Total Security on Planet Elsinore: a Social Security Thought Game (Part 1)
Lets play a game. The ultimate point of the game is to understand certain aspects of Social Security but to keep complications from creeping in too early (wait for later parts) we are going to start with simple game play on a board far, far away. In fact on distant yet oddly Earth-like Planet Elsinore.
Setting the map. Elsinore has two large land masses named in order of discovery by the dominant tribe as Old Elsinore and New Elsinore. Elsinoreans are much like Earthlings except that they are universally numerate and logical (which makes them not much like us at all). The land mass of New Elsinore is shaped like an hourglass which has led our logical (if unimaginative) Elsinoreans to dub them North New Elsinore and South New Elsinore. Two centuries ago certain inhabitants of North New Elsinore established a democratic republican polity under the name of the United States of Elsinore. (Which name cheesed off every other inhabitant until the warlike and heavily armed USErs explained to them ‘Shut UP’).
Any way the citizens of what they liked to call the Good Ol’ USE established a program a hundred years back designed to deliver a minimum income to retired citizens of USE which they called Total Security or TS. This program is financed by an individual income tax starting from the first dollar with no exceptions, exemptions, deductions or caps at a rate of 10%. The overseers of TS were quite naturally known as the TS-tees and among other things were mandated to report on the finances current and projected of TS on an annual basis. So that is the map.
Game One and Special Rule One.
All citizens of the USE agree that under no circumstances should the current schedule of TS benefits be cut either now or in the future.
Game One Scenario. The TS-Tees report that Total Security faces a shortfall starting in Year 20 that would require a 20% cut in benefits overnight. This shortfall amounts to 2 percentage points of current income. This could be backfilled by an immediate boost in dedicated income tax from 10 to 12%, itself a 20% increase in tax. Or it could be phased in over the 20 years in a way that reduced the sticker shock up front but by deferring portions of the fix to future years would mean a higher rate in the end, how much depending on the phasing schedule.
Should the citizens of the USE just take the increase on the ‘Sooner is better than later’ and ‘It will only cost more if we wait’ basis? Or would it be better to phase in the increase over the period?
Well the answer here is clear. We don’t have enough information to decide. Not logically and on a pure numeric basis as good Elsinoreans would always prefer. Because ‘sooner is better than later’ is under this rule simply a moral judgement, we just don’t know enough about the USE politics or economy to even make the call on grounds of equty or efficiency.
So lets add a new variable. In this same Report the TS-Tees show that the current tax gap projects to increase at 0.05% per year simply because of the demographics of Busters approaching retirement. As such the cost of doing nothing would mean a new gap that summed up the 2% gap over the period, the portion of that NOT collected in year one and so having to be allocated over year 2-19, AND the extra 0.05%. Does the calculation change?
Well a little. Under this scenario the ‘sooner is better than later’ folk’s argument starts to bite because whatever are the benefits of phasing they would reduce over time if the phasing was too slow because you would have some equivalent of a balloon payment on the backend. But still it seems to me there is no absolute argument for taking the whole 2% increase in the first year.
Comments on the game so far welcome. Or just pass on by until the game gets more complex and dare I say it closer to the actual game we are playing on Planet Earth. But for now we are talking about an income security program called Total Security in a country on Planet Elsinore named the USE based on a universal 10% across the board income tax facing a medium term shortfall amounting to 2 percentage points.
I am slightly confused. Is UST the same as USE?
Substantively, to the post. I’d suggest there’s a much stronger argument to not add the whole 20% at once. The 20-year projections are subject to change, even if only slightly, and by instituting a smaller raise each year, the USE is able to maintain flexibility to raise or lower that percentage as need as time goes on.
MIke yes. I had Elsinore named something else and in fact stolen from Vonnegut (Trafalmadore). I though I had all the UST’s edited out. My bad.
As to your second comment. We have A WINNER.
Yes. And you have actually anticipated later stages of the game where uncertainty in projections is introduced.
So you have already scored Total Security Level 3 Master before I have even thoroughly gamed out Level 2.
And prematurely returning the game to Planet Earth and the USA the whole “sooner is better than later” and “WE HAVE TO FIX IT NOW” moves have always been more about cementing changes in place before folks figured out that maybe no change or at least not that much change was actually indicated given current knowledge.
I think it no accident that Bush launched his Social Security Tour at the exact point when Solvency seemed closest. That is in 2004 the Trustees put Social Security Depletion at 2042 and had it advancing out at a rate of more than a year per year. The outlook has now deteriorated to Depletion in 2033 yet the fervor is not quite there yet.
In short Good News for Social Security is Bad News for New Deal Haters. In the end little to none of the crusade against SS has to do with solvency as such.
