CHUCK BLAHOUS FINDS THE ANSWER FOR SOCIAL SECURITY AND LOSES IT.
by Dale Coberly
CHUCK BLAHOUS FINDS THE ANSWER FOR SOCIAL SECURITY AND LOSES IT.
Charles Blahous is one of the politically appointed Trustees for Social Security. He has written “A Guide To The 2013 Social Security Trustees Report” at e21 Economic Policies for the 21st Century http://www.economics21.org/commentary/guide-2013-social-security-trustees-report .
Blahous tells us
“Social Security faces a large and increasingly immediate financing shortfall necessitating prompt legislative corrections.”
This is arguably true, but a cautious reader will recognize that “large” and “immediate” and “prompt” may be subject to differing opinions and lead to unnecessary hysteria.
From that point Blahous descends into a misleading presentation of Social Security’s finances.
First he offers a graph showing the projected decline in the number of workers per beneficiary. The graph is truncated to give a more alarming picture than the facts warrant. Moreover Blahous fails to note that the current tax rate has been until recently more than enough to pay for current benefits, so the “3.5 workers per beneficiary” in 2000 gives no idea what the ratio of workers to beneficiaries needs to be for the present tax rate to be sufficient. It turns out that the 2012 ratio of about 2.8 taxpayers per beneficiary very closely provides enough to pay 2012 benefits at the current tax rate. Comparing this ratio to the projected 2035 to 2040 ratio of about 2.1 workers per beneficiary suggests that a tax increase of about 33% would be sufficient to cover the benefit expenses of those years and after (note that the line flattens after 2035). But this is a 33% increase of a 6% tax. So a 2% increase in the tax will pay for expected future benefits at the expected ratio of workers to beneficiaries. Blahous fails to note this. Moreover, we have 20 years before we need to reach this 2% increase. The graph shows the needed increase will be gradual over that time. A one tenth of one percent increase each year reaches the needed 2% in 20 years without any shortfall along the way. Again, Blahous fails to note this.
Second, Blahous provides us with a graph showing the Per Capita Payments Rising Under Current Benefit Formula. He shows benefits rising from about 20,000 dollars per year today to about $45,000 in year 2090. He does not bother to tell us that the reason benefits are projected to rise under the present formula is because benefits are tied to wages, and wages are expected to more than double over the same time.
Please note that this doubling of wages is working at the same time that the above discussed 2% increase in the tax is taking place. This means that ultimately, while the payroll tax rate has increased, the worker will have twice as much money in his pocket AFTER paying the tax. Moreover he will get the money back to pay for his longer retirement at a benefit rate that will also be about twice today’s in real value . (The reason the worker to retiree ratio discussed above is changing is because retirees are living longer.) The reason “per capita payments are rising” is because we are getting richer and will want to keep the standard of living we helped create after we retire.
In other words, the increase in the “cost” of Social Security represents a quite reasonable decision on the part of workers (future retirees) to put aside a little more of their larger paycheck to insure a better retirement. Most financial planners would say this was the smart thing to do.
And finally, third, Blahous descends into blatant misdirection:
“And third, the program is financed on a pay-as-you-go basis, meaning that each generation’s benefits are paid for the most part from the tax contributions of the following generation, rather than saving those contributions to finance future payments. Such a financing method is very sensitive to changes in the ratio of taxpaying workers to recipient beneficiaries.”
Blahous fails to explain how workers’ contributions can be “saved,” or how “saving” differs from pay as you go. The fact is that financially there is no difference. Your contributions are saved the same way a bank saves your savings: by writing the numbers down in a book and using the money to fund other people’s needs.
