CBO: SS Scheduled vs Payable Benefits (Rosser’s Equation illustrated)
by Bruce Webb
CBO: SS Scheduled vs Payable Benefits (Rosser’s Equation illustrated)
‘Rosser’s Equation’ is something between an in-joke and tribute to Prof. Barkley Rosser, Jr of JMU, an economist friend of mine who pointed out a surprising result: real payable benefits after projected Trust Fund depletion and subsequent 25% cut will still be higher in actual basket of goods terms than those of current retirees. This is because the scheduled benefit formula delivers something like 160% of the current benefit and as Prof Rosser pointed out to me long ago 75% of 160%=120%.
The above Exhibit 9 from CBO’s 2012 Long Term Projections for Social Security resolves Rosser’s equation for selected demographic cohorts and income quintiles. And the results show that the retiree born in 1947 who reached FRA (Full Retirement Age) in 2012 would see an initial benefit ranging from $10k to $25k and representing 100% of the schedule. On the other hand the retiree born in 1970 and who will reach FRA at age 67 in 2037, that is after TF Depletion would see initial benefits in 2012 dollars ranging from $12k to $33k.
Now there is no doubt that an overnight 25% cut in benefits at Trust Fund Depletion would represent huge sticker shock for then retirees. And there are very good reasons based in societal equity for scheduled benefits to rise at the real rate the formula delivers. As such we should make every effort to find ways of closing the gap between payable and scheduled from the bottom up rather than forcing scheduled down simply to avoid the shock of of cut. Because the risk is that the ‘cure’ might deliver a worse result in real terms than the ‘crisis’ left unaddressed.
Which is why I have been maintaining for years that ‘Nothing’ IS a Plan. Not as good a plan as it was when Prof Rosser and I started corresponding five plus years ago, circumstances have changed. Still it represents the “First Do No Harm” alternative, after all a check in 2040 20% better in real terms than an equivalently situated retiree gets today doesn’t exactly meet the definition of existential crisis for Social Security.
cross posted with Social Security Defender
The last post I made on my own blog was just over 2 years ago on the same subject.
http://adastra1960.blogspot.com/2010/12/scheduled-social-security-benefits.html
I have to say, I think it is much better illustrated there, as it comes with a nice graph. (Things have not reaaly changed in character even though the dates are shifted a bit.)
What is says to me is that ‘Nothing’ is no longer an option. Everyone you retires after the 25 percent cut gets less than anyone who retired in any of the 15 years before the cut.
‘Nothing’ on the revenue side still requires action within 5 years on the benefit side to make sure that they stay better in real terms than today as today continues to march relentlessly into the future.
It has gotten enough worse (if you believe Intermediate Cost) that that 5 years is now no years. 2034 benefits are less than 2011 and less than everything from 2016 to 2033.
Table V.C7 plus calculations from Table IV.B1 after 2033
(2012 dollars)
Year Payable Scheduled
2000 15839 15839
2001 16377 16377
2002 17300 17300
2003 17598 17598
2004 17819 17819
2005 18309 18309
2006 18603 18603
2007 18168 18168
2008 19228 19228
2009 18927 18927
2010 18380 18380
2011 19036 19036
2012 18771 18771
2013 19164 19164
2014 18902 18902
2015 18667 18667
2016 18906 18906
2017 19257 19257
2018 19621 19621
2019 20074 20074
2020 20575 20575
2021 21025 21025
2022 21506 21506
2023 21919 21919
2024 22224 22224
2025 22498 22498
2026 22734 22734
2027 22955 22955
2028 23185 23185
2029 23415 23415
2030 23644 23644
2031 23899 23899
2032 24177 24177
2033 24441 24441
2034 18882 24712
2035 19060 24987
2036 19250 25266
2037 19472 25557
2038 19706 25849
2039 19970 26150
2040 20229 26444
Arne
I hate this sort of thing.
The people who should be defending Social Security by educating the public about its importance and its cost get lost in trivia.
Some things the Rossers equation folks lose sight of
What Rosser said years ago is no longer “as true” as it was then. Simply because the ‘real’ increase in benefits now has fewer years to grow, so while you might have expected 60% better benefits in 2040 than people got in 1990, you can’t expect 60% better benefits in 2030 than people get in 2012.
The Rosser “do nothing” plan is a worse outcome than the much (and deservedly) reviled “chained CPI.
What it does have to recommend it is that it is at least honest, while the chained cpi is a cynical lie. Rossers equation, then, at least had the virtue of being a better outcome than some of the other plans on the table… which we will see again as soon as they get away with the chained cpi and realize how stupid (sorry, Dan) the people are.
A better plan than “nothing” is to start raising the payroll tax a tenth of a percent per year. This would show the people that the Liars are lying. That is, that Social Security CAN be fixed for a very low cost TO THE WORKERS WHO GET THE BENEFITS.
This should… if we were not stupid… stop the lying. I no longer have any faith that it would. The liars are clever, and the people are not. They will keep looking for a magic fix whereby either the stock market or the government pays for their retirement with no effort or cost to themselves.