BTW much the same dynamic with Obamacare/ACA. The Republicans are in deathly fear that it will either BE a success or be PERCEIVED to be a success. This would be a repeat of the massive and decade long setbacks they experienced in 1932 and 1965, each of which put the R’s into electoral eclipse for a couple of decades, to the point that their own base is chanting “Keep Government Hands Off My Social Security and Medicare”. They certainly don’t want Obamacare making the New Social Democratic Trinity.
are you assuming an interest earning trust fund? otherwise i don’t see why the final tax should be any higher with a gradual phase in.
or waiting until the last minute.
otherwise i agree with Mike that it’s better to make small corrections reasonably far in advance so you can see how you are doing and change course if necessary. the difference between driving down the road, and shooting yourself down the road in some kind of pre-programmed ballistic missile.
i wouldn’t put too much emphasis on the good news for SS is bad news for the SS haters.
it’s too easy for them to manufacture bad news.
in any case SS is intended to work in bad times. should bad times come (are they here yet?) SS will continue to provide for old people via pay as you go financing. either the workers will have to pay a little more tax or the old will have to take a little less in benefits. not what we want, but exactly what humans have had to do for millennia… take the good times and the bad… together. SS does the same thing as “honor your father and your mother” .. the kids fed their aged parents even when there wasn’t much food to go around for anyone.
the bad times forecast for SS don’t look especially bad, except through the lens of the SS haters. we are projected to be making more money and to be living longer. this is not bad news. the bad news is that we won’t be making as much more money as we have been used to. we can live with that if we don’t go crazy with what amounts to thinking “oh no, i won’t be a millionaire by the time i’m thirty. i guess i’ll have to kill myself. or kill my parents so i won’t have to support them.”
Simple math, unless I am missing something.
Proposal one: collect 2% of income for 20 years.
Proposal two: do not collect income in first year.
Proposal two assumes income not collected that has to be reallocated over the last 19 years. Assuming a flat state economy with no inflation (as the game implicitly does) this means either collecting an extra 0.1% each year for 19 years to make to make up for most of the foregone 2% for the first year, or a balloon payment amounting to 4% in year 20.
In either case the additional tax would seem to be resettable in year 21 back to that 2% but still you need to come up with the foregone revenue somehow.
“i wouldn’t put too much emphasis on the good news for SS is bad news for the SS haters.
it’s too easy for them to manufacture bad news.”
Well yes. Except that the “There is No Crisis” messaging in 2005 backed by real numbers ended up smoking Bush’s Social Security Tour before it even got off the ground.
I know the Congress-critters like to pat themselves on the back but the reason the Bush Tour never got anywhere is that bloggers like Atrios/Duncan Black, Billmon, and Digby assisted by commenters at places like DeLong and dKos and MaxSpeak (like ahem,er) along with people like Dave Johnson and Brigham at “There is No Crisis” plus my pal and occassional commenter Lee Arnold with his brilliant Econolanguage flash knocked the Bush folk back on their dicks (forgive the Texas idiom here). In 2005 it was literally impossible for the Bad Guys to “manufacture bad news” in respect to Social Security. Which is why most of them retreated to their lairs under the Troll Bridge.
Not that the stayed, you and I were here on the next go-around. But they had by that point mostly given up on the magic word “Privatization” in favor of “Choice” and “Personal Accounts” and indeed a straight out reliance on benefit cuts via Intergenerational Warfare messaging.
We did win one in 2005 and that is worth remembering.
As a citizen I would prefer the phased in approach. It is less of a shock to my paycheck.
Historically, the phased in approach also makes sense. I recall seeing a chart from someone (maybe you, Bruce) who went to the trustees’ report for each year back to the 60s or something, and listed the year in which the Trustees predicted insolvency. It ranged from a low end of 4 years and I think as high as 20 years. (It has been a while and I could be way off on the numbers.) But I do recall there were wide fluctuations in the year to year numbers, presumably because of economic factors, as opposed to legislative changes (with the exception during the Reagan administration).
Actually, that chart is probably still very handy. Anyone know where I can find it?
I may not be Jim Kirk, but I still feel compelled to try to change the rules.
If the Elsinorans are universally numerate and logical, you won’t need nearly as much insurance. While I don’t buy into Bigg’s supply-side reasons for expecting the economy to grow faster if everyone saves for themselves, it does seem that over-insuring is not a good plan.
I hate bad analogies and I think you have produced one.
Also, to Dale’s point, even without an interest bearing fund, there can still be fluctuations in contributions to the trust fund, correct? Increased unemployment, for example, would lower FICA tax revenue without reducing the program’s expenses to existing retirees.
MIke, great comments. But you are getting way ahead of the game as outlined. And yes that chart was from me.
I’ll be introducing fluctuations starting with first year numbers in the next round. Later on I will be introducing rules that allow us to look backwards.
But for now I am just testing ‘sooner is better later and take all our medicine today’ against ‘phasing’ and hopefully showing there is no a priori reason to favor the former. And as some forward lookng commenters have pointed a number of reasons to avoid sticker shock.
And Arne I don’t see that you are even playing the same game. I have not introduced any kind of insurance model into the game or even tied outcomes to lifetime earnings or contributions. In the game so far we might well be looking at a straight out non-means tested universally equal pension much as the Swiss are currently debating a guaranteed national minimum income.
