Open thread Sept. 27, 2013 Dan Crawford | September 27, 2013 7:52 am Tags: open thread Comments (12) | Digg Facebook Twitter |
I’m trying to understand the NW/Coberly plan for SS. I need some math help.
The CBO said that an immediate and permanent increase in the PR tax of 3.4% is one option to bring SS into long term balance. NW says it can achieve the same thing by raising the PR tax by .1% a year.
Given = Taxable Payroll = $5.3T
Assumption = Taxable Payroll grows at 2%
Compare the two:
CBO plan would raise $180B (3.4% of 5.3T)
NW Plan would raise $5.3B (0.1% of 5.3T)
In year one there is a 175B difference.
CBO plan would raise $183.8B (3.4% of $5.41)
NW plan would raise $10.8B (.2% of 5.41T
In year 2 there is a 173B difference.
Any Trust Fund analysis has to make assumptions about interest. I used 3% at the constant rate (if you don’t like that, I can use what you like).
Both CBO and NW have surpluses, and they earn interest.
CBO plan would raise $215.4B (3.4% of 6.3T)
NW plan would raise $63B (1.0% of 6.3T)
Cumulative surplus with interest
CBO Plan = 2.2T
NW Plan = 337B
A 1.8T difference in the first 10 years.
At no time during the 75 future does the NW plan achieve the same results as the CBO plan. (NW = 52% of CBO plan over the 75 years)
However, if the NW plan is modified so that if the annual increase is .2% (Vs .1%) It matches up very well with the CBO numbers.
BUT – the .2% increase has to happen every year for the next 75. That means that the SS tax increase from the NW plan would be:
Year 1 = .2%
Year 10 = 2.0%
Year 17 = 3.4% (BE with CBO rate)
Year 25 = 5% (1.6% > CBO)
Year 50 = 10% (6.6% > CBO)
Year 75 = 15% (11.6% > CBO)
The NW increases would be ON TOP OF the existing 12.4% rate.
So at the end of 75 years SSA taxes would have to be 27.4% to achieve the same results as the CBO.
My conclusion is that the 0.1% NW plan does not get the job done. The yearly tax rate would have to be closer to 0.2% (double). But the results of a .2% NW plan create huge distortions. SSA taxes can’t rise to ++25%. That would never happen.
So what am I missing?
You could post a link to your source numbers.
The latest SSA numbers for taxable payroll are different from yours.
Not sure about your interest calculations since the TF principle will start to be drawn down during the period. Ignoring interst and using SSA rather than CBO numbers, I get that at 0.1 percent per year the NW plan will exceed thecollections of 3.4% immediate in 2063 at a rate of 17.4%; enough different that I am inclined to doubt your math.
If the CBO is right about lifespans, then retirement is going to cost each new generation more than what the SSA predicted, which is already more than people are really planning for.
The recognition that things are going to cost more is hardly a good reason to claim that we aren’t going to be able to save more.
If the CBO is right and lifespans increase, and
if 15.8% will pay for 75 years, and
if each generation should pay the costs of its longer life, then
a gradual implementation would distribute the costs in relation to the benefits, and
it will require a final rate higher than 15.8%.
Who are we to tell out children not to save enough so that they can still afford to retire at 65 (or 62 or 67) even though they live longer?
An easy way to see you have the numbers wrong:
If the cost grown was linear, then a gradual increase to a final increase of 6.8% would produce the same collection as a single increase of 3.4% – simple graphical math. Since the cost growth is actually higher order, the final increase will be less than double – a little bit of calculus.
Arne is smart and knows numbers. Me I just link to stuff. In 2010 CBO scored a variety of Social Security Policy Options in a paper strangely enough called “Social Security Policy Options” http://www.cbo.gov/publication/21547
Now if you visited that link and then linked to the PDF of the full paper at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/115xx/doc11580/07-01-ssoptions_forweb.pdf
and then looked at Summary Figure 1 you would see that the NW Plan was a blend between Policy Options 2 and 3 of which the first closes 100% of the then 0.6% of GDP gap and the second by phasing in those increases slower only 0.5% of that 0.6% or about what? 84%.
Now current CBO projections will have moved those numbers some but can’t have moved them that far. No matter how much precision your calculations would have us believe.
