Northwest Plan for Social Security: Conservative “Workers – Take Your Medicine”-ism (and why this Social Democrat likes it)
Long time readers of Angry Bear will be familiar with the Northwest Plan for a Real Social Security Fix. It has been pushed here in a series of posts and in innumerable comments (mostly by Dale Coberly) since 2009 including this core post:
NW Plan for a Real Social Security Fix Ver 2.0: 2009 Trigger.
Those who have questions about its details can ask them in Comments. But lets have the short version.
The Northwest Plan is inherently conservative in the old-fashioned sense of the word. It accepts that status quo that has resulted from the Social Security Act of 1935 and the important Amendments of 1939, 1950 and 1956 and for the sake of argument accepts the tests and Reporting imposed on Social Security by current law and the practice of the Social Security Trustees and the projections of the Social Security Office of the Chief Actuary. Having accepted that status quo in all its respects it then proceeds to ask a simple question: “What would it take to guarantee full Scheduled Benefits going forward under the constraints of current law and under the projections of the (standard) Intermediate Cost projection?” Or in other words “What would it take to Fix Social Security without Reforming it?” Where ‘Reform’ would include proposals from both the Right (which mostly take the form of benefit reductions) or from the Left (which generally take the form of modifying or eliminating the income cap formula). Or in still other words “What if we just made workers take their medicine and take the entire burden on themselves?”
In answering this question the authors of the Northwest Plan, primarily Dale Coberly with assists from Bruce Webb and Arne Larson, suggest starting from the arithmetic. Which in this case takes the form of “actuarial gap”. Now actuarial gap can be measured and presented in various ways over various time periods but is by the Trustees typically presented in the following form: “What is the gap between current rates of FICA and the rate currently needed to fully fund Scheduled Benefits over the 75 year Long Range Actuarial Window without changing either the Benefit formula or the Cap formula?” Now granted that there are a lot of barely buried assumptions in this formulation what would happen if we just ran with it? And answers to that under the fold.
We can start with Table IV.B5 of the 2014 Social Security Report
Table IV.B5.—Components of 75-Year Actuarial Balance Under Intermediate Assumptions where the literal bottom line of the Table shows us that the actuarial gap under this set of assumptions is 2.88% of payroll. Meaning that an immediate increase in FICA from its current combined employer-employee rate of 12.4% to 15.28% would restore ‘solvency’ to Social Security. At this point both the Right and the Left tend to jump in and claim this is an impossible solution. Because “unsustainable” and “crowding out” or “regressive” and “ignoring income inequality”. To which at least one contributor to Northwest would respond “Hold your horses friends! Before deciding questions of sustainability or equity can we do a little arithmetic FIRST?” That is what if we regarded Northwest not as the end-all and be-all but instead the starting point for all the rest of the ‘what-ifs’?
The basic ground for discussion is laid out for us by the Trustees in the Summary section of the 2014 Report.
The Trustees estimate that the 75-year actuarial deficit for the combined trust funds is 2.88 percent of taxable payroll — 0.16 percentage point larger than the 2.72 percent deficit in last year’s report. For the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.83 percentage points (from its current level of 12.40 percent to 15.23 percent; a relative increase of 22.8 percent); (2) scheduled benefits during the period would have to be reduced by an amount equivalent to an immediate and permanent reduction of 17.4 percent applied to all current and future beneficiaries, or 20.8 percent if the reductions were applied only to those who become initially eligible for benefits in 2014 or later; or (3) some combination of these approaches would have to be adopted. Under these scenarios, non-interest income would initially be substantially greater than expenditures, and trust fund reserves would accumulate rapidly. Subsequently, however, non-interest income alone would be inadequate, and reserves would be drawn down to cover the differences. This illustrates that if lawmakers were to design legislative solutions only to eliminate the overall actuarial deficit without consideration of year-by-year patterns, then a substantial financial imbalance could remain at the end of the period, and the long-range sustainability of program financing could still be in doubt.
If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2033. In order to maintain solvency throughout the 75-year projection period and finance scheduled benefits fully in every year starting in 2033, it would be necessary to increase revenues by an amount equivalent to a payroll tax rate increase of about 4.2 percentage points (yielding a total payroll tax rate of about 16.6 percent) at the point of trust fund reserve depletion, with the total rate reaching about 17.7 percent in 2088. Alternatively, solvency could be maintained if benefits were reduced to the level that would be payable with scheduled tax rates and earnings subject to tax in each year beginning in 2033. At the point of combined trust fund reserve depletion in 2033, this would be equivalent to a reduction in all scheduled benefits of 23 percent, with reductions reaching 28 percent in 2088. In addition, of course, there is a continuum of policies combining tax increases with benefit reductions that would maintain solvency at the point of trust fund depletion.
Now sharp eyes will not something right away. Given a current 75 year actuarial gap of 2.88% I claimed that an immediate increase from 12.4% to 15.28% would restore the system to ‘solvency’. Yet the Trustees say an increase of 2.83% for from 12.4 to 15.23% (0.05% of payroll LESS) would allow full payment of Scheduled Benefits. Not a big difference really, but does go to show why Social Security financials are tricky, turns out that ‘solvency’ and even more ‘sustainable solvency’ are slightly more stringent than ‘100% payment of scheduled benefits over 75 years). But this can be left for Comments.
But rather than quibble over 0.05% lets take the higher number and start by calculating what an “immediate and permanent payroll tax rate increase” of 2.88% would mean for the average worker using for this purpose SSA’s National Average Wage Index. For 2013 SSA puts this at $44,888.16. Multiply that by 2.88% and you get $1293. Which is our starting point.