But at least we could put the option on the table and defend it and explain it and give the people a fair chance to provide for their own retirement by continuing a government protected but not government paid insurance program that at least guarantees them some decent minimum in case all else fails… which it usually does.
Instead we all run around showing how smart we are by playing with imaginary numbers and imaginary concepts (the unified budget) and utterly fail to explain to people what Social Security is, what it does for them, and what it costs them.
It IS insurance. It will provide them with a basic income in retirement at a reasonable retirement age. And it will cost them an extra eighty cents per week each year, more or less, according to current best predictions.
As for that 25% cut in benefits “sticker shock”
It should be noted that it could be avoided by a 2% increase in the payroll tax on the same day instead.
MIght be a shock to some people, but not in the same league as a 25% cut in benefits when you have nothing else to live on.
The “real” value of benefits is as much a fantasy as the chained CPI. There is no way to measure “inflation” with either precision or any meaningful comparison of “standard of living” across decades.
Mr Webb relies very heavily on the use of computers and the internet. Things that did not exist when SS was invented. And no doubt these reflect an increase in our standard of living. Rosser’s idea, as well as the chained CPI, do not allow for the fact that living in 2012 is more expensive than living in 1935, and higher “standard of living” or not, there is NO way people can go back to living in the 1935 world on 1935 wages, much less 40% of 1935 wages. The “cheap” ways of doing things no longer exist. By 2030, or certainly by 2080, the economy will have changed so much that it won’t make any sense to compare then prices to now prices.
On the other hand, a percent of wages is very likely to represent a reasonable estimate of an actual “cost of living” at the then present, as opposed to a “cost of living” 35 or a hundred years ago assuming that the only thing that changes is the “price” of chicken.
IT makes no more sense to privilege the current “price index” than it would to base benefits on the 1935 price index adjusted for “inflation.” People are not going to want to give up their indoor toilets, even if they could find a house without one, even if the county would allow them to live in one.
But the concept does give the professors something to talk about. and talk about. and talk about. and talk..
In case it is not clear
that 2034 “payable” benefit is 120% greater (real value) than the year 2000 benefit, which is about when Rosser explained his equation to Bruce and others.
In other words, it has NOT “gotten worse.”
It simply makes no sense to say, as one might infer from Arne, that the payable benefit is always going to be 120% of the current benefit, however far along we have come since “current” was when the prediction was made.
The 2034 payable benefit IS about 75% of the scheduled benefit, just like we have been saying since 2000. but it is ALSO 120% of the 2000 “current” benefit, just like we have been saying since 2000.
It is unreasonable to expect that you can keep saying the 2034 benefit will be 120% of the “current” benefit while “current” changes from 2000 to 2001 to 2002… to 2012… to 2033.
Sorry to be beating this in, but it didn’t look to me like it was very clear to some people.
The graphic shows 2012 dollars and not 2000 dollars.
And the numbers are worse not just because Time’s Arrow is moving us closer to the cliff but because changes in actual economic performance and in projections going forward have brought the cliff closer. it is not just apples and oranges but different apples and different oranges. But the increase in real benefit due to tying scheduled to real wage continues to operate.
And as to 1935 vs 2000 vs 2030 well I wouldn’t want to return to 1935 plumbing, on the other hand I don’t expect 2030 food to be that much more of an improvement in quantity or quality or even ease of preparation. And maybe it is just a failure in imagination but I don’t see ever thinner TVs and ever more megapixel cameras as any improvement, not to mention that real prices for most of that stuff continues to drop. I suppose there is a future where I envy the kids their self-driving cars and weekends on the Sands Casino Space Station because I am scraping along on my only 120% better than 2012 SS check. but that won’t put me in the same relative position as some guy aspiring to have a Two-Holer some day back on the farm in 1935.
Hopefully I will never allow myself to lose total focus on wants vs needs
Bruce
i don’t think I was assuming 2000 prices when i noted that by 2012 prices, 2034 was still 20% better than 2000.
As for the rest of that 2012 is indeed closer to 2033 than 2000 was to 2040, and the difference between 2012’s real benefit (in any “constant dollars”) and 2034’s projected real benefit is not going to be as great as the difference between 2000’s real benefit (in any “constant dollars”) and 2034’s projected real benefit.
I was mostly replying to Arne who seemed (seemed) surprised by this.
Meanwhile I am not so sure you can predict with any confidence the difference between wants and needs twenty years in the future, much less over the infinite horizon, which is the way the Big Liars want us to think.
And, as I tried to say, while you CAN get by today with an outhouse, it isn’t “preference” which will make it harder today than it was in 1935. It is the law and the lack of available “holes.”
Hell, I think I even said it won’t be the price of chicken that determines what you “can” live on in 2080 or so, but changes in what is even possible in the economy of that year.
I know I could not live without a car in today’s economy. Yet my grandmother lived her entire life without one. Seems the grocery stores were closer back then, and the busses more frequent.