Pay as you go is what enables workers to save their own money safe from inflation and market losses. The next generation is no more paying for the older generation’s retirement than the next generation would be paying for your retirement if you saved the money in a bank and then withdrew it after forty years. The difference between the bank and Social Security is that “pay as you go” guarantees the money will be there, adjusted for inflation and growth in the economy. A bank, or stock, cannot make that guarantee, but even a bank, or stock, has to get the money it eventually pays you from “the current” generation. There is no way around that. But people who think “money” is something you can keep in a drawer…. indeed, MUST keep in a drawer… have trouble understanding this.
Blahous is confusing Social Security with a private savings or investment plan. Either because he doesn’t know any better, or because he is sure you won’t:
“…finally, even with our current tax rates, benefit schedules and demographics, the system would be sustainable if individuals’ tax contributions were saved to finance their own future retirements, rather than tapped to pay benefits previously promised to older generations.”
If I put my money in a “retirement plan” there is no reason that the “plan” has to further invest that money in stocks and bonds in order to be able to pay my money back to me, plus interest. All it needs to do is be able to attract new customers who want the same safe place to save money for retirement. Because retirement costs are going up with inflation and the real interest paid to beneficiaries, the plan would need to charge more each year.. a rate that would correspond to the increasing incomes of the new savers, which is a function of inflation and the growth in the economy. This is not a Ponzi scheme. The finances are transparent. The reason it would not work for a private business is that the private business could not guarantee it would always have enough customers to pay the savers back plus interest. The government can guarantee that it will.
You may not like the “mandatory” aspect of this. But that is different from claiming that there is something “wrong” with the financing that portends looming catastrophe. Most people “don’t like taxes.” But it’s also true that most people “don’t save enough,” and private “investments” have a way of going bad for most people. By the age of sixty or so most people understand this better than they did when they were young.
Blahous may not like “government” and he may not like “mandatory” savings. But he is being disingenuous pretending that there is something wrong with SS financing that would be magically cured by private saving.
Having got this far, it was a surprise to me that suddenly Blahous gets it right:
“We are running out of time to fix Social Security’s finances without abandoning its historical financing structure. Continuing Social Security’s historical “earned benefit” construct and self-financing structure is only possible if lawmakers are willing to assess payroll taxes at levels sufficient to finance scheduled benefits. If they aren’t willing to do that then another financing mechanism will need to be found, such as doing away with the program’s contribution-benefit link altogether and directly subsidizing the program with income taxes from the general fund.”
This is exactly true. But what Blahous does not say, and may not realize, is that the cost of assessing “payroll taxes at levels sufficient to finance scheduled benefits” is so tiny no one would notice it. One tenth of one percent increase in the tax for each the worker and the employer would solve the “actuarial shortfall” essentially forever.
That’s less than eighty cents per week per year over about the next twenty years, while wages will be rising more than eight dollars per week per year. The tax increase needed essentially stops at that point while wages should keep rising.
Blahous continues:
“We are already at the point where it is open to serious question whether Congress and the President will prove willing to balance the program’s books without turning to such changes. If and when such changes occur, Social Security will no longer be quite the same program it has been; instead of one in which it is perceived that workers in the aggregate have paid for their benefits, it would more likely become a means-tested program, as are other general revenue-financed programs such as welfare and parts of Medicare.”
This is exactly correct. And it is the mistake the “progressive” “defenders of Social Security” are making. Instead of teaching the workers that they can continue to pay for their own Social Security for a cost too small to notice, they are calling for a “scrap the cap” tax on the rich. This would turn SS into welfare as we knew it. Even if everyone keeps calling it Social Security, it won’t be the successful program it has been for over seventy years: A payment you get that you paid for.
But instead of realizing this, much less seizing it, Blahous goes on to another misleading claim:
“The Trustees’ Report explains how the problem will essentially become insoluble if lawmakers wait until 2033 draws near to address it. By 2033, scheduled benefits could only be paid by raising tax revenues by the equivalent of an increase in the current tax rate from 12.4% to 16.5% — an increase of nearly one-third in worker tax burdens. “
The “one third in worker tax burdens” is, again, one third of a six percent “tax”: money that they get back with interest in order to have something to live on when they are old.
