Current Law Social Security: "Scheduled" vs "Payable" Benefits
Okay, more jargon. But important jargon because the policy proposals are starting from different baselines themselves defined by this jargon. So while some of the following is basic, it is equally a rhetorical (in the classical definition) baseline.
Under current Social Security law future benefits are set by a formula. For a given individual this formula starts from income history but if we take total benefit payouts in the aggregate we have cost totals primarily driven by employment numbers, Real Wage, and CPI. And this aggregate number represents 99% or so of the category that the Report Tables label as “Cost”. These projected future benefits are in turn offset by projected income deriving from one main and two minor sources, that is FICA payroll tax, tax on certain benefits, and interest on Trust Fund assets, with the totals being labeled in the Tables as “Income”. In an ideal world the trend of projected Income would exceed projected Cost in just the amount needed to maintain a specific, relative level of reserves. This state of affairs for any given year or set of years is called “actuarial balance” and if projected to continue beyond the 75 year actuarial window, and with an upward trend is called “sustainable solvency”.
As it turns out current mid-range projections of future employment, Real Wage, CPI, payroll income, tax on benefits, and interest on Trust Fund assets do not project “sustainable solvency”, instead there is a projected gap between total income and accumulated assets available to pay out future benefits and total projected costs. That is if we simply assume ALL mid-range projections, something that is labeled in the Reports “Intermediate Cost” and follow current law that requires payment of full “scheduled benefits” as long as total income and assets allow those benefits to be “payable”, at some point the latter level falls below the former. The state in which “scheduled benefits” exceeds “payable” can be called “insolvency”, or working up the shrillness index “crisis” or even “bankruptcy”.
But before we start hyperventilating it would be useful to slow down and actually examine the financial and legal implications for actual beneficiaries at this “crisis” point. Because one thing we know for sure the end result will NOT be “no check”. Maybe not the SAME check on the SAME day, but the system won’t grind to a complete halt. To see what is likely to happen under current law and realistic political projections you will need to follow under the fold.
(Lucky you, a computer crash wiped out a bunch of text. So a shorter version.) The takeaway most readers of the Social Security Report would have is that at the point at which projected “Income” (which defines “payable benefit”) falls below “Cost” (which defines “scheduled benefit”) current law simply reduces the latter to the former overnight resulting in around an immediate 22-25% cut in benefit checks.
But this is where the two groups I will call fairly neutrally Social Security “Defenders” vs “Reformers” start talking past each other. While each sees this cut as tremendously disruptive “Defenders” see that disruption in the form of Gramma spending her remaining shopping dollars in the Catfood Aisle, while “Reformers” see armies of Greedy Geezers storming Capitol Hill in their Lexus’s demanding their God-given right to pay Country Club dues with their full scheduled Social Security check.
As such their definitions of “Fix” and even “Preserve” take very different forms. I like to think of this in the logicians terms of “direction of fit”. “Defenders” want to “fix” Social Security by ensuring that “payable” is fitted to “scheduled” while reformers prefer fixes that will defuse the crisis by fitting “scheduled” to “payable”. Both sides would argue that their respective fixes avoid the dreaded “slash” in benefits in the interest of “preserving” Social Security, it is just that “Defenders” are preserving a particular projected standard of living while “Reformers” are seeking to preserve a certain political peace, in their terms an avoidance of “intergenerational warfare”.
And as a “Defender” I am even willing to concede that certain “Reformers” are actually sincere. Where I see a perfectly fixable case of “under funded” they see an equally fixable case of “over promised”. Which is one of many reasons why the Social Security debate is not really one of numbers, but is really at root one of values and perceived equity. Which is not an argument for civility, just a suggestion that not all “Reformers” are liars or fools. Heartless sociopaths willing to use whatever tactics and number twisting they can to keep Greedy Geezers at bay? Sure. Fools? Well not ALL of them. And given a generous interpretation of whether “scheduled” or “payable” is the correct baseline to build your analysis even liar is too harsh. For some. Who simply consider themselves hard-headed realists.
(Dan here…paragraphs added after the jump for readability)
It would seem that a realistic view would be that we will find a compromise that modifies both “payable” and “scheduled”, but I* see very few plans that do much to increase payable. (Increasing the cap does not get you very far.)
Well one “compromise” would be explicit scoring of the economic effects of things such as stimulus packages on SS solvency. As it is we have the Fed formally figuring in NAIRU when targetting inflation while not formally calculating the effect of subsequent higher unemployment on Social Security. And while SS solvency maybe shouldn’t be under the direct purview of the Fed, it could be more prominently fronted in such things as scoring of stimulus packages.
