ANOTHER LOOK AT CBO REPORT FOR THOSE FOREVER YOUNG
by Dale Coberly
ANOTHER LOOK AT CBO REPORT
FOR THOSE FOREVER YOUNG
I wrote a post the other day trying to explain what the CBO’s number
meant when they said it might be necessary to raise the payroll tax
an extra 3.5% to pay for Social Security for the next seventy five
years. I was very disappointed, frightened even, by the responses I
got. Here is another way to try to explain it.
The following is a fairy tale. The numbers are made up to be made
simple. But they are meant to be realistic.
Our grandparents, or maybe your great-grandparents lived on incomes
of about 25 thousand dollars a year… in “our” dollars. That is,
they got by on about half of what we have in “real” dollars. Out of
this 25 thousand, they tried to save about ten percent for when they
got old. There was no Social Security. They hoped to earn enough
interest on their savings to keep up with inflation.
Let’s say they succeeded. So, they set aside 25 hundred dollars a
year for about 40 years and reached the age of sixty-something with
about a hundred thousand dollars in the bank. This hundred thousand
had to last them the rest of their lives. They were now too old to
work, or no one would hire them. They only expected to live another
ten years or so.
So, that meant they had about ten thousand dollars a year to live
on. And with care they could do that, but forget the Love Boat.
After a few years, if they were feeling strong they might start to
worry that they would live longer than ten years and run out of
money. So they had to cut back and try to live on less than ten
thousand a year, just in case. Of course, if they were not feeling
strong, medical bills might eat up their money even faster than ten
thousand a year.
Lot’s of old people didn’t make it. They ran out of money sooner,
or later. Had to move in with their son in law or ended up in the
poorhouse or sleeping in doorways.
And that was IF they had been able to save that ten percent of their
wages their whole working lives. Most people did not. Here, it’s
funny, I remark, that the realists among the Economics 101 crowd
never seem to notice that it is a real fact of human life that most
people are unable to save enough of their money, even when they have
enough to save. The realists just start talking about building
character by forcing the imprudent to learn to live within their
means. You see, “greed” is “natural” human behavior and it explains
all economics; it is, in fact “good.” But “improvidence” is a sin
and must be punished.
Anyway, there they were. Having been provident and lived carefully
and saved ten percent of a not very generous wage; and not having
been wiped out by a depression, or a bank failure, or inflation, or
illness, or bad planning, they were lucky to be able to live on
their savings and die just at the same time their savings ran
out…. and of course luckier still if they died before then and
“left something for the kids.”
Well, just about everyone’s luck ran out in 1930. Things got so bad
that Congress let Mr Roosevelt enact a program that was called Social
Security. (They also let him find a way to insure bank accounts,
surely a kind of socialism, so that at least losing your savings
because of a bank failure became a thing of the past.)
Now the funny thing is that since Social Security was enacted and the
government began to tax and tax, and entrepreneurs were driven out of
the country, real wages for people have at least doubled.
So today we have us, the forever young, making fifty thousand dollars
a year. Of course out of that we have to pay about 3000 dollars for
“Social Security.” Most people don’t even think about it. But some
people are so bitter about taxes that they keep pointing out that,
NO, it’s “really” SIX thousand dollars because “the boss’s share of
the payroll tax is really the worker’s money.” They don’t take the
next step of pointing out that in that case you are not making Fifty
thousand a year, you are making Fifty Three thousand a year, so that
after you pay the “six thousand” you have forty seven thousand
left… exactly what you had left when you thought you were making
fifty thousand dollars and paying a three thousand dollar tax.
