Dean Baker on the 2015 SocSec Report and Real Wage
CEPR’s Dean Baker: Wage Growth Continues to be the Key to Social Security Solvency
Dean Baker and colleague Mark Weisbrot have been making a steady case since their publication of the aptly named Social Security: the Phony Crisis back in 1999. In short Social Security does not face a structural demographic problem, instead it has encountered a contingent economic one, marked mostly by a failure of wages to grow with productivity in the ways it did in past decades. The ‘Phony Crisis’ link goes to the Introduction to the book, if you haven’t read it you should. And equally worth reading is the Press Release linked above published last Wednesday. I just want to isolate and emphasize two paragraphs from the Press Release.
Wage growth is the key to the program’s solvency for two reasons. The first is that the upward redistribution of wage income over the last three decades has played a large role in the projected shortfall. As income has been transferred from ordinary workers to those at the top of the wage distribution, a larger share of wage income has escaped taxation. When the Greenspan Commission set the cap for taxable wages in 1983, it covered 90 percent of wage income. Currently the cap only covers around 82 percent of wage income. If the cap had continued to cover 90 percent of wage income, the projected shortfall would be roughly 40 percent less than it is now.
“The other reason why broadly based wage growth is key to the program’s continuing solvency is that the burden of possible future tax increases would be much less consequential if most workers will share in the gains of economic growth. The Social Security trustees project that real wages will rise by more than 34 percent over the next two decades. (They are projected to rise by another 30 percent over the following two decades.) Even if the payroll tax is increased by three percentage points, it would take back less than one-tenth of the projected rise in before-tax wages if wage growth is evenly shared. On the other hand, if most of the gains from growth continue to go to those at the top end of the distribution, any tax increase will be a major burden.
On my reading Dean is calling for a dual approach: one that emphasizes wage growth in increasing revenue to Social Security but which also envisions accompanying tax increases. Whose affordability is that much more eased by the wage boosts. It doesn’t have to be either or, it can be MJ.ABW and NW.
More Jobs. At Better Wages. plus the Northwest Plan.
Part of the SS payout formula is to adjust your earnings for each year (to compute your retirement benefits) according to per capita income growth since. Trouble is that the growth of middle wages haven’t kept up with national overall growth.
Upshot: my 1968 earnings of $25,000 would have been adjusted to $50,000 to compute my benefits — if average persons’ wage growth had kept up with average wage growth. As such I only get credit for only $33,000.
So fallen behind wages cuts both on the taxation end but on the pay out formula end.
I love Dean Baker and I am even kind of fond of the present author, so if I offer what may sound like a tiny criticism it should not be taken as an attack on either. Just a report from an outpost on a different part of the front.
Baker wrote in 1999 that we had 35 years to fix the roof and shouldn’t be knocking holes in it because the bad guys were screaming the sky is falling. (my words mostly, not his.) He was right. But now we are down to about twenty years to fix the roof, and i think about two years before the official building inspector tells us we have a problem. So I think it’s getting rather late in the day to count on someone else fixing it for us, or to rely on methods that require a great deal of faith that things are not as they seem and will be changed by “plans” that don’t have any operational steps or, indeed, realistic probability.
Second, while the shift in ‘oo gets paid more than ‘oo is indeed part of the problem, Social Security was designed and intended to take care of us… enable us to take care of ourselves… in hard times.
These are hard times. And will be worse when we reach retirement age. We can at least guarantee ourselves, our children, and our less fortunate brothers and sisters, the ability to retire in modest comfort by simply raising our own payroll tax an amount each year that we would not notice, much less feel.
Once we have secured the safety net, we can go back to work on more jobs at better wages, fixing inequality, electing Bernie, enhancing welfare, taxing the rich… all good things.
But easier done if the roof is patched and we know it is patched.
Without (before) changing anything else, Social Security can be made adequate for our future needs (which will cost a lot more than most people seem able to imagine) simply by saving an extra 80 cents per week for every 40 thousand dollars a year we make, and raising that another 80 cents per week next year (when we are expected, inequality and all, to be making an extra eight dollars per week), and continuing this essentially for about 20 of the next 75 years, mostly or entirely (your choice) in the first twenty, but better if “triggered” only by Trustees Reporting “short term actuarial insolvency,” that is when the problem is reasonably imminent and not “over the infinite horizon.”
My apologies to those who can’t stand to hear this repeated, or feel that I am stepping on their parade, but repetition is the only hope of a still small voice getting heard. And we need to have that parade when we win the war, not instead of it.
Seems like deja vu all over again.
Jack
July 24, 2015 9:22 pm
“Does anyone any where ever discuss the probable better effect on the actuarial balances that would result if the income and wealth distributions were better balanced. Granted that raising the FICA tax would be one answer, but that only continues the increasingly distorted distribution of income and taxation in general. If unemployment were lower and those who have jobs were paid a better income that would be a more direct way to improve our national retirement plan. Just wondering why better income distribution is never the focus of attention when workers retirement is the topic of discussion?”
I’ve always admired Dean Baker for his honest and better thought out arguments regarding the economic ailments that conspire against the working class. Good company is always appreciated.
Jack:
Seems like I remember a few comments made by myself on well paying job growth and sharing productivity gains with Labor rather than going solely to Capital.
In fairness Dean wrote this on July 22nd. So deja vu even before again. Or something.
