Reply to Charles Balhous on Social Security finances
by Dale Coberly
(Dan here…Dale Coberly replies to this article (Is it Becoming Too Late to Fix Social Security’s Finances?) by Charles Blahous).
Blahous,
You do not seem to grasp how small “4% of the tax base” is, or how very reasonable it would be to pay that 4% for a longer, richer retirement, out of an income that will be more than twice what it is today.
That might be a politically difficult concept where neither side is being honest. The “right” want to cripple Social Security for essentially ideological reasons. And the “left” wants “the rich” to pay for Social Security… for essentially ideological reasons. But as you note, the essense of Social Security is that the workers pay for it themselves.
Moreover, that 4% can be reached over a period of nearly eighty years. To do it without ever reaching short term actuarial insolvency would require about a one tenth of one percent increase in the tax (combined) each year starting very soon, or a one tenth of one percent increase in the tax (for each the worker and his boss) starting in about 2018 and running through abut 2033… or some combination.
Further increases of one tenth of one percent (each) would be needed at a decreasing frequency, such that by the end of the 75 year actuarial window, the rate increases would be about one tenth of one percent every ten years… again, while wage are projected to be increasing over one full percent per year.
And again, this would be neither a burden nor unfair to the workers. They would get the money back over a longer retirement, and at a higher standard of living in retirement than current workers. Moreover they would have at least twice as much money in pocket AFTER paying the tax as they have today.
The problem may indeed be “political,” because neither side is honest enough to recognize this simple solution.
How about giving the workers a choice. If you were able to choose between a 4% tax hike with full promised benefits or no tax hike with reduced benefits. Wouldnt this make everyone happy?
Blahous has a PhD in computational quantum chemistry. He’s not an actuary or social scientist trained especially in retirement programs. But, he worked for Alan Simpson a few years ago during which period of time he developed his present “expertise” in Social Security and has published a couple of books about it.
If you want to hear all about how SS is doomed, read Blahous. You’ll be contributing to the economic well-being of someone who wants to argue you out of your retirement benefits. Wait. What? NancyO
casual observer
i think you missed the point. the 4% is combined. most workers would only see 2%… and that only over about 80 years.
what you would see would be about an 80 cent per week raise in the tax while your income went up 8 dollars per week .
and it goes to guarantee you a higher standard of living in retirement without having to wait until you are ready for the glue factory.
sadly, this would NOT work if it was “voluntary” because most people can’t understand either the “math” or the very high likelihood that they will need the money when they get old.
i think this would hardly be the worst thing you ever “had” to do that you didn’t want to.
eat your vegetables son, they will make you strong.
Coberly keep fighting the fight one this. I actually had a long diatribe about the “regressivity” of SS over at Thoma’s blog here:
http://economistsview.typepad.com/economistsview/2012/09/kenworthy-were-all-dependent-on-government-and-it-has-long-been-thus.html
i’m sure you’ll be happy to hear that tyler cohen just linked to the blahous piece
i sent his readers here in comments…
Nancy’s is absolutely correct about Blahaus having no adequate training in any field of study that relates to the Social Security issue. His training has been exclusively within the political arena with the expected pathetic results on his abiliity to deal with the topic via valid data analysis.
I often wonder how it is that these “experts” come to be defined as such. Blahaus is an excellent example of that quandary. Here is an article he wrote last year for the Hoover Inst. that is
so blatantly illogical and misrepresentative of even the most simple concepts of the social security program as to make one wonder how any reader would be expected to accept Blahaus’s
arguments? Here is one example of Blahaus’s contempt for his reader’s intelligence.