Times change. We need to keep that in mind.
btw
even if you don’t care about thinner tv’s with more megapixels, by 2035 you won’t be able to buy a fat tv with less pixels. they won’t exist. but Michael Boskin will tell you the new TV’s are an improvement in standard of living so their higher cost does not count as inflation. and because you are a greedy granny you don’t deserve to have one. no doubt you can go back to telling the old stories by the fireside.
what’s tragic here is that people who should know better are implicitly endorsing the chained cpi
and worse
endorsing the idea that the elderly are getting charity and that “we” can limit what they get to their “needs” as determined by “us” today (and not decent people of their own time and place). the old are not allowed to have any “wants” that we can determine are not “needs.” even if the old can and would and did pay for those “wants” themselves.
i don’t have to know in advance the difference between my needs and my wants twenty years from now, much less the difference between someone else’s needs and their wants a hundred years from now. i know that i would rather have a hundred and sixty dollars than a hundred and twenty dollars. and if i can pay for that future forty dollars with about ten dollars worth of my current “wants” i would be a fool not to provide for my future wants.
especially since i have a LOT more money now than i will have then.
coberly,
We want that for our children but for no one else…as if everyone else is not the child of someone. And “they” call us the greatest country in the world. Go figure!
Consider two variables – Interest rates, and the share of labor as a % of GDP.
The SSTF has estimates for these that are too high. They will bring down those estimates in the 2013 report to Congress.
I think the new drop dead date for SSTF will be 2029. A pretty big reduction in the scheduled/payable date would be the result.
Say this is 15-16 years away.You’re talking about someone who is 50-52 today. When do we tell this person what is coming?
Now we all agree that the TF must have a permanent reserve. Say one years worth of payments??
Around 2025 that is going to be ~1.5T. A big nut.
The reality is that the true “We gotta do something” date is mid 2020’s. Say 10 or 12 years from today. That isn’t very far away, and doing “nothing” seems like ignoring the problem.
Krasting
the last time i calculated it, the “do something” date is 2018. that is the last date that a one tenth of one percent per year solution will avoid the 2030 or so “shock.” By then the TF will be PROJECTED to be “one year’s reserve” by 2028.
So we agree with each other about that much.
But I don’t agree that even the “shock” of raising the payroll tax 2% in 2030 or 2029, or whenever the “death of the Trust Fund” actually occurs, would be a real problem. IF, that is, the people are educated to understand that all that has happened is that they need to save a little more if they expect to have a reasonable (minimum) retirement. I used to be more optimistic that people would understand that.
Watching the Dems turn ending the payroll tax holiday into “a huge tax increase on the middle class” has taught me to be less optimistic.
And yes, the share of GDP that goes to labor needs to be increased. But that is not a problem that SS can fix. In fact SS is “the fix” in case it isn’t fixed… that is, as low as wages may go, SS still provides the only way that ordinary workers have to save at least “enough” for their retirement.
But they have to pay for it. and they have to understand that and stop counting on “the rich” or “the government” or “the market” or the tooth fairy to pay for it.
Krasting your problem is that you never show your work, just your answers.
Exactly how much revision in interest rates do you see? From what to what? How many dollars would actually be lost from the current projection in each future year to carve a full five years off of Trust Fund Depletion?
The interest rate projections from the 2012 Report are here: http://www.ssa.gov/oact/tr/2012/V_B_econ.html#223125
The series of Real Interest rates is projected as follows:
2012: .4
2013: .5
2014: 1.4
2015: 2.3
2016: 2.8
2017: 2.7
2018: 2.4 enroute to ultimate 2.9 after 2021.
Those don’t seem dramatically high to me. Why do they to you?
Can you really arithmetically squeeze enough losses by reducing these rates to cost enough asset losses to cut five years off of Trust Fund depletion? If so how? And could you show your calculations on the (figurative) back of your worksheet?
I would like to take you seriously but you seem to pull data series and terminal numbers out of nowhere identifiable. You got a spreadsheet you can show us? Something? ANYTHING?
Or consider your other variable Labor Cost as percentage of GDP. The relevant Table from 2012 is here:
http://www.ssa.gov/oact/tr/2012/V_B_econ.html#236399
Now the Table does show a modest rebound in Real Wage to 2.67 by 2015. But this is off a very low base including actual losses in 2008, 2009, 2011 and after 2015 the Report shows a fairly rapid decline to 1.4 by 2019 and an average of 1.03 from 2020 to 2025. Once again in your estimation (and based on what?) this is not only over-optimistic but so much so that the TRUSTEES will be forced to reduce them by this Spring’s 2013 Report.
Which may be so. And presumedly you have something to back this conclusion up, at least in your own mind. But all we have to work with is ‘Well BK says”. As opposed to something like “Well as BK SHOWED based by economic factors A, B, and C as seen in data table X and figures Y and Z—-“
Maybe not everyone here is smart enough to follow the calculations, but I am betting some of us are. If we were only shown them.
Over to you.