Dean Baker: “An Aging Society Is No Problem When Wages Rise”
The argument behind MJ.ABW in relation to Social Security (More Jobs. At Better Wages) by real economist and mentor Dean Baker of CEPR. Also an implicit underpinning of the Northwest Plan for a Real Social Security Fix. The whole thing is short if you want to read through: An Aging Society Is No Problem When Wages Rise
The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.
So, taking history as a guide, MJ.ABW could have closed 40 percent of the gap. Still, the calculus remains that if we keep living longer (the lull in longevity ends), we need to increase the portion of our wages that we set aside for retirement. This is true if it is within SS or if people save as individuals. Up to the amount people need for basic expenses, I choose the dependability of SS.
Dean is on record saying that the entire gap could have been made up if Real Wage had tracked Productivity as it had in the 60s. Which is NOT the same as saying it is all MJ.ABW, because there are more inputs to Labor Productivity than just labor time. But would seem on a back of the envelope calculation to add up to more than 40%.
But of course I agree with Arne on the substance, And Dean in the rest of the piece notes explicitly that the current time between FICA increases is unparalleled in the program’s history. Ideally Real Wage and FICA would increase together with the latter being the tiny fraction of the former that was needed. But needed. Because we WANT future retirees to live longer and have higher standards of living. Those are features and not just solvency bugs.
Mentor huh? A good one at that. At Loyola Chicago, I had one who kind of watched over me.
The increase in life expectancy can be broken into two parts.
First is the decrease in infant mortality. Even if those who survive infancy live no longer, the fact that fewer people die in infancy will lengthen the average live expectancy. The people who no longer die in infancy will pay FICA during their lives and should be roughly net neutral to the Social Security system. According to Paul Krugman, decreases in infant mortality account for about half the increase in life expectancy.
The second part can be calculated by looking at life expectancy at age 65. Krugman divides this population into two parts, those with above median incomes and those below. Those with below median income who make it to 65 do not live longer than the same cohort did 25 years ago. Those with above median income live enough longer to make up the other half of the increase in live expectancy. All this argues for changing the formula at which the government stops collecting FICA to fund this increase in longevity.
None of this detracts from what Bruce and Dean say. However, it does argue that simply having more jobs at better wages may not be enough.
To get back to a point I made in an earlier post.
MJ.ABW has two effects. One for the individual worker working more years/more consistently at higher pay will drive up that worker’s Scheduled Benefit. Right to the point where that worker has 35 years at the Cap.
Two. MJ.ABW by increasing total payroll will drive Trust Fund balances and so Payable Benefits overall. how could it not?
What MJ.ABW might NOT AT ALL do is close the gap between Scheduled and Payable.
That is if your primary focus is Solvency as such then MJ.ABW isn’t the Golden Ticket. But it tweaks up the trend lines for both Scheduled and Payable even if it doesn’t serve to close them.
And in the end retirees eat from the Payable basket and not the Solvency metric.
Which gets back to an even older and foundatiional point of mine.
What is Social Security crisis? Most people would agree that it is most prominently marked by Trust Fund Depletion and subsequent Benefit Cut. But the actual nature is disputed.
For enemies of Social Security the crisis point is the demand by then retirees that taxes be raised to make up for the gap in a program those enemies always hated and claimed was “unsustainable”.
For friends of Social Security the crisis point is the cut in benefits itself.
Both sides agree that the solution is to close the gap between Scheduled and Payable and so avoid the overnight cut. But enemies seek to eliminate the political pressure point on taxes then and there while friends want to eliminate the possibility of people throwing up their hands and saying “well too bad, so sad, but what can you do”.
But there is a third path. Rather than hypefocusing on the gap instead measure the outcome as it relates to the present. What share in future productivity and future improvements in standards of living is it fair for then retirees to claim? Because the future productivity pie will be sliced somehow. Which leaves the question of whether the first order metric is pie size, pie slice size, or pie slice proportion.
My personal focus is on pie slice size = basket of goods and that compared to today’s retirees first and then in proportion to tomorrow’s workers.
As MLK might have said: “Eyes on the Pies”.