That’s an extra 2%… eventually… to pay for about an extra five years of life expectancy without having to work for the boss until you knees and mind give out. And it comes while your wages are going up an extra 100%.
Blahous gets apocalyptic:
“Avoiding a tax increase would require cutting costs by the equivalent of a 23% across-the-board benefit reduction – one that would apply regardless of the beneficiary’s income level or whether she had been already been dependent on benefits for decades. If alternatively Congress does not want to slash benefits for everyone already receiving them, even 100% elimination of benefits for those newly eligible in 2033 would be insufficient to close that year’s shortfall. In sum, by 2033 the game is basically over. The window of opportunity to deal realistically with Social Security finances is actually in the process of closing now.”
Part of this is true: avoiding the 2% tax increase (he calls it “one third”) would require a 23% cut in benefits. Unlike the tax increase, this is a real cut of about a quarter of benefits. For someone living on Social Security that would mean not having enough to eat or pay rent, much less pay for all the new “deductibles” being called for to “save Medicare.”
But even waiting until 2033 would not mean “the game is basically over.” We could raise the tax 2% all at once at that time, and the workers would never notice it except for all the shouting by people like the Petersons convincing them that the world was coming to an end. We restored the payroll tax from the “tax holiday” by raising it 2% at once… and no one noticed except the politicians telling us it would crash the economy, and plunge the poor workers into poverty. It didn’t. And it won’t.
[Blahous talks quite a bit about “DI”, Social Security disability insurance, but apparently fails to realize that most projections combine the old age and survivors program with the disability program in forecasting The Death of the Trust Fund.
This is because the most likely solution will be for DI to “borrow” from OASI.
I think it would be wiser to simply increase the DI tax right now. It would amount to a one time increase of three tenths of one percent. DI’s financial problems are smaller even than those of Social Security proper, but Blahous’s friends think that the earlier projected exhaustion of the DI Trust Fund helps them make Social Security look even shakier. So he would be glad for you to shift your attention to that… without of course realizing that it too can be fixed for a long time just by raising it’s tax a dollar or two per week at once. And not again for another fifty years. They don’t want you to be thinking about why you need Social Security and how cheap it would be to fix it if we do the unheard of thing and just pay for it. Ourselves. Just like mom and dad did.
The indented “boxes” in the typography above are confusing. They look like they are meant to isolate the quotes from Blahous, but they often fail to notice that the quote ends and my comment on the quote begins.
The reader will need to pay attention to the quote marks ( ” …”) to resolve the confusion that may arise.
Dale,
An excellent post, but asking us to pay attention is asking too much from the average person. Though I did realize after a few paragraphs of blue tint that the quotes and your commentary were melding.
Some professional background re. Blahous, which I have detailed here before, is always helpful to understanding the motives and content of the writer’s motives.
From the description at the bottom of his article:
“Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center.”
From Wiki’s description of
“The Mercatus Center at George Mason University (GMU) in the United States is a non-profit[1] American market-oriented research, education, and outreach think tank affiliated with the Koch family. It works with policy experts, lobbyists, and government officials to connect academic learning and real-world practice. The Mercatus Center takes its name from the Latin word meaning “markets”, and reflects the Center’s free market-based approach to solving public policy problems.”
And goes on to describe the history of Mercatus as follows:
“The Mercatus Center was founded by Rich Fink as the Center for the Study of Market Processes at Rutgers University. After the Koch family provided more than thirty million dollars[2] to George Mason University, the Center moved to George Mason in the mid-1980s before assuming its current name in 1999.[2] The Mercatus Center is a 501(c)3 non-profit and does not receive support from George Mason University or any federal, state or local government, but rather is entirely funded through donations, including some from companies like Koch Industries and ExxonMobil, individual donors and foundations. As of 2011, the Center shows that 58% of its funding comes from foundations, 40% from individuals, and 2% from businesses.”