Also, relying on the Trustee’s report to confirm the obvious is unfortunate, but apparently necessitated by the continuous echoic nature of the attacks on the Social Security program by the less than objective participants in what has become a straw debate. This has never been a case of two legitimate sides of an argument vying with one another for the hearts and minds of the citizenry. The problem is that those whose job it is to argue for a change/fix/repair/adjustment/saving of the Social Security program are aiming at those hearts. Dean Baker and others like him, including those here at Angry Bear, are addressing the minds. It’s not a fair fight because it is made to appear to be a debate between equal and legitimate positions. Not so. Call the liars what they are. The louder the better. Don’t simply point to the Trustee’s Report as evidence of a better light at the end of a tunnel. The light was never dim save for the ever fading incomes of the workers. Better wages lead to greater tax revenue. Better wages lead to a stronger economy with more demand for goods and services, which leads to the need for more workers to meet that increase inn demand. Which in turn leads to even greater tax revenue. A Trustee’s Report is a good script to argue over, but it is little more than a presentation of the obvious.
Well a presentation of the obvious by the official scorekeepers. This isn’t just as Issue Paper by GAO or something, this is the 75th in a series of mandated Reports to Congress by the Trustees of Social Security and Medicare who have oversight and in the persons of the Secretary of Treasury/Managing Trustee and the Commissioner direction over a big chunk of the American economy and the direct welfare of 16% of Americans. As such it has a certain auctoritas absent in say Angry Bear posts by you or me.
For the last 29 years or so the enemies of Social Security have often resorted to the trope “Even the Trustees say —“. Well maybe it is time to pay them back in their own rhetorical coin.
Something doesn’t work here. Are we, or are we not, funding our own benefits?
If we are funding our own benefits, then future wage growth should be irrelevant, because our Social Security benefits are funded by, and determined by, our own contributions. Thus, in paying my FICA taxes, my benefits are being funded.
Well there are two answers to your question: Sort of. and No.
Social Security works more like a Defined Benefit Pension than a Defined Contribution Pension. That is your benefit is defined by the income of your of highest 35 years in the workforce while being funded by all years in the workforce which then with the amount determined by a formula tied to Real Wage increases over your working life. This is all complicated by a formula that has higher replacement rates for lower income workers than higher ones.
So like a Defined Benefit Pension you participated and paid in and had the pension amount dependent on that without ever having your singular contributions set aside. Unlike a Defined Contribution Pension where your contributions and an employer match (or not) go into a singular account.
The two systems converge in output if your highest income years are right before retirement, but would differ significantly if those highest income years were mid-career and Real Wages accelerated in the years between then and your Full Retirement Age.
So in short between the two answers “It depends” and “No” the much better one is “No, that is not how a Pay-Go system works”.
Warren
the amount you get back depends on the amount you put in.. AND the effective interest generated by the growth in “covered wages” over the 35 or so years you have been contributing.
so while you are paying for your own pension, the “time value” of your contributions is determined by the value of wage growth over that time.
Jack
at the risk of whining myself, it’s NEVER a fair fight.
you have to do the work and the thinking. relying on “the debate” will get about the same results as German liberals in the 1930’s got from laughing at Hitler.
so once again, it’s all well and good to dream, want, wish, plan, and even work for “justice.” but in the meanwhile the roof needs to be fixed.
Dale,
Don’t get me wrong. I’m not saying to ignore the needs of the program. If slight increases in the FICA deductions is a good way to cope with the needs for better cash flow then sure thing. Do it.
What I am saying is that more voice needs to be added to the more general income needs of the workers, and that that is a more effective and long term enhancement for SS as a worker’s retirement program. I’m also noting that the “debate” is fallacious in its current structure. There is no SS crises and those that have, and continue to argue the same, are dishonest. Don’t phrase your attention to the needs of the program as an alternative to bogus critics, but rather describe an approach like the NW plan as the first step and better income for workers as the better if later step. Keep the bull shiters out of the discussion by ignoring their falling sky arguments. Emphasize the effectiveness of a long running program and the need to continue that success with small adjustments over time and a bigger adjustment in the wages of people who do all the work.
Jack
you got me:
the only “Do Something” I know how to do now is to try to put the one tenth percent solution into the hands of someone who can use it to laugh the sky is falling Lie out of court.
As for expanding my argument to emphasize the “justice” aspects, well there are other people who can handle that better than i can.
As for not hearing that aspect… I thought Bernie was doing a pretty good job of bringing it to the fore.
My job, so far, is to keep reminding the good guys not to forget to fix the roof while they are fighting the good fight.
It seems to annoy them when I do this.
“[So] while you are paying for your own pension, the ‘time value’ of your contributions is determined by the value of wage growth over that time.”
That ‘time value’ should be determined by the interest on the bonds in the Trust Fund.
Warren if Social Security benefits were actually funded by returns on the Trust Fund you would have a point. But they aren’t. And shouldn’t be.
All I can suggest at this point is that you go to SSA.gov and start reading up on how Social Security works. Start with the concept “pay go”. Because there is no kind way of saying “Your claim doesn’t make any sense at all”. And it doesn’t.
Try this. Let’s say you bought an Insurance Policy or Annuity that had a fixed payout. You know that the Insurance Company makes payments on that policy or annuity via a combination of current premiums coming in and returns on investments of past premiums including those you paid in. Certainly you would not expect a short term to medium term dip in the investment return to allow the Company to reduce the value of your policy or annuity. That is not what you contracted for. Your proposal to tie value of benefits to return on the TF would not be fair even if benefits were being funded primarily out of those investments. Which they aren’t anyway.
