Note to Laurence Kotlikoff on Social Security
Your analysis that SS is desperately broke ignores the fact that the projected shortfall can be made up by raising the payroll tax one half of one tenth of one percent per year, while incomes are projected to go up over one full percent per year.
This would result ultimately in an increase in the payroll tax of about 4% of income (which you misleadingly call a 33% increase in the tax, which it is, but which is likely to mislead the average reader). A 4% increase in the tax really amounts to a 4% increase in the savings protected by Social Security, which is properly understood as insurance against the potential failure of other modes of saving for retirement. The 4% increase is a very fair price to pay for the longer life expectancy that the workers paying the tax will enjoy.
They really won’t want to work any longer, and since they are paying for their own benefits, there is no reason they should have to. Further, while the tax increase does represent a higher percent of their income going to their own longer retirement, the projected increases in their wages would leave them at least twice as well off “after the tax” (that is, in terms of money left in their pockets each month after putting away the extra for their longer retirement) as they are today.
I don’t know if you are able to understand all this, or if you just prefer to ignore it. But I do what I can.
Pardon me, but Kotlikoff is a professor of economics? How can he say things like the US is bankrupt, which is ridiculous on its face?
As for Social Security, take a look at this CBO graph:
http://www.usgovernmentspending.com/budget_cbo.php?year=2000_2087&show=frame
There are problems which such graphs, but even if we take this one at face value, the part that indicates Social Security spending is about as close to flat as we might expect. Social Security is neither broke nor broken.
Min
I think if Kotlikoff were entirely honest he would have to mention that while that “20.5” Trillion Dollar Shortfall is accruing,” wages will be about 500 Trillion dollars, and GDP will be about 1,700 Trillion.
I don’t think Larry understands that “present value over the infinite horizon” is not a good way to understand Social Security’s finances. Present value assumes a magic bank that can pay a known interest rate forever, and, of course, that we have, or have to have, the money to put in that bank right now.
It also discounts the risks of this “investment” effectively to zero. Present value does assume a “risk” assessment. But that assessment is always a guess, and it is an irresponsible guess when you are effectively playing Russian roulette with someone else’s life. After all, how much are you willing to bet to find out if the next chamber in the revolver has the bullet in it?
Or, suppose the odds of the bullet being there were a million to one against, and you stood to “win” a million dollars by taking the chance. Would you?
You’d be a fool. Even at a million to one, dead is dead. And there are other ways to get a million dollars, or live without it.
Times change, costs change. We can pay for Social Security the way we pay for our daily bread… one day at a time. It is useful for the Trustees to predict what the finances will look like a few years ahead. It is not useful, and it is not honest, to make decisions based on “desk calculator projections” for “the infinite future,” or even “the seventy five year actuarial window.”
speaking of million to one, looks like he’s running for president…
Just more of the same. He has made part of his living off of creating generational hate and angst.
So Kotlikoff is running for President as the first economist to take on the challenge. Too bad he’s not a fact based scientist of some sort. His logic and analysis might be more fact based than it is. Given the current state of the economy and the fact that the economy has tanked at least twice in the past two decades one might think that the field of economics is no great preparation for a Presidency that is faced with the task of improving things. Let’s take a look at Larry’s suggestion for how to start the jobs ball rolling once he’s elected. From his web site blog:
“As President, on day 1, I’d gather the top 1000 CEOs in a large room. Day 2 I’d start meeting with mid-sized employers. In these meetings, I wouldn’t lock the doors, but I’d have NFL players standing at each exit! I’d talk with the CEOs about why the economy isn’t moving — why we have 27 million people out of work or short on work. But the main thing I’d discuss is the massive coordination failure we face and the need for each of them to increase their employment by 5 percent. I’d stress that they need to do this the starting the next day — that there would be no coercion, no intimidation, no tax breaks, and no subsidies to do this – that this would be a voluntary, collective, simultaneous hiring by all large and mid-sized employers who would, if they acted together, discover they had new customers to justify their additional hiring, namely the 27 million Americans who are now jobless or underemployed.”