Not to beat the point into the ground but “Rosser’s Equation” measures pie slice size in the future to pie slice size today. While avoiding the question of pie slice size envy or the great-grandkids with their Jetsons flying personal spaceships and robot maids. Whereas I will have to actually get up off the couch to get my dinner from the auto-chef. And suffer in my old self-driven Tesla Coupe on my way to the Senior Center.
Maybe I missed it; but, where does any of this claim the numbers of workers to retirees is the issue? Neither of the articles do and it should not as this is not the problem with what we are experiencing with SS TF and its coming shortfall (not that this will make any difference to Congress and those in the 1% and greater of household income).
I never got to the point of what would have happened if productivity gains were distributed to Labor in the same fashion as they had in the seventies and earlier and if the SS Payroll Tax needed to be increased. Too many intelligent people are stuck in the mud of numbers of workers to retirees paradigm which the ABriggs, Petersons, Druckenmillers (“How the Baby-boomers Stole $Trillions”), etc. ruthlessly employ and far too many believe this nonsense. It is a blatant attempt at masking the issues plaguing SS.
Baker says this:
“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.”
No productivity gain sharing and the same stagnation of income to Labor would result in the issue being 43.5% less “if just” the SS Payroll Wage Cap had kept up and at 90% of Payroll Wages. This only states part of the issue with this point as I believe we would find over the years, much of the income garnered by the 1% and a part of the 17% has escaped the SS Payroll Tax anyway as this income was Capital Gains. And this is shown here by Dean Baker:
Annual Difference in Social Security Revenues vs Outlays Without Upward Redistribution Graph
This is calculated over a 75 year actuary would should appease the naysayers.
First and foremost is the issue of productivity gains and the skewing of them upwards to a small percentage of Households in the form of Capital Gains which is taxed far differently than Payroll Wages and misses the SS Payroll Tax altogether. The issue with the skewing of productivity gains goes beyond SS.
It might be safe to say “an amount equal to 30 percent of the projected shortfall” due to not holding to a 90% of Payroll Income cap plus “roughly 40 percent of the shortfall projected by the Social Security trustees would not be there if there had not been a massive upward redistribution of income over the last three decades” and we would be left with an ~30% shortfall of SS Revenues meeting Payouts over a 75 year actuary (which is hardly reasonable as the economy changes every decade).
If you first look at how the gov invests money over the years their return on investment is not very good. This leads to a major trust issues with the gov and getting and paying for my fair share of the SS pie. The way wages are and have been going most would expect to get a smaller piece of the pie. The system has been rigged for the wealthy not to pay into by having the majority of capital gains income as unearned -untaxed incomes by SS. The wages income that have been depressed over the past 30 years is taxable by the SS. So the rules have been rigged for the benefit of the wealthy again. Nice story to tell my kids and grand kids . The rest of the story is all about obfuscating the average guy-tax payer into thinking their is fairness in the SS systems at hand. The smoke and mirrors created with all the misleading data to build arguments for or against will all boil down to taxing the middle class worker more once again in the future to pay for others greed. Perhaps we should be looking more at the Sanders plans for greater economic justice and fairness rather than all the fear, race and war mongering we get from all the other candidates that will only benefit the oligarchs more in the future. We have to make a livable wage where people-workers who actually make or do something for a living is rewarded and not punitive-punished by the governmint..IMHO.
Run just a note.
The 43.5% figure only represents redistribution within covered employment/wages. What it would not include is any effects of total labor share against returns on capital from MJ.ABW.
A grossly overpaid CEO might have a total compensation package or $15-40 million. That is only a rounding error for the actual masters of capitalism. At $20 mil a year you have to work 50 years to gross a $billion. Warren Buffet is old but he isn’t the 2000 year old man that he would need to be to have his net worth at a measly $20 mil a year.
MJ.ABW is not directed at CEOs as much of Chairmen of the Boards.
BTW something that most Raise the Cap folk tend to miss. Where is Ed Lambert when you need him: Labor Share Baby!
After Christmas, ;lets talk about your point. I need to understand it better. I think I do.
Let’s do. But simple schematic.
Productivity pie is split between labor share and capital share.
Theoretically the slices should be apportioned by actual input.
In practice representatives of capital determine the split.
