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.