So he’s going to corral 1000 plus CEOs to tackle the problem in deep, coordianted fashion. I suppose in that manner they can better attack wages of their employees more effectively. Or better reduce fringe benefits, though there can’t be much of any fringe left in the average worker’s job to reduce. Probably, given the content of Kotlikoff’s Social Security stance, they’ll agree to implement Simpson-Bowles ASAP. No better way to reduce unemployment than to require geezers to work untio their 70.
Note to Larry. Increase wages, reduce hours and cut CEO compensation to make up for the improvement in worker pay and jobs. Business doesn’t hire because they think people will spend money. People spend money when they have it to spend. Raise wages and reduce working class taxes. Oh, not the FICA tax. That’s a false savings that would result in geezers having to work until they collapse. It’s simple basic economics 101. Supply and demand, and although its stated in that order we all know its the demand that is the precursor to supply. An economy7 is people needing and seeking to purchase goods and services. They need the money first. More pay!! They need the jobs. Shorter hours and fewer work days and both for the same pay.
And reduced executive compensation. No one earns or needs in excess of $5Million annually, and one could easily argue that no one has ever earned that amount. Two guys wiped out polio a few decades back and neither of them ever got anything close to that kind of pay. I’m not talking about return on investments. I’m talking about executive compensation.
The SSTF says the FICA tax must go up by 2+% immediately to restore balance.
Coberly wants to raise it by 4% over a longer period of time.
They come to the same thing, except Coberly wants to kick the can down the road for another 10 years before the consequences are felt.
You can plug in tax increases however you like to “pretend fix” SS. But sooner or later you will have to contend with the reality that there we be no tax increases to fix SS.
Take that whole line of thinking off of your table. It ain’t happening.
Krasting, trust funds (‘SSTF’) don’t “say” anything. And that 2% number is not even the work product of the Trustees of Social Security who do sign the Report and so can be said to “say” so, it is instead the product of the Office of the Chief Actuary of Social Security, known by the acronym ‘OACT’ to people outside SSA and ‘OAT’ by those within (according to a private note by former SS Principal Deputy Commissioner Biggs).
Not that acronyms are important in themselves but just showing that your work here is as sloppy as ever. What Dale understands, and obviously you don’t is that the actuarial gap goes up 0.06% a year simply due to the change in actuarial period as old year 76 becomes the new year 75. With other changes in assumptions, methods and data simply adding to or subtracting from this baseline change. Meaning that if we assumed Intermediate Cost was a perfect projection (as BTW Infinite Future numbers do) AND we in fact instituted precisely the fix indicated by the current 75 year number, we would find that come next year there would be a new 0.06% gap. Dale’s formula accounts for this factor and in doing so establishes what Steve Goss (the Chief Actuary and so head of OACT)calls (and calls for) ‘sustainable solvency’. That is in effect Dale is calling Kotlikoff’s bluff and addressing the 3.5% Infinite Future gap in spite of his (Dale’s) doubts about the usefulness of the measure itself.
What “ain’t happening” is any sign that you really understand this topic even as publications like Bloomberg run pieces under your by-line. Showing you really CAN fool some of the people all the time. But like the most famous bear of the all, one Mr. Yogi B of Jellystone Park you only THINK you are “smarter than the average bear”. Or in this case Angry Bear.
And what seems to be lost in the comments of both Mr. Kotlikoff and Mr. Krasting is that there is no good alternative to Social Security that is available to the working class in this country. Some municipal workers continue to have decent and safe retirement plans in place. Otherwise what is there as a better alternative? Both IRAs and 401(k) plans have been devastated over the past two decades by the turbulaence of the equities markets and the effect on mutual funds which are the basic investment medium of those retirement plans. The fixes that the two of them have offered up are really only losses of benefits. That’s not a fix. Pay a bit more now and throughout one’s working life to guarantee freedom from poverty and a reasonable retirement age is the best deal that the American worker can be offered.
Krasting
what’s interesting about your comment is that it contains no actual thought, or evidence of thought. just words thrown together in a way that sounds good to you.
