Total Security in the USE: A Social Security Game Continued

Total Security on Planet Elsinore: a Social Security Thought Game (Part 1) – Set the gameboard and initial rules for Total Security or TS for short. To recap the USE a democratic republic polity on Planet Elsinore has a long established government retirement security program called Total Security paid for by an across the income spectrum 10% tax with no exceptions or exclusions.

In Part One it was posited that the TS-tees in their most recent Annual Report had reported a medium term funding gap equaling 2% of income. Absent an increase they projected a 20% cut in benefit in Year 20. The question bruited was whether there was a priori any argument for taking that whole increase in the first year as against phasing it in. Even though the latter move would mean a deferral of certain revenues that would otherwise have been raised early to the end of the process. And nobody came up with any defense of taking the increase immediately as opposed to phasing. (But feel free to address it in this comment thread).

In Part Two I am going to suggest that the actual response of the USE-rs was to do nothing in Year 1. The Whys are unimportant here, we could posit that they had a one time 2% war tax instead and decided not to double down when the cost of deferral was so small, but lets say it just happened.

Now the expectation of the reslts of this deferral would be a slightly larger gap over years 2-20 to compensate for the Cost of Inactivity. But as it happens the TS-tees come back in the next year’s Report and project exactly the same 2% gap going forward. All of a sudden a game that was pretty static gains a dynamic aspect. More below the fold.

Now the easy first conclusion is that this result is a clear rebuke to the ‘sooner is better than later’ crowd, because at least for this year that was not true. Instead income earner in the USE pocketed either a 2% ‘tax break’ or whatever amount would have been phased in during Year One. That is it was a clear win for everyone, at least in monetary terms. And nothing was harmed. But for a logical people like the Elsinorians it raises some questions as to the ‘why’. Was this just a one time event not likely to be repeated? If so we can just replay the game from Part 1. But unless we can establish to total satisfaction that this was just a one time event and not a fault in the TS-tees model we have introduced an element of doubt and probabiity calculations into the game. Because the possibility of a better than projected outcome in Year 2 is obviously more than 0. As of course might be the possibiity of a worse than projected outcome. But either way you can’t argue that just taking the 2% hit in Year One was obviously correct.

On the other hand we might here have opened a sliver of daylight in favor of rolling the dice on Nothing and just defer any action for Year Two as well. IF it doesn’t work out you could simply backfill any gap with the retained earnings from doing Nothing for Year One. But what if the bet pays off bigtime and the next Annual Report STILL just shows a 2% gap going forward? Well the citizens of USE end up pocketing another 2% of income on net. And might well start casting some doubt onto the model used by the TS-tees after it failing two years in a row. Not to mention entertaining the idea of betting on Nothing for one more year. And there is where the game calculations get interesting. Because even if the needed tax for Year Four after three years of inaction comes in above 2% it wouldn’t necessarily offset the pocketed gains over any of the short, medium or long term and wouldn’t until the required take over the remaining years of the first 20 reached the 40% of annual income level (20 years x 2 percentage points).

At this point the ‘Sooner is Better than Later’ people should start feeling pretty sick. Because the burden of making the case against Nothing starts falling on them. Maybe nobody can satisfactorally explain why the outcome was the way it was, but the charge against the Do Nothings of being in Denial because of ‘what everyone knows’ because ‘even the TS-tees of Total Securty say’ starts ringing pretty hollow. Because the TS-tees just piled up a three year record of Fail. And the Do Nothings have pockets full of untaxed cash.

(Back on Planet Earth this scenario actually understates the situation facing the Trustees of Social Security from 1997 to 2004. In each of those years policy makers did exactly Nothing in the face of explicit warnings by the Trustees in the Report Sumamry of ‘Sooner is better than later’. And the gap going forward actually went down from 2.22% to 1.89%)