Steady State Social Security: What Would it Look LIke?
What would Social Security look like if it met all current law requirements for ‘solvency’? Well unfortunately we have to start with the most eye-glazing opening ever deployed: ‘first lets define our terms’. To which I would add ‘within an artificial economic model’. Because real life is messy, particularly right now, and that introduces unnecessary conceptual confusion. So lets begin.
First assume a solid state economy. For my purposes I will define that as 5.5% unemployment, 5% nominal yield on 10 year Treasuries, 2.5% Real GDP, 2% inflation, 1% annual growth in SS beneficiaries. (Yes in the real world these interact, and maybe this precise combination is unlikely, though each number in isolation is in intermediate ranges, but that will not effect the basic argument).
Second assume that Social Security is currently ‘solvent’, meaning that income from all sources is sufficient to pay all costs, leaving a reserve numerically equal to next year cost. What would it take to keep it ‘solvent’?
Well in our simplified model Social Security cost increases year over year as a sum of inflation growth and beneficiary population. Which ignoring interactions means an increase of 3% per year. Which in turn means that maintaining ‘solvency’ requires bringing in enough income from all sources to pay 103% of Year One cost AND add 3% to Trust Fund principal and so leaving the Trust Fund ratio (reserves as a percentage of NEXT year cost) at the end of Year Two at 100 or one year’s worth of Year Three cost.
Now in our model the 5% nominal yield on Trust Fund assets (mostly invested in a mirror of 5 year bonds) would boost the TF ratio to 105% by interest effects alone, assuming that is that no portion of current interest was needed to pay current cost. Turning that around this means that 2 points of interest are available to reduce the need for ‘income excluding interest’ to match cost. Meaning that such income has to total 98% of the new 103% of previous year cost.
Now in year over year terms this has two effects on the overall economy. First ‘income excluding interest’ has to increase year over year to pick up its 98% share of the new year’s new increased cost. And second some part of the 5% interest on Trust Fund assets has to be transferred in cash to pick up its 2% share.
What does this leave us? Well a Social Security system that is cash flow negative each and every year. But with a wrinkle. Since that portion of the 5% nominal interest retained simply to meet the 3% growth in TF balance to maintain a TF ratio of 100 is credited in the form of NEW Special Treasuries, which are NOT financed directly by borrowing, that nominal interest is discounted in cash terms by some 60% from the perspective of the General Fund and the taxpayers who pay into it. AND the system is picking up basic income support for the 1% of the population being added on net to the beneficiary pool.
It seems to me that once having established steady state solvency that people paying taxes on non-wage income are getting a pretty good deal out of Social Security. To the degree that basic income support for seniors, widows/widowers/orphans, the disabled is some societal wide responsibility then 98% is being paid by current wage workers in FICA and by retired workers in tax on benefits and an additional percentage by income tax on wage workers leaving a pretty damn small levy on gains from capital. Forgive the language.
All this of course stems from a condition of ‘solvency’, which translates to keeping the income excluding interest/cost ratio approximating 98%. Which in theory can be done on either the benefit or cost side. But either way the resultant post-solvency is not remotely ‘unsustainable’. Or if so leave some numbers in comments. The only real policy question it seems to me is determining the actual costs and trade-offs getting from where we are now to solvency as defined. And not as is too common now trying to calculate the costs of paying off all the principal going forward. Because as noted in a previous post in a Steady State Social Security system principal NEVER needs to be paid down, instead all of it has to be retained to meet reserve requirements.
Bruce, as a fiat currency, the steady state is simple affirmation from the government that they will credit senior’s checking accounts regardless of the numbers on the TF/revenue spreadsheet. Also affirmation that does not raise the retirement age (we should lower the medicare age to 62 to match early SS) nor any cuts to benefits.
The future state problem is if the economy can produce what retired boomers need. If you cut social security, that means less money available to pay people that need to produce that stuff. People won’t produce that stuff for free.
That is the steady state.
It doesn’t change what Bruce said, but another thing people need to know to understand the steady state is that the tax rates needed to supply that 98 percent from current workers depends entirely on the ratio of workers to beneficiaries.
I would refer to a “steady state” in which the fertility rate is constant, but the mortality rate is decreasing. In that case the worker/beneficiary ratio is directly related to the ratio of years worked to years retired. With years worked staying constant and years retired increasing, tax rates will also be increasing.
Everyone needs to pay more because they are getting more.
