’s going to be a loss of interest income here as rates continue to be depressed).
I think it’s equitable to draw down the SSTF over 30 years, starting in 2015 or whatever. I’ve paid ~$50,000 into the SSTF, so I would say that, of course.
To be more succinct about the issue, it is not the Social Security system that is a deficit contributor. The SS system is related to the deficit only in its role as one of many creditors of the general budget. The budget debacle is a product of the blotted military budget, including the ludicrous process of never ending warfare that our government has been practicing over the past several decades. Add to that the absurdity of the tax code since Bush II 2001. And add on to of that the lack of discretionary spending money suffered by about 75% of the working population and all of the poor.
Yeah, Batmensch, what you said. NancyO
“ And add on to of that the lack of discretionary spending money suffered by about 75% of the working population and all of the poor.”
Talking my “book” here, we’d have more discretionary income if housing costs still weren’t so high.
Housing costs always eat any surplus income from the working class.
Either we bid up the cost of housing as buyers or the landlord chisels it out of us.
And still the media and system as a whole considers high housing costs a public good.
We are insane.
I don’t have Laurence Kotlikoff’s phone number, but a casual check of google suggests to me that I did not mischaracterize his alarmist rhetoric. Even here he seems to be saying… “I didn’t get the numbers about Social Security from Social Security and Medicare but from Medicaid.. the 78 million boomers who will be on Medicaid … and it wasn’t 3 Trillion, it was 211 Trillion, and all by 2025 or 2030….” just to “give” to a “portion” of the population.
Larry’s arithmetic may be “correct”, but his “math” seems intended to deceive, especially as he didn’t make any of this clear in the interview.
I am not angry at Larry, yet. But I am very angry about the lies being told to undermine the people’s faith in Social Security so that it can be “fixed” … like the cat… and then taken away from them because it will have ceased to be a meaningful way for them to insure that they will have enough to retire when they need to.
Meanwhile, I modestly suggest that my arithmetic, based on the Trustees Report, and an understanding that if we pay our bills we won’t have any debt, and that we may have to pay a little more for Social Security if we are going to live longer and don’t want to spend our golden years polishing the boss’s boots, and we may have to pay a little more for our health care.. if we are going to want to live a little longer and can’t figure out how the rest of the world does it so cheaply… I suggest my modest arithmetic is somewhat closer to the truth of things than Kotlikoff’s 211 Trillion Dollar Debt.
The real wage forecasts aren’t “rosy”. Under IC (I.e. Standard assumptions) they are ultimate 1.1%, quite low by historical standards and openly inviting policy interventions via minimum wage increases and resistance to lowering gains on capital overall.
There is exactly nothing that would prevent us adjusting labor, wage, and taxation policy to achieve the 1.6% real wage growth that would not only fully fund Social Security and increase living standards for that portion of the 99% reliant on wages in the meantime.
Basically your argument reduces to “we have been fucked by 30 years of turning our consensus away from the New Deal formulae so we will probably always be fucked”.
It doesn’t have to reduce to defeatism, ostensibly we still live in a democratic society open to utilitarian ‘greatest good for greatest number’ outcomes. I mean even Supply Side was sold via ‘rising tide’ and ‘trickle down’, there was nothing in Reagan’s Morning in America that equated with today’s MOTUs “fuck you I got mine, I am not going to pay taxes on it, and you all can just suck on it”.
Stagnant wages just didn’t happen absent specific agency, agency operating the other way can reverse that. Which is why ‘we are the 99%’ has them pissing their pants, absent massive electoral disenfranchisement the majority can enforce its way. Why explains why the R’s are pursuing disenfranchisement under the cover of ‘voter fraud’, few percentage points of movement in election results can have outsized impacts. See 2010. That tide can reverse.
The bonds in the Social Security Trust Funds don’t change yields in the face of market changes, that is the flip side of them being unmarketable, they always yield exactly their face value at issuance.