God help us. Look who makes up the “Advisory Board” of E21, http://www.economics21.org/page/leadership
William Kristol, a man noted for his objective approach to social, economic and political issues.
Andrew Laperriere, an executive from the investment industry. No conflict there I’m sure.
Keith Hennessey, a Trent Lott and George W. protege and former member of the infamous Financial Crisis Inquiry Commission, which seemed to find no one responsible for anything that went wrong.
That’s an Adisory Board for the publication that Blahous chose as the vehicle for his misleading article. No doubt an impartial jury for peer review. Dale, see if they might publish your response to Blahous.
Jack
thanks for this.
ever the simple minded optimist, i keep thinking that once they realize the facts, they themselves will call for the one tenth of one percent per year tax hike. it would cost them nothing. and “security” for the workers would actually help them make money.
but these people are, i fear, unable to detach themselves from their ideology (religion). or it’s just a matter of power for them (as opposed to “money.”)
the big thing that struck me about the Peterson and Alan Simpson unguarded quotes about Social Security was that it’s not the money that worries them, it’s that they can’t stand the thought of “the help” standing around idle. i am enough of a Freudian to think they got that beaten into them when they were children… father always made sure they kept “busy.”
of course, like other people who preach against sin, they either don’t notice it when they sin (take time off from work) or hate themselves for it and redouble their efforts to save the rest of us from the sin of idleness.
Oops…sorry for the formatting error. Word can add extra formatting to a cit and past, and sometimes word press adds things back in when taken out manually if you overlook a beginning or ending.
Thanks, Dan
for the fix. I’m glad it’s you who has to worry about those things and not me.
“but these people are, i fear, unable to detach themselves from their ideology (religion). or it’s just a matter of power for them (as opposed to “money.” Dale
No, it’s the money they’re after. That’s why Blahous is gently suggesting that workers be given the chance to save their retirement money rather than give it to the government. Of course the fact that the Social Security program hasn’t lost any worker funds since its inception is not brought to the fore of the discussion. And the dismal over-all performance of IRAa and 401 plans of varying types is left out as well. These are the plans of deceitful people who have their eyes on yet more wealth, for themselves not for the rest of the public. They see the poublic as just so many rubes who are there for the plucking. It’s all about money. It’s always about money. Money leads to power, but the money comes first.
I think I should add that when those benefits reach 45k per year in 2090 as Blahous tells us, wages will be about $130,000 per year.
The payroll tax, including the 2% increase needed would be about 10 thousand per year for the worker, leaving him with 120,000 per year for spending on “current” needs and wants (including other taxes).
Today, that same worker’s grandfather is making about 40k per year and paying (at the present lower tax rate) about $2500 per year for Social Security, leaving him with about 38 thousand per for spending on current needs… including other taxes.
This is not a story about “looming poverty” and “crushing burdens”. It is about making rational choices for how best to spend increasing wealth.
But note this: even if the increasing wealth does not materialize, you are still going to have to pay for your retirement… or work until you die, IF you can find a job. If the economy has not grown, it is unlikely you will be able to find a job, even if you are still strong enough to work. And if the economy has not grown, it is extremely unlikely you will have made enough on “investments” (or “savings”) to afford to retire.
But if Social Security still exists in its present form, then I suspect that 2% increase in the tax will still look like a bargain. If you can’t imagine how you can live on 2% less today. Imagine trying to live on “nothing” when you are old.
Coberly consistently maintains this position:
” …they are calling for a “scrap the cap” tax on the rich. This would turn SS into welfare as we knew it. Even if everyone keeps calling it Social Security, it won’t be the successful program it has been for over seventy years: A payment you get that you paid for.”
French labor unions take the same position: If you can’t defend the proposition that you have paid for what you get, some nasties will call it welfare, which will make it more susceptible to budget cuts.