Now $1293 is a significant amount of money. But before concluding that it is too much let us consider what it buys which in this case is preventing an initial 23% cut in Scheduled Benefits in 2033 and 28% such cut ultimate. Which is our baseline and makes every other proposal some sort of tradeoff. For example you could cut down on that initial amount by just accepting a later age of retirement. Which raises the question of how much two or so less years of retirement is worth it to you to say money up front.
Or you could just accept a change in the benefit formula itself via adoption of a different inflation measure or changing the initial benefit formula from one established by lifetime wage changes to price changes. And there are ways to combine these measures in a way that ensures no discontinuity in 2033 or any other year, it just means accepting the ultimate benefit cut in phases but still ending up with that 23-28% ultimate number. And there are an infinite combination of changes and cuts and phasing that would smooth out the outcome and all with disparate impacts depending on your age and income. But all mostly arguing that it is better to smooth out the impact rather than taking it all at once.
But lets say that you don’t want a change in the benefit formula, in fact you might consider even the current Scheduled Benefit too low, how then would you avoid the cut? Well there are all kinds of ways. But lets start with the simplest: an increase in FICA amounting to $1293 per year for the average worker. But few people get paid once per year, instead they get paid monthly or bi-weekly or weekly. If weekly and assuming 52 work weeks the FICA increase is right at $25 a week. But this is for a worker making $44,888 a year, mostly weekly workers make less than that. And almost all weekly workers are subject to an employer-employee split of FICA. So instead of our “average worker” lets take an entry level worker making $10 an hour for a 40 hour week with 50 paid weeks of work a year (noting this is significantly more dollars and hours than a minimum wage worker would get) and assume they are paying only half the FICA. In this case an increase in FICA of 2.88% represents $5.75 a paid week or $11.50 a typical two week pay period. For their pink or white collar counterpart working on a monthly salary at $20,000 a year works out to $24 per monthly pay check.
Which is a bite but then has to be used as a baseline for EVERY OTHER proposal out there. What would you pay to avoid two extra years of work life? How much money are personal account proponents suggesting you set aside every month for their alternatives? In each case the worker has to do an individual assessment of the costs and benefits of just taking their medicine. But as the game show hosts say “But there is more!”
And that ‘more’ is the Northwest Plan. If we look back at the text from the Trustees we see to different proposals which we can call “pay me now or pay me later”. The cost of an “Immediate and Permanent” fix is 2.88% of payroll while the cost of a fix delayed until actual time of Trust Fund Depletion would be 4.2%. Which is a significant sticker shock either way. But it isn’t either or, instead you could phase in the increase taking a certain bite each year. Which would push the ultimate take higher than 2.88% but lower than 4.2% and would mostly split the difference. That is is you simply took an approximate ultimate increase of 3.5% and phased it in over 30 years and applied the 50/50 employer-employee split you would be looking at a first year decrease in take home of 0.06%. Which for our average $44,888 earner paid monthly is $2.24. Or for out $10 a hour/$20,000 a year worker paid in 26 pay periods a shade under 25 cents a paycheck. For the first year, it goes up another $2.24 per month for the $44k person and 25 cents a paycheck for the $10/hr person each year.
That is your baseline. And I suggest that given a chance most workers would take that deal in an instant. And THEN entertain other changes to INCREASE benefits. Like adjusting the cap formula so that more national income was ‘covered’. But the bottom line is that workers can simply accept the most conservative assumptions out there, can assume the current benefit formula and the current income cap formula and the current economic assumptions and just decide to take their own medicine and fully fund Social Security as is. For literally pennies a day. And in so doing tell the billionaires to stick their “unsustainable entitlements crisis” up their ass. Which isn’t to say that workers shouldn’t entertain proposals to take their money, because they are taking an unfair share of worker labor productivity, just to say that workers don’t need to beg for it. If push comes to shove workers can afford to pay for Social Security as is.
Or…. we could all learn how a fiat money system works and understand the government can fully fund social security without needing any tax revenue. The purpose of taxes is to remove spending power from the private sector to prevent inflation. So simple yet so misunderstood.
Of course those who want to gut (or privatize) Social Security right now aren’t overly concerned about long term solvency no matter how much lip service they pay it. They’re actually more concerned with the interest that the SS trust fund EARNS because it it paid out of general revenue. And despite all efforts by the 1% ers to change it they still sometimes pay a marginally higher effective rate on income taxes than median tax-payers.
Well interest on the Trust Fund is not actually paid out of general revenues, they are not actually scored as ‘Outlays’ by Treasury and are not included in the budget line called ‘Net Interest’. Actually I should be more precise and say that interest was not paid out of general funds prior to the DI Trust Fund going cash flow negative in I think 2008. But even now Social Security as a whole is still in surplus and so reducing the top line budget deficit number. It is all a little complicated.
More to the point adoption of the Northwest Plan or similar plans would have the result of the Trust Fund continuing to grow in perpetuity, meaning no net redemption of TF principal, and cash transfers that would only cover a portion of the interest.
That is in part why I called the NW Plan “Conservative” in the post title. Done right it can from a certain perspective be seen as a huge future tax break to billionaires no longer burdened with the need to redeem $2.8 trillion in Treasuries.
Very little is actually intuitive about Social Security finance, a lot of up is down-ism going on.
The NW Plan has the advantage of not mucking around with peoples’ current understanding of who pays for their SS benefits. During my years with SSA, I never once heard obviously well-off claimants filing for retirement benefits that they paid too much in FICA or thought benefits ought to be reduced. That included the guys who drove Rolls Royce automobiles and wanted a personal tour of the office because they “were thinking of buying the building.” (I didn’t doubt it one bit. Talk about a solid gold lease!) Instead, everyone who expressed an opinion without fail said that they had earned their benefits and paid for them themselves.
