SOCIAL SECURITY AND INNUMERACY
by Dale Coberly
SOCIAL SECURITY AND INNUMERACY
MATH HELP FOR K*ASTINGS
In the open thread section last night constant reader B*uce K*asting reported:
“CBO changed some variables, the result was an increase in the unfunded numbers. In 2012 CBO concluded that the shortfall was 1.9% of payrolls. In 2013 they increased that to 3.4% – A 70% increase.
Question; How big does this shortfall have to be before anything is done about it??”
I assume that the report is accurate and that CBO is making an honest prediction.
But B*K* is vastly over reacting. It is true that 3.4% is 70% bigger than 1.9%. But this is a meaningless, or misleading, comparison.
If one were to compare the new projection to the old projection for the tax rate needed to put Social Security into “actuarial balance” for the next seventy five years, it would look like this: Old projection 12.4% (current rate) plus 1.9% equals 14.3%. New projection 12.4% plus 3.4% equals 15.8%. So the new projection 1s 15.8/14.3 or about 10.4% bigger than the old projection.
And if you compare, as you should, the new projection to the old projection as a percent of PAYROLL, the increase is 1.5% of payroll. Or, since workers only see half of this, it would be a difference of about 0.7%.
For an average worker today, making 40,000 dollars per year, this would be about 280 dollars more per year (or about five dollars per week). This may seem like a lot of money, but when you realize it is the money that you are going to need to “save” (that’s what the payroll tax is: mandatory savings) in order to have enough to live on for twenty years or more when you are too old to work, it shouldn’t seem like a lot.
But there is no accounting for math hysteria.
Moreover, all of these numbers are based on guesses about how the economy, and population, are going to change over the next seventy five years. This is not the sort of thing you can make a reliable guess about. So you are going to have large variations in a small number. Exactly the sort of situation where you might get a (gasp) 70% increase between one guess and the last, even if the guessers are trying to be honest. Which is by no means certain.
One thing worth keeping in mind is that it will take almost eighty years for this tax increase to fully take effect. During that time your wages are expected to more than double. So that extra 280 in taxes will come out of an EXTRA 40 thousand dollars .
Part of the reason the new estimate is bigger than the old estimate is that someone at CBO thinks you won’t be getting such big raises over the next eighty years. They could be right. But if you are not going to be getting those raises, you are going to need Social Security more than ever. You aren’t going to win big on the stock market in an economy in which no one is getting pay increases.
So if you are expecting hard times ahead, it makes sense to put a little more away for… hard times.
To keep this short and clear I left out some details, but it won’t change The Basic Point: You are going to need Social Security. It may cost a little more. But the cost will increase at a rate of much less than one tenth of one percent per year… less than a dollar a week per year for the average worker. This estimate has not changed materially over the last twenty years. What is happening is that the date we need to actually start increasing the tax is getting closer. You will never feel the increase. But if you don’t increase it, you are going to be very, very sorry when you are too old to do anything about it.
Even if you don’t understand why.
Wow! Nice spin on those numbers Dale. With the skill you’ve show with this effort you should run for office.
Rather than play with percentages, look at real numbers. SSA projects payroll revenue for 2014 at $658B. Divide that by 12.4% and you get payrolls at 5.3Trillion.
A 3.4% increase in SSA taxes comes to $180B. Like I said before, that would be the dumbest thing the country could do. There is zero support (on either side) for this to happen.
The CBO said the increase had to be immediate and permanent. The Coberly plan wants to delay the implementation of the higher taxes, but how high would SS taxes have to go (and in what year) to achieve the same level of increased revenues?
Face it, there is no fix for SS that ends up with substantially higher tax rates.
Krasting
I try to be kind to you.
There are 300 million people in this country. So it’s pretty easy to find numbers like 200 billion dollars. As you point out, payroll is 5.3 Trillion.
200 billion is … ah… 3.8% of that. It’s still less than 4%. Get it?
And this is to pay for a retirement that may last more than 20 years.
Do you understand how much that will cost?
About 400,000 dollars in today’s terms. How are you going to get that 400,000 dollars? On the stock market? good thing no one ever has a bad day on the stock market. In the bank? good thing banks always pay more than the rate of inflation. Good thing poor people always remember to put their money into the bank. Good thing employers are going to pay them enough so they can afford to do this.