The Trustees Report does say that an immediate and permanent 2% increase in the payroll tax would close the 75 year actuarial shortfall. That’s nice. They also say that about a 4% increase would close the “infinite horizon” gap. That’s even nicer. But the infinite horizon is so far away, I thought it would be worth trying to raise the tax one half of one percent (each) each year. CBO does this for twenty years and closes the 75 year gap… or did before “changes in methods and assumptions” increased the gap. The way I did it closes the gap forever… as far as we can tell from here. But it takes about seventy years to raise the tax by about 3.7% , which turns out to do the trick.
And this is how to avoid “losses of benefits.” In fact it preserves benefits at the present replacement rate, which will be 160% of present “real” value after about forty years and going up from there… per month. Then you will have all those extra months you expect to live… paid for. Because YOU, the worker, paid for them.
This is not “kicking the can down the road.” This is solving the whole goddamn “problem.” The reason your friends call it kicking the can is that they don’t want to see the problem solved. And they dearly love cute phrases, because it stops people from thinking.
It is worth noting that CBO and SSA have over the last fifteen years or so projected different actuarial imbalances with CBO putting the 75 year ones at about 75% of SSA’s. Even though CBO explicitly accepts SSA’s demographic projections.
Gosh it turns out that tiny changes in assumptions about the performance of something as big as the world and U.S. economy over the next 75 years or over the time between now and heat death of the sun change ultimate numbers and so presumed required fixes. Which for our twin K’s of Kotlikoff and Krasting are reasons to slash benefits in accord with one set of infinite future projections YESTERDAY.
On the reasoned basis of “Fuck probability spreads, we need to screw over workers RIGHT NOW!!!! Just in case.”
They made a movie using this kind of logic. It was called “Soylent Green”. And sho’ nuff solved the problem handily.
Bruce
The beauty of the “northwest plan” was that it allowed for rational, small changes in the tax rate as appear required by “short term actuarial” projections.
for some reason this easy solution is unable to find a lodging in the minds of the experts.
its as if they had to drive from here to Chicago and decided to throw away the steering wheel and brakes. Just point the car toward Chicago… according to the best available estimates… and gun it.
Since this concept is too difficult for the experts to understand, I have fallen back on suggesting the CBO Option number two (number three is too complicated for them also), on the grounds that even if it is “wrong” it doesn’t do any damage that can’t be fixed by future rational, small, changes..
…in the tax rate, which is really the savings rate needed to arrive at retirement with “enough.”
but then, the experts cannot grasp the concept of Social Security as “savings” protected from inflation and market losses by pay as you go financing. Or as “insurance” in which everyone pays (saves) the same small portion of their wages and receives the benefit generated by the effective “interest” automatically generated by pay as you go…plus or minus an agreed upon subsidy from those who end up with “more than enough” to help out those who end up with “less than enough.”
this differs from welfare in the same way fire insurance differs from welfare. but again, it’s too simple for the experts to understand.
and they get tired of hearing me try to explain it to them.
see,
they can say “we can’t just kick the can down the road.” we have to “fix it forever now.”
it’s as if a bunch of actuaries got together and predicted than in a hundred years the price of bread was going to be a larger fraction of average income than it is today. so the only solution is to tell everyone they have to start rationing bread. NOW.
don’t ever let them think they might be making so much money in a hundred years they won’t mind spending a little more on bread. or that, hell, even if they aren’t making more money, they may prefer to spend more on bread and less on something else.
because you can sound so wise when you say “we can’t keep kicking the can down the road…”
that is so much more clever than “give us this day our daily bread.”
or even “sufficient unto the day is the evil thereof.”
no wonder they don’t want to listen to me.
Isn’t MMT the new mantra? We do not need to do anything, we just print money to pay benefits and account for imbalances.
By proposing an increase in the withholding you are conceding the status of Treasuries obligations to the SS Trust Fund. To wit, it has to pay back the money it borrowed from it, or should I say, us. No different than any Treasury obligation.
Note these people never suggest we don’t pay back the Peoples Bank.