“To understand this, consider a simple analogy of a family with its own retirement fund. Everyone in the family agrees to put money into the fund while working, and each is to withdraw benefits in retirement. Now let’s assume that the father spends from the fund during his working years. Each time he does so, he puts a note in the fund promising that it will be repaid in the future. When it is time for the father to retire, he tells his son, “Son, I’ve spent all the money in the fund on other things I wanted. But now I am ready to claim my benefits, so it’s time to pay the fund back. So, in addition to the contributions we previously agreed on, you’ll need to come up with additional contributions to pay back the money I spent.” Obviously, the son would be none too pleased by this arrangement. It would not escape his notice that the person who borrowed the money (the father) is not the same person being asked to pay it back (the son).”
Note the distortion of the analogy. On the one hand we have a two part relationship, the father and the son, both contributors to the fund and both eventual beneficiaries of the fund. The Social Security system, especially that aspect represented by the built up assets of the Trust Fund has at least three participants. There are the contributors (as are the father and son) and their will be beneficiaries (again the father and son), but there is also the actual borrower of the funds being held for the benefit of the future beneficiaries. The general fund is the borrower. Same government, different accounts. In our example, Social Security, the contributors have been “investing” their current contributions in the Treasury of the USA. The Treasury has the obligation to pay back those assets to the fund. In Blahaus’s example the family could have lent the funds to the neighbors and those neighbors would be expected to pay back with interest those borrowed funds. The analogy fails all the more so given that no contributor can borrow from Social Security.
The report is filled with such invalid analogies which Blahaus uses to support his false analysis and conclusions. Blahaus and his ilk are certainly intelligent enough to recognize the pay masters, and to put together many words that sound like one idea, but are actually another. They are most likely recruited because of their evidenced inclinations to agree with the ideology of the financing sources. No reiteration of the facts will deter their thinking. They have come to see the world through ideological prisms. Is that dishonest? In large measure yes it is.
I said it before, and I’ll say it again.
Rounding error.
To say nothing of the projection error.
There is no repeat no cause for alarm.
Coberly:
Wasn’t the shortfall 2% which was up from 1.92% not so long ago? Is the 4% a project of HC as opposed the IC projections normally stated? In any case, ether projection is a reflection of fewer people working and paying into SS. Get people back to work and the issue decreases in magnitude.
run
getting people back to work is best plan of course. but even if you do, the big liars will attack SS with new lies.
The projected shortfall over the 75 year actuarial window has been essentially 4% of payroll as long as i have been paying attention… almost 15 years now. and the Death Date of the Trust Fund has been within a few years of 2035 all of that time as well. In effect there has been no change since about 1990.
most workers would only see a 2% increase in their tax… the employer pays the other 2%. in either case it is not a big deal… compared to what they get for their money, and compared to the increase in wages they will get over the same 80 years.
the fact remains that a one half of one percent … combined.. increase in the tax per year will “fix” SS in the sense of preserve the monthly “replacement rate”… which means a higher benefit because of the many more months you will live and the fact that the replacement rate will be a replacement of an income that is worth twice in real value compared to today’s.
This is all IC… but today’s IC looks more like yesterdays’ HC… because of the recession and the fact that the Trustees do not “predict” so much as “project” today’s circumstances onto the future.
HC could mean bad times for everyone… including the stock market… but SS would still be able to pay the same replacement rate… of a lower income… and enable people to pay for their own ability to retire at a reasonable age with “enough” to stay out of real poverty… what i called “basic needs” and confused one commenter into yelling at me as though i meant basic needs for a stone age life style. i mean basic needs according to the standards of the people paying the tax and collecting benefits based on that tax.
SS was designed to “solve” the problem of the “bad times.” remember it was invented during the real Great Depression.
trouble with people is that when there are good times, they think they did it themselves, and that they will never end, so they start thinking of replacing SS with a sure thing on Wall Street.
and a note on numerical sanity: the difference between 2% and 1.92% is too small to matter to anyone. we are not talking machine tools here.. we are talking about a few pennies one way or another eighty years from now… as a guess.
another cite for blahous:
http://econlog.econlib.org/archives/2012/09/blahous_on_soci.html
i send him here in a comment, now held for moderation…