And CBO DOES NOT say this must be done immediately. It says that if it were done immediately it would pay for the shortfall over the next seventy five years. Good thing the CBO knows exactly what is going to happen over the next seventy five years.
But as I have tried to point out, fairly rigorously, if we just increase the tax rate one tenth of one percent from time to time whenever it is actually needed, Social Security will NEVER experience a shortfall.
One tenth of one percent of an average workers income is about 80 cents per week. He would never feel the increase. But Krasting wants to talk about EVERYONE’S income NOW to pay for an increase that will pay for the entire PROJECTED (guessed) shortfall over seventy five years.
Krasting: the price of bread is likely to go up over the next seventy five years… better you should start paying the higher price right now, so that your banker knows it is “funded.”
People are going to live longer. That will cost more money. Fortunately they will have more money, so they can save a larger percent of it for their longer life.
Social Security is the ONLY safe way to be sure they will have “at least enough.” And it’s still cheap enough so that if they want to “invest” the rest of it on “higher returns,” they have plenty left over to do it with.
How high would “the coberly plan” taxes have to go? using the same projections… about eighty cents per week higher each year for about twenty out of the next seventy five years. Their boss would match that. That means self employed people would have to pay a staggering dollar-sixty per week. Good thing self employed people never want to retire, and never find themselves at age 60 without enough money to do it… except for their Social Security that the evil government made them pay taxes for their whole life.
Krasting is looking for a miracle. Most people don’t get that lucky.
I also have been trying not to scare the children. But since Krasting points it out, If after twenty years or seventy five years, the combined SS tax rate is 16.4%, an average worker would be paying about 6500 dollars a year into his Social Security retirement fund. After forty years he would have paid in about 260 thousand dollars. For his 260 thousand dollars he will get about 400 thousand dollars in benefits over a retirement that lasts 20 years. The extra 140 thousand dollars comes from the fact that SS is “pay as you go” and the workers twenty or seventy five years from now will have larger incomes out of which the same 16% is enough to pay for all the benefits of the then retired.
It really works in much the same way as the stock market. Only the “stock” is the prosperity of American workers. And the payout is guaranteed. And you won’t have to worry about inflation.
Or reading the Wall Street Journal, or remembering to get the money to your broker.
And the thing Krasting cannot understand, among other things, is that the average worker will NOT make enough on the stock market to pay for his retirement. And the economy will not work very well when half of old people are starving in the streets, and working people spend their lives scared to death they will become one of them.
As I pointed out in the previous thread, which seems to have motivated this current thread, the simplest way to assure the continuing solvency of the Social Security program is to increase workers’ income and to assure enough jobs with good income for those who are able to work. It’s not rocket science. Its the simplest of economic concepts. Pay workers a good wage and provide work for as many workers who are able to work. The retirement program will then have the necessary base to provide all workers with a sound income in their senior years.
Mr. K knows about the stock and bond markets. He is always in search of the ever elusive magic formula that makes him and his clients rich. People who faithfully chip in their FICA every payday are not looking for wealth. They are hoping that they’ll somehow be able to stop working some day and still have enough coming in so they can make ends meet.
If you’re a bond broker, a small slice of the action in fees on just one year’s FICA haul would be big bucks. But cruel fate has put these rightful gains far beyond the markets’ reach. Don’t think for a moment that the Peterson’s and Koch’s of the world are worried about bankrupting the US government. It’s the money, stupid. To be more precise, it’s YOUR money stashed away in that SS check you’ll get some day that is driving them nuts. See it their way and you really will end up working until you drop.
Dale is right about the math. I labored in SSA’s vineyards for 32 years listening to irate conservatives rant and rave about how SS was stealing them blind. They didn’t pass up their retirement checks, of course. I wouldn’t expect them to. They paid for their benefits just like everyone else and they should go ahead and file for retirement. Of course. SS is for everyone.
And, maybe that’s the worst aspect of SS. It works, it’s accessible, ordinary people get SSA’s services for free and SSA’s employees care about the public they serve. I don’t think that’s the way things work on Wall Street. NancyO
jack
that might be the “best” way, but it’s not the “simplest.” the simplest way is simply to pay into SS the amount of money that SS needs to meet the basic needs of the retired people who paid into SS in their turn.