Warren
NO! the whole point of SS is to free the worker from the anxieties of the bond market.
and where do you think bond interests come from anyway. (hint: the growth in the economy.)
trying to find a nice way to say you don’t have the first idea about SS. you are still trying to turn a horse into a cow. no real shame; neither do most people have any idea what SS is, and the bad guys trying to take it away from you rely on that.
“Are we, or are we not, funding our own benefits?”
Social Security can be and is looked at different ways by different people. I think that is important in why it is so successful, but it also means that people who do not like it can easily find things to pick at.
I see it primarily as insurance. You are funding your benefits by entering into a compact to pool your risks with other workers. Your risk of running short of your own saving during retirement. If no reason develops wherein you run short, you should be thankful – even though it means that your return on investment with SS was not so good.
As an engineer I conclude that trying to analyze SS as a retirement vehicle, (as if it should return compound interest), is going to get the analysis wrong because you are modeling the system poorly. The clearest system analysis is just to compare its administrative costs to alternative insurance plans. SS is less than 1 percent – VERY good.
When I find myself disagreeing about SS, I tell myself it is a feature and try to spend some time also figuring where we agree.
Just so it’s clear — we’re paying for our parents’ and grandparents’ Social Security benefits, not our own; and our children and grandchildren will be paying for our benefits, not their own.
Warren,
If you draw a control volume around your own cash flows and you cannot tell the difference, does it matter?
Yes, technically you are correct, but as I said above, you can look at it other ways as well.
Would a company pension program, in which the early retirees get something for nothing, and in which the excess contributions were put in a fund that holds nothing but that company’s bonds, be legal in this country?
Arne
technically Warren is not correct. when you pay your SS “tax” it goes into a fund. just like any other fund the money does not sit there breeding in the dark until you come to take ‘your” money out.
does Warren think he is funding his own insurance when he buys an insurance policy? does he think he is funding his own future income if he puts money in an investment, bank, or bond?
somehow the idea that his dollar bills go out the door today to pay for an already retired person benefits so looms in his mind he cannot see that retired person already paid for his benefits… the money plus interest coming to him was absolutely “funded” by him. just the same as an investment, a bank account, an insurance policy, or a savings bond.
similarly when he retires his SS checks will have been funded by him. the kids paying their SS are funding their future benefit checks.
there is nothing mysterious here except to people who want to pretend that the only way you can “fund” your own benefits is if the money is never, ever used by.. say the people who funded their own benefits in the past.
this is not a matter of “opinion”, it’s a matter of how money works in the real world. there may be two ways to look at something, but as an engineer you ought to know that some ways work, and some ways don’t. SS works.
Warren cannot, no matter how hard he tries “fund” his own benefits without that money passing through the hands of other people who use it in the meanwhile for their own purposes.
his imagination is locked in a world where the dragon hordes gold and jules. even people who know nothing about money know that you take care of your children while they are growing and they take care of you when you are old and their children take care of them when they are old and so on.
maybe in the insect world Warren can find a way of “funding” old age that does not depend on a transfer of “wealth” from the young to the old, paid for by the old who paid for the young AND for their own elders back through time til before we came down from the trees. and forward through time until we forget “honor your mother and father” and cease to be human.
Warren now you are trolling. Nobody could be so apparently clueless about Social Security finance and just come up with this particular talking point.
First Past Participants (which is Social Security’s way of talking about former beneficiaries now dead) actually put in more dollars in contributions than they took out in benefits. So your premise, though widely shared, was this year debunked.
Second while there were participants who drew out benefits without contributing this was entirely because they were drawing benefits under Title 1 of the Social Security Act even as they were largely exempt from contributions under Title 2 of the Act, which is what we know as Social Security today.
That is benefits under the program that required contributions did not start until 1940 and at no time in its early years did it require subsidizing. On the other hand the Title 1 program, which was funded out of the General Fund was larger than Title 2 until 1950. But to address your point there WAS NO cross contribution from Title 2 to Title 1, the backwards transfer to early retirees NEVER HAPPENED.
So stop playing the innocent here when you are just rolling out talking point, getting contradicted by actual data, and then rolling out a new one. This is a dishonest game and we have seen too many players of it in the past to be fooled.
Warren
the early recipients did not get something for nothing. they paid for their own parents old age, and they paid for the taxes that supported the poor elderly. and they lost their own savings through the great depression which they did not cause. they also educated their own children and fought in their country’s wars, and worked and built a world in which it was easier for their children to make money than it had been for them.
SS was invented as a better way of preventing old age poverty in a world in which, say, one’s children could be drafted and die in a war, or they, or you could have all your money and investments disappear in a financial calamity they or you did not cause.
if you want to “think of it your way” be my guest as long as you don’t mind me thinking of your brain my way.
its the Scrooge disease and has been reviled by people since the beginning of time.
correct me if i am wrong:
while you are correct that “past cohorts” paid in more than they took out (not sure this is true other than “actuarily”) there were probably some of the very early retirees who got more in benefits over a retirement than they had paid in SS taxes in the few years between 1940 and the year they retired.
But Social Security is not, and was not intended to be a private investment club. It was intended to be a community solution to a community problem, and the early retirees did not just walk in off the street and start picking up government checks without having contributed in the ways i suggested above: most directly by paying into the “retirement systems” that SS replaced.