Okay, so now you have to struggle along on only forty seven thousand
a year… a little more than twice what grandma and grandpa had after
they put $2500 of their 25 thousand dollars in the bank for their old
age. But it’s so unfair, you say, to have to pay a tax of three
thousand a year, or six thousand. Because, after all, you EARNED
that fifty thousand, or fifty three thousand. On the other hand,
today, with the Social Security tax, even if you can’t manage to put
any of that 47 thousand you have left after paying the tax into
savings or investments that don’t let you down at the worst possible
moment, you will still have enough money in the “bank” (a bank
called Social Security) to pay you about twenty thousand a year for
as long as you live… no need to worry about living longer than your
As I said, most people don’t even think about this. Until someone
starts shouting “Social Security is Broke, Flat Bust, Trillions of
Dollars in Debt!” Then when little mr coberly tries to point out
“wait a minute, what all this shouting means is that we will need to
save… through the Social Security “tax” … another thousand
dollars a year (or two thousand if you insist on calling the
employer’s share “really” the employee’s money)”… all you can
think is IT’S NO FAIR. How can you be expected to live on only 46
thousand a year?!! Even if the reason for the extra thousand dollar
“tax” is that you will be living longer than your grandparents and
the money is needed to buy groceries and pay rent for several more
years than you previously expected to live. And when little mr
coberly tries to point out that actually you won’t have to live on 46
thousand, because the extra tax can be increased a little at a time
so that by the time you need to pay that extra thousand a year you
will be making an extra twelve thousand a year… well, it’s still
“NO FAIR!” how can you be expected to live on only 57 thousand a
But, this is a modern fairy tale, so I have to add that it is
entirely possible, though not likely, that the economy could fail to
grow, or at least that wages would fail to grow, and you might have
to take that extra thousand dollars of tax out of a wage that is the
same as or less than your current fifty thousand. So, gee, it really
is the end of the world if you had to iive on only 46 thousand a year
in order to save enough to be able to live 20 years, or more, in
reasonable comfort after you are too old to work.
Must be some way. Hey, here’s an idea. Lets get rid of Social
Security entirely. We can always make a million dollars on the stock
market by investing our Social Security tax! Or maybe, wait a
minute, even better, we can let the rich guys make a million dollars
on the stock market and then we can tax THEM and make them pay for
our comfortable retirement. Yeah, that should work.
Coberly – I understand that this is just a “fairy tale” but:
You write about grand parents and great grand parents ‘before there was SS’ making $25,000 a year. In 1939 the average income was about $1,900 per year. It was not until 1996 that average wages rose to $25,000.
You seem to think that raising tax rates has no consequence to the broad economy. The fact is it does. When the 2% Payroll tax break was introduced in 2010 the argument was made that if would result in a dollar for dollar increase in GDP (some argued that there would even be a multiplier).
A 3.5% increase in SS taxes would raise $200B for the SSTF, but it would also reduce GDP – by how much is not clear, but if it were 1 for 1, the increased PR tax would drag GDP by 1.2%. Even it was only half that amount it still would be bad policy. The US needs 3% gdp growth (minimum) to achieve escape velocity. More regressive taxes are the wrong medicine.
You may argue back that your phased in approach over 20++ years would moderate the economic consequences. But in 25 years the drag would be 1.5% of GDP. So to ‘save’ SS we have to strangle the economy. I don’t see any support for that approach from liberals or progressives (and certainly not conservatives). So who are you preaching this idea to?
This type of argument came up with the deficit hawks who were all about cutting spending to lower the deficit as opposed to increasing taxes to cover the deficit. Cutting taxes in a slow growth period had a greater detrimental impact on GDP than did the increase in taxes. What was recommended was a gradual increase or decrease using either cuts or decreases to lessen the impact. If one were worried about the deficit or a deficit in Social Security, it would make sense to increase the tax as the resulting cuts in benefits and gov expenditures would have a greater impact on the economy.
Higher tax rates reduce the rewards of work and investing. This can have supply-side effects that lower economic growth over decades.
But a large number of academic studies has found that these effects are relatively small. An excellent survey due to be published in the Journal of Economic Literature found that raising current tax rates by 10 percent would reduce reported income — the end result of work and entrepreneurial effort — by less than 2 percent. That is far less than what was hypothesized by prominent Reagan-era supply-siders like Arthur B. Laffer. He and others postulated that raising taxes 10 percent would ultimately reduce income by more than 10 percent, leading to a decline in tax revenue. Christina Romer “The Rock and the Hard Place on the Deficit” http://www.nytimes.com/2011/07/03/business/economy/03view.html
In any case, I do not believe Coberly is asking for a total increase of 3.5% which also would not correlate to a similar decrease of 3.5% GDP growth
now recalculate the 1930 wage in today’s dollars.
and try to remember that the payroll tax goes right back into the economy… it’s pay as you go, remember?
stop buying without thinking the talking points of the right.
whatever they “said” would happen with the payroll tax holiday, it didn’t happen.
meanwhile the point of the whole goddamn essay was to help people remember that they were going to get old and they were going to need a good deal of money to live on after they could no longer work and social security is the best way they have to MAKE SURE they will have enough.
