Fareed Zakaria on Social Security, Fareed Hearts Pete Peterson, Disses your mom
by Dale Coberly
Fareed Zakaria on Social Security
Fareed Hearts Pete Peterson
Disses your mom
Fareed Zakaria wrote an essay for Time, The Baby Boom and Financial Doom. Dean Baker responded to Zakaria with Fareed Zakaria is unhappy that the American left chooses arithmetic over Peter Peterson. Baker makes the point that the increase in the number of people over age sixty five has always been accompanied by an increase in productivity that makes everyone richer despite the costs of feeding the old.
Baker is far too kind to Zakaria. Zakaria’s article is a compendium of lies designed to fool people in order to lead them to their harm. The lies are not original with Zakaria but are the same lies we have been hearing from Peter Peterson sponsored think tank “non partisan expert” liars for years.
I hope that by taking a little harder look at those lies people will learn how not to be fooled by them and others like them. [Note: I have been told that I need to find another word for “liars.” I understand that people are put off by it, but they need to understand that is exactly what we are dealing with here: lies and liars: words designed to deceive you by people who mean you harm. It is almost possible to believe that Zakaria doesn’t know he is lying, but has merely been fooled by Peterson. But the selection of “facts” presented by Zakaria suggests he knows exactly what he is doing.]
Here is what Zakaria says: (under the fold)
The facts are hard to dispute. In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays.
Well, the facts may be hard to dispute, but they don’t have anything to do with Social Security, and Social Security doesn’t have anything to do with the deficit.
The short answer to Zakaria’s Baby Boom and Financial doom scenario could be put something like this:
Social Security is paid for by the people who will get the benefits. It is their own money. It has nothing to do with the federal budget. The population numbers that Zakaria offers sound scary because they are meant to sound scary, but the fact remains that the workers can continue to pay for their own Social Security by simply raising their own payroll tax by what amounts to forty cents per week each year. This is an “undisputable fact” that can be clearly demonstrated. And it takes into account all the baby boomers, and the increasing life expectancy, and the poor growth in wages the Trustees project over the next 75 years. It also takes care of the “infinite horizon” which the Big Liars like to trot out when the numbers for the next seventy five years don’t sound scary enough.
In particular, the Baby Boomers have already paid for their retirement. That is the Trust Fund you hear about. It’s real money, paid by the Boomers. It needs to be paid back to them for their retirement. Paying back money that you owe does not increase your debt; it decreases it. The Trust Fund is not “going broke.” It is paying for the Boomer retirement, as it was created to do. After the Boomers have been paid, the Trust Fund will return to a normal reserve fund and Social Security will go back to “pay as you go” as it was designed.
An average worker today might be making, say 50,000 a year, and paying about 3,000 a year for his Social Security, leaving him 47,000 for other uses, including other taxes. His boss contributes another 3,000. And because there are today about three workers for each retiree, those three workers contribute a total of about 18,000 dollars per year, which is about what the average Social Security benefit is.
In another forty years or so, the average worker will be making twice what the average worker today is making… so, say 100,000 dollars (inflation adjusted). If nothing else changed, he would pay about 6000 a year in payroll tax, leaving him 94 thousand dollars for other uses, and his boss would contribute another six thousand, making 12000. By then there might be only two workers per retiree, so there would be 24000 available for that retiree’s Social Security benefit. But 24 thousand a year might feel like poverty in a world where the average wage is 100k. So those workers… who know they will soon become retirees themselves … might agree to pay 8000 each per year, leaving them 92,000 per year for other uses. Their bosses would contribute another 8000 (don’t worry about the poor boss: “most economists agree” that this is “really” the workers money). So 16 thousand, times the two workers per retiree, results in a SS benefit of 32000 per year. Enough to live on in reasonable comfort. (Please note that with a real income of 92 thousand a year, those workers would have plenty of money to “invest in the market” to try to raise their standard of living in retirement. But the SS would be there “in case all else fails.”)