MMCosker. I can’t see that I disagree. Still I think metrics add value to the discussion, especially when other folk are using language like ‘unsustainable’ and throwing around ‘% of GDP’. Particularly when they tend to ignore the incidence of the sustainability, in this case more than 98% resting right on the shoulders of labor and labor compensation.
The real irony of the NW Plan as promoted by Dale (with assists from me and Arne) is that if implemented it lifts TRILLIONS in theoretical ‘unfunded liabilities’ from the future burden on capital. That is the NW Plan permanently fixes Social Security AND gives billions of dollars of annual ‘tax relief’ to billionaires after 2018 or so.
Which I guess makes us dirty commies or something in Wingnuttia.
there is a spreadsheet that shows this in numbers which are sometimes easier to understand than the words.
i wish someone, not me, would work the spreadsheet up into user friendly format and make it available to interested readers… especially any lawmakers or pundits with large audiences.
Well I would slightly modify Arne’s comment. While the tax rate does depend crucially on worker to beneficiary ratio there is a variable that moves it off ‘entirely’.
And that is Real Wage. From a strict solvency perspective Real Wage is a two-edged sword. Because lifetime improvements in Real Wage translate to faster growth in Real Benefits with a rough outcome of “Earn more, pay more, get more” with real baskets of goods in retirement mirroring those of life in employment at the same percentage of income replacement. This is Dales ‘workers paying for their own retirement’.
So while Real Wage increases in income to SS are offset somewhat by Real Benefit increases after retirement we should note that Real Wage is by definition after-inflation, and it is inflation that adjusts current benefits.
That is there are scenarios (like the Trustees Low Cost alternative) where a combination of high employment, high real wage, and low price inflation combine to make paying for current benefits for current retirees LESS of a burden for current workers earning currently improving Real Wage. There can be a lag effect which in some cases will more than offset the increases in beneficiary to retiree ratio. Or offset them some. You could plug a lot of numbers into those spreadsheets.
But what we don’t want to do is to fall into the trap being set by the economic right that would have us believe that longer, happier, healthier lives in retirement is somehow theft from younger workers. It ain’t necessarily so, whether it is true or not depends on a combination of productivity improvements and the subsequent share of those gains that go to labor LIFETIME. It is only when current workers and past workers are set against each other to split a shrinking share of the pie that bad things happen to EITHER generation.
i don’t think “fiat currency” has anything to do with it.
i won’t claim to understand the argument about fiat currency, but i’ll offer what i think i understand as a place to start if an exposition of fiat currency would help. i don’t think this comment thread would be the best place for that, but if you can make the case in a few words, or write a post of your own that is readable… maybe you can teach us something.
to my way of thinking “fiat currency” just means the government can print money from time to time to boost the economy or restrain it as judged best by those who are entrusted with the decision.
you cannot however “just print money” for all times and all occasions. the ultimate limit is the ability of the people, and resources, to produce useful products and services… that the people want to buy.
money is just a fast way to keep the accounts. it has some emotional connotations one way or another for most people that need to be kept in mind by the money printers, but “money” is not what is important. what is important is… well, perhaps an ordered government that makes commerce possible.
we have that except when the congress starts granting too much “freedom” to the money manipulators. then we see what unlimited freedom has always meant: law of the jungle collapse into a state of nature, solitary, poor, brutish, and short.
And Dale I have the spreadsheet and will attempt to do what you suggest, but on my first attempt there were just way too many columns. What I need to do, or you, or someone, is reorder the columns so that the key ones all display together on the left while the calculations get moved to the right. After all it is only for convenience of the initial calcs that the formulas need to be set up strictly left to right, they can apply backwards as readily as forwards.
Anyway folks, that spreadsheet is coming. Eventually. Somehow.
I think perhaps you’ve made the “steady state” analysis overly complex, but I’m not completely sure. And I won’t be until I’ve had days or weeks to think upon it.
Note that you don’t seem to use the unemployment percentage. I suspect that like income above the Social Security wage cap, it is irrelevant to a steady state as long as the percentages don’t change.
My gut feeling is that as long as inflation is zero or is perfectly and fairly indexed, all you need for steady state analysis is the real interest rate (2% seems rational), the ratio of the trust fund size to annual payouts, and perhaps a couple of constants to reflect the lag between birth and entering the workforce, and the lag between leaving the workforce and death. And I’m skeptical that you need those lags.