Since it is iikely that costs will gradually increase to a plateau, but not go down, the extra you might pay in for those already retired turns out to be exactly, or a little less, than you would have to pay for your own eventual needs if instead of “pay as you go” the money were just put in a box and earned interest.
pay as you go works better because it finesses the inflation problem and pays an effective interest without ever putting your money at risk “in the markets.”
In other words, SS is a rather well designed system for preventing old age poverty by letting the workers save their own money safely, and letting them insure each other against most of the things that could go wrong over a lifetime keeping you from saving “enough” for an adequate retirement.
It’s easy and it’s cheap: about an extra eighty cents per week per year for a few years will take care of the projected shortfall.
Meanwhile we can all keep working on those higher wages, but SS is designed to protect you even if your wages don’t go up. …. but you have to pay for it.
There is no way to avoid paying for it. But we can pay more and fool ourselves by either demanding “the rich” pay for it (they will pass the costs on to us, in spades) or letting them fool us into thinking we can make a “better return” on the stock market. Even those who do get a better return will end up paying more, because that better return comes from higher prices and lower wages than you would see if the “profits” weren’t needed to pay the stockholders.
Or, as Krasting fails to realize: ONE person can make money on the market. even SOME people can make money on the market. But EVERYONE can’t make money on the market.
This is just rearranging the deck chairs while the Titanic sinks.
Social Security is fully backed until about 2036; we are at about the same risk from the asteroid Apophis.
Remove the income cap that was $107,000 and it becomes a progressive tax to help the working poor and middle class indefinitely despite Baby Boomers.
Dale, Did you see these graphs at CBO’s blog? It struck me that, despite the intent and origin, these displays show precisely what you have been talking about in terms of cash flow adjustments and control monitoring.
http://www.cbo.gov/publication/44597
Not to get too far down the conspiracy rabbit hole, but it strikes me that social security is about the only thing that labor has in its battle for survival against the capitalists. That being said, what would the CBO say are the prospects for shortfalls if the minimum wage were raised to $10 an hour? $15 an hour? What would be the effect of immigration reform which would entitle more young immigrants to claim social security down the road, but would get them all paying into the system–unless they work in agriculture- right now? Does anyone see a trend in all of this class warfare? And does it not ultimately come down to high unemployment rates which permit employers to keep wages low and to suck up all the productivity gains? As long as the Koch brothers and their ilk can bully an even weaker Democratic president than Jimmy Carter unemployment will remain high, income inequality will increase and social security will remain vulnerable and subject to attack.
Anna Lee
thanks. my computer is working very slowly, so i’ll have to wait a while before i can read the cbo report. but i will. thanks for pointing it out to me.
Domnogin
I keep tryijng to tell people that Social Security has worked very well to protect workers from the worst… and formerly very common… poverty in old age. It has worked because the workers pay for it themselves.
Those who want to make the rich pay for it… and that’s what “scrap the cap” means… don’t realize they are playing into Peterson’s hands.
Peterson tells everyone that SS is going to cause them huge tax increases. Well, if the workers pay for it, their tax increase will be about 80 cents per week per year. If “the rich” , say the top 1%,pay for it, their tax increase would be 80 dollars per week per year. And the rich are very good at calculating that means about 4000 dollars more per year, and after 20 years that would be 80,000 dollars per year. To them that is a “huge tax increase.” And they will vote to cut… or make their congressman vote to cut… Social Security before they will agree to be taxed that much.
And even if you could get the Congress to “scrap” the cap, then the rich would be paying for SS, and you can bet that every year, every day of the year, they would be working to cut SS… and they would succeed. In the meanwhile workers would no longer be able to say “I paid for it myself.”
So I understand why you want to make the rich pay for it, but it’s a trap.
And for myself, and every working person I know, we WOULD rather pay for it ourselves. And you will never feel a raise in the tax of less than a dollar a week each year.
And even if that adds up over time, your wages should grow a lot more, so you are still money ahead.
And even if wages don’t grow, you are still going to need to retire some day. And which is worse… getting by on 2% less while you are working… or trying to get by on nothing after you are too old to work?
Terry
there is nothing paranoid about the “conspiracy.” Peterson has spent a billion dollars funding the Big LIe about Social Security.