I am only vaguely aware of the shift from title I to title 2, but I think that fits in with what i am saying here.
again, i’m not trying to argue with you here. just giving you a chance to explain the “titles” more fully, and trying to present a somewhat less narrow picture of SS… or “paying for” than the Warrens of the world will ever understand. and since theirs is such an easy narrative to write, and seems to stand up to “common sense” to people who don’t look too carefully, it’s a narrative that can seduce people into thinking they are being clever when they say that SS “steals from the children.”
Dale check out Table VI.F2, also reproduced on my Infinite Future Fun post from the 23rd.
http://angrybearblog.strategydemo.com/2015/07/2015-social-security-report-infinite-future-fun.html
The first two lines discuss ‘Past’ Participants, i.e. dead beneficiaries, which would include everyone who turned 65 by 1970 or so and certainly all legacy beneficiaries. There may have been some minor cross-subsidies within this cohort but taken as a group they more than paid their way.
As to Title 1, I have blogged about it before. It was a welfare based program that used Federal money to fund State Old Age Pensions and served more people and paid out more in benefits than Title 2 right until 1950.
I also discussed this in my 2011 post on the First Social Security Report whose Tables show that there were no General Fund transfers to pay benefits under Title 2, that is the Social Security Trust Funds didn’t start out with some deficit due to paying benefits to previous generations of retirees. Because those retirees were not eligible for benefits under Title 2 to start with.
That matter is handled adequately on the ssa.gov/history site, which is where I got most of my information, subsequently filled out and confirmed by examining the 1941 Report.
BTW the retirement systems that Social Security “replaced” were not contribution based. They were welfare plain and simple. Unfortunately there don’t seem to be easily accessible data on the dollars put out between 1935 and the ultimate sun-setting of Title 1. Which in a sense never went away entirely but ended up morphing into Supplemental Security Income (SSI). From this perspective workers ultimately relieved income tax payers of a large part of a previous welfare program as Social Security phased in.
Bruce
thanks. i don’t know if i will get time to look into it. but my guess is that people who reached 65 in 1970 wouldn’t have had the same ratio of benefits collected to taxes paid as thouse who turned 65 in 1945 or 1950.
And i’d have to look pretty hard at that “paid in more than they collected” because that sounds like another “present value” con.
and served more people and paid out more benefits while probably true is not quite the same as individuals getting out more, or less, than they paid in.
you see, the scam, or the argument, depends on the evil magician misdirecting your attention from the actual reality to an argument about categories with similar or same names… i don’t need to go into that again, and I am not arguing here, just explaining my own unreadiness to “believe.”
the legacy debt is a con job. I get angry with people who tell me “it’s hard for the layman to understand,” when the reality is their idea of “understanding” anything is to be able to repeat the explanation that someone else gave them… without their understanding that explanation or realizing it was no explanation at all.
Orszag told us a story about imagine your grandfather got sick and spent all his savings on doctors so your father had to spend HIS savings to support grandfather, and now YOU have to spend all your saving to support your father… and so on. well, this tender story might sound a little different if your grandfather spent all his savings on doctors for your father, or college for your father so he (the father) wouldn’t have to work as hard as grandpa to make a lot more money.
nor would Orszag have told us a story about folks who were the first in the door on the Microsoft IPO. these people bought cheap, and sold high… to the folks who came in late. does that make their higher profits a kind of theft from the later investor?
the fact is that all the people who paid into SS in the early days eventually got all their money back plus interest when they retired. that’s all you can expect from an “investment” or an insurance policy.
you cannot expect to hold a grudge feeling cheated because someone else got a better deal than you did.
which is what the “legacy debt” folks are inviting us to do. it’s a cheap way of selling your soul.
SS didn’t start out with ANY deficits. People paid in and a short time later some people began retiring paid for with (if not exactly “by”) the taxes of those working but not yet retired. but those working did not lose anything by the deal… when they retired in their turn they got paid the benefits they paid for. those who retired earlier did not owe them anything.
eventually the system “matured” when the number of retirees reached a point where the taxes paid by the still working equals the amount needed by the retired (and disabled and dependents). that condition can last forever.
it would only be if SS suddenly stopped and those who had paid taxes were denied benefits. that’s what you and i are trying to prevent. that’s what the bad guys are trying to bring to pass..
exactly
the retirement system that SS replaced was welfare
it could be argued, fairly, i think, that even welfare recipients “paid for” that welfare by taxes they paid before they fell on hard times, or maybe just by being good to other people. the schoolteacher who taught you the basic skills that got you a good job “paid for” her welfare check when she got too old to work and the school didn’t provide a pension, and she had no children to support her…
but this is not a way of thinking that is encourage by the “money is god” people.
the important difference between SS and welfare is that SS establishes a chain of ownership. you get your SS check of such and such because you paid your premiums and they earned interest according to the growth of the economy on your watch.
with welfare, the money-is-god people can always pretend to themselves that it is “their” money they are giving (willingly or unwillingly) to the undeserving poor.
“… be legal in this country?’
Yes, of course it would. But it would not qualify to be guaranteed by the government.
excellent reply.
but i am afraid warren will persist in his delusion that a horse is a cow.
but you raise another issue i’d like to comment on.
some people say SS is not guaranteed and they point to a Supreme Court decision that denied benefits to a deported communist.
so all i can say is that if you are a communist or some other lone unliked individual don’t count on the Supreme Court to uphold your ordinary rights. On the other hand, if congress decided to take away the pensions of everyone at once, you can be fairly sure the Congress would hear about it, and the Supreme Court would find a way to say “you can’t do that.”