I’m thinking that for the steady state, all that is necessary is for annual payouts not to exceed annual revenues by more than the real interest earned on the trust fund. (Obviously — due to the baby boom — we will not have a true steady state for a number of decades.)
BTW, are your writings on Social Security collected in any one place where I can send people who are totally confused about how the system works? (That would seem, incidentally, to be just about everyone including many people who should know better).
Coberly, think of the fiat currency as a part of that spreadsheet. It can be a problem if it stimulates too much inflation. If unemployment is too high and inflation low, then we are probably not printing enough to get aggregate demand where it needs to be.
To put it in numbers we might have to issue debt (print money) at maybe 2% or less of GDP each year (Bruce that might be the # to use) to make SS payments based on the current rules. Is that really a big disaster if GDP is growing? But remember, U.S. debt is our savings – opposite of a household. So just making the SS payments increases our savings.
The best way to solve the SS funding problem is fix unemployment now, and payroll taxes will automatically go up.
i think… someone smarter than me needs to think about it.. that an “explanation” for the effect of rising real wages (as well as increasing population) is that it is what creates the “interest” effect in pay as you go financing.
while over time we would expect “benefits” to keep up with wages and so “net out”, the fact is that as long as we are dealing with increases (not “an” increase) in wages, present retirees are being paid out of a larger pot of money than they paid in from.
this enables benefits to be larger, or taxes lower, than they would otherwise be.
but.. even if incomes are not rising, and expenses are, SS is still the best way we have to pay for our retirements. we may not get as much as we hoped, or we may have to pay more than we wanted. but being a little poorer, in a country in which everyone is a little poorer, might be almost unnoticeable over time… people adapt to “what is”… and in any case is a lot better than some people having nothing at all while others have more than what they really know what to do with.
those who have more never understand this. but those who can imagine having nothing do… but will work hard anyway, trying to make “enough” for themselves. SS does not encourage anyone to lie down and wait for the government handout.
well, not quite not anyone. but those who do are as sadly delusioned about the nature of SS as are those who think SS is stealing from them.
i agree with the important parts. i think we need to increase employment, and wages, and that this is “the” best way to “fix” SS.
but it is not what we can do, or need to do, about SS. the employment etc is not a consequence of SS, or a problem to SS. we live in a world, fortunately, where different things are fixed in their own terms. you don’t fix your car by planting more wheat… though indirectly that may ultimately be what it takes to have a car that works.
SS can be fixed on its own terms by raising the payroll tax one tenth of one percent at a time until we have fixed the employment and wage problem. meanwhile SS does what it was designed to do… prevent ugly poverty in old age.
Don the largest part of my SS writing was done for Angry Bear and so searchable here. But I also maintained an index of the AB SS series and subsequent posts to 2010 (along with my earlier work) on my own blog: bruceweb.blogspot.com on this page:
Dan will be rolling out the new site soonish and it should be easier to get to individual posters past work.
I think he has too. But that is just a difference in personality styles that I am hoping does not result in bad feelings.
Meanwhile, without too much arrogance, I think I have a pretty good bead on the dynamics of SS, and I would suspect some of your intitial guesses will not turn out to be critical factors.
That said, by all means to some serious thinking about it, and give us what you come up with. I hope you will be ready for some robust debate which is not, in my case at least, always diplomatic.
But I have confidence that serious thinking will ultimately yield a better understanding, and the more people doing it the better.
I won’t even mind too much if I turn out to be “wrong”. But I would mind very much if the Big Liars win because the rest of us don’t put up our best case.
Don as to specifics.
Social Security is crucially exposed to unemployment rates both on first order (percentage of workers paying in and so effective worker/retiree ratio) and second order (unemployment itself driving people onto DI rolls, ironically removing them from the number itself but adding to costs). But in thinking about it is (as you point out) not particularly key to the model as such. However it would over time by a reverse lag effect tend to drive up needed rates to maintain solvency. For example the NW Plan 2012 version (not yet published as such) requires boosts in FICA to start earlier than original NW Plan 2009 due entirely to near term unemployment effects.
As to the rest of your analysis well i will have to think on it. I think I agree but would put it differently. Once solvency is achieved maintaining it is mostly a matter of avoiding the killer combination that is late 70s stagflation. There was an abortive SS reform in 1977 that was swamped by a combination of high inflation which merrily increased retiree benefit checks, probably out of proportion to their actual experienced inflation, particularly on the housing side, and so overall SS costs, even as slow growth and high unemployment crushed receipts. With the result that by 1982 the Trust Funds were shockingly only a few months from ABSOLUTE depletion, a state they actually reached in early 83 but disguised by some fancy interfund borrowing by Treas Secty Baker. More later, my meeting just got here.