Which is precisely why this game is being played on Elsinore, so that people will resist injecting the game board and rules of Social Security on Total Security. At least at this stage.
Mike, you are right that the “trust fund” need not be interest bearing. I have trouble understanding exactly what Bruce’s parameters are. And he seems to not understand what I am saying.
But delaying the collection of a one tenth of one percent per year increase in the tax would not result in a need for a higher tax than just waiting for the twenty years to run out before raising the tax in one, shocking, lump by 2%. Now would increasing the tax by that (still shocking) 2% all at once today save you any money in the long run.
Options: One: wait the twenty years, increase the tax 2% at once. that is your baseline. Two: increase the tax 2% all at once today. After twenty years you will have accumulated a “trust fund” of 40% of one year’s wages. But this is a trust fund that will never be used because the tax is already the 2% you were going to need to raise it.
Three: increase the tax by one tenth of one percent per year. After 20 years you have raised the tax to the needed 2%. And you have a trust fund of 20% of one year’s wages. Again, a trust fund that will never be used, because by the terms of the “game,” it won’t be needed.
Four: Wait, say ten years, before starting to raise the tax one tenth of one percent per year. Think of putting that one tenth of one percent from the first year in a box (no need for a lock), and the two tenths of one percent from the second year in another box. Etc. Now by year 20 you will have raised the tax by 1%, which is 1% short of what you need. You would simply take the 1% extra tax you collected in year twenty (which you did not need) and add it to the 1% you collect in the year 21 and you get your two percent. The next year you raise the tax another tenth of one percent to 1.1% and add to it the 0.9% you have in the box from year 19, to get the 2% you need. And the next year you raise the tax another tenth of one percent to 2.2% and add to it the .8% you have in the box from year 18. and so on until by year 29 you have raised the tax 1.9% and add to that the .1% from the box from year eleven…to get the 2% you need. The next year you raise the tax another tenth of a percent to get to the 2% you needed. The boxes are now all empty but you don’t need them. You continue with the tax raised 2%.
You have neither cost nor saved the taxpayers any money compared to the 2% all at once base. Just started collecting it a little earlier to avoid the “all at once” shock, and of course delayed the full 2% by ten years.
I got the exact timing of the boxes wrong here. someone with more time than me can get it straight. but it won’t change the result. What would change the result would be waiting longer than ten years to start. Then there wouldn’t be enough money in the boxes to avoid at least one raise steeper than the one tenth of one percent per year.
of course if the trust fund was interest bearing at say 5% that 5% on the 40% of income you collected would pay the 2% you needed without raising the tax at all. except you already raised it. and if the interest came from the government (they borrowed the money) then it would be paid by the taxpayers anyway, just not in the “payroll tax.”
i see that i overlooked bruce’s wrinkle: increase the cost half a tenth of a percent per year after the sudden and permanent 2% twenty years from now. yes that would change things. but that is a bit too open ended to keep up with without knowing anything else about the “economy.”
actually, it might not change it much at all. everything i said above about the first twenty years would remain the same. what would change is that, according to Bruce’s frame, in year 21 the cost would go up another half a tenth of a percent, so the tax would have to go up another half a tenth of a percent…. and so on. i don’t see where you get any advantage to paying early or paying late, except for the “shock” factor and perhaps assigning the costs to those who will get the benefits, and may (not in Bruce’s frame) be making more money and so could afford it better.
but this half a tenth of a percent per year increase can’t go on forever. at some point you are paying more than its worth TO YOU. no good living on the Love Boat when you are old if you couldn’t afford a house when you were working.
This is NOT the current case with Social Security… not even close. But it IS what the big liars are telling the kids is the case.
If you saw someone cheating your grandmother out of her life savings by lying like this…. or saw them cheating your daughter out of her eventual life savings… by lying like this, you would kick them downstairs.
Be clear, that “someone” is the Peterson gang. and that’s what they are doing.
Sorry Bruce, but a program that delivers a guaranteed income is insurance, whether you intended to introduce insurance or not.
I play games for fun and you decided to call it a game, so Jim Kirk and I may have a little fun with your post.
Arne
don’t be so rigid. a guaranteed income doesn’t have to be insurance.
Arne are you saying AFDC and Medicaid are ‘insurance’? Food stamps? Public libraries? All public services paid from taxation?
Or is there some fundamental distinction between ‘income’ and the services it would buy if not supplied by government that would make a cash benefit ‘insurance’?
Somehow I am not willing to redefine all aspects of Social Democracy as being insurance when you don’t have either a dedicated premium or some kind of risk pool.
There is nothing in the rules of Total Security as outlined to this point that ties the benefit delivered to any kind of contribution, it is not in that respect any kind of ‘earned benefit’. Except that I did specify ‘citizen’ so you could say that USE-rs earned it by being born or gaining citizenship. But even stretching ‘earned’ to include ‘born into’ doesn’t make a guaranteed income ‘insurance’ that I can see. Perhaps you can expand. Here or in the next thread, because I plan another installment soon, probably within a couple hours (it being 3:32 PM here in California)