The less that the high-end earners have to say about SS finances, the better. After all, if the hedge fund guys actually start ponying up bigger FICA contributions, they’ll just hijack the program and to heck with ordinary people.
All I want to hear from the various Presidential candidates is where they stand on SS. If I don’t like what I hear, I’ll find a way to let them know. Chris Christie has apparently joined Pete Peterson’s army of debt-hawks. He couldn’t have done anything more helpful for the Dem’s ultimate nominee if he had tried. 😉 NancyO
I think Webb is engineering something that will never get sold.
A single solution plan, whether it be all tax increases, or 23% benefit cuts is simply not going to happen.
Tax increases may well be a part of what will come. A phased-in tax increase is possible. But any increase would come with a number of other things like raising the cap, the FRA, COLA, means testing, millionaires tax and a transaction tax on Wall Street.. But an “All Tax Increase” solution is not in the cards.
Where is the power in the democratic power today? The Progressive side. Liz Warren would never support a tax only plan. Hillary? She would sign off on a plan that raised payroll taxes every year for the next 30?? She would never do that. (She will promise not to do that in the next few months). I don’t think there would be many Dems in D.C. today that would support a tax only plan.
Republicans will also say “no”.
Anyway, I don’t think it matters. There will be no changes made to SS in 2015, and there will certainly not be any changes in SS in 2016*.
By 2017 Webb’s 2.88% will be 4% and 50 years of tax increases. A combo approach will have to be the outcome.
* In October of 2016 Congress will be pass some ‘temporary’ measures to patch DI for a year. This will force a debate on the SS big picture in the first year of the next president.
Krasting one I don’t have any respect for your political prognostication abilities and your sense of the possible. And two there is no arithmetic way that the acturial gap could go up to 4% in that time period. Not according to any data series except the one that you periodically pull out of nowhere and refuse to explain.
Plus you totally misjudge my tactics and strategy in talking about Northwest. Unlike Dale I don’t believe it is a complete plan in itself. Instead it has a heuristic value in showing how cheap such a plan would be and allows a starting point for the debate.
For examplel the main plan being pushed by the Social Security Works/Strengthen Social Security “Expand Social Security” fok DOES include a phased in FICA increase that would backfill about 50% of the current gap. And this inclusion is rather explicitly credited to Northwest, you can find our plan cited in both Eric Laursen’s recent “The People’s Pension” book and in the brand new book from Nancy Altman and Eric Kingson “Social Security Works!”
That is I kind of laugh in your general direction when you claim that no one will ever listen to us. I know they are listening and the proof is in the indexes of these books.
” Given a current 75 year actuarial gap of 2.88% I claimed that an immediate increase from 12.4% to 15.28% would restore the system to ‘solvency’. Yet the Trustees say an increase of 2.83% for from 12.4 to 15.23% (0.05% of payroll LESS) would allow full payment of Scheduled Benefits. Not a big difference really….”
An amazingly small difference , actually. Impressive.
Given your skills at accurately crunching these numbers , have you ever considered looking at what effects growing income inequality has had on SS finances ? For example , what if , all else equal , the income distribution had remained as it was in , say , 1975 , over the last 40 years ?
Clearly , the majority of people today would be better off in regards to both current income and expected SS benefits , but my suspicion is that SS finances would also be more robust because the relative “cost” to SS ( i.e. $s of outflow vs $s of inflow ) of low-wage workers is higher than for higher-wage workers , given its progressive structure.
If this is true , such an analysis would provide another argument for fixing inequality that could be used against conservatives , since we’d be tackling the “entitlement problem” when we reduce inequality.
Webb – Now you say that NW is just a part of a larger plan? In the piece you ask:
“What would it take to guarantee full Scheduled Benefits going forward under the constraints of current law and under the projections of the (standard) Intermediate Cost projection?”
Then you answer that question with a 30 year plan to raise taxes that would, according to you:
“..blah, blah….and fully fund Social Security as is. For literally pennies a day.
So it certainly read like you were talking about a single solution – all payroll tax increase plan.
PS – SS Works also called for 40% of the TF going into common stocks. That’s another thing on the list that ain’t gonna happen.
Krasting methinks you need to brush up on the concepts of ‘rhetoric’ and ‘heuristics’. I was trying to make a point that properly seen the Northwest Plan could be seen as a conservative alternative that would fix Social Security in a way that shifted all costs to workers while obviating the need for income tax payers to redeem Trust Fund principal. I hope to develop that point in Comments only to have you come in and try to make a puerile political argument that mostly amounted to “Nyah, nyah, nyah, sucks to be Bruce”.
it’s actually a great deal simpler than Webb makes it sound.
you could raise the tax one tenth of one percent starting by 2018 and each year for twenty years reaching an ultimate tax increase of about 2% for a total of about 8% for workers, and that would be matched by employers as it is today.
this would be about eighty cents per week per year while wages are going up over eight dollars per week per year.
i hate to talk about “ultimately” because as you have shown most people’s brains can’t handle “future costs” because they intuitive compare them to “today’s income.” the fact is that the total tax increase over 20 years would amount to about 16 dollars per week while wages will have gone up over 160 dollars per week. AND the people will get their money back in the form of larger benefits over a longer life expectancy.
for those who can’t think except “oh my god we can’t raise taxes” eighty cents per week per year looks huge. for those who can think that one day they are going to want to retire and the extra 300 dollars a month that eighty cents per week will buy will make the difference between living out of a dumpster and having a comfortable home with real food and a few modest luxuries.
people who sell insurance know that people are not capable of thinking about the future.
people who sell “investments” know how to get people to think in terms of “this will make me a milionaire.” perhaps it will, but your Social Security will keep you from starving if something goes wrong with your “investment plan.”
the fact is that Social Security, as designed, essentially solved the “old age poverty problem.” while i am still waiting for the miracle of compound interest, or DOW 36,000 to make us all millionaires.
eighty cents per week.