Unless offset by democracy, direct democracy or revolution. (Or a rational discussion based on reality, facts, and data that apportion it as such – as if, maybe on Alpha Centauri)
Thus economic equity is determined by a struggle (some guy in Europe I think called it a ‘class struggle’) between democracy (or the mob) and ownership (or the Invisible Hand).
Social Security was a political victory by democracy. Whether it actually passes the Alpha Centauri rationality test is what we do at AB. I am a rational mobster.
I understand that part of the schematic. I am the one who improves throughput by minimizing Labor. Unfortunately, I do not determine the split.
CEOs repress Labor Share on behalf of Capital. Which is why their real money comes from Stock Options and not Salary.
The Managerial Revolution transformed Managers into Owners. And Servants of Shareholders/Owners into Masters.
“What is Social Security crisis? Most people would agree that it is most prominently marked by Trust Fund Depletion and subsequent Benefit Cut.”
I argue that Trust Fund Depletion is irrelevant.
There are bonds in the SSTF. When taxes do not cover benefits, those bonds will be redeemed, paid out of General Revenue (taxes).
So whether there are bonds in the SSTF or not is really irrelevant, because whether those bonds exist or not does not change the fact that the FICA shortfall will be made up by the General Fund.
My understanding is that any SS shortfall cannot be made up from the General Fund by law. The law would have to be changed first. Am I mistaken?
Jerry the payroll tax 2% holiday of a couple years back was backfilled by a General Fund transfer.
And no Congress can bind any future Congress and any such transfer would have to be pursuant to law by being made as a result of a law so a distinction without a difference.
Congress can change SocSec’s funding mechanism or benefit schedule tomorrow. And though Flemming v Nestor has been made too much of in my opinion would give some Supreme Court backing to the notion that nobody had grounds for suit.
So yes a law would have to be passed. Whether it would have to expressly invalidate some other section of the U.S. Code seems like more of a technicality as anything. New legislation is almost always full of “Replace Sec 1234.21 with the following: ” or “Strike Sec wxyx “.
Current law says that Special Treasuries backed by Full Faith and Credit of the U.S. have to be redeemed by the General Fund. But exactly NOTHING says that is true for gaps between Scheduled and Payable Benefits.
Which is why just this year the Republcians tried to hold the government hostage against the automatic cuts to Soc Sec Disability that would have happened without the rebalancing compromise.
As a matter of accounting any method of backfilling the gap requires a transfer. But there are political and legal dimensions that your argument implicitly dismisses as meaningless.
You need to take off those Green Eyeshades and take a wider view. The political postion of retirees with $2.8 trillion in legal claims is different than retirees begging for a handout. Even if the transfer is from the same pocket to same pocket.
It is the difference between a beggar getting a handout and a banker demanding the return of a loan. My being compelled to throw a dollar in the old man’s hat is nothing like the requirement to pay my mortgage. Even though it is funded by the same paycheck.
“Productivity pie is split between labor share and capital share.
“Theoretically the slices should be apportioned by actual input.”
How can the “actual input” be compared? One is time, the other is money.
“Current law says that Special Treasuries backed by Full Faith and Credit of the U.S. have to be redeemed by the General Fund. But exactly NOTHING says that is true for gaps between Scheduled and Payable Benefits.”
Please cure my ignorance. In current law, how do “Scheduled Benefits” and “Payable Benefits” differ?
Warren there is a well defined concept in accounting and finance called “the time value of money” which is then tied back to “return on investment” which is also a function of time which in turn is controlled by investor expectations based on “historical rates” which clearly are related to time.
All of these are quite explicitly spelled out in accounting texts. Or you could revert to the popular expression of “time is money” and then debate to what degree that is commutative.
The results of all those calculations might be debatable but to make the claim they are non-commensurable is not sustainable. Calculating the expected time value of money against actual is what finance departments of major corporations do.
Scheduled benefits are calculated and scheduled under current law. If funding allows then a particular income history over a given work life will result in specific retirement checks which will then be adjusted by a specific inflation formula. The Social Security Administration used to send out an annual Statement of Benefits that would project your ultimate check based on your past and current income to every participant. Such is your “Scheduled benefit”. And legally you will get exactly that amount if funding is available.