Now if you have evidence (beyond your own calculations) that CBO has backed off its analysis of Policy Options 2 and 3 in any serious way then your attempts to play off CBO vs NW are going to come a cropper. Because they suggest that for all the apparent sophistication of your calculations you biffed.
Before you cite CBO numbers as a counteractive against NW you need to explain away CBO scoring of Option 2.
And the real irony here is that Coberly originally argued for a version of Option 2 only to have me and Arne argue for the more complicated ‘Trigger’ version that underlies Northwest. Because in retrospect Coberly’s ‘Kiss’ ‘Keep it Simple Stupid’ approach is a lot simpler to understand.
Yes Bruce K you need some math help. And a good place to start is CBO’s Social Security Policy Options. Which is more than a table, they also go into the analysis that supports those numbers.
Got a quarrel? Take it up with CBO. And “What am I missing?” Well everyting of importance.
I am back in school. After 20 years away I am again a college student. As it turns out a Freshman in a Accounting Certificate program. And a big difference between my current program and my previous academic life prior to 1993 as a medieval historian and celticist is that opinions and private judgements don’t matter at all. When you are putting together a problem set in accounting there is only one right answer. And if you are off by a penny than you screwed up. No matter how fancy your work might look.
Krasting has from the beginning insisted that we follow his numbers and then disprove his conclusions. Well if there were not competing numbers using standard arithmetic rules we might stand around scratching our heads saying “My that looks okay” But when Krasting’s spreadsheets arrive at different numbers than all other competent authorities the simplest conclusion is that BK just got it wrong. Or at a minimum needs to show conclusively that other people got it wrong.
I am not seeing that Bruce has passed that test. Yes his numbers are impressive. But where is the outside test of them against the numbers of CBO or SSA or for that matter Dale Coberly or Arne Larson?
I tried to do an apples to apples comparison of the NW plan Vs the CBO 3.4% plan. I looked at what the cash flow differences would be for each year for the next 75.
For this narrow comparison, it does not matter what the current Taxable payroll is, what’s important is how it grows. One could simply use 1,000 to start, and then use the tools of NPV to make comparisons.
So now you’re an accountant as well as an expert of SS – good for you.
I looked at the NW plan in the context of the new info from CBO. I concluded that the NW plan did not achieve the same results as the CBO’s immediate 3.4% option. I think the NW 0.1% plan achieve about half what the CBO alternative does over an extended period. I did this because Coberly said the .1% NW plan was still a viable option. It’s not.
There were many ‘options’ on the table to address SS’s long term issues in 2010. If some of them had been adopted three years ago it would have addressed the problems – but nothing was done.
Three years ago the .1% NW plan would have ‘worked’. So would have a 2% immediate tax increase. (other options would have worked as well). My point was not to criticize (or support) one option over another. My point was that the options available in 2010 are no longer viable. Much larger tax increase (or cuts) are required the longer it takes to implement changes.
I doubt that anything will happen with SS until 2017, but then the CBO will say that it will take a 5% immediate and permanent increase to achieve long term viability.
For five years I’ve been making the same point with AB readers – SS is not ‘healthy’, and the sooner we address this, the less pain will be required. You folks love SS, but you have your heads in the sand. The longer it takes to address the imbalances, the bigger the cost.
to be fair to you, my calculations assumed a one tenth of one percent increase per year for each the worker and the employer. So if you see two tenths of one percent per year “working” you are not far off.
but to be fair to me, i did the calculations very, very carefully and got exactly the same results as the Trustees using the existing tax, and a result using one tenth of one percent “whenever the Trustees report short term actuarial insolvency” which would occur in about twenty of the next eight years assuming the gradual tax increase… and this not only paid for the next seventy five years, but it also established a tax rate that funds Social Security going forward to that “infinite horizon.”
Moreover I showed that with the same SS projections for wage growth, workers would end up with twice as much money in their pockets AFTER paying the increased tax as they have today, PLUS they would get their “tax” back in the form of higher benefits over the longer life expectancy also projected by the SS actuaries.
My results agreed with the CBO “options” published at the time, and also with results scored by the chief actuary published in the National Academy of Social Insurance (Fixing Social Security, by Reno and Lavery, 2009) and they were kind enough to give me a footnote in that publication.