I guess “steady state” is also in need of defining.
Productivity, and therefore covered wages, and therefore the the number of beneficiaries that can be supported per worker and several other things I am letting slip will all continue to change even in the absence of a demographic bulge.
Right now it looks like we need rate increases, but we should apply them over a long period, not attempt to “fix” the entire gap, because there is no “steady state” tax rate that can go for every generation.
the NW plan, as you know, adjusts the tax rate in tiny increments (or the opposite) as “needed” by the ten year projection. as the projections change is is an easy matter to change them again, or unchange them.
“I’m thinking that for the steady state, all that is necessary is for annual payouts not to exceed annual revenues by more than the real interest earned on the trust fund. “
Almost right, but you would have to add a bump to both income and principal to account for the increase in both nominal and percentage terms of the beneficiary population. That is any combination of population increase due to immigration and close to replacement fertility combined with even marginal improvements in mortality will over time increase the retiree beneficiary population. The effect doesn’t have to be dramatic, though of course it could be. Under current projections the total beneficiary population (including survivors and the disabled) is projected to increase from around 17% to 24% of the population with resultant rise in GDP share from around 4.9% to 6.1% for SS due to this factor alone.
On the other hand as Dean Baker points out even at slowed down rates of productivity this doesn’t represent an absolute increase in burden, Just a proportionate share of a bigger pie.
“I guess “steady state” is also in need of defining.”
Steady state in this context is keeping TF ratio pegged to target. Just like keeping a car exactly at the speed limit over uneven terrain this requires small adjustments on the gas pedal. You add some marginal gas when going up that hill, let off the gas when you go down the other side. All without stomping on the accelerator or jamming on the brakes.
The NW Plan just requires keeping your eye on the cars a mile and more ahead.
As to “fix at one time”.
I see the NW Plan as a SET of fixes each of which would fix the system given the year over year change in Intermediate Cost. That is the 2012 version of NW fixes SS forever. Just as the 2009 one did. Just differently by adding and subtracting incremental changes at one end of the chain or the other.
But the fix is forever because the method becomes the permanent fix.
First thing I picked out in this blog was the assumption that Social Security is or will be “Solvent.” The current amount of spending by our government is frequently subsidized by the social security program. Until spending is cut to a level that equals the income of the government, social security will always suffer.
“The current amount of spending by our government WAS frequently subsidized by the social security program.”
Social Security had a large cash surplus (income excluding interest) for just around a decade: 1997 to 2006. Cash surpluses prior to then and since were small and are now flirting with zero or already below that point. Even if you fixed Social Security on the revenue side it is unlikely to ever start returning large surpluses. Benefit side it is a different story but the likely plan now is just to bleed SS enough to shake people’s faith in the program, there is just not enough blood in the stone to squeeze out surpluses big enough to disguise anything.
That particular ship has sailed. What is left is a hatred of social insurance/social democracy/the New Deal/FDR that is leading them to try to destroy SS just because. Which requires a different set of defense tactics.
“On the other hand as Dean Baker points out even at slowed down rates of productivity this doesn’t represent an absolute increase in burden, Just a proportionate share of a bigger pie.”
well, i’m glad Baker is pointing this out.
but it still involves a dangerous misconception.
there is no “burden” which “the young” bear to carry the weight of the old.
as long as “the young” will some day become “the old”, the burden they are bearing is better thought of as “paying (or saving) for their own retirement.”
as long the economy grows, however slowly, the young will get back more than they paid in … effectively “interest” paid for directly by the next generation.. as all interest is paid…out of the growth in productivity… and who will in their turn get back more than they paid in…
“not an absolute increase in burden..” who wouldda thunk it? eighty cents per week increase in the tax per year while wages are increasing eight dollars per week. hmmm.
“”The current amount of spending by our government WAS frequently subsidized by the social security program.””
No, no, no!!!!! Is that emphatic enough. I was afraid that with all the words being spent here on this simple, but confounding subject, we would end up reading a statement like the one quoted above. Worse yet we get a denial of the statement, but a continuation of the of the misconception. And I know that Bruce knnows this subject better than anyone else I know. Excess FICA deductions have never “subsidized” any government spending other than that which is paid out as some form of Social Security benefit. When a bank, or any entity with extra money to invest, buys Treasuries do we regard that as a subsidy to government spending?
