by Dale Coberly
THE CBO AND SOCIAL SECURITY
HYSTERIA and HONEST MATH
The Congressional Budget Office (CBO) recently released a new projection for the costs of Social Security [no citation. I looked up the link in the AEI article (below) and did not immediately find a projection for SS].
They say that increases in life expectancy will increase costs, and increases in unemployment will reduce revenues. They say an “immediate and permanent” 3.4% increase in the payroll tax would be needed to pay or the expected shortfall over the next 75 years. Please note that this new projection is a projection of increased costs due to changes in life expectancy and the wages of workers. It is NOT due to any inherent flaw in Social Security, or any failure to “fix” it sooner. SS was designed to help workers during hard times. CBO is projecting hard times. That is exactly NOT the time to cut it.
Andrew Biggs and the American Enterprise Institute say this increase is “almost twice as much” as the last time CBO projected a needed “immediate and permanent” increase (of 1.9%). This means, they say, “we must act now.” By “act now” they mean “cut benefits,” which they have been calling for for the past twenty years. They have no interest in an “immediate and permanent” increase in the payroll tax. But with the help of the Washington Times Washington Times they hope to stampede you into believing a 3.4% increase in the payroll tax would be a staggering burden.
It’s easy for people to be stampeded by numbers they don’t understand. But “almost twice” a small number is still a small number; and when that small number is a guess about what will happen over the next 75 years, it is not a reason to panic.
The average worker (income $40, 000 per year) would see that 3.4% as an increased deduction in his paycheck of about 13 dollars per week (the worker pays half of the 3.4%). Even this can look scary, or at least unpleasant, to a worker who does not realize he will get this money back, plus interest, when he needs it most…when he is too old to work.
Moreover, it would be a $13 reduction from a $769 paycheck. If no one said anything, most people would not notice a difference between 769 dollars a week and 756 dollars a week.
The other fact workers won’t realize, unless it is explained to them patiently, is that this “immediate and permanent” increase will become less and less significant as time goes on and wages increase a projected more than one full percent per year. After 20 years that 40k job will pay about 50k in real dollars per year, about $962 per week. The deduction will then be about 16 dollars per week, leaving the worker with 946 dollars. This is 180 dollars more than he had before the tax was increased. After seventy five years… just so you know, though you won’t be there.. that 40k job would pay about 90,000 (real) dollars per year, about $1750 per week. After the increased tax, the worker would have about $1720 left… 950 dollars
more than he had before the staggering tax increase.
The AEI has no interest in a payroll tax increase. They want to cut SS and eventually kill it entirely. All that an immediate increase in the tax would do before it is actually needed, is provide more money for “the government” to borrow, increasing the national debt. CBO is counting on the interest from that loan to help pay for SS when,eventually, costs do increase. This interest would be paid for out of general taxes… something the rich do pay.
In fact, we, the workers, can pay for any needed increases in SS as the need arises. We showed a few years ago, in something Bruce Webb called the “Northwest Plan,” that by increasing the payroll tax one tenth of one percent for each the employer and employee (this is eighty cents per week for the employee) in any year that Social Security Trustees project having to dip into the Trust Fund (within the next ten years) would keep SS “actuarially solvent” forever. Under the Trustees projections at that time, this increase would happen in
about twenty of the next seventy five years, and much, much less often after that.
Since then the “Great Recession” has changed the projections such that the one tenth of one percent increases would have to start sooner and happen a little more frequently at first. But the ultimate tax increase would still not exceed 2% for the worker and 2% for the employer, and would be reached so gradually, while wages were rising, that no one would even notice the increase.
The new CBO projections, if accurate, could still be met by that one tenth of one percent (each) increase in the tax per year. After 23 years the income from the gradually increasing tax would equal that of CBO’s “immediate and permanent” 3.4% tax increase plus the interest earned by putting that increase “in the bank” until it is actually needed. [Note, this depends somewhat on the timing of the increased costs projected by CBO. If the increases come sooner, for example, the payroll tax could be increased by 0.17% each. This is about a
dollar and thirty cents per week for the worker. This would equal the income form the CBO “immediate and permanent increase” in about twelve years.] The ultimate tax increase under these assumptions would be about four or four and a half percent, a little larger than CBO’s “immediate etc”, but not enough to feel, and not for a long time. Moreover that larger tax would “fund” Social Security essentially forever, while the CBO increase would run out of its nterest money after 75 years, requiring another “immediate and permanent” increase of about… one percent.
One nice thing about the “Northwest Plan” is that because the increases are gradual the people who are going to be getting the higher benefits (living longer) are the ones who would be paying the higher tax. Moreover they would have more money to do it with, as we showed above. The CBO “immediate and permanent” would have people now paying more tax than they would see in benefits; the people half a century from now would be paying less tax than they would get in benefits, and the people 75 years from now would have to face a sudden (though not very big) increase in their tax. All in addition, of course, to the general taxes you would have to pay in order to pay the interest that CBO is counting on. And under the CBO plan, you would have to listen to the horrifying reports every year of “The Trust Fund Going Broke in 2088!”
In a comment to Angry Bear Bruce Krasting presented his own results that showed (showed him anyway) that the Northwest Plan couldn’t possibly pay for SS under the new CBO assumptions. His arithmetic was wrong, but he didn’t show his work so I couldn’t help him. I sent him an email showing my work, but I never heard back from him.
The bottom line is still this: You are going to need your Social Security. You can easily afford to pay for it… while living better than your parents did and having plenty of money left over to “invest” and get rich if you think you are smart and lucky.
But keep that old Social Security just in case. Even if you are lucky and smart, it won’t be so easy to get rich in a country where most people face desperate poverty in old age.
Don’t let the bad guys panic you with misleading numbers and bad arithmetic. And do get your Congress to understand that you, the workers, can easily pay for SS yourselves, just like your parents and grandparents did. There is no need to increase the national debt or beg the rich to pay for your groceries when you get old.