You are saying, as far as I can tell, that CBO has come up with a new projection. That’s fine, but first, you are talking about a projection over seventy five years, which is very unlikely to be accurate within one or two percent. Second, you offer absolutely no way for workers to pay for their retirement other than by using Social Security to guarantee their savings.
You have never in the past produced any analysis that withstood a careful look, and I don’t have time right now to find your errors. But since you seem to have found that you agree with the “northwest” plan within a percent or so, I think you need to stop attacking it.
Try giving some real thought to the problem of funding… guaranteeing… the retirement of most of the American population. Not just those who get lucky on the market.
that should have been 20 of the next eighty years. the change in projections from 2010 to 2012 did not change the “one tenth of one percent per year” answer, or the ultimate “tax” rate (really a savings rate: how much you need to save (via the tax) in order to have enough to live on for twenty years when you can no longer work… and since its insurance you don’t have to worry about living longer than 20 years, your extra time will be paid for by those who don’t live as long as 20 years. they won’t miss it.) what it did change was how soon the tax raises need to start, and how often they need to occur in the first fifteen years. in other words the rate of increase is a little faster than it looked like just two years ago. but still no more than eighty cents per week per year. not a “burden.” just a tiny increase in the cost of a retirement that will last longer than you thought.
i am sorry that I can’t take the time to analyze Krastings math. from here it looks too simple…leaves stuff out… to be accurate, and Krasting has a track record that does not inspire confidence.
Well, no answer.
I haven’t looked at it hard yet myself. But just intuitively… and intuition is not worth much here… IF CBO has produced a set of assumptions about the future economy and life expectancies that raise the 75 year actuarial deficit by 70% (that’s 70% of a small number, so don’t panic) I would expect that the Northwest Plan’s one tenth of one percent per year (for each the worker and the employer) WOULD have to be increased. With nothing better to go on, I would run a new spreadsheet using, say, 0.17% per year.. that’s a dollar 36 cents per week per year. I would be a little surprised if this does not get us close… at a cost per year that is still trivial. But I would not be VERY surprised because there are some moving parts to this problem that need to be accounted for.
Krasting needs to check his work very carefully if he can, and look at some variations that he doesn’t seem to have considered… such as raising the “northwest” “one tenth of a percent” to one point seven tenths of a percent. My experience with people who talk about NPV is that they usually don’t understand what they are talking about.
In any case it’s a bit unfair to expect the Northwest plan to give the same answer when CBO changes the problem… changes the assumption… the guess. We… Krasting… are not looking at any change in the SS projection that arose “naturally” from “not taking any action” two years ago. We are looking at a change in CBO projection based on nothing more than the latest guess about the remote future… one i suspect is heavily influenced by the politicians.
At the end of the day you are still left with the problem of paying for an adequate retirement for working people. As long as the cost is reasonable in terms of what they get for how much they pay, and they can afford the premium… they can, and what they will get IS reasonable… SS.. worker paid insurance… is still the ONLY plan that can guarantee their money does not disappear on a bad day on wall street, or a few bad years of inflation.
i looked at it a little harder. not at Kratings math… finding someone else’s mistake is always harder than solving the problem in the first place.
i get the original Northwest Plan bringing in the same money as CBO’s “immediate and permanent” after 23 years of raising the tax one tenth of one percent for each the employee and the employer each year. that’s eighty cents per week per year. the final tax rate is 8.5% for the employee and match that for the employer. it may look like a lot of money to some people. but it’s what it takes to pay for rent and groceries for twenty years when you are too old to work. and it’s not that hard to live on 2.3% less take home pay, when you are making twice what you are making today, or your parents made when you were small.
on the other hand, if i am allowed to raise the Northwest plan tax increase from one tenth percent etc to one point seven TENTHS of a percent (about a dollar and thirty cents per week) I can catch the CBO revenue stream in 12 years at a final tax rate of about 16 and a half percent (combined).
These are numbers that are too small for the worker to feel… whatever you might think by looking at them.
and you, and Krasting, still have the problem of how else are you going to pay for the retirement of American workers… that doesn’t leave them out on the street going through dumpsters? and be realistic. the magic of free markets has never worked for the great majority of people.