I guess my point is that you can’t really say ANYthing is guaranteed, but most of the things that are, are guaranteed under the law… the law that Congress COULD change, subject of course to the Supreme Court.
but once more, there is a certain kind of personality that can’t accept that.
Coberly: “[The] retirement system that SS replaced was welfare.”
I cannot find evidence of that claim. Only that it was decided that CHARITY was not enough, and so the Great Depression programs were enacted:
http://www.ssa.gov/history/pdf/histdev.pdf
Anyway, the point was merely to clarify that those who payed in early (either through Title 1 or Title 2 — it does not really matter to those who were paying, except that the latter contributions were credited to them for their benefit calculations and the former were not) payed for their parents’ and grandparents’ benefits, not for their own. That is why an ever-growing pool of new payers is required to keep the system from collapsing.
But my other point is this: Why is the SSTF held to a different standard than are corporate pension funds?
“Why is the SSTF held to a different standard than are corporate pension funds?”
Two reasons here.
1) The SSTF is not a pension fund, it is simple a reserve.
2) Corporations do not have the authority to tax.
“SS works.”
Yes, Dale. That is the point. So, when someone makes a true statement that he thinks has dire implications, you need to tell him why the implications are untrue instead of pretending the fact is untrue.
Warren–The original 1935 version of Social Security included provisions for substantial pre-funding, with FICA taxes implemented several years before the scheduled commencement of benefits in 1942. (This pre-funding may have been one of the causes of the 1937 recession.)
However, the original pre-funding approach was scrapped by the comprehensive 1939 amendments to Social Security.which accelerated payment of benefits and deferred scheduled increases in payroll taxes. The 1939 amendments were enacted by a coalition of conservatives who wanted to forestall the creation of a massive government-controlled investment fund and liberals who wanted to increase benefits. My source for this histor is Jacob Hacker’s 2002 book, The Divided Welfare State, pp 108-112.
Arne
Warren did not make a true statement. He made a statement that showed he did not understand Social Security. There are others here who do not understand Social Security but think they are in favor of it and even make good contributions to understanding the mechanics of it.
If we had time enough we could debate… or even try to understand… the “true” nature of things. I tried to explain in more than a few words why Warren was wrong. But I can’t go on forever answering questions.. or charges… from someone who shows no sign of even trying to understand my point of view even as a point of view, let alone as a “true” description of how the world actually works.
Wkj
I think your “facts” are correct, as far as facts ever are correct. My reading gives me a different perspective on those facts.
But saying pre funding may have been a cause of the 1937 recession seems to me to be one of those “possibly true” if by “a” you mean maybe a tiny straw on the camel’s back, but it’s not the sort of thing that should be said in front of people who will take it to mean and prove that “Social Security caused the recession.”
The sorts of things I read say that recession was caused by Roosevelt’s anxiety to “balance the budget”, which in the light of other things i think i know about the economic history of this country strikes me as “more likely to be true.”
But thanks for the contribution. If, as I said, we had time enough, I would like to explore all those ideas. It is with the Warrens that I lose patience because after several hundred exchanges with no sign of movement but very quick response with bogus and familiar formulations I suspect those people of lack of sincerity or lack of mental capacity. Not that they are “stupid” in the ordinary sense of the word, but completely incapable of letting go of a previously conceived idea.
We all suffer from this to some extent, but the Warrens… and there are many of them (unless Warren is one of the name changers AB seems to attract… seems particularly pernicious, or at least wearing me out.
“I cannot find evidence of that claim.”
Look up about county run poor houses.
Yes and State Old Age Pensions. The base on which Title 1 was built and the conduit for the funds.
I agree with Dean Baker’s press release. It’s good that he mentioned that the DI’s current problems are due to lower revenue because of the downturn rather than higher spending.
One reason that the upward redistribution of income hurts Social Security’s finances is that, as Dean mentions, tax revenue is lowered since only wages below the cap are taxed. However, benefits are not reduced by the upward redistribution, since they depend on the Average Wage Index (AWI), which includes income above the cap.
By the way, as others have pointed out, wages are adjusted by the AWI, but only until the year a person turns 60 – after that, wages are not adjusted. This means that a person’s benefits can be proportional (or nearly so) to the AWI the year he or she turns 60. Since the downturn has reduced wages over what they would have been, this cuts benefits. The most recent AWI is $44888 for 2013. The Trustees Report for 2008 estimated that the 2013 AWI would be $51050, 14% higher. This means the downturn has cost some people born in 1953 (who turned 60 in 2013) over 10% in benefits. Similarly for people who turned 60 in other years during the downturn. These “losses” are permanent. (The “cut” is less for people who have many of their 35 highest-income years after the downturn started.)
“wages are adjusted by the AWI, but only until the year a person turns 60”
Thanks, I did not know that.
Because my raises for the last 15 years have been only about equal to CPI, my highest earning years relative to Average Wage Index were from age 35 to age 45. I know that our local teacher’s contracts are the same way.
Since each of the highest 35 years has the same weight, I think you are overestimating. On the other hand, there are many folks whose wages were reduced to zero for a significant period, so there are many people who did lose more than 10 percent of their Primary Insurance Amount. on the third hand, benefits are progressive, so a 10 percent drop in salary does not mean a 10 percent drop in benefits.
The details may overwhelm, but it works.
“an ever-growing pool of new payers is required to keep the system from collapsing”
We can already see that we need to adjust to the reality that the pool is not growing as fast as is used to (in part because wages are not keeping up as was the point of the original post). If we ever reach a point where the pool is not growing at all, we will need to adjust to that too. Since people will still need to live after they can no longer work, we will want to make that adjustment.