I don’t see where your argument addresses that, or much of anything else in the real world.
the goddamn economy takes care of itself. we can’t run around never doing anything because some goddamn economists say it will hurt the economy. sure, we could give up eating and invest the money in the stock market. that would make Milton Friedman happy (increases savings) but might have unintended consequences.
please, get real.
I think I might also have mentioned that the “right” was making the same arguments Krasting makes here when SS was introduced in 1936. And sure enough, right after the payroll tax was imposed, the economy stopped growing. Right?
I’m not sure what “escape velocity” means when applied to an economy, but I have been watching the economy for over fifty years and listening to the bullshit that economists speak about growth and competing with the Russians and the Japanese and the evils of taxes.. and absolutely none of it is true, as any honest person would see if he kept his eyes open and could remember from one year to the next… and didn’t live in the fairy tale world called “Economics.”
Krasting is hardly the only one living in an imaginary universe where “ideas” are more important than reality. But it sure is disheartening to get into an argument with someone and realize his eyes are turned back in his head and he is reading from some catechism he learned in school and has no contact with reality whatsoever.
for example, Krasting likes to say “regressive tax” which is something he learned from LIBERAL economics professors. It sure is strange to call the savings and insurance program that is Social Security a “regressive” tax, when the people get their money back, and the poorest get the biggest return as a percent (over 200%) of what they paid in.
and it sure is hard to see how taking (holding) money from someone who is otherwise going to have to hide it in his matress, and using it to pay for the groceries and housing of those too old to work “hurts the economy.”
look at current interest rates. look at the stock market fail to find anything productive to “invest” in. and look at the economy before Social Security was invented. and keep telling yourself that Social Security “hurts the economy.” this is beyond stupid. it’s a mental disease.
and try to remember that that person you are “taxing” will get his money back with interest… meanwhile his money is used to pay back with interest the old person you “taxed” when he was young and could still work.
or is it just too hard to see how that works when your eyes are on the stars?
Krasting is so anxious to find me wrong that he says things that are completely dumb, safe in the knowledge that most people won’t know how dumb they are, and plenty of them will think, “boy, he showed that coberly.”
But in spite of my making clear that the 25,000 dollar income of the grandparents was in “today’s dollars”, Krasting runs in breathlessly and reports that income in 1939 was about $1900 a year… failing to realize that if this was true it would make my point about ten times stronger than i made it. But Krasting, who in comments to my previous post on this subject assumed that i didn’t understand about inflation… completely ignores inflation in his comment on this post.
By my rough calculation an inflation rate of about 3% per year would make a $1900 dollar income in 1939 roughly equivalent to a $17,000 dollar income today. Close enough to my “25000” assumption for the purposes of a fairy tale. Though I am sure Krasting will look up the real numbers and find that i am off by a couple of dollars proving that I don’t know what I am talking about and therefore of course Social Security is bad for the economy.
I got the “25,000” number by looking at how i would live today on 25k and comparing that to what i know about how my parents and grandparents lived “back then.” I did not specify a year for the very good reason i was trying to make a point about the real world and not about imaginary mathematics.
You see, pardon me if I rub this in, people like Krasting can’t think at all, so they substitute by making impressive calculations with meaningless numbers that have nothing to do with the problem at hand. They neither understand the “real” problem nor have any idea how their calculations relate to their own argument. It’s just, “Hey, pi are squared and a minus ten therefore the moon is made of green cheese and taxes are bad for the economy.”
And that’s the reason I get so angry. This cow shit for brains is what passes for political “argument” in this country.
It’s not that the bad guys are so dumb. They know the facts that count to them. And they know they can snow people like Krating… which is most everyone… with cow shit for arguments. All the bad guys care about is getting the power to make lots of money to get more power. And they DO NOT GIVE A DAMN about you, the poor, workers, “the economy” or the future. All they care about is their next million dollars. If people hurt, it will teach them virtue. And at least some of them actually like to hurt people.