Note also we are on track to pay at least half a trillion and probably a full trillion in losses on GSE MBS paper. So the famous ‘implied’ guarantee of the GSE’s has been transformed into a real guarantee while the legal obligation to pay off the Treasuries obligations to SS are forever and always ‘implied’ to be unreal.
Three years ago I told Webb and Coberly that SS would never again run a cash surplus. They actually called me “chicken little”.
But I was right.
I have bad news for you boys. It’s happening again. The US is slowing down, and headed into a recession. The fiscal cliff in 5 months assures that this will happen.
With a weak economy, revenues will again slip at SS. Interest income will go down with prolonged low interest rates. The number of new beneficiaries will be ahead of the base case expectations.
The results will look close to the “high Cost” 2012 analysis. This means that the TF tops out in 2017 and will not exceed $2.8T.
That is 4 years early, and 400b light.
Face it, this problem can’t be fixed with the Coberly Plan. The reality is that SS is in much worse shape than you are willing to admit.
Wait another three years and we can have this conversation again.
I just emailed him RDan’s note.
Larry’s response:
This is sheer nonsense. Study table IVB6 in the Trustees Report. I says the hike needs to be 4 percentage points IMMEDIATELY!
McWop
I don’t know much about the MMT mantra, but I think you know that “just print money” won’t work.
the government “just prints money” all the time, but only to kind of grease the system. in small doses it doesn’t hurt. as a “policy” it won’t work any better than “just cut taxes.”
in the case of SS, the money the government owes SS… the Trust Fund… is not financially very important. but people do like to keep track of their legal ownership.
what matters with SS is that the payroll tax subtracts purchasing power from you “now” and returns it to you later when you will need it more.
because you can no more “save” money (on a large scale over a long time) that purchasing power that is being saved for you is used today by those people who in their turn gave up some of their purchasing power then in order to get it back later when they would need it more.
this is the genius of pay as you go.
the only thing about the Trust Fund is that the money (purchasing power) was not needed at the time by SS (but would be needed later) so it was lent to the government for other uses… on the promise it would be returned when needed.
this is perfectly ordinary finance. it only confuses people because the Big Liars set out to confuse people.
if the Trust Fund were not returned to SS, the “money” would be lost just like any other bad loan. people get on with their lives. of course they prefer to be paid back, but the important thing is to keep on baking the daily bread.
Krasting
I am willing to wait three years before having another conversation with you.
if the worst happens to the economy, the older people will still need to eat, and the younger, working, people will still need to share with them.
Social Security will still be the best way to do that. It may take a higher tax or lower benefits… but we can face that when it happens. We don’t need to cut off our heads today to save the cost of tomorrows dinner.
RN
Kotlikoff turns out to be not very intelligent. He has calculated… or SSA has calculated… ONE way of dealing with the imaginary projected shortfall.
There are other ways to deal with it… if it ever actually appears… and other ways to deal with it before it appears that Kotlikoff is not smart enough to think about.
I have tried to give you some reason to consider those other ways. You don’t need to rely on some “expert” who says “you are all going to die.. unless you sacrifice your first born child to me right now.”
Jack:
There is no suitable alternative to SS unless of course Larry and Bruce K are advocating 401Ks which for Bruce K would be a boon as billions of $dollars would again pour into Wall Street again to be tranched into safe mortgage investments, rated properly by Moodys and S&P, and insured by CDS with 1% reserves. We could bet long or short on these investments without evening owning the investments with naked CDS.
“Mortimer” Randolph said “We are Back.” “Coming To America”
This really has nothing to do with a 75 year SS solvency, which Bruce and Coberly have pointed out is ludricrous; it is paying out of the GF (if no increase in SS Withholding is implemented) which would mean tax increases. No one can safely predict where the economy will be in 75 years; but, the trend of growth as determined by stats and whether the growth is in Financial Services or true Labor intensive service and manufacturing is upwards.
While taxing the income of the 3% of the household taxpayers makes sense as they benefitied the most from the 2001/2003 tax breaks; it is still not enough. Tax Revenues have been skewed heavily to rely on the collection of SS Withholding in lieu of Corporate and Individual taxes on higher incomes. It has been a tax holiday since Reagan for this group. This again milks those who are dependent on Payroll Wages in favor of the Romneys, Kochs, Soros, Adelsons, Buffets, etc of the nation.