SS works. If your analysis says that it can’t, you need to look at your assumptions.
Bruce Webb: “BTW the retirement systems that Social Security “replaced” were not contribution based. They were welfare plain and simple.”
That is a very unfortunate statement and not really accurate. Defined benefit pension plans, almost all a thing of the past now, were a contractual arrangement between employers and workers. Some of those contracts were explicit and backed by union strength. Some were verbally and concretely (in writing) described to workers, usually at time of hiring, but still a contractual agreement. All were provided in lieu of current salaries and represented delayed compensation to the workers. That some employers chose to inadequately fund such plans is not the fault of the employees, but, instead, an abrogation of an employer’s fiduciary responsibility to the delayed compensation aspect of the employment contract. I don’t think that guys like James Dimon or Lloyd Blankfein have to worry about their retirement package being pulled out from under them. It’s only regular employees that face that risk.
No Bruce, welfare is an entirely inappropriate description of the pension plans that SS and the insipid IRAs have replaced. Let’s try hard not to make the liars’ arguments for them. They’re doing that well enough without any assistance from SS supporters.
Social Security did not replace defined benefit pensions. If it had that would have been a bad thing. But to the best of my knowledge the golden days of defined benefit pensions came after WWII and not before 1935. So your entire premise is off. Perhaps it wasn’t clear that I was talking about the immediate effects of the Social Security Act of 1935 on State Old Age Pensions and intended nothing one way or another about private pension plans then or now.
Oh, and what I said here: Jack July 29, 2015 12:13 pm. Warren is doing a swell job of proving my point. That’s an awful lot of blog space being devoted to a troll who can’t seem to get the story straight.
Arne wrote ” On the other hand, there are many folks whose wages were reduced to zero for a significant period, so there are many people who did lose more than 10 percent of their Primary Insurance Amount. on the third hand, benefits are progressive, so a 10 percent drop in salary does not mean a 10 percent drop in benefits.”
I was just calculating the effect of the drop in AWI on people’s benefits, without assuming any change in their own income. To make matters simple, assume the highest 35 years of indexed wages of a person born in 1953 all occurred by 2008. Then I think that person’s AIME would be 12% lower with the actual 2013 AWI than it would have been with the projected 2013 AWI, because in this case AIME is proportional to the 2013 AWI. This would also mean a 12% lower PIA (the bend points are also indexed by AWI, so the lower AWI gives lower bend points, and the result is that PIA is also proportional to AWI).
If some of the person’s highest indexed earning years were during the downturn, then I think you would get the same result if the person’s income relative to the AWI in those years were the same as they would have been without the downturn.
The bottom line is that people who turn 60 in periods when wages are relatively low (like now) do worse than people who turn 60 when they are relatively high, all else being equal. It’s not a big difference, but it could easily be $100/month.
“I was just calculating the effect of the drop in AWI on people’s benefits, without assuming any change in their own income.”
Oh, I see now. A valid concern, but I know SS works, so I still wonder if there is more to tell.
I think you might want to use inflation adjusted numbers, then. The 2007 report predicted 21 percent increase in CPI. the 2015 report says only 10 or 11.
Also, being picky about wording: the 2007 report predicted an inflation adjusted increase from $41.4K (2008 dollars) to $45.5K but the actual increase was only to $43.9K. A relative drop without being an actual drop.
All of our finances, not just our retirement prospects, would benefit from better wage growth.
Arne – Yes, it would have been more accurate to include inflation. Because of the downturn, wages grew slower than projected, but inflation was also less than projected. However, even after correcting for inflation, the real AWI increase was less than projected (projected to be over 1% per year, while it was actually negative). So it’s still a significant effect after including inflation.
Wkj: “This pre-funding may have been one of the causes of the 1937 recession.”
If the money is put in the SSTF via bonds sold by the Treasury, with that money going to the General Fund and spent by the government, how would that be a cause of recession?
If tax money is put right back into government spending, how would it lower GDP?
Warren
that is a very good question.
i think to get a sensible answer to it you are going to have to know exactly what “prefunding” meant in detail including where the money was “kept.”
i actually don’t know myself. and can only contribute that at least one source i read attributed the ’37 recession to FDR’s decision to balance the budget. which also needs to be understood in detail as to what it meant in terms of who had the money and what they did with it.
you will need to be careful of the folks who have “theories” about this.
it would make sense to me that money withdrawn from circulation would hurt the economy. money not spent on investment would hurt the economy. on the other hand too much money spent, or too much money “invested” also hurts the economy. i believe the “art” of the Fed is to manage the rate of lending (money creation) so that it just balances the rate of business expansion. i also believe that they have had some serious failures attempting that.
Not to dispute Warren and Coberly’s answers here, which I think are broadly right but it might be worth noting that there was no SSTF in 1937, instead the Trust Funds went into operation on Jan 1, 1940 which explains why the very first Report of the Trustees didn’t come out until Jan 1941.
Still the principle is the same, amounts paid in contributions were credited to special accounts at Treasury but the cash dollars extracted from the economy were not physically sequestered. And in any event the amounts of money in play could not realistically have had the macroeconomic effect necessary to trigger the events of 1937.
Update: http://www.ssa.gov/OACT/TR/historical/1941TR.html
Per Table 1 it would appear that the program started collecting receipts as of Jan 1, 1937 and immediately invested them in 3% Bonds. So hard to see any of that triggering a current year recession.