And, no, that does not make me a “liberal.” Plenty of “liberals” are playing the same game for power, and while they may cry about the poor poor, you don’t want to put them to the test. They are ready to hurt people just to prove Marx is right…. or just to hurt “the rich.”
Give them a straightforward solution to the Social Security “problem” (just pay for what we need), they will pass that over, supress if needed, in order to reach for a solution that furthers “the revolution” that they have been dreaming about since 1848.
Did I mention the professors?
give them a straightforward solution, and they will say “that’s nice. now don’t bother us again, we get tired of hearing about it.” besides there are a thousand other ideas we can talk about until the cows come home. And that is what we professors do.
Note the importance of saying “we professors.” If I had said “us professors” they would have scorned me out of the room. Which they would have done anyway, but grammar makes them feel righteous about it.
Given a choice in the matter, I would prefer to depend on the federal government’s ability and willingness to pay out my retirement.
Pensioners of private companies were being screwed so often that in 1974 the federal government established the Pension Benefit Guaranty Corporation (PBGC). Before that year, I saw an older women often in tears because her bosses were giving her fits during the year that she turned age 65 and could retire at full benefits. (Vesting occurred at age 65) Even after 1974, the techniques used to screw employees were varied but the result was the same. No corporation can be trusted over the long term. Employees and retirees are just a leveraged buyout away from disaster. Corporate executives with some claim to personal morality will act in devious, unethical, and immoral ways, if that benefits their employer. Expecting anything else is childish.
The 401K system requires a knowledge of investing that only a very tiny percentage of those earning less than the median wage possess. And I doubt that most of the middle class have that kind of knowledge either. (Let’s ignore any overlap here.) Add to that, the fact that many Americans have inadequately funded their 401K. Also add to that, the current conversation about the various excessive management fees and success seems to be difficult to achieve. Other defined contributions system share the same limitations.
Social Security is a backstop, if you want more than mere existence then you had better be able to supplement it. But our current Social Security system is the safest practical backstop system that is available.
The only remaining question is, can it be funded adequately, and I agree with you that it can.
thanks. and i’ll add to your comment about other pension systems. I had a pension from the State of Oregon that was based on what my payroll deductions earned on the stock market. my risk. i could have opted for a straight guaranteed percent, or the “normal” defined benefit based on years of service at X pay times a percent and a half. i took the risk because neither the normal nor the guaranteed “return” on my payroll deduction would have given me enough to make a significant difference to my retirement.
so my risk. not complaining. and better, my “investments” were managed by State of Oregon experts with no fee to me. As it turned out I got lucky on the market, and the State managed, as opposed to employee managed, worked far better than a 401k.
now, here’s the sad part. since i did so well by risking my money, the State of Oregon has decided first, that pensions are too generous, and second, that their guarantee of inflation adjustment is just a promise they can renege on whenever they convince themselves that the State can use the money better for something else.
So far, Social Security hasn’t done that to me. But Obama has been trying. Meanwhile the 3% or so I used to get on my “personal savings” has been cut to zero thanks to the magic of the pfree market.
And, oh yes, I did try to invest some money after I retired, seeing as I had been so successful before. Lost quite a bit of it before I decided that 0% interest wasn’t such a bad alternative.
But we still have people telling us we don’t need Social Security, and, of course, that Social Security hurts the free market.
Not to mention that they don’t seem to understand that they have lost more money from “free market” gyrations than they have ever paid in taxes. Why don’t they understand that… because no one has ever told them. And 99.99% of the people never think a thought that wasn’t put in their heads by someone with an agenda.
coberly is not asking for a 3.5% increase. CBO is.
but coberly is saying, much more important, that a 3.5% increase would have no effect… or maybe a good effect… on GDP.
That money will go right back out into the economy in the form of benefits paid to people who will spend all of it the month they get it.
Whereas not increasing the payroll tax would lead those retired people to have not enough money to spend.. hurting the economy. Even the workers would not spend all of that money… they’d have to save at least some of it for the future. History shows they would not save enough of it. But that money is more likely to disappear from the economy than money spend on the retired.