The current portfolio has bonds yielding as much as 7% interest, a rate that will remain constant to maturity. As a result the net yield on the entire portfolio of 10 Years held by Social Security will mirror the average of the LAST ten years and not the market value of equivalent regular Treasuries over the NEXT ten years.
Meaning that returns on the Trust Fund lag the market for better or worse. For now that adds up to ‘better’
Bruce, I agree with that 100%.
But I think things are going to go hard right (2012, 2016) before they go hard left (2018?).
I’m not defeatist per se, but this nation has a very tough row to hoe this decade, and the disinformation and public opinion shaping is really something.
Not even Krugman and DeLong — being centrists in the scheme of things — have a firm handle on what is really ailing this country.
Troy
absolutely we are insane. and when i try to correct some of the disinformation i despair that even the good guys “assume” the lies when they think they are refuting them.
as for housing costs eating the wages of the working poor. think you are on to something there.
Bernard Shaw was on to it too, early in the last century. read Widowers Houses if you like to read, and you may see that this has been going on a long long time.
The Slate article was very deceptive; Mr. Kotlikoff was definitely talking about a combination of so-called “entitlements”, but the Slate article is most definitely talking about SS alone.
Not saying anything about Mr. Kotlikoff’s numbers, but I think Dan’ contention that Mr. Kotlikoff was being deceptive about the cost of SS was just an honest mistake from the poor sourcing in the Slate article.
Henry George coalesced a lot of this thought in his book, which had an immense impact on the pre-Progressive era.
GBS was a Georgist, as we’re most public intellectuals of the day.
But Georgism was expunged from the system by the neoclassical Econ movement.
See Gafney’s The Corruption of Economics for more.
Hey Buff…I don’t see ad homs on this thread. Good start. The transcript on Laurence’s interview may or may not represent his thinking, but it does reveal how carefull a reporter or interviewer needs to be as well as the expert.
I am just catching up at 9 pm now. Will take a look and get in touch.
According to Kotlikoff, one of the biggest fiscal problems Congress should focus on is America’s obligation to make Social Security payments to future generations of the elderly.
This is a direct quote from Slate made by the writer describing Laurence’s views, so it is a direct impression by the reporter but not in the quotes provided.
Hmmmm….now what.
Mark:
Cahnge ost model from service for fees which has nothing to do with benefits or a reduction in them
coberly:
Hmmmm. Some of my stuff sinking in?
Got a post in there Troy?
Coberly I looked at both the transcript and at the NPR article and I agree with your take on Kotlikoff. Technically he didn’t say precisely what the NPR article leads a reader to think he said. But Kotlikoff’s purpose was to spit out an alarmist sound bite that sounds like “it’s just math.” The NPR article captured the spirit of the message, and of this blog posting.
Dan and Bat
I will take full credit or blame for my statement that Kotlikoff was being alarmist as a way of undermining confidence in Social Security. There is no other way to read the NPR transcript. Slate did not mischaracterize that.
If Kotlikoff thinks he was misquoted, or misunderstood, he should write here and make his case.
The question is not whether his arithmetic was correct, the question was whether his “math” was misleading. I cannot know if he INTENDS to be misleading. I can know that he WAS misleading.
run
possibly
but i probably never disagreed with you as much as it can sometimes seem, given the difficulties of making ourselves clear.
PJR
thanks. see below.
10:30 pm I agree. And there are other math pieces of his that are confusing a number of issues. Medicaid projections are confounded by the 2014 ACA kick in, but that arcturial estimates are 8.4% increases yearly to 2019 to reach $840.4 billion (pretty high projections and not likely)
The “transcript” cite that Jack gives is actually an NPR “summary.”
the transcript can be found at http://www.npr.org/templates/transcript/transcript.php?storyId=139027615
to be fair to Kotlikoff the NPR summary juxtaposes Social Security to the 3 Trillion dollar debt hanging over our heads to “give” to a “portion of the population” even more closely than the Slate quote and more closely than Kotlikoff does on the transcript.
but that’s being too fair to Kotlikoff, the actual transcript is worse. Kotlikoff calls for a 40% cut in Social Security and says the “true” national debt is 211 Trillion Dollars. Kotlikoff does not show his work, but I have no doubt his arithmetic is correct. I doubt, however, that his “math” means anything in the real world.