[oh, and for those who want “the rich to pay their fair share” they already do. they pay FICA on the first 100k of what they earn. from this about 12k per year over 40 years they can collect about 30k over a life expectancy of 20 years or more. that is, they make money. not as much as they are used to, but it’s still good insurance. even rich people sometimes fall on their faces. and the difference between the about 1% real interest the rich will make and the 2 or 3% real interest the “average” will make, and the over 10% real interest the “poor” will make… is what pays for that “insurance” payment to the poor.
yet there are highly educated people who call FICA a “regressive tax”.
but taking someone who makes, say 8 million dollars a year, and making him pay 12% FICA would cost him 1 million a year. guess what that person is going to do about it. and guess who congress listens to. the “friends of Social Security have just shot themselves in the head. it’s too bad they will succeed in killing Social Security by being too greedy.]
i should point out that by making the tax increase gradual the people who will pay the most are those who will get the most out of it (by living longer at a higher standard of living) and who will have the most money with which to pay the higher tax, leaving them with more money, a lot more, in their pocket AFTER paying the tax.
by talking about “immediate and permanent” tax increases, all they are doing is making the problem look much bigger than it is.
in any given year, the needed tax increase would be the equivalent of an eighty cent per week increase this year out of an eight dollar per week raise in pay.
eighty cents per week.
wrap your brain around that.
Marko I haven’t tried to make that calculation (as I often say I am more a ‘number pointer’ than a ‘number cruncher’) but others have, most directly Dean Baker. In fact Dean has been pounding this point since he and his colleague Mark Weisbrot wrote “Social Security: the Phony Crisis” back in 1999.
The introduction to Phony Crisis is available online and is an extraordinarily important read. I can honestly say that i started developing my ideas on Social Security prior to reading it but it certainly informed my ideas to a great extent. In fact it is fair to say that all my work is more or less as a disciple to Dean, something I have made clear to the man himself (he being a combination of mentor and friend). Link to Phony Crisis http://www.press.uchicago.edu/Misc/Chicago/035468.html
I’ll see if I can come up with Dean’s calculation of how much of the gap would have been made up if Real wage had simply kept its historical relation to productivity over the last 30 years.
Marko here is a good start:
The Effect of Rising Inequality
on Social Security
By Rebecca Vallas, Christian E. Weller, Rachel West, and Jackie Odum February 10, 2015
Our analysis demonstrates that the rise in earnings inequality, which has led to an upward redistribution of income, has taken a significant toll on our nation’s Social Security system.
If wage increases had kept pace with workers’ productivity gains over the past three decades, the OASDI trust funds would be $753.8 billion larger today, which would have reduced the expected 75-year shortfall by 6.8 percent.** If policymakers had acted to freeze
the cap on taxable earnings at 90 percent of covered wages after 1983, the trust funds would be $1.1 trillion larger today, and the shortfall would be smaller by 10.1 percent. “
certainly people would be better off if they had made more money. and SS would be better off if more of the money were made by the people paying FICA.
but i try not to dwell on “what if but didn’t.” SS was designed for hard times. these are hard times. you won’t do yourself a bit of good by worriting about how good it would be if only the rich were poorer and the poor were richer.
you could do yourself some good if you and about 300 million of your best friends made it clear to the congress and president that you would be glad to pay a little more for your social security to help you through the harder times predicted to be coming.
people have said they’d pay an extra one percent FICA to avoid a benefit cut. just by coincidence a one tenth of one percent increase in the tax every year for 20 years averages one percent over that time.
we could leave the people 20 years from now to decide whether the ultimate 2% increase they’d have to pay going forward would be ‘too much.” i think i know what they’d say. but i’d be glad to give them a chance to decide for themselves.
and not have it decided for them by the liars and morons now calling for an “honest discussion” about entitlements.
And here is Dean Baker’s take, complete with chart
“Taking these two factors together, if there had been no upward redistribution of wage income from 1983 to the present and the tax was projected to continue to cover 90 percent of wage income over the program’s 75-year planning horizon, the shortfall would be 43.5 percent less than what is currently projected. While this is still some distance from complete balance, the upward redistribution of wage income has been an important factor in the deterioration of Social Security’s finance. And, unlike the decline the ratio of workers to retirees, this upward redistribution was not an event that was anticipated by the Greenspan Commission when it designed a plan to secure 75 year solvency in 1983.”
and if i remember, about 25% of the shortfall is caused by employers paying in “benefits” instead of taxable wages.
Thanks , Bruce. I’ll take a look at those.
Just looking at the summaries , it looks like Dean comes up with a bigger reduction in the current shortfall , but I’m guessing that maybe he extended the inequality reduction into the 75 out years while the other study only calculated the benefit up to the present.
Anyway , it confirms my suspicions , and offers another compelling reason to do something about extreme inequality.
BTW , I’m also in favor of implementing a plan like the one discussed here to firm up SS. SS benefits aren’t enough to provide for a decent retirement income as things stand now , so we can’t let them fall even further in the 2030s because we failed to act when we had the chance.
Yeah Marko that was my take too on the difference between the two numbers, the one using the PV of the extra money in the Trust Fund as of the moment while Dean was measuring the projected income stream over the period.
Kind of what our friend Steve is getting at with the distinction between stock and flow.
As for the BTW you might want to take a look at the Social Security Works All Generations Plan as outlined AND SCORED in Nancy Altman’s and Eric Kingson’s brand new book
OOH, OOH. Through the magic of Google I just found out that the Plan itself is available as an online standalone (the book giving a lot of background and history).