Moreover, the CBO “plan” would lead to “too much” money being taxed at least at first. but even that would not affect the economy. that extra money would be “lent” to the government reducing other taxes from what they would have to be, or reducing borrowing from the public from what it would otherwise have to be.. reducing the “crowding out effect” of government borrowing.
moreover, the deficit hawks are perfectly happy to see deficit spending during a recession.. they just shut up about it.. because they know that government spending is good for the economy. but they hate to pay taxes… which they don’t have to pay because government “stimulus” spending is always by definition (practically) not accompanied by a tax increase (that would be counterproductive all the economists say). but during “normal” times, all of a sudden government spending is bad for the economy… either raises taxes or increases the defict.. or something that “reduces the incentive to work.”
this poor boy never noticed that having a smaller paycheck because of tax withholding reduced my incentive to work. if anything it increased it… to get more money.
but we are not dealing with people here who think at all, much less past the first step. they simply parrot the lines they have been told win the vote for the politicians who will help them with their bottom line… whether lower taxes or government subsidies.
what all this comes down to is that you are far too kind to Krasting granting him more credibility than he deserves.
in any case, are we to stop eating on Sunday because some economist tells us that saving our Friday paycheck until Sunday “hurts the economy.” Everyone knows that if you don’t spend it all by friday night the bars won’t make enough money, and barkeeps will lose their incentive to work.
i dropped a stitch op there. Even with the CBO raising the tax before it is needed, the money would not disappear from the economy. The government would borrow it from SS and then spend it back into the economy.
The right does not object to government spending. It objects to taxes and deficits. The government used to understand that deficit spending can help the economy. Somehow that cut transmorgified into “tax cuts help the economy… in all seasons for every purpose.”
But the governmet used to understand that deficit spending helps the economy when the money is directed into jobs for real people. Recently it has decided that deficit spending works by giving the big banks billions of dollars to hold between their legs to keep warm until they build up their courage to “invest” in another grand scam to defraud the people in a bubbelicious economy. This hasn’t worked, but economists are never deterred by the failure of their ideas. After all, the ideas were handed down by God. So if they don’t work, it’s because some sneaking liberal is hiding in his tent not believing hard enough. We need to seek him out and expose him to God’s wrath.
Dale, before BK triumphantly latches onto what I am sure he will think is a new GOTCHA! I should refer people to my post linking to CBO’s new Long Term Budget Outlook (released today) which has revised their 75 year 3.5% to 4.0%. But it is a little difficult to make out their reasoning and whatever it was it didn’t seem to effect their medium term number which now is set at a 2.1% of payroll gap between now and 2039 (i.e. the first 25 of that 75). Meaning there is no particular need to adjust the current rate of increase envisioned in the 2013 version of Northwest even if we accept CBO numbers at face value. With a hole card being that CBO and SSA flipped in their predictions last year with the former becoming for pessimistic than the latter rather than the other way around as it was for years. Meaning it is possible and even in my view likely that the 2014 Social Security Report (if ever released) will show a smaller number than 4.0% for the Long Term window.
Not that the differences after mid-century actually mean a lot in real terms. But the Bad Guys do love their 75 Year and Infinite Future Horizon #s.
thanks. those guys can make it up out of their heads and i can’t keep up with that.
but absolutely you are right… there is no need to FIX IT FOREVER NOW.
we can fix it as we go, as needed. and if THAT ever becomes “TOO MUCH” we can do something about it then.
I cannot imagine a situation in which saving for retirement ever becomes TOO MUCH. not any situation vaguely resembling the world as we know it.
an atomic war or global warming might change that.
let me add here that i dropped another stitch above.
while I have been showing people for years (not that they are paying attention) that a tiny raise in the payroll tax “at need” would “fix” Social Security forever and not even be felt, the CBO has a plan that sure would be felt: raise the tax 3.5% (yesterday), no 4.0% (today) all at once.
thing is even this would only be felt for about six weeks until people got over the shock and realized it made no difference to their “life style.” then they could go on with their lives just like they did before.
thing is, to be fair to CBO, by not raising the tax a tiny amount today we are inevitably increasing the amount by which we will have to increase the tax “sooner rather than later” because each year the projected deficit acts on more years… if you are collecting 2% less each year than you spend, beginning in, say, 2030, then this year that 2% acts on 60 of the next 75 years. next year it will act on 61 of the (then) next 75 years, and the year after that it will act on 62 years..