And that’s it. Please note that the poor worker staggering under his load of one retiree for every two workers has 45000 dollars more in his pocket after paying his payroll tax than he has today, and he can look forward to a retirement with 14,000 more dollars per year than today’s retiree. That is, in spite of the staggering load of only two workers per retiree, the future worker will be about twice as rich after paying his payroll tax, and will be able to look forward to being twice as rich in retirement.
It is hard for me to see the gloom in this picture, much less the doom. You may note that the workers could have decided to not raise their payroll tax, keeping the extra two thousand a year for “now,” at the cost of 8000 a year when they are retired. I think this would be a foolish choice, but if it were made honestly, with everyone knowing what they were doing, I would not have an objection.
But Zakaria and Peterson try to keep the people from knowing what their honest choices are.
“The facts are hard hard to dispute…”
but the facts Zakaria chooses are meant to deceive. Please note “the facts are hard to dispute” adds nothing to the argument but does tend to set up in the unwary reader’s mind… “no point arguing with this… these are the facts.” And it is pretty much the standard of excellence among “non partisan expert” liars to use “facts” which are “strictly true” but nevertheless designed to mislead.
“ In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65.”
Does this sound like it means something? It’s meant to. Something like, “Gosh, the population of old people is soaring. It’s going to cost me five times as much to pay for “the old” if we don’t do something.”
Well, maybe not. In 1900 people had large families because a lot of their kids died. This by itself would tend to make the ratio of under sixty five to over sixty five larger than it is today. Add to that the fact that people over 65 also tended to die “young” because they couldn’t work and ran out of money for food and shelter. But perhaps Zakaria doesn’t really want to return us to the dear old days of high infant mortality and a short but miserable old age. Maybe he’s only pointing at the problem… “how are we going to support all these old people.” But in fact he is not. He is pointing away from how we are going to support these old people: We could continue to support them the way we have since 1936 when Social Security was invented: Allow them to save enough of their own money in a way that is safe from inflation and bad days on the market.
And the fact is that unless we decide to kill off the old, we are STILL going to have to “support” them, even if there is no Social Security at all. When they cash in their stocks and bonds, it will be “the young” who are providing the cash.
“Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications.”
Well, maybe not. Workers pay for their own Social Security “off budget.” So Social Security has no budgetary implications whatsoever. Medicare has some “budgetary implications” because it was made partially “on budget” in what I think was a misguided attempt to make the rich pay for more of it. Ordinary workers could pay for all of their own expected medical care in retirement through Medicare, but eventually a serious effort would need to be made to bring down the cost of medical care or no one but the very rich will be able to afford it. This is a problem Zakaria… and Peterson… carefully do not address. Because Peterson’s agenda is ENTIRELY the destruction of Social Security, despite what he says.
Medicaid is entirely on budget; it is welfare. But again, unless you want to go back to high infant mortality and people dying in the streets, this is a problem we are going to have to address. And the way to address it is not to begin by cutting the programs and throwing sick people into the streets. It would help if you knew that the budget deficit has not been caused by medicare and medicaid, but by unreasonably high defense spending, wars of dubious value to America, and the massive fraud of “bankers and private equity billionaires” that brought down the economy in 2008. America can still afford to take care of “the least of these.” And for those who think money is the measure of all things, a case can be made that taking care of the sick now ultimately makes the country richer.
“ In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. “
This does not mean what it seems to mean. You might ask, if you knew to ask, why Zakaria leaves out “the fact” that today the ratio is three working Americans for every retiree. Perhaps that makes the jump to “two working Americans” seem less scary. Perhaps that might make you ask “how can only three of us support each retiree? The answer turn out to be that “we” are not supporting those retirees. They paid for their Social Security themselves. But this ratio of retirees to workers scare “fact” is a perennial, and I want to take some time with it. It will be a little bit (not much) mathematical, made harder by the fact that I don’t know how to draw pictures on line: you will have to use your imagination and draw them for yourself.