Paradigms need to be changed which scares the Bruce K and Larry’s of the world. The same as Brooksley Born being block, Frank Dodd is being blocked by Wall Street even though it is no Glass Steagall. Main Street should not be placed in a situation where it must again rescue Wall Street from itself and suffer the consequences. Ivestments in Labor intensive industry should be made more profitable than Wall Street gambling (tax the damn derivatives or have fees for them and have higher reserves). Pass an act which over rides the National Bank Act the same as what Gramm’s Financial Moderization Act did canceling out and replacing Glass-Steagall which would control Usury (or give it back to the states).
What Bruce K and Larry are proposing is an argument over who will control the economy of the nation. 1000 of today’s CEOs in one room would not do justice as so many of them do not know the business they are in today.
Bruce K:
Why are we slipping into recession? You are big on predicting the obvious.
“Never” can not be determined by you as you do not have the long range forecast capability beyond 5 years. Most businesses recognize their ability to forecast short term, teak the middle term, and plan the the long term.
The reality is with fewer people working, Withholding tax revenues are down. So we draw from the SS TF until the economy picks up again. Three years ago is immediately after the Wall Street crash which dragged the economy down.
Unless you are telling us Labor will never work again, the economy should come back. Or maybe you are telling us the Party of “No”rquist will keep the stranglehold on us. In any case, your three year prediction is no accomplishment. Still not a Cassandra Bruce.
Bruce K.
Without a stable and growing job market, it is obvious many are taking disability or are retiring at 62.5. This does not signal the doom of SS and the TF. It does signal to much of Main Street, Congress is concentrating on the wrong issues and should be occupied with job growth and cutting costs in the “guns” sector of the economy.
I have to go fix a pump.
I haven’t done the arithmetic on the latest projection. I don’t want to play the game of keeping up with the ever new “methods and assumptions” the political Trustees invent to keep the “SS crisis” alive.
The fact is that the principle of SS is very robust. It will survive any circumstances I can think of… except letting the politicians change it. And of course, letting the people fail to understand it.
If I get some time, I’ll look at the current projections (2012 Trustees Report) and see what a one tenth of one percent per year increase in the tax rate (for a limited number of years) shows.
What it will show is that … assuming the Projections… in the very long run the payroll tax will need to increase about 4% combined. That’s 2% for most workers and 2% for their bosses. This will be what it takes to provide for their own longer expected retirement. It will either be very very easy to pay if their wage go up even a small amount. OR it will still be better to pay it for their retirement than use the money for something else. You can always live without a new car this year. Harder to live without food and shelter when you are old.
It will also show that the 4%, or 2%, can be approached gradually… no more than one tenth of one percent increase per year.
The math is easy, but tedious. Anyone else can do it… if they are careful. and honest.
and think clearly about exactly what it is that Social Security does for them and the country.
and what it will actually cost THEM, per paycheck. and not some imaginary Trillions of Dollars over a hundred and fifty million people and seventy five years or the infinite horizon whichever comes first.
Krasting your response proves my point. What you didn’t understand four years ago and still don’t is that the existence or not of cash surpluses and particularly the timing in which they would disappear is in the big picture immaterial to SS solvency.
In a very important article in the 75th anniversary edition of the Social Security Bulletin Chief Actuary Steve Goss pointed out that under a perfectly balanced system, one closely approximated by what he calls ‘sustainable solvency’ and which BTW is the end product of the Northwest Plan, Social Security would be cash flow negative EVERY YEAR FOREVER. What he didn’t point out, but what is implicit in the numbers is that this means Trust Fund Principal NEVER GETS PAID BACK.
Under ‘sustainable solvency’ Social Security would run budget surpluses every year even as it was cash flow negative. And it only seems paradoxical.