And as Baker has pointed out many times this is even more true when discussing distribution of gains from productivity. In addition to whatever equity arguments one would advance about reversing the thirty year trend of labor getting a smaller share of gains from productivity compared to capital there is the additional argument that this would serve to help SS self-fund. For that matter it would equally improve the economics of private accounts, it being hard for wage workers to fund accounts out of artificially constrained wages.
I would like to see the Congress explicitly targetting employment AND Real Wage in the way that the Fed targets inflation. Because that would itself improve “payable”.
There is no “compromise” when “scheduled” is already the lowest amount that can deliver a pension that pays for basic needs.
More important: who the hell are we “compromising” with?
Workers pay for their own goddam pensions. They can set the contribution rate (“tax”) at whatever level will provide them a guaranteed income in retirement that will meet their needs.
The “reformers” that Bruce is talking about are pretending that “the government” pays the money. Or “taxpayers” who do not get the benefit. The first is nonsense… literally. The second is just not true.
The talk as if “Social Security” were some kind of living being, or god, whose “needs” (a balanced budget) must be met, and can be met simply by some clever cut which slips by the understanding of the poor citizen who is simply being denied the opportunity to save his own money for his own retirement in a program run by, but not paid for by, the government… because only the government can provide the required guarantee against inflation and loss.
I appreciate what Bruce is trying to do here, but I think we must be very careful we don’t get sucked into the abstract “debate” in which “compromises”… such as “raise taxes on the rich” in return for “cutting benefits from Social Security” can seem to make sense.
They don’t. as you… not just Arne… would understand if you could keep focussed on what it is Social Security actually does, and who actually pays for it.
meanwhile, even though readers of AB are sick of hearing it: Social Security can pay full “scheduled” benefits by raising the “tax” one half of one tenth of one percent per year… about forty cents per week each year while wages are going up eight dollars per week each year, and the people paying the money are the people who will get those benefits… getting all of their money back in the form of a longer retirement (they are going to live long but not want, or be able to, work longer) at a higher standard of living than curretn retirees (their benefits will keep up, in real value, with the rise in wages, because that’s where the benefits come from.
“There is no “compromise” when “scheduled” is already the lowest amount that can deliver a pension that pays for basic needs.”
Dale this is frankly bullshit. “lowest amount”, “basic needs”? To take this seriously we would have to believe that my grandmother lived the life of a coolie because the living standard she enjoyed as as a Social Security widow was still in the overall societal context that held that chicken was THE prototypical special dish for Sundays. That is there was a time within the life of still living American’s when “A chicken in every pot and a car in every garage” evoked a lifestyle closer to the Rockefellers or maybe the Jetsons than that of the typical working class family.
There is a moral argument for providing our elders a living standard in retirement in proportion to that of their working children and grandchildren, an argument that is as old as “honor thy father and thy mother”. But equating equitable shared prosperity to the subsistence level suggested by ‘basic needs’ is going rather too far. I have grandparents who lived and died in dirt poor conditions and others who lived what was for their time and place comfortable and even more than comfortable middle class lives. Which still didn’t deliver the latter central air conditioning or a gas clothes dryer. Or winter fruit imported from Chile.
Which doesn’t mean descending to the wingnut absurdity that holds that no one can be poor who has indoor plumbing or a microwave, because after all Louis XIV and Marie Antoinette didn’t have either. Still the idea that subjecting my great niece to a lifestyle in retirement equivalent to that my mom, her great-grandmother, has today would be some sort of sub-basic needs hardscrabble existence is faintly ridiculous.
As an example I would trade off a ten percent reduction in real Social Security benefit in 2040 for the knowledge that every American had access to health care. More than that maybe and similar tradeoffs for such things as universal access to higher education. The current law scheduled benefit is what it is, it just doesn’t have any magical pre-equivalence to ‘basic needs’. To assert that it does smacks of selfish circularity. Particularly since you personally have conceded that outcomes delivered by formula less than 2012 IC scheduled benefit would be acceptable because intergenerationally equitable. That is under current law seniors share both the upside and the downside of future improvements in living standards.
In effect you are arguing that WHATEVER that upside or downside end up being equates to ‘basic needs’. Sorry, I need to be convinced that relativity translates to absolutivity in quite that way.
please don’t call my arguments bullshit.
i may not have made them clear to you. i could even be wrong. or, of course, you could be wrong.
let me suggest that “basic needs” is defined by society. neither of us know what “basic needs” will mean in fifty or a hundred years. but we know that SS benefits are none too generous today, and cutting them for some bogus compromise is going to hurt a lot of people. some of them quite seriously.
considering that it is the people who are paying the tax, maybe we might let them decide what are “basic needs.”
i don’t think there is any need to trade SS benefits for some health care benefits. we can afford both.
we can’t guarantee an absolute value for SS benefits, but we can aim for a “replacement rate” that seems to make sense. certainly we can do this before we talk ourselves into accepting cuts in return for some ill considered “compromise.”