First there is the original version: “there were 40 workers per retiree in 1940” or “16 workers per retiree in 1950”… or some such.
This is a meaningless artifact of how the Social Security system was phased in. Imagine if you will a country which has recently experience hard times which have wiped out the life savings of everyone.
The people get together and decide to create an insurance pool to keep this from happening again. Imagine there are forty million people in the pool, one million aged 25, one million aged 26, one million aged 27, and so forth to one million aged 63 and one million aged 64. So far no one has retired so the ratio of workers to retirees is 40 million to zero. The next year the one million aged 64 turn 65 and retire. The one million aged 25 turn 26 and “move up a year” as does everyone else, with one million new workers who turn 25 and enter the insurance pool. So the number of workers remains the same while the number of retired people increases by one million. Now the ratio of workers to retirees is 40 million to one million… or 40 to 1.
Next year another million people retire and another million young workers enter the pool, and the ratio becomes 40 to 2, or 20 to 1. And the next year another million… etc, and the ratio becomes 40 to 3 or about 13 to 1. And so on.
First note in passing that those first cohorts who retire “only” paid their insurance premium for a year or two… far less than they will collect in benefits. But the people knew this when they designed the insurance pool. They reasoned that the first retirees were people who had lost the most savings in the depression; the first retirees had worked their whole lives paying taxes, supporting their own elders, and supporting the children who would be directly paying their benefits, as well as building the infrastructure that made it easier for those children to make money than it had been for their elders. They also noted that none of the later retirees.. people who paid the premium “tax” for a full forty years … would lose anything by the deal. They would collect the benefits they paid for in their turn… benefits that would equal what they paid in, plus an interest that takes care of inflation and about two percent real interest on top of that. Plus any “insurance” benefit they would collect if they died with dependents, got disabled, or just never made enough money to have saved enough for retirement.
But note that people don’t live forever, so by, say, year ten, the number of retired people increases by another million but decreases by say half a million who die that year. This means that the ratio of workers to retirees will not continue to decline forever. It will stabilize at some level that reflects the death rate of retirees, or what is the same thing, the average life expectancy of retirees.
If, say, the average death rate was 10% of each cohort of retirees each year, then after 10 years (in our model… real life is a little more complicated) the number of people who die each year is the same as the number of new retirees. This would also mean that the life expectancy… you have a 50-50 chance of living to this age… of new retirees would be five years.
Draw a picture. Make a bar graph: write ages on the bottom axis, and population on the vertical axis. For every age from 25 to 64 the bar is “one million” high. For every age after 65 the bar is shorter by 10% or 100 thousand. So you have 40 million workers, and 900 thousand plus 800 thousand plus 700 thousand… and so on … retirees. The sum of those retirees is four and a half million (9 plus one, 8 plus 2, 7 plus 3, 6 plus 4, and 5). So the ratio of workers to retirees is about 40 to 4 1/2) or about 9 to one. And this is a ratio that will not change over time unless there are changes in death rates, or birth rates, or immigration. Note that the life expectancy is about four and a half years. This means that each worker works for forty years and can expect to collect 4 and a half years of benefits. So, oddly, the ratio of workers to retirees is the same as the ratio of working years to retirement years for EACH retiree.
If the death rate was 5% per year for each cohort of retirees, the bar graphs would decline at a slower rate.. taking 20 years to reach zero at age 85, with the life expectancy now ten years. One million retirees still die each year, but now there are ten million of them alive at any one time . This makes the ratio of workers to retirees 40 to ten or 4 to one. It also makes the ratio of working years to retirement years 4 to one.
Now, finally, let us give those retirees a life expectancy of twenty years… half of them will die by age 85, and (most of) the rest of them by age 105. This would result in a population of retirees of twenty million… or a ratio of workers to retirees of 2 to 1. It also means that workers will work two years for every year they expect to be retired.
But wait, if they are going to be retired, they are going to have to buy groceries for those twenty years. Where are they going to get the money?