From the dictionary:
noun, plural sub·si·dies.
1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a charity organization, or the like.
2. a sum paid, often in accordance with a treaty, by one government to another to secure some service in return.
3. a grant or contribution of money.
4. money formerly granted by the English Parliament to the crown for special needs.
Excess FICA deductions are represented by Special Treasury notes. That is money lent not given as a subsidy. The Trust Fund is one of many credeitors of the USofA. That is the legislative requirement and the first, and continuing, intent of FICA. Using terms like subsidizing the government is incorrect.
Jack is of course correct.
On the other hand for the 2001-2007 period if you substituted for ‘subsidized’ the phrase ‘disguised by surpluses in’ as in “The current amount of spending by our government WAS frequently DISGUISED BY SURPLUSES IN the social security program” you would not be far wrong.
But the numbers simply don’t support this formulation for years before or really for years after those dates. SS just wasn’t running that level of surplus.
well, remember when Clinton got a “balanced” budget and then reduced the debt… except that it was only balanced if you counted the money borrowed from SS as “income.” and the debt was only reduced if you didn’t count the debt owed to SS.
[i am not absolutely sure about all of this.. i think it was true one year and the next year they actually did “reduce the debt. but the “talk” in both years made it sure sound like “disguised”…of course you only hear about this from the”right’ when they want to make sure you don’t give Clinton credit for reducing the defict to levels never achieved by the tax cutters.]
and while i don’t know what the effect on the economy would have been if the gov’t had to go to the “private market” to borrow the money they borrowed from SS. I tend to suspect “not much,” but in any case we invite insanity if we insist upon tracing every possible “what if” up every imaginary tree. i’m happy to deal with “proximate cause” unless someone makes a very, very convincing case for looking at secondary effects.
convincing to me, that is, not to themselves.
Dale I looked up the numbers a few times.
Clinton ran three “unified budget” surpluses but only the last was ex-Social Security.
As against that his rhetorical response to those first “unified budget” surpluses in the face of Gingrich led calls for tax cuts and “giving the (rich) people back their money” was a strong “Save Social Security First”. In practice to use SS surpluses to pay down Debt Held by the Public. Since he was term limited out I can’t throw any blame at him on the SS front.
On the other hand Gore’s “Lock Box” imagery was criminally stupid compared to “Save Social Security First” even if the mechanism was supposed to be the same. Christ Gore practically handed ‘Phoney IOU’ and ‘just a file caninet’ over to the bush campaign, all apparently to seem cleverly differentiated from Clinton.
Lock Box made no sense. Pay Down Other Debt did.
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thanks. “lock box” had me so confused i found myself explained to people you can’t keep “money” in a lock box and have it remain money.
of course that confused them and they decided i was lying.
Clinton confuses me. i don’t “blame” too much. but when i heard he and Gingrich were going to save SS between them by the “obvious” raise the retirement age… well, thank God for blue dresses.
If a reserve fund or trust fund cannot ever be used then why is it called a reserve or trust fund? Reserved for what purpose?
It’s all well and good to point out the legal structure of SS as it exists, thus rendering the liberal narrative about the surplus fund moot but how about defending that structure?
I cut Greenspan and his commission no slack. I had always thought the gigantic surplus was not intended to be paid, with knowledge aforethought, by Greenspan et. al. via a political struggle but it turns out it won’t be paid out because it can’t be, by law. Operationally the result is the same and ethically it still stinks. Bush was more right than he knew I guess when he said the Trust Fund doesn’t exist. It exists in name only. Same dif.
now you are confused.
the trust fund is doing exactly what any trust fund does. it pays interest on money you are not using at the moment, and can only be used by the trustee for the purpose intended.
the principle may not have to ever be paid back under a “steady state.” but the interest will be paid out… helping hold the payroll tax down a bit. and should worse come to worser, the principle will be paid down, just when you need it most.
it most certainly does not “stink” ethically, and it still looks to me like an elegant solution of the “baby boomer” problem.
i am sorry if this sounds rude, it’s the same advice i’d give a much loved child: read slow, think slower… but keep thinking until you understand.. that’s generally long past the time you think you understand, or like what you think.
Well the ‘rapier’ is not for your sharp reading or math skills.