When Social Security taxes were initiated in 1937, that action reduced net wages and net profits and thus reduced demand in the economy. The investment of those taxes in bonds did not restore that demand, but instead was a component of the withdrawal of demand from the economy that arose from the federal budget balancing. See attached,Federal Reserve History of the Recession of 1937-1938, particularity the 6th paragraph.
http://www.federalreservehistory.org/Events/DetailView/27
Yeah except that in full context that paragraph doesn’t support your assertion at all.
There are two different claims here, the second in direct quotation and the first as indirect reporting. In the first the imposition of payroll tax ON TOP of other taxes is seen as a component of BOTH “the recession and the revival”. At worst suggesting the FICA created a time lag between the taxation and the spending.
The second puts the problem firmly where most supporters of the New Deal (and Social Security) generally do: premature austerity. “too rapid withdrawal of the government’s stimulus”
Investment in bonds may not have “restore(d) that demand” but it did provide cash to the government whose spending then led to the “revival”.
Or that is my reading anyway. And I do follow links. Because blind assertions of “read this, I won’t explain it but it supports my point” really get us nowhere. Bring it up front.
Wkj
subject to my need for more coffee, I don’t think the paragraph you cite supports your statement that SS pre funding may have been a cause of the recession.
I’ll stand by my “possibly A cause”… but your citation refers to several other possible causes which look a good deal more familiar to me (“excess reserves” by banks, Fed interest policies). And apparently it was reversing those other possible causes that resulted in the end of that recession…. while SS (including “pre funding?) continued and has continued through the greatest expansion of real living standards in American history… an expansion that only really began to fail when the Fed clumsily pursued anti-inflation policy in 1980.
And while your citation mentions the SS tax, and other taxes, together with a cessation of “stimulus” policies, it does not mention “pre funding.”
I certainly don’t know anything about this, but based on the “evidence” so far submitted, I think you’d have to work a little harder to make your case.
“More Jobs At Better Wages”
A great slogan, but what policies can get us there?
Minimum wage increase. $1 trillion ten year infrastructure program funded by a transactions tax on derivatives plus a return to Reagan era top marginal rates. Appointments made to the Fed Board of Governors that ensure that they will actually put equal weight on their employment and inflation mandates rather than as over the last seven or so decades mostly to the latter. Dynamic scoring by CBO that measures not just money impacts on the country but employment multipliers as well.
That might be a start. Once we see how that goes we might try a return to Kennedy era top rates and do something like launch a high tech CCC to install renewables on every flat roof in any State that gets more than 180 days of sunshine a year. The specifics don’t matter so much as making employment and Real Wage primary policy targets. Rather than listening to central bankers worldwide who insist that every tiny sign of good news for worker wages means Weimar is around the corner and Zimbabwe down the block.
Well, the specific DO matter if they don’t work.
We know, for instance, that increasing the Minimum Wage will cost jobs. Anyway, are people really too stupid to negotiate a fair price for their labor? If you think your labor is worth $15/hr., and you’re only getting $10, then ask your employer for a raise. If he won’t give it, then try to get a job somewhere else and ask for $15/hr. If no-one will give you $15/hr., then you were wrong — your labor is not worth $15/hr.
I am all in favor of infrastructure spending. Infrastructure improvements are a good way for the U.S. government to provide for the general welfare of the States. A good interstate highway system improves internal and external trade, and it’s a whole lot better than paying people to not work, which brings us to your idea of CCC. Get the people on welfare to do the work, and we can just transfer the money from welfare to infrastructure.
Warren we don’t know that raising minimum wage will cost jobs. All the empirical evidence is against it. You need to get your head out of page 3 of that Principles textbook.
And very few jobs that pay under $20 per hour are negotiable in that way. If you go to work at a large retailer or for government you get a take it or leave it offer at whatever their scale is. Plus anyone who thinks that you can just play one employer off against the other has never experienced the concept of a “wage study”. Which is where employers hire a consultant to do a study of “comparable wages” in that industry across a locality or region which the employer uses to bat down requests for wage increases. Then a DIFFERENT employer hires that same consultant to do the same “comparable wages” study and uses the results of the first client to justify the results to the second. Which all works out as a method for establishing a wage cartel.
Look the strategy you are suggesting might work okay for a 20 something coding wizard in an area where there are umpty dozen tech startups hiring talent away but it doesn’t describe the job market in any smallish city or town that I have ever experienced. Employers pay whatever the prevailing wage at which the wage market clears. And very few jobs at the $10-15/hr range are specialized enough that any given employee could leverage skills and experience. You are living in a fantasy world.
Plus you have no clue about welfare. In most places single men are not eligible for cash assistance, almost all of that instead goes to young families, often single parent ones, where the head of household is not remotely going to have the ability to just take on a construction job either as to time and skills. The notion that you could fund any significant portion of an infrastructure program out of welfare funds just means you learned your economics from a comic version of The Tales of General/Saint/Aw Shucks Ronnie Raygun.
Warren please go away. I just got home after buying this juicy steak and crab legs with my $1200 a month food stamp check and I need to eat before I go out shopping for my new Escalade and iObamaPhone 6s. So I really don’t have the time to address these childish fables.
Bruce: “Warren we don’t know that raising minimum wage will cost jobs. All the empirical evidence is against it. You need to get your head out of page 3 of that Principles textbook.”