so while nothing is really changing the “actuarial” deficit is increasing because it acts on more “deficit years” and there are fewer “non deficit years” to gradually bring up the tax rate to that needed 2%.
if we wait until 2030 itself, the tax would then really have to be raised 4% (2% for you and 2% for your boss) “immediately and permanently.”
my bet is that we will wait. and then go hysterical and “compromise” by raising the tax 2% (combined) and cutting benefits 12%. That way we can save ourselves 16 dollars a week while we are young and working, and not worry until we are old and can’t work about how we are going to live on 200 dollars a month less than the current 1600 dollar SS benefit.
“for example, Krasting likes to say “regressive tax” which is something he learned from LIBERAL economics professors. It sure is strange to call the savings and insurance program that is Social Security a “regressive” tax, when the people get their money back, and the poorest get the biggest return as a percent (over 200%) of what they paid in.”
If it was a savings and insurance program than surely the value of accrued benefits due is greater than $0. Except whenever leftwing lunatics define the distribution of “Total Wealth” they assume that the accrued benefits due of social security is $0.
i don’t understand what you said. could you translate it?
Jay – Google “Is FICA a regressive tax”. I did not learn that FICA is regressive from ‘liberal economists’. It’s just a fact.
The Wikipedia answer:
The Social Security component of the FICA tax is regressive, meaning the effective tax rate regresses (decreases) as income increases beyond the compensation limit.
Coberly like to point out that SS is progressive on the payout side. And that is correct. But the tax side is regressive. We are talking about raising taxes, not increasing benefits. This is a regressive discussion. – Sorry.
i guess if you can’t think, you have to rely on quotes pulled out of Wikipedia.
I would guess the article was written by a liberal college professor… because that’s where i heard all the nonsense about SS being a “regressive tax, regressive tax, awk, awk!”
The fact is that SS is a program which acts more like an insurance and savings program than a ‘tax for government spending.” The fact is that everyone who pays into Social Security gets back more than they paid in, and the poorer they are after a lifetime of work the more they get back as a percent of what they paid in. That’s not regressive.
I don’t know if you have ever noticed that pennies have two sides… one is called “heads” and the other is called “tails.” And that’s why they are called “pennies” and not “tails.”
The real problem with Social Security is that Wall Street financial institutions have not found a way of collecting fees from its recipients.
Of course some of us see that as a feature.
But that leaves the Wall Street crowd red faced with rage! How are they to justify their miserable lives if they can not amass more money than they can reasonably spend in a lifetime?
You got it. 🙂
“i don’t understand what you said.”
Read page 37 from the link below. After doing so if you believe Piketty, EPI, or any of the other left-wing blowhards are providing you with statistics on the distribution of TOTAL wealth (as they claim) than you either deny that social security is a savings/insurance plan or you are too stupid to understand the definition of something as basic as an asset.
The Fiscal Times “hair on fire”, breathless headline of “entitlement programs unsustainable” got me wondering………..
I don’t recall any media outlet ever going back and checking to see how many of these “sky is falling, run for your lives” headline predictions turn out to be, at the very least, less dire than predicted, or don’t pan out at all? I’ve been reading dire predictions of our imminent demise in one way or another for over 50 years and yet the world trundles on. Is it possible the “bleedia” isn’t interested in acknowledging unfulfilled predictions of gloom and doom, because, to paraphrase Wm. R. Hearst (I think), ‘it doesn’t sell newspapers’.
Is it any wonder so many deny climate change?
I was afraid of that. What the hell does Picketty and your hobby horse about “total wealth” have to do with the discussion at hand?
I think you should see a doctor.
personally I would be just as glad if your claim on social security benefits was counted as “wealth.” but there are complications and issues with that.. and with how almost anything is categorized.
i know people who seem to be unable to think about things unless they first put them in some iron clad category from which they think about the thing in question as if it was identical in all particulars with what they think is the defining category. that’s another way of saying these people can’t think at all. though they might make a living as logicians or grammar teachers.
i would expect the sight of a flying squirrel or a bird that couldn’t fly would cause you to have a nervous breakdown.