Update: By Dale Coberly (was inadvertently omitted as author, although regulars know and the label names him)
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.
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.”]