Well, they could save it from their earnings if we could solve the inflation problem for them in a way that didn’t expose them to the risk of ending up with nothing at all from investing in stocks that fail. And this is what Social Security does.
Note that they don’t need to save enough in protected savings to have the same income in retirement as they have while working. They could decide, say, that since the kids are grown and the mortgage paid, if they had to they could get by on, say, one third of their working wage. Since they will be working 40 years and expect to live 20 years, they would need to set aside about 16% of their wages to have enough. (16% times 40 equals 32% times 20.)
And if they put that money into an insurance pool, they can expect to keep collecting that 32% even if they live longer than 20 years. This is made possible by the money paid in by the people who don’t live as long as the twenty years.
But Zakaria doesn’t know that and Peterson doesn’t want you to know that.
You are making well over twice as much money as your grandparents made… and they struggled to save 10% of what they made to eke out a retirement that would only last about ten years. But you, twice as rich as they were, are being told you can’t be expected to save 16% of your wages to pay for a retirement that will last twice as long or maybe a lot longer?
Or maybe you can. But the only way to do this is through Social Security, and Peterson doesn’t want you to, because even though its YOUR money, its a “government” program. And that drives Peterson crazy. Literally insane.
But wait, it’s better than that. While you are paying your 16% every year, wages will be going up so that by the time you retire real wages will have about doubled. That means that the 16% workers are paying in each year will be worth twice as much as the 16% you paid in (this is a simplification). That means that instead of living on about 33% of what you were making while working, you will have about 50% or more. Because Social Security is insurance, the effective interest on your premium (payroll tax) is a lot higher if you were a low wage earner than if you were a high wage earner. The high wage earner is not hurt by this. He still gets a reasonable “return on investment” plus the insurance value of Social Security “in case” things had not turned out so well for him. The interest on your Social Security “investment” is not high. It depends on the growth in the economy, but it is always higher than inflation. And whatever happens, you will get “enough.” And that’s priceless.
The “facts are not in dispute.” And the facts are that all the scary language about the looming booming number of old folks “we” have to support… turns out to mean that we can easily afford to support OURSELVES out of our own savings, protected by Social Security, but not “paid for” by the government.”
And if you are going to live longer.. become one of those looming booming old people… you are going to have to find a way to pay for those extra years. Social Security provides a very secure way to pay for at least “enough.”
That is if you don’t let the Big Liars scare you into letting them “save” it.
Question for the Reader:
what exactly does “these programs will take up over half of all federal outlays” have to do with anything?
It seems to me that “these programs” are exactly where “federal outlays” should go.
Zakaria should take Coberly’s expert advice and avoid writing about SS as seen by the Peterson gang or any other conservative economist. Jerry, you are absolutely right. SS speaks for itself through its obvious value to society. Furthermore, people like Coberly and Bruce Webb can do the math to prove it. Zakaria is out of his leaque. NancyO
“Paying back money that you owe does not increase your debt; it decreases it.”
Here is a simple truth that somehow eludes people. Repeat it just by itself because SS can be made very complicated, but this much can be grasped.
“Perhaps that might make you ask “how can only three of us support each retiree? The answer turn out to be that “we” are not supporting those retirees. They paid for their Social Security themselves.”
I have trouble with this. We do support those retirees. We do it because that is how PAYGO works. It works well. It keeps Wall Street out of it. It will work indefinitely.
It works very much as if they paid for it themsleves, but anyone prepared to read 3513 words about SS should understand the subtle difference.
anyone who has to put up with me better be prepared to understand that it’s not a subtle difference. it’s both. sort of.
but the essential truth is that we pay for it ourselves.
pay as you go is merely the mechanism. you are probably too young to have ever bought anything on the layaway plan. but that was common before credit cards.
or, i suppose you could insist that when you put your money in the bank and the bank lends it to someone else, and then forty years later when you take your money with interest out of the bank it is “really” the people who put their money into the bank on the day you take yours out who are paying for your withdrawal.
nah, it’s your money. you paid for it.
those other people putting their money in on the day you take yours out are just paying for their own retirement on the layaway plan.
but yes, it’s a subtle plan that keeps wall street out of it
Dale thinks that the interest on Social Security is greater than inflation.