It’s pure deficit hysteria, as Kotlikoff would say, “to the millionth power.”
Coberly I believe you have provided the NPR article, written by NPR staff, rather than the NPR transcript. A link to the transcript is at the top of the page of the NPR online article, here: http://www.npr.org/templates/transcript/transcript.php?storyId=139027615 (I’ve listened to the interview and the transcript is 100 percent accurate on what was said on the radio program.)
Heard on All Things Considered
August 6, 2011 – DAVID GREENE, host: Now, S&P says this downgrade might not even be the last one if the nation’s debt keeps ballooning. So how to turn this around? Listen to the prescription from Boston University economist Laurence Kotlikoff.
LAURENCE KOTLIKOFF: What you have to do is either immediately and permanently raise taxes by about two-thirds, or immediately and permanently cut every dollar of spending by 40 percent forever. So I’m talking about cutting Medicare benefits, Medicaid, Social Security, defense spending, you name it, by 40 percent forever, starting today. That’s what the CBO’s numbers say we have an absolutely enormous problem facing us.
GREENE: Big tax increases, huge cuts to military spending and entitlement programs – good luck getting that through Congress – and the problem Kotlikoff says is a whole lot bigger than this $14 debt we’ve been talking about.
KOTLIKOFF: If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract off all the taxes that we expect to collect, the difference is 211 trillion. That’s the fiscal gap. That’s our true indebtedness.
GREENE: It’s a big number. Why aren’t we hearing more about that as these big debates and all the drama go on in Washington?
KOTLIKOFF: Well, the politicians have chosen their language carefully to keep most of the problem off the books, and they’ve done this for decades. So this is Enron accounting to the 10th power, I mean, millionth power, actually.
GREENE: Quite a strong accusation.
KOTLIKOFF: Well, it’s, you know, it’s true. Why are these guys thinking about balancing the budget? They should try and think about our long-term fiscal problems. We’ve got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by 40,000, you’re talking about more than $3 trillion a year in today’s dollars just to give to a portion of the population. That’s an enormous bill that’s overhanging our heads, and Congress isn’t focused on it.
GREENE: So Americans just watch this drama play out in Washington. I mean, is your message to them that this was all just a useless process?
KOTLIKOFF: This is a sideshow. The Democrats and Republicans have been having a food fight for decades. Underneath that fa�ade of conflict, what’s really going on is that older generations are taking from young generations on a ongoing basis. And we’ve consistently done too little, too late, looked too short-term. Well, guess what? You can’t keep putting off these problems. And we’ve used language to disguise what’s really going on here, which is this mess of Ponzi scheme.
GREENE: We’ve been speaking to Laurence Kotlikoff, professor of economics at Boston University. He joined us from member station WBUR in Boston. Thank you so much, professor.
KOTLIKOFF: My pleasure.
PJR
you are correct. i fixed it 3 minutes before you posted. Nevertheless, the transcript is just as bad as the summary and the Slate quote.
And you might note that in my article here, I did not say that Kotlikoff said that SS was going to cost 3 trillion. I went looking through the Trustees Report to see if I could find where he got the numbers. The closest I got was 2700 billion in current dollars for combined Social Security and the payroll tax part of Medicare.
if kotlikoff was thinking of medicaid, it is not certain why he should begin his sentence with “78 million baby boomers are poised to collect…” and i still don’t see those boomers collecting 40,000 per person.
It seems to me Kotlikoff is trying to get away with alarmist rhetoric about Social Security, and come in here and say “Hah! you got me wrong: you didn’t guess where i got my alarmist numbers from. i got them from some other place.”
There is no doubt about Kotlikoff’s motives, I agree. I guess from his words that he’s including, with SS and Medicare, spending on nursing homes and any other medical care for the elderly that comes from Medicaid. I’ll give him the benefit of doubt that he’s not including all of Medicaid in his figures, since the program covers lots of disabled people and poor kids.