The Trust Fund has been drawn down in the past both in dollar terms and more often in terms of Trust Fund Ratio and consistently so between 1971 and 1982. Absent a Trust Fund balance SS would have experienced some true existential crises during that period. Similarly the DI Trust Fund starting drawing down its TF ratio starting in 2006 and six years later is in pretty dismal shape. But still paying scheduled benefits and able to do so for a few more years.
And there was no “gigantic surplus” for the first 20 years after the Greenspan Commission, instead by Dec 1992 the Trust Fund had just struggled to get back to a ratio of 96. And didn’t get to real excess dollars until 1999.
As such there is in fact no legal obstacle to paying down the combined Trust Funds to zero, we did that in 1983 or paying the separate DI Trust Fund down to truly crisis stage, we are doing that now.
You basically got everything wrong. On the facts and on the politics and on the law. At least in respect to the data I presented. Which gives me a sad—–.
KA850900712 it has subsidized nothing, the surplus was spent back into the economy in most years. So it added back to our savings.
I am glad someone has done this work. However, I do not understand one goddam word of it, pardon my English. Please, might someone translate this essay into a lay understanding, so readers without a lick of economics training might follow along? Thank you.
P.S. The Angry Bear emails aren’t always impossible to follow along.
Well unfortunately some parts don’t translate until or unless the reader has thoroughly educated himself with the terminology as defined in both the annual Reports of the Trustees of Social Security and the Budget Concepts and Budget Process section of OMBs Analytical Perspectives on the Budget.
Or you can try starting with the Angry Bear Social Security Series as written back in 2008. But that runs 46 parts. And then has dozens of follow pieces. The whole set is indexed at my own log but the posts actually link back to AB.
The topic is NOT easy. Particularly since most readers start with a knowledge base heavily influenced by a multi-decade propaganda campaign led by Cato fundamentally hostile to Social Security. With the result that much of what most people ‘know’ about Social Security is just not true at all.
It would be easier if I were putting up a series on Welsh Dynastic History in the 9th Century or the Name List in Cuhlhwch ac Olwen, two of my foci in grad school. Because I would be fairly safe but the “yes but Blahous/Biggs/WSJ OpED say—-” factor kicks in. Young workers KNOW that SS will not be there for them. And think you a simple wanker if you just start out stating the opposite. And that process takes a great deal of brush clearing and ground breaking and fancy schmantzy budget talk.
I have tried to translate this, and some efforts are found in the indexed series. But others are directed at the students who have already slogged through the material all along. Including this one.
I am more than happy to field questions by e-mail at whatever level of detail. Try Bruce dot Webb at mac dot com.
if social security was taking in exactly as much as it needed in taxes in order to pay for exactly as much as it pays out in benefits, it would take in 500 Billion per year (for example. the real number is a bit higher) and pay out 500 Billion per year.
But. Social Security is required to maintain a “reserve” equal to the expected cost of benefits for the next year. In this case (“steady state”) it would need to have 500 Billion in the bank. If the bank is paying 5% interest on that 500 Billion, that’s 25 Billion dollars that SS would not have to collect in taxes in order to have the 500 Billion for Benefit payments.
But now suppose that the population of beneficiaries grows 1%, then the amount needed for benefits next year would be 505 Billion Dollars. That means that the Trust Fund would also have to be increased to 505 Billion.
So now instead of taxing the original 500 bilion, or the 475 billion plus 25 billion interest to reach 500 billion, we have to reach 505 Billion to pay benefits PLUS another 5 billion to add to the trust fund, for a total of 510 Billion. Since this year we ae collecting 25 billion in interest, we have 15 billion left over to pay the 500 billion in benefits… so we need to tax 485 billion.
there is a little confusion in my example about which year we are paying benefits for, but i cut my finger and its toohard to type to go back and fix it.
see if this helps anyway… i think it should. maybe i’ll fix it up later or try to put it in a Post.
note that the 500 B in the bank grows to 505 B… that is the bank does not pay back any of the principle.
this is Bruce’s point about the TF never having to be paid back.
Nicely done . . .
Dale and Bruce. Thanks for your comments and for the link to the SS articles — which I have bookmarked.
I have done some thinking about “steady state” and today’s opinion is that it probably is indeed very simple — depending only on real interest rates.