Sorry, not the case. SS is investing at 1.375% well less than inflation.
The worst part is that the Fed has promised zero interest rates for years to come and the SS formula for setting rates insures that the return on SS will be less than inflation until 2018.
Sorry for the bad news Dale. Without a return that is at least 3Xs what SS is now earning, this program is headed for the rocks.
And absent SS, what will the cost be to you, Bruce, when your parents show up at your door with carpetbags, to live in your basement because their income has fallen below the tipping point that allows them to live independently?
Oh yeah, lets make it even harder for ordinary people to save for their old age. I am sure they will like your basement.
Currently, your taxes are paying for the upkeep of millions of Americans who were screwed out of their 401ks, or whose employers tossed them to the wolves, or who were injured on the job. You get to support them, while the yachts float away and the band plays on.
Bruce K is demonstrating why it is important for anyone actually involved in making decisions for SS to understand the sublties of PAYGO. The “return” on payroll taxes does not depend on the interest rate on Special Treasuries. An ROI analysis of SS is an accounting fiction. The analysis may be useful, but only when you are able to understand the limitations.
I have been trying to avoid using the word “idiot.”
But you are not helping me.
The return on SS to the person who pays his payroll tax is always greater than inflation.
This is not the same as the return on the Bonds bought by the Trust Fund.
If you had not made your money as a Bond Trader i would not call you an idiot for not knowing that.
I did not see that you had already answered Bruce Krasting. You are correct.
In addition to the pay as you go “automatic interest” from the growth of the economy (as well as the growth of inflation…. but even a bond trader doesn’t always find it easy to keep up with inflation) there is the insurance factor.
it bothers me that some people on our side who should know better calculate the “return on investment” to the “average worker.” But the whole point of SS is that it is insurance. And the”average return” is not the right measure for insurance.
workers who end up after a lifetime with “less than average” wages will get a lot more than the “average” rate of return… as of course will those who die with dependents or get disabled.
Krasting will never get it because he simply refuses to grasp that Social Security is not a pension fund and doesn’t rely on ROI from assets on hand.
The Social Security initial benefit is set by Real Wage while continuing benefits adjust by Inflation. Since Real Wage by definition is ex-inflation just about any positive number works.
There are a lot of moving parts but the reality is that interest rate moves tend to track inflation. And lower rates of inflation mean slower increases in benefit costs for existing retirees (which is why there was no COLA for 2009 and 2010).
Social Security isn’t harmed when interest rates and so ROI on the TF is at the lower bound, or at least the harm is not being done by the loss of interest earnings but instead by depressed collections of FICA via unemployment. On the other hand Social Security was rocked to its core by the stagflation of the late seventies. Even as bond yields were comparatively through the roof.
In a properly balanced Social Security system actual earnings on the Trust Fund should be paying right around 3% of cost. And the actual yield on the Trust Fund is exactly on par meaning that Social Security earns roughly the AVERAGE of the face yields over a moving ten year window. And much of the portfolio is still paying significantly higher rates than the current ten year.
Now if the recession starts turning into perma-recession then at some point you might have problems funding with interest the 3% of benefits needed to keep the system steady state. But the ten year moving average of yields and the offset in cost due to inflation tending to track interest rates each work to buffer that process. But the real difference is that the TF is immune to changes in bond PRICES for existing issuances. Because Special Treasuries always get redeemed for par in good times and bad. Meaning it can NEVER take a hit on its portfolio.
You just can’t apply models derived from public and private pension plans to SS and make any sense of it. Yet Krasting persists in his belief that Social Security works just like CalPers or Pemco.