The Plan actually expands Social Security to include a new basic benefit and then credit for such things as child care and then funds it with an array of changes including a half-version of Northwest (raising FICA by 1/20th each on employers and employees for 10 years and so backfilling 1.41% of the 2.88% actuarial gap) plus a cap increase and a surcharge on incomes over $1,000,000.
(And yes the name Dale Coberly and the words ‘Northwest Plan’ do show up on page 266 in endnote 25 to Chapter 8 of the book.)
Webb – I wish you well in this effort. I must say I’m a bit disappointed that you fall back on the “pennies a day” talk. There is no cheap solution to the SS problem. NW will end up costing 1+% of GDP.
I’ve attempted to show that a NW plan falls short as it does not fully address the cliff in 2033. NW would push that date out by a few years, but the lines would still cross.
Rather than go through that effort again, I’ll wait for the 2015 TF report and then look at what happens if the NW plan were to happen in 2018 as Coberly suggests.
Relying on 12+ month old SSA data to make claims with is a bit thin. SS Works used the old stale numbers too. If readers are interested in a different perspective on what SS will produce over the next decade, then consider the projections from CBO published January, 2015.
There ain’t no way that a NW plan starting in 2018 fills the bucket if CBO is proven correct. The CBO link:
the arithmetic shows NW “filling the bucket” and avoiding shortfall at any time (including 2033).
you have been shown the arithmetic but you can’t seem to remember it.
if something happens between now and then, you might have to raise that 80 cents to a dollar a week. seems kind of stupid to my to destroy a program that keeps tens of millions of people out of poverty, using their own money, because you believe the lies of people who have hated social security for 80 years… because they think it’s “socialism.”
i can’t cure stupidity. but i can show the arithmetic to anyone who has an honest interest in studying it.
Okay Coberly, I’ll take you up on that offer. When the 2015 report comes out, you do the numbers. Then we’ll talk.
taking a quick look at the CBO numbers you link to shows that in 2025 Social Security outgo will be 21% greater than it’s income (with a Trillion dollars still in the Trust Fund to pay for that).
But more than that, what you seem to have failed to understand is that that is 21 % of 12% of income, or about 3% of income subject to FICA tax.
3% of about 800 dollars a week is about 24 dollars a week.
by raising the tax 80 cents per week for ten years for each the worker and the employer you would be paying 16 dollars of that, while the Trust Fund is contributing the other 8 dollars or more (more contribution, not more gap): more because if you have been paying the 80 cents per week more each year over those ten years you would have reduced the call on the Trust Fund, leaving quite a bit of interest to help make up the difference.
this is not the best way to do the arithmetic. the last time i did it the right way, it showed that the trust fund never fell below the required one year’s reserve… extending the date of “trust fund exhaustion quite a few years, allowing the continued 80 cents per week per year increases in the taxes to catch up to the required 2% of payroll that will balance SS finances for the rest of the century and out toward the infinite horizon as far as the eye can see.
i don’t remember if the CBO estimate is higher than last years Trustees estimate, but as i said above, if it is it won’t be by much. not enough to change the simple fact that we can pay for it ourselves with pennies per week and avoid turning it into welfare or a sad joke on the people who paid their taxes and find when they get old that SS is not enough to keep them off the street.
i can see why you don’t want to “go through that again.” Simple math is just not your thing. More fun to make blowhard statements like “there ain’t no way…”
yes there is a way. you have been shown it. by repeating your claims you are simply lying about it.
and 1% of GDP to pay for your expenses in old age is “cheap.”
in fact, the actual number is 2% of GDP… still cheap. that turns out to be aout 4% of “wages subject to the tax,” but half of that is money that is paid by your boss, which is money you never see, and never would see if SS didn’t force your boss to pay it.
as you know I am all for increasing benefits and “expanding” them. what i am against is riding a new welfare program on the back of Social Security which works because it is not welfare.
it seems a little bizarre to me to back fill half the shortfall with one 20th PERCENT when you could back fill all of the shortfall with one tenth percent. saving the workers forty cents per week at the risk of destroying the program. and certainly giving the Petersons the chance to say “see, we told you so.”
as for expanding benefits from SS itself. i’m fine with that… as long as the workers are willing to pay for it themselves. it would be smart of them because they would like to have a more generous retirement that what SS affords on a tax that was intended to provide only the bare minimum in a politically acceptable way.
Coberly – Way back in 2013 CBO projected the I&P number was 3.4% The big revision was due to CBO changing their mortality assumptions. Attached is the detailed discussion from CBO.
So two years ago the CBO I&P number was significantly higher than the 2.88% you use in 2015. I assure you, that whatever the number was in 2013, it is higher today. If you build a plan around the 2.88% number you will be disappointed.
SSA has not changed it mortality assumptions. They will some day. And when they do, the SSA I&P number will be pushing 4%.
The NW plan has a maximum increase ~equal to 150% of the I&P number. If you start with 3.5% I&P, then it means a net PR tax increase of 5+%.
So the NW plan would require 26 years of consecutive tax increase. (more if you start in 2018). No sale on that idea.
Dale I fully understand both THAT you are against riding a new welfare program on the back of Social Security and WHY. And for the most part agree with your reasoning.
But you are in the position of the Conservative standing on the Tracks of History and Yelling ‘Stop’.
The Social Security Amendments of 1950 started cutting the strings between contributions and benefits as worker benefits started being based on the growth of the overall economy during their work life rather than purely being funded by their individual contribtions.
The Amendments fo1955 that introduced DI put in place a welfare program under the cover of group insurance and with a fig leaf that had benefits out depend on lifetime (up to then) earnings. But there is no question that DI has a transfer element that OAS didn’t.
Medicare was officially inaugerated as yet another Amendment to the Social Security Act and was from the beginning a transfer program in that it equalized benefits across income (and so contributions) and was only half funded by contributions to start with.