What FDR proposed, what was enacted, and what we have today are all different. There is room for compromise. Since we live in a democracy (more or less), there will be compromise. If everyone understood SS, then they might make a reasonable choice (close to the NW plan). Unfortunately, right now, as you have said, very few people do understand SS.
My point is simply that until we see more people actually proposing raising taxes (not just rasing the cap), we can expect that any agreement that is reached is going to be a lousy compromise.
I see SS through the eyes of an engineer. The biggest issue I see is that it is a dynamic system that people want to treat as static. The settings that were chosen almost 30 years ago will work for another 10 to 15 years, but this longevity has led people down the garden path to think that broken or not broken is all you need to know.
The most important part of the NW Plan is the triggers (or as I would call it, feedback). Make adjustments when you need to make adjustments. We need to teach people that they need to accept adjustments. It should be easy, because (if we do not have to wait too long) the adjustments are small.
the main thing i think is to keep track of what we agree about and not resort to extreme language when we think we don’t agree…. yes, i, even I, am saying this.
I absolutely agree with you about the importance of making small timely adjustments. but the Liars have convinced themselves and the politicians that because we have to “solve this once and for all” the only way to solve it is to destroy the program now and end the suspense.
just note that i am not willing to accept a “compromise” that is really the death of a thousand cuts… just because “compromise is inevitable.”
you don’t compromise on the basis of a lie.
for what it’s worth. i really do not know what FDR proposed. based on a book by Nancy Altman I believe he overruled his own commission in order to get essentially what we have now… they would have created something more like what Medicare is now: part worker paid and part the dole… essentially a mess politically and hard for people to think clearly about.
Thing is, after writing a whole book about the difference between welfare (the dole) and worker paid insurance, and citing FDR on the importance that SS be worker paid… Ms Altman offers a “fix” for SS (it ain’t broke) that would turn SS into the “dole.” And she can’t see this even when it is pointed out to her.
So I don’t worry too much about what people “thought” fifty or seventy years ago. Or what they say about what they thought, or what some people say they thought… I try to look at what we have now, and I think it works extremely well, and all the “compromises” i have heard put on the table are plans to kill Social Security one way or the other.
So let us try to focus on the facts, here and now, and the real world outcome of any changes we consider. I get real tired of “bright ideas” the people have and fall in love with without ever thinking through the consequences… all the consequences.
I’m a bit surprised to read what you say about trading 10% of the benefit for some improvement in some other social necessity. That has long been the strategy of the right. Workers can have A if they are williing to give up some of B, and before we know it workers have moved backwards in regardds to compensation. I receive what I think is near the top of the benefit calculation. I earned that much when I first started working as a school teacher about 44 years ago. Even then I regarded the pay as entry level and not sufficient to sustain a family. I was one young guy and had no surplus and that was when chump change went further than now. So how do you see current Social Security as better than enough for basic needs. It is just barely enough to get by..
i think it’s because ‘basic needs” is in the eye of the beholder. i am willing to let the “beholder” be the people paying the tax and collecting the benefits… if they are well informed and not confused by lies or their own private “needs.”
Bruce seems to have thought i meant by basic needs that anything less than current benefit levels meant digging turnips with your bare hands.
as you point out, “cutting” future benefits ten percent to “pay for” universal health care is a devil’s bargain. the devil cheats and you won’t get what you thought you were getting, but you will definitely lose more than you thought you were losing.
meanwhile we can all easily pay for the 2 or 4% increase in the payroll tax that would be needed 80 years from now… if we start soon and raise it one tenth of a percent per year until about 2030 and then at a reduced rate after that.
there is a side note here: some have pointed out that the 25% cut in benefits expected if “nothing is done” by 2033 is “really” about a 20% INCREASE in “real” benefits. this is true if the arithmetic works as predicted,and if you believe the boskinized inflation index, and if you don’t care about how people are going to pay for all those improved standard of living things that turn out to be necessities once everyone has them.
but worser and worser… it is EXACTLY what the bad guys are calling for when they call for price indexing, or a “more accurate” CPI, or simply “small” cuts. their argument is that small cuts over time will avoid the crushing blow of that 25% cut all at once… but it will still be a 25% cut.
and that’s a damn fool way to save yourself 40 cents per week each year.
(Truth in advertising: it looks like it would take about 80 cents per week per year for the first fifteen years, starting in about 2018. I realize that 80 cents per week is a significantly more crushing burden than forty cents, but think of the children.)
(oh and for those who are following closely but not too carefully… it still averages out to be forty cents per week per year over the 75 year actuarial window. the higher cost early on is to pay for the current recession mostly.)
Your ability to share Information is a talent and very appreciated.Thanks for another Timely Post.
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