Regardless, he is playing with numbers (and words) to frighten people into supporting really stupid policies that he favors. About the only thing he said that makes sense is that taxes have to go up considerably (I agree because we can’t continue tax at only 15 percent of GDP). I’ll just ignore the rest of his “analysis.”
Between 2012 (current Fiscal Year) and FY 2022, the pentagon is planning on spending $7800 B. Indeed things like new carriers and F-35 imply those levels of expenditure.
Which should be debated the rise in medical burden or the burden of empire?
“Various Market Choices”….
Have a look at the operative word “choices” there.
There are plenty of market choices which could *obliterate* SS returns and plenty which could make it seem like paradise.
I don’t quite see the point you’re trying to make… but I think there are plenty of index funds which outperform SS (provided you didn’t panic and sell out the bottom).
A bit off topic now, and back to “choices” as you have so conveniently entered….
This very blog posted an article highlighting Thoreau’s jail time. Do you think it’s a bit ironic that his imprisonment was the result of his unwillingness to vicariously support war… and here we are with most Americans angry about government spending, war and policy but still being required to support it?
Troy,
Mechanized factories have high fixed costs too yet run well enough to be viable.
You “lol”d at my example of driver for higher medical costs… rather than following up on the fact that subsidized coverage plans and directly burdening the hospital with cost of care of the poor you concluded that it should be nationalized… completely ignoring the reality that it’s already impacted by unsustainable policy which has lead here.
The point is: hospitals don’t compete on price because their can’t or they don’t have to.
This is not an inherent reality in the health-care industry nor capitalism. It’s directly the result of unsustainable statism.
Nancy,
You have mischaracterized what I said. I never suggested we repudiate our public debt; non-sequitor.
Nor did I suggest government was imperiled by “over-promising its SS beneficiaries’ returns”. THe viability of SS is directly related to the viability of *all government activity* impacting its stability (and thus its bond viability). SS is just as much imperiled by unfunded wars as it is by free cell-phone. My point about AIG was that, while synergistic, we cannot individually assess the viability of parts which cannot be segregated from the whole.
Regarding TBTF, AIG, GM, Goldman… red herring. If the government were doing its job of stabilizing policy and obstructing monopolies (rather than consumer market manipulation and ENTRENCHING monopolies) we would not have had to bail them out in the first place. Capitalism works: the equity holders would have consequences for their foolhardy investments.
Instead we have let moral hazard run amok.
The government *does* act to prevent investment fraud; just not on the companies they’re using to buy-off voters by bribing you with your own money.
There is a reason a tremendous amount of unsustainable sub-prime loans originate with or are sold to Uncle Sam…. Because none of us is as dumb as all of us: we keep buying them and demanding to be able to write them.
matthew
i think you are still talking ideology and not reality based.
let me suggest http://prospect.org/cs/articles?article=the_medicare_bind
coberly
I certainly agree that Mr. Kotlikoff is being alarmist. He seems to be posting numbers without context, in my opinion. I was just pointing out that the Slate article was not being clear about WHAT his numbers were describing, that’s all.
Rdan,
Yes, the ad homs have not started and as of the time of post seem to be muted. But historically my point is very valid. Any time anyone puts up valid CBO approved numbers that don’t fit th emantra, well if gets ugly quickly. Basically you can’t disagree with the paradigm on SS, even politely. My point gets made later in this thread. The idea that someone disagrees with you or is trying to ‘decieve people all the time gets very repetitvie. Especially when its studiously avoided mentioning that its the Democrats doing the gutting of SS. Otherwise I agree about both reporter and subject.
Islam will change
buff
i use the CBO numbers. fact is i had them before CBO did.
Matthew
Most of the time the stock market can ‘beat’ social security’s “rate of return.” but the time when it can’t are really hard on people. and a lot of people never can find the money to bet on the stock market. so you are really missing the whole point.