That is Social Security could only be a virgin once and insisting that it needs to keep wearing that chastity belt of “you paid for it” is losing its utility
Social Security is currently a layered program owing only so much to its original form as Title 2 of the Social Security Act of 1935. Along the way it effectively absorbed the program established under Title 1 which was transformed into SSI. Simultaneously with adopting a survivors component as part of the 1938 Amendments. Then layered Medicare and arguably Medicaid on top of THAT.
The Social Security Works All Generations Plan seeks to add layers both below Title 2 in the way of guaranteed basic retirement and then to widen the scope of Title 2 to include certain non-wage work to calculate benefits. And then fund all that by adding on tax surcharges. And the result may not much look like the Social Security Title 2 you are used to. then again your 1935 Victrola doesn’t much look like a Smartphone even though they both reproduce music.
Ultimately your argument comes down to one of political risk. And most people just don’t share your sense of risk assessment when it comes down to expanding Social Security even if that includes a component that can be fairly considered ‘welfare’. Maybe because Social Democratic types are not as afraid of the twice repeated ‘Provide for the General Welfare’ clause in the Constitution as the Billionaires are.
Krating the CBO’s justification for chaging their mortality assumption was simple crap. And if you throw that out then their top line number is crap.
Maybe you don’t think the mortality assumption change is crap. Fine, then defend it in detail. But just pointing to it doesn’t buy you anything. There is good circumstantial evidence that CBO quite deliberately changed their stance towards Social Security from the one that had its outlook be much more positive than that of the Trustees (in 2004 CBO put Trust Fund Depletion at 2048 compared to the Trustees 2041) to one that tracked reasonably well in the late Oughts to one that is much more pessimistic now. But unless you are willing to concede that the most accurate projection for Trust Fund projection in 2004 was actually 2048, meaning that Social Security was in no sort of crisis at all, then you have no scope for simply pointing to the current CBO number in preference to SSA. You are just cherry picking.
I have never agreed with the Trustee’s Intermediate Cost projections, although like CBO I was too optimistic back in 2004. But what was agreed across most of the policy spectrum was that people needed to be using the same set of numbers as a starting point. And for the purposes of Social Security policy that set of numbers was the Intermediate Cost Alternative. In response to that Dale started to design a proposal based explicitly on those numbers, one that I joined onto over time and eventually grew into the Northwest Plan. My stance then and now was to say “Okay we’ll accept your preferred data set, that of the Intermediate Cost alternative, and STILL show that you can fix this problem within its current tax and benefit structure for less than a dollar a week the first year”. Because all the other plans being floated at that time including LMS, Posen, and Bush Option 2 were using that set of numbers as THEIR starting point. And the reason you don’t here much about those plans is that their numbers crumbled as against proposals like Northwest and Dean Baker’s ‘No Economist Left Behind Challenge”.
But Dale and I didn’t make these rules, we just played by them. Now you insist that it is only fair to ring in a new set of scoring rules on the basis I guess of “just because”. Well no Homie don’t Play that Game. If you can justify the underlying reasoning that had CBO abandon their previous reliance on the demographic numbers of SSA’s Intermediate Cost alternative (something that was very explicit in their reporting) for what appears to me to be a totally ad hoc adoption of a new set of assumptions then fine. Go for it.
But you dont just get to play “Point at the Report”. I don’t accept the CBO argument. I perhaps might be MADE to accept it by the right combination of logic and data. But until I see it I am free to say “Fuck Elmendorf and the horse he rode in on”. And substitute the names of AB commenters if I like.
For those interested in examining the CBO argument for themselves it is summarized as follows (h/t BK for link)
“The single largest factor contributing to the 1.5 percentage-point increase in that actuarial deficit is an increase in CBO’s projection of life expectancy, which accounted for 0.6 percentage points. This year CBO based its long-term budget projections on its own projections of mortality rates, whereas in previous years it used the projections in the annual report of the Social Security trustees. The trustees’ 2013 report incorporates an assumption that mortality rates, adjusted for the age and sex composition of the population, will decline at an average pace of 0.80 percent a year over the next 75 years—a rate of decline smaller than the one seen for the past several decades. CBO, by contrast, projects that mortality rates will decline at an average pace of 1.17 percent a year—as they did between 1950 and 2008. The faster projected decrease in mortality rates, compared with the decrease assumed in last year’s long-term budget outlook, leads to an increase in projected life expectancy and thus an increase in projected spending for Social Security and Medicare.”
And why. Well CBO goes on to examine some researchers work and then goes on to examine that of the 2011 SSAB which argued for a modification of the assumptions based on certain specific factors. But CBO considered that and just said this:
“The panel argued that the Social Security trustees’ mortality projections should be based mainly on an extrapolation of past trends and should not be adjusted for many specific factors—but that the effect of smoking (and, to a lesser extent, of obesity) was large enough and predictable enough to merit explicit adjustment.
CBO chose to take a simpler approach—extrapolating from past trends without adjustment—for a few reasons. First, a number of past factors (such as improvements in medical technology, environmental conditions, and health behaviors) have had as significant an impact on mortality rates as smoking has. Second, there is great uncertainty about how such factors will affect mortality in the future. Projecting a continuation of past improvement requires no subjective judgments about the roles that specific changes will play. That approach implies that although a great deal of uncertainty exists about the impact of the many factors that will influence mortality, the effects on mortality of future changes in those factors will be such that mortality rates will continue to decline at their long-term average pace.”
Let me pull out that one sentence: “CBO chose to take a simpler approach—extrapolating from past trends without adjustment—for a few reasons.”
But those reasons on my reading add up to “Well the future is uncertain so the hell with it, lets just extrapolate from the past without doing any kind of data informed modeling at all”.