Until it isn’t. Under the exact same current law that establishes the schedule is the binding rule that the Trustees of Social Security have no legal authority to borrow money in the markets or run deficits on account against the Treasury to pay out scheduled benefits. The details of what happens when available revenue fails to meet scheduled cost is more murky than most believe (I had an illuminating discussion with former Deputy Commissioner and current chief enemy of Social Security Andrew Biggs on this) but is generally summed up as requiring an automatic cut from Scheduled Benefits down to the level that is then currently Payable out of then current income.
Neither the Social Security Commissioner of the Board of Trustees of which he or she is a member has the ability to adjust payouts in advance in a way that smooths out the gap between Scheduled and Payable either on the cost or revenue side. Both equations are bound by law and legally the Managing Trustee of Social Security has to call on the Secretary of Treasury (and under law they wear the same pair or pants or skirt) to write monthly checks for the full amount of Scheduled Benefits until the drawing account goes to zero. After which one way or another payouts are reduced to Payable.
The gap between Scheduled and Payable calculated forward is the Actuarial Gap or alternately the Unfunded Liability. Although it doesn’t meet the actual legal definition of ‘liability’. While your Scheduled benefit is indeed set by law you have no independent legal property right in it. (In law this is the principle “no remedy, no tort”).
Bruce, that “time value of money” is not relevant to the discussion.
We are talking here about a person’s time spent on the job, not the expected return of capital over some period of time.
Are you trying to claim that, over a period of time, the return on the captial invested, no matter how much that is, should equal the cost of labor?
Regarding Scheduled Benefits vs. Payable Benefits, even if there are bonds in the Trust Fund, the trustees cannot redeem those bonds to pay Scheduled Benefits if there is a revenue shortfall?
Revenue shortfall where?
Treasury has been redeeming the bonds in the DI Trust Fund since 2008. There is some dispute as to whether those redemptions are ultimately financed by General Fund borrowing but that is not how the initial fund accounting is handled. Instead Treasury treats Special Treasuries as cash equivalents, kinda like the old Yogi Berra-ism, “cash, its almost as good as money”. And neither the redemptions or interestingly even the interest payments are scored as ‘outlays’ for budget purposes.
I don’t know that that answers your question, mainly because it doesn’t make sense in the form it is posed.
On the ROI thing. This is equally confused.
First of course I don’t agree that the return on capital should be equal to the cost of labor. I don’t even see how anyone could possibly derive that out of what I said anywhere above.
“Productivity pie is split between labor share and capital share.”
This is clear enough, whether you are talking factory line or corn field the ultimate product is sold and the proceeds allocated between labor cost and various factors of capital inputs aka investments. Equipment and materials and factory overhead are paid for by some combination of retained earnings and investments with the ultimate goal some future stream of earnings to the owner/shareholders.
“Theoretically the slices should be apportioned by actual input.”
The inputs from capital are not ‘money’ they are things purchased by money including materials, equipment, and energy. And of these particularly equipment is often measured specifically in terms of “labor saving”.
You have a field of corn to harverst. This can be done purely by the human and animal labor of 15 men and two horses or it can be done in half the time by one man and a mechanical harvester. The mechanical harvester is a direct time replacer of those 14 men and its cost of acquisition and operation is measured directly against labor cost. Time savings are money savings are labor share savings. Of course they are commensurable, financial statements do this all the time.
“This can be done purely by the human and animal labor of 15 men and two horses or it can be done in half the time by one man and a mechanical harvester. The mechanical harvester is a direct time replacer of those 14 men and its cost of acquisition and operation is measured directly against labor cost. Time savings are money savings are labor share savings.”
There are intangibles to this which are going unmentioned.
> Revenue shortfall where?
Outlays vs. Income in Social Security: https://www.ssa.gov/oact/STATS/table4a3.html
Treasury has been redeeming the bonds in the DI Trust Fund since 2008.
Not according to the table cited above. According to that, there has been a surplus every year since 1982.
The question is, IF there is a shortfall — greater outlay than income — can the trustees redeem those bonds, or does that require an act of Congress?
“First of course I don’t agree that the return on capital should be equal to the cost of labor. I don’t even see how anyone could possibly derive that out of what I said anywhere above.”