As such your focus on the exact timing at which Social Security enters permanent cash flow negative status, whether 2010 really represented the inflection point as opposed to the 2017-19 point we have been anticipating for decades is a laser-like eagle eye on the WRONG METRIC. You triumphantly trumpet changes in date of ‘shortfall’ or as in your recent article in actual vs projected rates on Special Treasuries as if they very vitally important discoveries Dale and I are just too blind to see. But we always saw them. And dismissed them as fundamentally irrelevant, or even in the category of “feature not bug”
You seem to fancy yourself as the One Eyed King of the Land of the Blind when in reality you are One-Dimension Man in a 3-D World. That is you don’t even SEE the Big Picture. Because you persist in seeing SS through the tunnel vision of the bond trader you used to be.
Sit down and think hard about how SS can be in permanent surplus and permanently cash flow negative as it was DESIGNED TO BE. Which on all evidence will give Dale and I three years of peace. Because you persist in not getting what we, and I might add Chief Actuary Goss are trying to tell you.
Some further points.
When Larry K suggests increasing FICA by 4% immediately he is just setting up the whole system for a fall. If you look at system financing using the 25 year sub periods in Table IV.B4 rather than blindly focusing on Infinite Future numbers in IV.B6 you can calculate the danger of overfunding a 25 year gap placed by the Report at .68% of payroll with a 4% ‘fix’. The result is a vastly bloated SS reserve (which is all the TF is in the end) which simultaneously scores as Public Debt even as it is generating huge amounts of paper interest, similarly scoring as debt. And at some point the total interest earned starts approaching cost. And controlling that growth for the decades between when the tax was initiated (say 2013) and when it actually projects to be needed (say 2102) actually requires MORE GENERAL FUND transfers than not ‘fixing’ it.
I wrote a post in 2005 or so called “interest on Interest: a Threat”. It examined the impact on the economy of SS under Low Cost or Low Cost Plus, which would be the result of full employment, 2% Real Wage and 3% Real GDP. Which BTW were supposed to be the result of the Magic of Supply Side Tax Cuts on Capital. It turns out that under those circumstances SS would be vastly OVER FUNDED which paradoxically would be a HUGE DISASTER for long-term retirement security. Because when you break down cash flow and interest earnings decade by decade as opposed to century over century while tinkering with assumptions certain medium term outcomes go where no one would anticipate.
But you have to start with the arithmetic and not with a predetermined slash benefits ‘solution’ to a problem seen from Infinite Altitude. Turns out things look a little different if you get out of your hot air balloon and actually cut your path through the numeric weeds.
well
krasting and kotlikoff always do just enough arithmetic until they arrive at a number that looks scary to them.
then they break their pencil and run around screaming “we are all going to die.” and when you try to explain the rest of the numbers to them, they say that you just don’t understand.
so it’s useless to tell them to do the arithmetic. they don’t know what arithmetic to do.
Coberly,
MMT primer:
http://pragcap.com/understanding-modern-monetary-system
Folks such as Stiglitz and Galbraith would argue printing (via deficits and debt) don’t “really” have consequences if the government issues its own currency. In fact, Galbraith arguies we should be lowering the SS retirement age, and encouraging retirement. They are not worried about any actuarial SS imbalances.
Not saying I buy into MMT or not. But have been doing a bit of reading on it.
mcwop
someday you can explain it to the rest of us.
i am fairly sure that in a pinch the government could just print the money to pay for the difference between SS income and SS outgo… but only for a short time.
ultimately its the quantity of goods and services that matters. and how these are distributed. most particularly in the case of SS… and all retirement schemes… between your young self and your old self. in the case of SS this looks like a transfer from younger generation to older. it’s not really, but it takes a few more minutes of thought than most people can give it to understand that. other schemes look like you cleverly “investing” and reaping the rewards of your own cleverness when you retire. except it doesn’t always work out so good. and SS had to be invented to take care of when it doesn’t.
I would agree with Galbraith, but lowering the age would require an increase in the tax to pay “enough” over a shorter career in order to have “enough” over a longer retirement. I suspect Galbraith thinks he can make up the difference by taxing the rich. I think that would just turn SS into a kind of universal welfare program, and that would get ugly very fast.