Most people think he does it because he stands to make a lot of money if SS is privatized. I think he does it because he hates people. At least he hates the idea of “the help” standing around not working… even if they paid for their retirement themselves. He hates the idea of the worker being able to look him in the eye and saying, “No. Mr Peterson. I’m not your servant. I am a free and independent American, and I bought this retirement with my own money.”
Or, he is just crazy, like Alan Simpson, who talks complete nonsense when the “defenders of Social Security” don’t get that nice Mr Boles to shut him up. Simpson was doing more damage to the Peterson Big Lie than the “defenders of SS” ever did. I guess they were jealous.
OH, I got carried away.
Yes there is a class war, sort of. But it’s not “the rich” vs “the poor.” It is a very few rich people who want to own it all.
They call for policies that “favor the rich” because they need the rich on their side for now. When they have destroyed the middle class, just as they destroyed the worker class… who they used to help them destroy “welfare,” they will destroy “the rich.” Except of course for the few reliable toadies that they will need to administer the feudal system they want to take us back to.
That’s one reason I do not favor rhetoric that damns “the rich.” Most of the people who happen to be rich are on our side, or would be if we’d stop scaring them into the hands of the Petersons.
Anna Lee
I followed the link you gave and found a CBO article about the present value of future taxes and future benefits.
I will have something to say about that, but if that is the article you wanted me to see, i didn’t see (or understand) what you meant about cash flow and monitoring.
[in brief.. the “Present value” is not a useful way to understand SS. The charts make it look as if workers will get back less than they paid in. In fact they will get back more… about twice as much as they paid in. What they won’t get back is what they “would have” gotten back if there was a magic present value bank that always paid 3% above inflation. And they won’t “get back” the insurance value of Social Security which not only includes death and disability benefits but also an “extra” benefit if your lifetime wages turn out to be too low to support a (barely) adequate retirement.
This is why looking at the “average” return on investment is misleading. SS is NOT an “investment.” It’s insurance. People with below average earnings get above average returns… something like 10% real “interest.” This is the whole point of Social Security.
If you pay a thousand dollars a year for car insurance and never have an accident. After 40 years you have paid 40 thousand dollars and gotten back nothing. Does this make car insurance a bad investment?
Or would you rather have the accident and get a much better return on your investment?
Can you tell us a little more?
as for the CBO charts on present value of SS taxes vs present value of future benefits.
these charts are the wrong way to look at SS. they make it look as if you will get back less from SS than you pay in. this is not true. you will get back about twice what you pay in. that’s about a 2% real return. this is less than the 3% real return used to calculate present value.
trouble is you can’t find a bank that will guarantee you 3% above inflation for the next sixty years. moreover that bank won’t pay you 10% above inflation if your income happens to be a lot less than average… which Social Security will. and that bank won’t pay death and disability benefits, which social security will.
SS is not an investment. it is insurance. if you paid a thousand dollars a year for insurance on your home and never had a fire would you complain that the “present value” of your “return” was less than the present value of your premium?
only if you are a fool.
Dale, No you are right. I leapt before I looked closely.
Anna Lee
thank you.
i need to say, because people seem to misunderstand:
first.. the comment editor moved one of my lines again to a place where it didn’t make much sense.
second “only if you are a fool” was a generic comment, even a hypothetical. i was not calling anyone a fool. least of all the person my note was addressed to.
Dale
We’re in the same book, but chapter one must precede chapter two. Yes, of course workers have to pay for their own retirement and it is self destructive to that goal to think that taxing the rich will do the job instead.
But first and foremost workers have to have income in order to pay the cost of their own retirement. The economy has to provide that income to its workers and in order to do that the economy has to be better balanced in regards to income distribution and the employment rate. Lambert spells it out pretty effectively within his post above yours. Effective demand moves the economy forward and only results from the ability of workers to spend. And savings in the form of retirement planning (including Social Security) is no different from spending. Money has to flow into that sector of the economy that makes up the 99% in order for money to flow out and support both their retirement and their purchasing power.
Working and earning is Chapter one. Paying taxes and saving for retirement is Chapter two. The story is incomplete without both.
Jack
you are exactly right. but fixing the economy, and the pay of workers is NOT simple. meanwhile raising the SS tax one tenth of one percent per year would be simple, and preserve the program while we are working on the economy and the wages of workers.