The bond market reacts to tiny changes in yields by adjusting prices. And depending on what you paid for that bond you can win or lose at that game. Which is played by rules that I don’t pretend to understand but which Krasting probably understands full well. Well it seems the reverse is true as well.
Among the many things that Churchill either did or didn’t say but get attributed to him anyway is this: “America and England are two great countries separated by a common language”. And I can say the same for Bond-ese and Social Security-ish. A lot of overlap in vocabulary but also a lot of talking past each other.
(In America “I am going to go smoke a fag” means taking a gun to engage in a hate crime murder. In England it means taking a smoke break.)
The words used to describe Social Security finance just don’t map the same way as they do when used in the regular bond market. They. Just. Don’t.
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The Trust Fund is NOT Social Security. The interest earned by the Trust Fund is not an important part of Social Security finances. It would amount to about one half of one percent of payroll in “normal” times, and currently to about 2% of payroll while the extra large Trust Fund helps pay for the Boomer retirement as it was intended to do.
This effectively reduces the payroll tax to the post-Boomers to what it would be for normal pay as you go without the unusually large size of the Boomer cohort.
As the boomers leave the picture, Social Security will have to deal with a larger retiree population due to longer life expectancies. This is an entirely separate problem which is being masked by the Trust Fund for the Boomers, but which will become “suddenly” apparent when the Boomer Trust Fund is fully paid out.
Of more importance to Social Security than the interest on the Trust Fund is the “effective interest” that comes automatically from pay as you go… as wages grow, the tax collected from those wages grows, making it possible to pay higher benefits to people than their own wages from an earlier time would have paid for. This interest is equal to inflation plus the average increase in real wages over the time between when the tax was collected and the time of the first retirement check.
Because wage growth is expected to be slower in the future than it has been in the past, either benefits will need to be cut, or the tax will need to be raised.
I have argued that a small tax raise is much, much easier for the workers to deal with while working than a fairly large benefit cut would be when they are retired. I also argue, too strongly for the taste of many, that “taxing the rich” to make up for the lower incomes of “the poor” is the wrong way to go.
Social Security works because it is NOT welfare… it does NOT tax the rich. So far only the insane rich want to kill Social Security. If you raise the taxes of all the rich to pay for SS, then all the rich will want to kill it.
As things are, slow growth in wages means either that retirees will get less, or workers will pay more… a tiny amount more. This is exactly the way the human race has dealt with hard times for the last two million years. When food is short, everyone gets by on less… the young as well as the old.
All SS does is make this “honor your father and your mother” idea work in an industrial economy the tribe or individual family does not have the ability to control the forces of the economy.
The evil people who want to kill SS are trying to teach you to think of it as “us” paying for “them.” This is not only wrong as a matter of financial fact, it is a way of thinking about “us” that is contrary to human nature, bad for us psychologically, and sets us up to be exploited at will by those who control the money economy. It is in fact evil.
Trying to turn SS into some kind of “investment fund” is to exactly destroy the whole idea of SS which was to be outside the investment economy in order to protect the workers from the bad days on the market that inevitably come.
I wrote that essay, not Fareed!
If I understand correctly, your argument and your math are fundamentally dependent on your assertion that real wages will double by 2050 [“In another forty years or so, the average worker will be making twice what the average worker today is making… so, say 100,000 dollars (inflation adjusted))”].
Your confidence regarding this assertion is either inspiring or alarming.
it’s not my math, it’s the Trustees. If you read what I say carefully you might realize that i do not “fundamentally” depend on that projection, not assertion.
WHATEVER happens to real wage, Social Security will still be the best way that ordinary workers have to save enough for their own retirement.
If wages do not rise as projected, the workers can either cut their benefits or increase their tax.
I hope you can see that if the tax increase needed is not eighty cents, but two dollars, it won’t make any difference to the worker. and if the workers decide they’d rather cut their own benefits in future, that would be a legitimate decision.
what is not legitimate is cutting their benefits by lying to them about the need for it … or “projecting” a need for it in the far, science fiction, future.