I am suppose to just accept this? Why pray tell? I invite everyone to read through it and get back to me.
Webb fights back with “I am suppose to just accept this? Why pray tell?”
Folks please do look at the report. The estimated Life Expectancy in 2060:
SS Advisory Board – 85.8
Bongaarts – 85.8
CBO – 84.9
Census bureau – 84.8
SS Report to Congress – 83.6
So the SS advisory board tosses out a number and SSA totally rejects it.Hello??
CBO has a middle of the road estimate and Webb thinks they are flat out lying.
The census bureau is ahead of SSA.
SSA is dead last on the list. And Webb cries foul.
I guess you are free to say things like:
“Fuck Elmendorf and the horse he rode in on”
But I would not run with the trash talk if you want anyone in government to take you seriously. The left you sit with liked Elmendorf. You will come to hate the new guy, Keith Hall…..
Krasting of course I saw those numbers. How else could I have cut and pasted the sections I did?
But it is not like these five numbers are all that there are. Instead they are the CHOSEN studies that CBO used, that CBO ended up in the middle is just a product of their methodology in selecting those numbers not any kind of verification that they are correct.
Plus you clearly have little understanding of the history of the SSAB. It can be and has been a place for President’s to appoint foks who support thier policy agenda and under Bush it tended to be very hostile to Social Security and deploy pessimistic assumptions. Now I have great hopes for SSAB going forward because its new head Henry Aaron is a true friend of Social Security even as his economics tend to be quite conservative. But it is worth noting that Republicans squealed before approving his nomination.
But all that is by the by. Can YOU provide a solid argument why I should accept the reasoning of the SSAB or Bongarrts (who at least supply reasoning) or the non-reasoning of the CBO instead of just pointing and appealing to authority? And yes, tut tutting about my incivility and trash talking. Like anyone cares.
Plus I don’t know anyone on the left that “liked Elmendorf”. i do know a number of beltway types that consider him a sensible centrist. Or in other words a Villager in Good Standing with Villagers. But then I don’t expect to ever be accepted by the Villagers who from my perspective are mostly suckups to the power elite and the 1%ers.
To leave the invective. Do you have a single thought in your head? Or are you just content to leave everything to appeal to authority, and at that authority that you have simply chose for convenience. I explained why I use SSA numbers EVEN THOUGHT I DON’T AGREE. But you just invoke privilege for CBO out of nowhere.
Just a hunch , but I think life expectancies may be headed down , not up , if current societal trends continue. I base this on the recent surge in YouTube videos of cops shooting guys in the back.
well Bruce (both of you)
thank you for the history and colorful language.
but while predictions are by their nature uncertain, we can still raise the payroll tax less than a dollar a week, say, this year. and do it again next year if we find we survived the previous raise and we still think we might need social security when we get too old to retire.
and we can keep on doing it until… unlikely… the majority of the people decide they are putting away too much for their retirement compared to what they want to spend the money on today… a new truck would be nice, or a trip to Vegas.
i get very tired of cute rhetoric. on the whole Webb is much much smarter than Krasting. but sometimes he tries to be too smart.
you can save your social security TODAY by telling congress and the president…. a lot of you have to do it, and you have to do it in public in a way they can’t ignore… tell them that you would rather raise your own payroll tax one tenth of a percent, or maybe a little more (a tenth of a tenth of a percent?) each year and see how things look in ten or twenty years. or you could raise it a full percent all at once and see how that feels after ten years.
the solution is simple, obvious, cheap, fair. and even if Bruce Webb is comfortable with a welfare approach to “the general welfare” i think most people would still rather pay for it themselves.
can’t say for sure about present company.
Tell Congress to let it ride for the next decade or more. When the Trust Fund assets are reliably down to the last 48 months or so, implement something that makes sense then. But if it seems imperative to fund it fully without using Trust Fund redemptions, well just send those assets back to contributors as best as can be determined. Too many workers “took their medicine” already to simply not redeem Trust assets on their behalf. So boost taxes 2.83%, but stop rolling-over the debt in the Trust and give it back. Certain beneficiaries get bigger checks and some workers pay the FICA from Trust credits for a period.
your heart is in the right place, but you have been given bad information so your fix really doesn’t have anything to do with the problem.
there is nothing wrong with the Trust Fund. and no one is trying to steal it. it is doing what it was designed to do: help the Boomers pay for their own extra costs of retirement. it will run out of money at about the same time we run out of Boomers.
when that happens we will find that the “tax”… that is the amount of money people have been saving through Social Security for their own retirement… will not be enough to pay benefits at the level they have come to expect.
there are a lot of bogus “fixes” for this being touted by one “expert” or another: raise the retirement age, increase immigration, tax the rich.
none of these will work, and most will be cruel.
but there is a very easy fix that is cheap, fair, and sensible:
just increase the amount you are saving through Social Security.
The amount needed would be an extra eighty cents per week per year for the average worker…. that is “raise the payroll tax” without raising the cap.
you would never miss the eighty cents. because wages will rise at least ten times as fast as the extra tax you would have more money in your pocket, after taxes, than you have today. And you would get the money back with enough “interest” to beat inflation and keep up with the general rise in the standard of living.
You will not hear about this fix from the media, the politicians, or even “the friends of Social Security.” The media gets its “facts” from the liars paid by the enemies of Social Security (who think it is “socialism.” The politicians also get their facts from the enemies of Social Security. And the “defenders of Social Security” appear to WANT Socialism (make the rich pay) enough to destroy Social Security which works exactly because Roosevelt insisted it not be “make the rich pay.”
It’s not socialism. It’s the workers paying for and insuring their own retirement using the government to protect (but not pay for) their savings from inflation and market losses and provide insurance against most of the bad things that can happen to your money over a lifetime of work.