From what you repeated below:
“Productivity pie is split between labor share and capital share.”
“Theoretically the slices should be apportioned by actual input.”
Take the example you gave — harvesting a field. Let us say that this is strictly a contract job, and all proceeds go to the contractor. The owner of the company puts up all the capital, and none of the labor. He buys the horses or the combine, and advances the laborers their pay before he is paid by the farmer. So, theoretically, how much should go to the laborers with the horses, and how much should go to the laborers with the combine?
Your link is for the OASI and DI trust funds combined, but “the Disability Insurance Trust Fund is a separate account in the United States Treasury”
You have to delve into interest earned to see why outlays exceeded payroll taxes in 2008 but the balance still increased until 2009.
Warren you do need to read carefully. OASI is not OASDI. SSI does NOT stand for ‘Social Security Insurance’. When examining the Tables in the Reports of Social Security ‘Income’ often stands for ‘Income from Contributions and Taxes’ and excludes Interest. There is a hugely different meaning between ‘Surplus’ and ‘Primary Surplus’. And while you would think that something called ‘Primary Surplue’ would be in reporting and commentary more widely referenced than simple ‘Surplus’ you would be wrong. Because mostly the only people that deploy ‘Primary Surplus’ as it relates to SocSec are the highly skilled and knowledgable liars at AEI and CRFB (cough, cough Biggs and MacGuineas).
If you see Arne saying something that seems easily mockable and refutable based on a simple reading of some table or another you need to pull yourself up short and ask who is the simpleton in this equation. Because while Webb might get carried away by polemics, Larson isn’t going to. If he says something you don’t understand try at least putting your objections in the form of a question. And know that Arne will likely have an answer.
I think the horses versus combine example is over-simple. In the case of the combine, at least some of the otherwise manual farm workers will be making combines or repairing combines, but it is also important that the price of grain goes down compared to what the laborers receive.
All of the workers will benefit from the increased productivity, but will they all get an equal portion of the increase in GDP? (I am aware that many economists say yes, but does not Piketty’s model of capitalism say no?)
Arne sometimes you have to over-simplify when responding to simpletons.
Sometimes simpletons over simplify to be able to make their point, hoping that you will not see the over simplification and take their simple statement seriously.
Jerry all too true.
But not quite sure if I should be patting myself on the back or slapping myself across the face. Becuase ‘tu quoque’ can transform to ‘me quoque’ just like that.
On both point, you are simply avoiding the question.
First, on Social Security, if there is insufficient tax receipts, can the trustees redeem the bonds, or does that require an act of Congress?
Second, how can the input of labor (time working, skill applied) and capital (money invested over a period of time) be compared so that “the slices [of the productivity pie]… be apportioned by actual input.”
Warren on both points you are not reading, or if reading not understanding
The Special Treasuries in the Trust Funds like all 10 Year Treasuries earn interest and mature and get rolled over (redeemed and issued) without any Act of Congress. The Disability Insurance Trust Fund went cash flow negative in 2006 and started net redemption of its accumulated bonds in 2008 pursuant to then current law without any action by Congress whatsover. The bonds in the Trust Fund are considered by the Treasury as cash instruments and their redemptions are not considered ‘outlays’. Which is not related to the fact that Social Security is legally ‘off budget’ and that all non-Administrative expenses are not exposed to the Appropriations process. Which is also true. (In fact there is legal debate over whether Social Security checks would or should be effected by a government shutdown. Because the benefit payments are not in theory effected but the salary of the guy who punches the button to send out the direct deposits is.)
The the varying inputs of capital and labor to any production process and the splits between its outputs are calculated down the the literal penny every year, quarter, month and these days every day in the financial statesments of that enterprise.
Thank you, Bruce. So what I do not understand is how can any non-action by Congress prevent the Trustees’ redemption of bonds to pay retirement benefits.
To the next point: “The varying inputs of capital and labor to any production process and the splits between its outputs are calculated down the the literal penny every year, quarter, month and these days every day in the financial statements of that enterprise.”
OK, then, how is the INPUT of labor given a value down to the literal penny? The COST of that labor is easy enough to calculate, but how does a business know what percentage of their production is from labor, and what is from capital (both the equipment purchased with that capital and the wages forwarded to the laborers before their produce is sold)?