Apparently, the CBO is also working off page 3 of that book: http://www.usatoday.com/story/news/politics/2014/02/18/cbo-minimum-wage-jobs/5582779/
Bruce: “[Very] few jobs that pay under $20 per hour are negotiable in that way.”
Which means that such labor is not worth more.
Bruce: “[You] have no clue about welfare. In most places single men are not eligible for cash assistance, almost all of that instead goes to young families, often single parent ones, where the head of household is not remotely going to have the ability to just take on a construction job either as to time and skills.”
I never said anything about single men. And why are there so many single-parent families? And if such people do not have the time and skills for construction jobs, why do you think their labor is worth $15 per hour?
Screw the CBO. Congress just inserted a new guy with instructions to do dynamic scoring, but of course only of tax cuts, and they have lost a lot of what little credibility they had under Elmendorf. I agree with the following from your USA Today link:
And Warren it was you that suggested that a worker making $10 could negotiate for $15 but now pivot to saying that all jobs earning under $20 are not worth more. Which doesn’t make any sense at all. Lack of negotiating power over the specific wage doesn’t mean the labor is worth whatever the employer wants it too. Instead the mechanism changes from one of direct negotiating between employee and employer to one of market clearing.
Plus you brought up the ludicrous idea that we could just find our labor force for an infrastructure program among current welfare recipients. Which implies a pool of labor available and able to take on that kind of work. Which doesn’t include single mothers for the most part. As to your $15 an hour question, most construction jobs that are not simply exploitative of undocumented workers start north of $15 an hour anyway. You might be able to hire flaggers and some asphalt guys for that but few others.
“Warren it was you that suggested that a worker making $10 could negotiate for $15 but now pivot to saying that all jobs earning under $20 are not worth more.”
No, I did not. I said that such a person could try to do so, but “[if] no-one will give you $15/hr., then you were wrong — your labor is not worth $15/hr.”
“As to your $15 an hour question, most construction jobs that are not simply exploitative of undocumented workers start north of $15 an hour anyway. You might be able to hire flaggers and some asphalt guys for that but few others.”
If the option is NOTHING — don’t take the job and you don’t get a check — then perhaps you would indeed find people to take that work. In fact, that is exactly what the illegal immigrants’ option is — take the work or get nothing at all — and they take the work.
Warren you are simply being incoherent here, in ways I am sure you don’t realize. You are skipping from claims that labor wages are set at marginal productivity to (partially) agreeing that wages are set simply by pricing power by employers. And in the process are embarrassing yourself.
Please proceed gov’ner.
Bruce, You either have too much time on your hands or you are indefatigable or hyper active. You’re killing mega bites and encouraging Warren to do the same all at once. And to what end? You may have noticed that Warren hasn’t changed his position a whit and much of what he offers is little more than Republican right wing boiler plate. Worse yet, he gets to have a debate here and make it look as though it’s an intellectual disagreement. An almost perfect form of propaganda.
What Warren is not taking into account is that for all those who have to take it or leave it in the jobs for low pay sector of our economy their is a direct cost to the rest of us. Even at $15 per hour the employee begins to make use of local and federal government support assistance programs. When workers earn even less, what has become known as the “working poor”, they receive yet an increasing amount of government assistance for things like health care, food purchases, and even child care. Great!! Below par wages paid by Cheap Charlie’s Fast Food emporium has now become subsidies by the government, which is us through increased taxes to make up for better pay. Then of course there is the effect of reduced FICA in flows to the Trust Fund for their eventual retirement.
One aspect of the invisible hand in the free market is the presence of the visible ruler that needs to slap the hand that keeps grabbing more and more than a fair share of the income and wealth of the nation. Walmart doesn’t need government assistance to meet its labor costs. Nor does any other business. If there are too many of the poor in any part of the country it does not follow that it is appropriate to allow employers to exploit that situation to their financial benefit.
Sorry Jack, didn’t mean to choke the Intertoobz.
And FYI at long last I start an actual honest to God full time job next Monday. And yes I HAVE had too much time on my hands. Pretty much since I came to Angry Bear.
I too am tiring of Warren treating us like we were noobies to this field and that he can just lay out the lamest talking points and have us looking on slack-jawed at the sheer brilliance of his logic. And am debating whether allowing him to stick around my comment threads serves a teaching purpose for others or not. Because clearly he has failed the “Fool or Knave” test. (Of which more latter). But I have literally nothing to do between today and Sunday so we will see.
Jack: “One aspect of the invisible hand in the free market is the presence of the visible ruler that needs to slap the hand that keeps grabbing more and more than a fair share of the income and wealth of the nation.”
What is this “fair share” you keep babbling about, Jack?
How, exactly, do you define what is anyone’s “fair share”?
Progressive taxation is the best way to go my friend. Pay your execs as much as you please and know that they will be taxed in a manner that reflects their earnings. Let’s go back to 1960 era rates and close all the loop holes. And include quick trading gains as regular income. And tax the boys and girls who didn’t even earn the fortune that mom or dad may leave them. It’s income isn’t it? It’s not family estate wealth given that only the head of the family decides how it gets spent.
BTW, Jonas Salk didn’t earn in his life time what many corporate execs
are paid for a month’s work. You figure it out my friend. And in case you didn’t notice, what the .01% don’t pay in taxes you do.
Quick trading gains (anything held less than one year) is already counted as regular income.
I think you’re talking about the folks who get paid trading other people’s money, but their pay is taxed as long-term capital gains, not ordinary income. And on that we are in total agreement — it should be taxed as ordinary income.