I don’t want to get into all the arguments. They are too long and too subject to cute answers that are beside the point or just dishonest.
But if you need longer answers to some questions, i will try.
meanwhile, you try to think why “eighty cents per week” more in payroll tax each year is not better than all the other fixes you hear about.
you would never notice
I get it that redeeming it right now on an accelerated basis is not going to happen. But that’s why my first suggestion is to make sure than most of it gets redeemed to the benefit of the system prior to making adjustments. The most vocal and determined “reformers” have their sights on changes in which the Trust Fund never has to be redeemed at all or so slowly that they are confident that the next generation of scoundrels will figure out how to keep that racket going for the 30 years that are on their “watch”. You and the other commenters here are not loons braying that the Trust Fund is a fiction, but those people are the ocean in which Pete Peterson swims best. Talk to these loons once in a while and you get stuff like: the Trust Fund is a figment of our imaginations and the best policies are ones that increase the balances in this imaginary accounting system. Redeem the debt (or nearly all of it), then let’s talk about where to take this thing.
Eric that seems to make sense. Except for one thing:
It make perfect sense for Social Security to carry some level of reserve to allow it to avoid immediate benefit cuts in the face of short term decreases in revenue due to employment recessions. And I see plenty of reason to agree that a TF Ratio of 100 (one year of next year’s cost ‘in the bank’) is a perfectly reasonable target. Now it is true that the current Trust Fund Ratio is something like 390 and embarking on a policy that brings that down to close to 100 is the right way to go. But it just happens that putting the Trust Fund on a smooth glide path to a 100 TF Ratio results in the nominal balance of the Trust Fund never actually declining. Which in turn means no net redemption of the Trust Fund even as it shrinks in proportion to Cost.
This was not an intended result of the Northwest Plan and actually came as a surprise to at least one principal author. In fact you can look at it as just an arithmetic quirk. But the fact is that nominal Social Security cost will increase over the years in rough alignment with GDP but with a small bump on top of that due to demographic change. As such at some point the amount needed for a 100 TF Ratio will be greater than the $2.8 trillion in the TF today. The only question is whether we should starve the system of income in a way that puts the TF ratio on a U-shaped curve to that ultimate level of reserves and so give a break to people in the next ten years at the expense of workers in the ten years after that or whether we should just put the Trust Fund on a straighter glide path to that result. If the latter the arithmetic just results in a TF that NEVER declines in nominal terms.
It is worth noting that this same effect happens no matter how you ‘fix’ Social Security. The current ‘Expand Social Security’ proposal does the same thing as the most dastardly ‘Starve Granny in the Catfood Aisle’ would. It is just a byproduct of restoring solvency to the system with a reasonable level of reserves.
To put this another way. What do we gain by “redeeming the debt (or nearly all of it)” if that means taking reserves down to a critical level in the way the system was in 1983?
I think I agree with Bruce above, but let me try to put it another way:
The finances of Social Security are pretty straight forward and easy to understand once you know what they are.
As things currently are, the Trust Fund will be “fully redeemed” in about 2033. This is what the bad guys call “broke”, but they are lying.
If at that time people decide they would rather pay 2% more on their payroll tax than to take a 20% cut in benefits, Social Security will be fixed essentially forever.
But some people call a 2% tax hike a 33% tax hike because 2% is 33% of 6%… the current tax…. and it sounds so much scarier.
As it happens there was a 2% tax hike a couple of years ago to restore the tax to the level it was at before the 2% tax cut… a cynical political ploy… of a couple years previous. And NO ONE NOTICED.
On the other hand it would be an entirely unnessary and stupid way to manage things. By raising the tax one tenth of one percent per year, the tax hike would be completely unnoticeable (about eighty cents per week each year in today’s terms), the extra tax “before it is needed” would extend the life of the Trust Fund and PAY INTEREST which would help pay the remainder of the Boomer retirement, which was the reason for the enhanced Trust Fund in the first place.
The gradual increase provides that those who will benefit most by the ultimate tax raise (2% per worker) will be those who will get the most benefit… by living longer at a higher standard of living and commensurate benefit level… and they will be those with the most money to pay for the increased tax due to gradually increasing wages.
This way of doing it is so perfect, if I can be forgiven a shocking lack of modesty [actually I did not invent this approach, I merely discovered it],that I cannot see any point in jury rigging some other scheme that would not actually fix the “problem” and just invite more endless arguments… not all of them honest… that would be turned in the hands of the enemy into more scare rhetoric.
I quite agree that those who call the Trust Fund “imaginary” are lunatics, and especially funny when after calling it imaginary run around and scream we are all going to die when the newspapers report the Trust Fund is running out of money.
I hope that if you read carefully, and I was clear enough, you will see that scenario one above is what you get if you “redeem the Trust Fund before making adjustments,” short of cutting the payroll tax now and just living on the Trust Fund for about three years… not a good idea.
On the other hand, just raising the tax one tenth of one percent per year would extend Social Security… without “redeeming” ANY of the “principle” in the Trust Fund, and letting it sit as THE “one year’s required reserve” forever, barring another Great Recession.
This latter approach would, first, let the people decide when and if the cost of Social Security is more than it is worth to them to support their old age [which would be never if they are honestly informed]
it would allow the “defenders of Social Security” as much time as it will take for them to either “expand benefits,” “tax the rich,” or “provide more jobs at better wages.”
There is NO reason Social Security needs to be fundamentally changed (destroyed) now. We can simply pay for our own retirements the way our parents and grandparents did, by saving (via the payroll tax) enough to provide adequate minimum benefits.
Anyone who wants to cut benefits below “adequate” or raise them above “adequate” ought to have to face a very heavy burden of proof before they are allowed to monkey with something THAT WORKS.