But it’s also irrelevant as the real world probably is never going to be a real “steady state”. I think that the best that can be hoped for is a stable average state. e.g. the employment rate and thus the payroll tax amount will vary with the state of the economy and I think that we gave up on trying to achieve a steady state economy during the Nixon years when it became obvious that economics isn’t mature enough to support “economic engineering”
So maybe we do need a more complex analysis that recognizes that variables … well … vary.
I would point out that the actuarial stuff would be far simpler to handle if Social Security payouts were based on giving each recipient a fixed (tiny) percentage of the payroll tax collected plus interest earned rather than a base amount plus an inflation allowance. Presumably, that would result in about the same individual payouts as now, but with a small monthly or annual relative drop when payroll receipts are low and a small bonus when receipts are high.
But I’m not sure that’s politically possible, and it has several drawbacks. Those who are truly dependent on their SS check would find planning harder. And from the point of view of Keynesians (and maybe even Friedmanites) if (when?) our economic masters manage a really disastrous crash, Social Security payouts would no longer be counter -cyclical.
Them’s my thoughts.
Regards: Don Kenney (vtcodger)
nothing wrong with your thinking, but if you knew more about the way SS works, you’d see that there is no need for any change in the design.
at the risk of oversimplifying, the Trust Fund, in its original purpose, takes care of normal fluctuations in receipts/payments. pay as you go with wage indexing takes care of normal growth in the economy, and a sensible increase or decrease in the tax from time to time as “needed” would take care of significant changes in economic or demographic growth.
thing is, the people paying the tax are in a MUCH better position to cope with changes than are the people receiving the benefits. a tenth of a percent change in the tax rate would be no more noticeable than a change in the price of some groceries, or some cars, or some houses, or some interest… just the normal day to day.
of course there is no “steady state.” i didn’t think Bruce was saying there was or should be, only using it as a necessary “simplification” in order to explain why the TF may never have to be paid back, and why lending it to the government (aka “looting” it) was perfectly normal and desirable.
Don the actuarial stuff would be simpler but in addition to the objections you note (countercyclicality etc) any such change has the psychological effect of changing SS from “I paid for it” to “they are paying for it” that is from self-funded retirement plan to welfare. Of course it is not exactly a self-funded retirement plan NOW, but the psychological effect is real enough.
A second objection is that a system explicitly basing current payouts on current income simply begs for various ‘equity’ adjustments starting with means testing and calls to tinker with the funding mix, in short the shenanigans we are seeing with the Payroll Tax Holiday and proposals for such things as variable application of different CPI formulae.
Social Security has by a variety of mechanisms been insulated from Congressional meddling on a year over year basis. For example the COLA was put on auto-pilot in the 70s so that we wouldn’t have this debate every year. This has in the past been a mixed blessing as the crisis of 1981-1983 showed, Congress had to be dragged kicking and screaming to make the major adjustments needed after stagflation almost killed the system. But there is real value and real political insulation in the otherwise kind of innumerate cry: “Keep government hands off my Social Security!”
It is what puts the Juice in the Third Rail of American Politics.
as far as i know SS proper is entirely self funding.
if you are referring to the interest from the gf contribution… well, interest is what you pay for borrowing money. money that originally came from the folks paying the SS tax.
SS is designed (evolved?) very well. the problems codger is trying to solve are already solved. the TF as originally intended takes care of those short term fluctuations in income/outgo. pay as you go takes care of inflation and pays a reasonable “interest.” the benefit schedule takes care of the insurance against old age poverty function… maybe not as well as could be, but this is not the time to monkey with it when the system is under attack with intent to kill.
and of course a small change in the payroll tax from time to time takes care of secular changes in population ratios and income growth.
it short, don’t mess with it just because the Liars are screaming the sky is falling the sky is falling.
medicare is not self funding. it was welfareized in a misguided attempt to make the rich pay for it. kind of like some people want to do to SS.
as a consequence we have people saying with a straight face “we need to save Medicare… by cutting benefits to where it no longer functions as meaningful insurance for the elderly.
i would like to see one of OUR experts calculate the cost of making SS entirely “worker paid” with a dedicated, transparent, capped, “flat” tax just like SS is.
that is cost TODAY. we can worry about the rise in costs later. once people see what it’s costing them, they can focus on controlling costs instead of getting someone else to pay for them.