I respect that position and grudgingly agree that it may be necessary to defend it until we reach political Nirvana where everyone agrees that a certain amount of welfare never hurt anyone (or not many, anyway)
But after you reach a certain point where payroll deductions get higher and higher, and bring in less and less due to increasing unemployment, you start canceling out the benefits of the progressive tax system, and you drive wage costs up so much that you become uncompetitive. That’s one of the problems now in France.
I suppose everyone knows that, but keeps pushing it aside. So, I’m just wondering how long we can or should defend this strategy.
FRauncher
But we are not there yet. Not even close. And not for a long time if the Trustees projections are even approximately correct.
It will cost an extra 80 cents per week (all right, 40 dollars per year) to keep SS “solvent” (paying the present replacement rate over a longer expected retirement), each year. The amount goes up over time.. but each year it’s the then-equivalent of an 80 cents per week tax increase while wages are rising a then-equivalent of 8 dollars per week. This is not going to break, or even encumber, anyone.
And the money ALL goes to pay for pensions… NONE of it goes to pay for “government.” That’s what keeps it honest and should keep it out of “politics” if the Right and the hard Left would bother to tell the truth while they fight about their respective ideas of cosmic justice.
There is nothing wrong with “a little welfare,” but it should not be the standard way of living our lives.
And i wouldn’t worry about “driving wage costs up.” The SS “tax” is just a way to make sure the workers contribute part of their wages to ttheir own retirement savings. The wages themselves will continue to be set by “the market” as determined by the power relationships between workers and bosses.
IF you want to drive wages up, or drive them down, you need to play the political game… but it’s a lie to pretend that SS affects wages one way or the other.
If the government wasn’t “forcing” employers to pay SS, the employers would still have to pay a wage high enough so workers could hope to retire decently. Or maybe they wouldn’t. Then the workers wouldn’t be able to retire decently. That’s the choice. There is no magic trick whereby Social Security forces wages up (to the employer) or forces them down (to the worker).
It is my guess that on the whole, SS pushes wages up, because the employer is NOT going to pay any more than he has to (subsistence or less), and the workers are generally not smart enough, or not in a position to demand a wage high enough to cover future retirement costs…. and in the absensce of SS, their “retirement savings” have a way of never being enough when they need them.
But, because you said “uncompetitive” I have to say this again louder: “competitive” for what? with who? If competition means driving wages down so people starve in old age, what’s the point? more money for the owners; death in a gutter for workers when they are no longer “competitive”?
You got this competitive crap about germany for decades.. their high social costs made them “uncompetitive” , they they are still out competing us. why is that?
FR, “But after you reach a certain point where payroll deductions get higher and higher, and bring in less and less due to increasing unemployment, you start canceling out the benefits of the progressive tax system, (2) and you drive wage costs up so much that you become uncompetitive. That’s one of the problems now in France.”
I’ve inserted (2) above in order to distinguish between the first and second parts of that statement. I’ve done so in order to ask, how does part 2 of the statement follow from the phrase that precededs it? How does the cost of wages go up as a result of increasing a payroll tax rate? Do you assume that employers will pay the entire increase, which I haven’t read into Coberly’s description, above.
Also, how does it follow that higher wage costs are the cause of France “becoming uncompetitive”? Other EU countries have even higher wage costs with no adverse effect on their economies. How do you define France as uncompetitive?
Thanks Jack
i wish there were time and patience and intellectual honesty enough to work through with people their “logic” on at least this question. I am naive enough to think that eventually they could see they are not making much sense.
As long as we don’t feed old people to the purina factory, the “cost” of keeping them alive will “come out of the economy, or out of society, or “from the young (still working)” There is no way to avoid that. The choices are whether the old save the “money” under their mattress and then “demand” (spend it) part of the resources (taken from the young… who else?), or “the young” put their money into “investments” and hope for the best (that their investiments really do make the economy grow and that they get a “return” that can pay for their needs) but experience has shown that half or more than half of the people do NOT “earn” enough from investments to eat indoors. Or the rich can pay for it (welfare), OR “the government” can pay for it (welfare), or “future retirees” can “pay for their own” by “paying for those who are currently “old.” Some people can’t understand this sense of “paying for” but it is fact the usual we we “pay for” things that we say we are “saving for” or “investing for.”