By this “theory,” to allocate the percentage of profit “fairly” between labor and capital, the exact percentages produced by each must be computed. How is that done? How can that be done?
“So what I do not understand is how can any non-action by Congress prevent the Trustees’ redemption of bonds to pay retirement benefits.”
Did someone ever suggest that it would? Absent legislation the Social Security Administration will continue to pay “scheduled” benefits as long as they have spending authority to do so. In other words, until they have run the Trust Fund balance to zero by redeeming all of the bonds that comprise it. At that point they are only authorized to use current year receipts, so then “payable” benefits will drop from being equal to scheduled benefits down to (if their current forecast is correct) about 3/4 of scheduled benefits.
There are a number of plans to “fix” SS by reducing benefits now so that they will not need to be reduced later. Bruce has provided numbers to suggest that doing “Nothing” has proved to be better for SS participants than any of the fixes that have been offered. I personally believe that Bruce is able to get his numbers largely because there is huge uncertainty in forecasting and it has just worked out that way over the last two decades – but I agree that many of the plans offered actually are worse than doing nothing.
>> So what I do not understand is how can any non-action by Congress
>> prevent the Trustees’ redemption of bonds to pay retirement benefits.
> Did someone ever suggest that it would?
Yes — President Obama.
Temporary failure to fund the budget and you conflate it to mean Congressional non-action to fund the budget was meant to not pay retirees? I did not understand it to be such and this was a political argument not directed solely at SS. The fallout happened to be SS along with other programs. Did they fail to mail the checks even if late due to inaction by Congress?
Rather than play cat and mouse on issues here:
1. Being the long term funding of SS
2. Short term political events in Congress stalling payments.
It would be kind of nice to ask your questions directly.
Obama was wrong.
Was he lying? Or mistaken? Good questions and ones advocates of Social Security were asking at the time.
Many, many people, including people who should know, don’t understand the ins and outs of Social Security finance. In fact I have rather shocked some of the big names in this field by digging up odd facts. Much like obsessed hobbyists know stuff about the Battle of Antietam that eminent historians of the Civil War don’t. zzz’You mean C Company of Brighams Brigade advanced on Cooch’s Hill thus blunting the force of Jone’s Cavalry charge? Who knew?” (or often enough “Who cared?”)
Whether or not failure to pass the budget would or should have stopped Social Security checks depends on whether paying the salary of the guy who punches the button sending out the checks is “essential personnel” as defined. You can argue that absent an appropriation authorizing the administration of Social Security checks that they shouldn’t go out. Which is not to say that any action of law was needed to authorize the underlying payment.
Thank you, Bruce, I thought that was the case, since the Trust Fund is counted against the debt ceiling already.
To address the long-term viability of Social Security, I propose that the retirement age increase annually to (approximately) maintain the ratio of people above and below that age. In 2010, the full retirement age was 66. I do not know what percent of the population was over 66 then, but the Census Bureau can tell us. Let us assume it was 15%. In 2020, there will be another census. When those results come in, let us assume that the oldest 15% starts at 67.5. Then, over the following ten years, we increase the full retirement age by an equal amount annually until it is 67.5.
Increasing the retirement age applies an across the board benefit reduction (about 7 percent for a one year increase) to all future beneficiaries. It is difficult to be certain without knowing the distribution of population ages for every year, but I think your method cuts deeper than necessary. For the short term we know that Baby Boomers do skew the results, so you might want additional adjustments to transition to your plan being balanced going forward from about 2040 or 2045.
Such a plan has the virtue of still being by workers for workers, but it falls more heavily on those who work their bodies harder without getting more wages in return. When I consider how much we value be able to retire, I conclude that setting aside more while we are working really is a good idea.
Current estimates say that paying scheduled benefits will (eventually) cost 50 percent of GDP more than today, but retirees will be twice as large a percentage of the population. Why would that be a bad deal?
I don’t think any proposal considers how hard a person works his body. Don’t aside more money while working is generally a good idea, but putting extra money into the SSTF does not fit the bill.
Under this proposal, the retirement she can also go down as the baby boomers die off.