In a sense, isn’t that what Medicare For All would do for people under 65?
i think so. that’s how i would design health care in this country.
but the problem would remain: the poor want the rich to pay for it. the rich don’t want to pay for everybody’s health care.
and of course… “it’s going to cost too much.” we are finally beginning to hear it may not cost too much. there are after all economic forces that will eventually hold down costs.
on the other hand “your money or your life” pricing will keep costs high, and higher as new treatments evolve, unless someone “does something.”
It is not so much that “the poor want the rich to pay for it”, than the poor can’t afford it and need assistance. I suspect that the vast majority of the poor would pay for their own healthcare insurance if they could. Of course if they could, they would not be poor.
Therein lies the problem.
I am not so sure. I spent a lot of time on a blog were most of the folk were poorish liberals as far as i could tell. the idea of paying eighty cents per week for their own SS infuriated them. It’s only fair, they said, that the rich pay.
and this seems to be the feeling, strategy, of their “leaders” (such as they are.)
a flat medicare tax set to a level, with a cap, that would pay all expected medical costs, would be expensive… but not too expensive at first, i think.
and you have to remember that a “flat” tax for insurance really amounts to a subsidy of the poor by the rich.
but what i hear from the “progressives” is hell no. don’t raise taxes on the poor, even pennies a week to pay for their own direct needs. instead raise taxes on the rich, thousands to hundreds of thousands of dollars a year, because that is “simply justice.”
we would want to see a minimum wage at least high enough to pay for medical insurance as well as groceries and rent. and a little time off.
I wonder how much the SS cap would need to be raised to cover the “pennies a week” needed. I believe if memory serves me correctly, it is about 40 pennies per week per year. Alternatively, a penny or two increase in the minimum wage might cover it.
if i remember.. and i don’t… raising the cap entirely would about cover the projected shortfall.
over the same time, an average increase in the combined payroll tax of forty cents per week per year would cover the projected shortfall and establish a tax rate that would fund SS for the foreseeable future, if not the infinite horizon.
now i suppose a penny per hour increase in the min wage would get you forty cents per week, but you’d still need to increase all wages that penny per hour to get the forty cents we are talking about.. and then only if it went entirely to the payroll tax. so i am guessing about eight cents per hour might cover it (12% tax).
whether that increase in wages would stay far enough ahead of the increase in benefits that would follow from it, i don’t know. too tired to think about it.
I find it interesting, and a little strange, that 40 cents per week per year is equivalent to eliminating the cap. I would love to see some numbers supporting this.
look for CBO report Options for Socail Security
2007 I think.
it will compare raising the cap and increasing the tax one tenth percent per year…
it’s outdated as to the amount needed when, but the comparisons ought to still be valid… you will need to read carefully though.
i might be back later, if the thread is still here.
the CBO Report Options for Social Security dated July 2010 shows that eliminating the cap would pay for the whole actuarial shortfall. So would raising the payroll tax one tenth of one percent (combined) per year for twenty years.
Interestingly, raising the cap to cover 90% of earnings only pays for 1/3 of the actuarial shortfall. Taxing earnings up to 250k pays for 5/6 of the shortfall… so “scrapping the cap” entirely only gets you another 1/6 of the shortfall. notice that w/ 250 k you are only taxing the “near rich” you are not touching the stinking rich… the people the progressives hate.
there are a number of variations on the “tax the rich” scheme. they all run the high risk of making new enemies for Social Security by “saving” the worker who will get the benefits about eighty cents per week. It is a very bad bet.
(note the eighty cents is the amount the worker would see deducted from his paycheck over about the next twenty years.. which should essentially take care of the problem forever. the forty cents i have been using is the “average” deduction over the 75 year actuarial window. because of the recession, that forty cents average hasn’t changed, but it has needed to be moved forward to the early years. and it needs to be also applied to the employers share.
i think you can do the arithmetic. i won’t. because people who can’t handle quantitative ideas at all panic when they see what it is going to cost them in twenty years without being able to hold in their minds both how much they will be making in 20 years, and the fact that they are going to be getting it back, with interest, and how much they are going to need it then.
Thanks, coberly. That’s good stuff!
CBO: Social Security Policy Options
see Summary Figure 1 for graphic and numeric comparison of all 30 options.
Note that 0.6 is the score needed to backfill the whole gap. And also note that the NW Plan is best represented by Option 2. The difference being that the NW Plan proposed by Coberly allows for year over year dynamic fixes to the schedule of increases. It represents a total permanent fix because its METHOD is its fix. You could call it the Flexi-Option 2.
I have this saved as a JPEG somewhere, expect to see it as a front page post soon.