I took your suggestion and asked the e 21 people if they or Blahous wanted to talk about this. They did not reply.
Jack,
“Also, how does it follow that higher wage costs are the cause of France “becoming uncompetitive”? Other EU countries have even higher wage costs with no adverse effect on their economies. How do you define France as uncompetitive?”
I am glad to see you question this. In France, where I live, the right is constantly bringing up supposed labor costs higher than in Germany. I take this as a tactic to squeeze labor. Brussels keeps insisting on so-called structural reforms. Counter productive austerity when demand is needed.
Negotiations are now underway on solutions for persistent pension fund deficits, so these questions are topical. The main problem, of course, is persistent high unemployment.
FR:
Why the high unemployment? Is it because investors can find a higher profit investing and requiring smaller portions of or no labor? This is precisely what is plaguing the US. In the end, it is not a zero sum game. Labor is sidelined for profit taking as related to capital.
Costs as associated to Labor (which I would call overhead) are also lower in Asia; but, the low overhead costs come at what expense to the overall country and population? I find it difficult to believe the costs are so much higher in France as compared to Germany.
It is interesting the only solution t retirement costs is to cut the benefit or raise the age rather than look at employment and profits raised solely from capital investment.
Sorry for the snippets of info. I am on the run.
I don’t know much (anything) about France or Germany, but I “think” what you are seeing there is “social democracy” under attack. As long as the rich, or even “the taxpayers,” think they are paying for workers’ retirements they will be under attack.
In America where the workers pay for their own retirement… Social Security is STILL under attack because “the rich” or “the taxpayers” THINK (courtesy of Peterson’s Billion Dollar Lie) they are “paying for” them.
Which is why I keep trying to get the workers to understand that they are paying for their own retirement, and it won’t cost them much to pay the little more it will take to cover their longer life expectancy… in fact, it won’t “cost” them anything… merely shift the day they get to spend the money from “today” to some day in the future when they are really really going to need it.
And yes, they get “interest” for the time value of their money.
Interesting read from the EPI http://www.epi.org/blog/tax-policy-curb-income-inequality-growth/ “Tax Policy Curbing Income Inequality Growth.”
“the shift in market-based incomes, particularly capital income’s rise as a share of total income, is driving income inequality growth. Tax policy changes have exacerbated post-tax, post-transfer income inequality by less than one might reasonably suspect, and there are practical limits to how much increased redistribution can push back against strong market trends (though we should be pushing harder). Meaningfully curbing income inequality growth necessitates reducing the market income share accumulating to upper-income households.”
Certainly Labor is not the cause of higher expenses and the loss of economic growth.
And brute force tax transfers are not the answer to income inequality.
Laws that make it harder for companies to break unioins, and laws that aggressively limit business models that amount to fraud, would be a good place to start.
But you don’t want to scare the “honest rich” into voting for the Republicans.
Coberly:
Instead of implying something not said, why not take a few minutes and read the article?
Run
how about we stop being nasty to each other and try to have a normal conversation. i don’t follow links mostly because they are usually worthless, i don’t have time, and I sincerely believe that if you have something important or interesting to say you can say it in a few words without sending me to the library.
in a normal conversation people often have short term misunderstanding, easily corrected by , “no, what i meant was…”
you should practice this with your friends. then you can try it out on blogs.
sorry i can’t find a citation to prove what i just said.
but also, i meant what i said in my comment, and would have meant it whatever your comment citation said.
you see, i really don’t have to read Das Capital to have an opinion about communism good enough for a blog.
besides, i have a sneaking suspicion i understood what you said better than you understood what i said.