by Dale Coberly


An Overview of the Overview

The 2016 Trustees Report  didn’t have much new to say, so the usual commentators were free to say what they have always said, which is mostly wrong.

A careful reading of just the Overview (p 2 to 25 of the Report) will help us correct the dangerous misunderstandings that have been created by commenters who either don’t understand it themselves or just hope that you won’t understand what the Report actually says.

Let us begin with the Trustees own conclusion (p 25):

“With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.”

“Can continue… to protect… future generations.” But there has been no informed discussion. no creative thinking, and no timely legislation. Instead, the politicians and the press keep repeating hysterical distortions to lead people to believe that Social Security faces a huge debt, a “looming crisis,” that, so far from “protecting future generations” will impose “crushing burdens on the young.”

The Trustees indeed report [page 5] an “actuarial deficit” of 11 trillion dollars, a number  the “non partisan experts” use to scare people who aren’t used to thinking with numbers.  Thinking with numbers leads easily to an approximation:  Eleven trillion dollars divided by 100 million workers is about 110 thousand dollars per worker.  Dividing that by 75 years yields about 1500 dollars per year per worker.  And to put that into terms workers are familiar with, that would be about twenty-eight dollars per week for an average worker (who is making about a thousand dollars per week).

Is this a huge burden?  The $ 28  does not go into a government black hole:  it comes back to the worker when he will need it most, with enough effective interest (automatically created by pay as you go financing in a growing economy) to provide for his basic needs when he is too old to work.   This is a reasonable cost for the benefit.

The Trustees don’t leave the reader having to trust my approximation. They state quite clearly [page 5] that the $ 11 Trillion Dollar actuarial deficit would require an “immediate and permanent” tax increase of 2.66 per cent. That 2.66% would be 27 dollars per week for a worker making  one thousand dollars per week.

Moreover,  the average worker would only see about half of that cost. His employer pays the other half.  The worker would see fourteen less dollars per week out of his paycheck, leaving him 986 dollars per week to live on today while putting away that $14 (plus the employer’s $ 14) to live on when he gets too old to work.  A low wage worker making only 25k per year (half of that thousand dollars a week) would only see about seven dollars less in his paycheck each week.

But it’s even better than that.  The Trustees point out (page 25):

“The Trustees recommend that lawmakers address the projected trust fund shortfalls …in a timely way in order to phase in necessary changes gradually …Implementing …changes sooner rather than later would allow more generations to share in the needed revenue increases … and could preserve more trust fund reserves to help finance future benefits.”

In fact,  the needed revenue increase could be phased in at one tenth of one percent per year for each the worker and the employer. This would amount to about one dollar per week each year for a worker making one thousand dollars per week while  the worker’s wages are expected to increase by over ten dollars per week each year.  This means that after twenty years, while the tax has increased twenty dollars,  the worker will have an extra two hundred dollars in his pocket AFTER paying the tax.  Plus, of course, he will still have that twenty dollars (per week) in a savings account with good interest and great insurance to live on after he can no longer work.

Readers with a sharp eye may have noticed that  the Trustees project an increase in the combined tax of 2.66%,  but I ended up talking about increasing the workers tax 2% over twenty years  and the employers share another 2% over that, for a total of about a 4% increase.  There’s a reason for this:   The Trustees 2.66% “only” closes the actuarial gap for seventy five years.

The Trustees warn (p 25):

“If lawmakers design … 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.”

Is a possible 1.3% increase in the needed tax 75 years from now a “substantial financial imbalance”?  Does it make sense to worry about “doubts” about something 75 years in the future?  Not if it means we are going to panic today and start cutting benefits or privatizing Social Security or turning it into a welfare scheme.  But the politicians and the press use doubts about a possible one percent increase 75 years in the future as an excuse to scream about a “200 Trillion Dollar debt over the infinite horizon.”

It turns out that the “substantial financial imbalance,” as well as the “infinite horizon,” can be paid for by simply  raising the tax that one tenth of one percent for twenty years… reaching a total increase… 2% for the worker and 2% for the employer… of 4%.  This will provide sustainable solvency at the end of the 75 year actuarial window because the tax will then equal the expected costs [page 4].  And that same 4% will continue to pay all foreseeable costs over the infinite horizon.  The Trustees say so (p 19):

“Through the infinite horizon, the unfunded obligation, or shortfall, is equivalent to 4.0 percent of future taxable payroll.”

It’s worth noting here that real wages are expected to be 30% higher by the time that 4% tax increase is reached.  By the end of the seventy five year actuarial window, real wages are expected to be 250% (two and a half times as much) of what they are today… with the tax still only 4% higher than it is today.  This would mean in today’s terms that your thousand dollar per week income today would be about two thousand five hundred (real) dollars per week 75 years from now, while your payroll tax would be about a hundred dollars more per week than it would have been without the 4% increase.  We have to wonder how those “young” are going to get by with only $2400 per week to live on, while being forced to save that hundred dollars extra in case they live longer than than their grandparents did.

And over the infinite horizon, wages will still be growing… infinitely?… but the tax will remain at 4% higher than it is today.

Another way to look at this is that Social Security benefits today cost about 5% of GDP.  That is we use five percent of our national income to pay for our basic needs when we get too old to work..a retirement that may last 20 years.  This comes from money the workers paid themselves plus the interest it earned by increases in the economy that came from their work. Because we think we are going to be living longer — up to 24 years after we can no longer work, that cost is expected to increase to about 6% of GDP.   Think of it!  Six percent of GDP just to be sure that people who are too old to work will have a place to live and enough to eat … and they paid for it themselves.  Clearly a crushing burden on the young.  Oh, wait a minute,  “the young” will be “the old” by then.

I have only talked about increasing the worker’s own savings in Social Security (this is called the payroll tax or FICA deduction).  The Trustees say that instead of raising the tax 2.66% “immediately and permanently” to cover the next 75 years, benefits could be lowered by 21%.

I’ll leave it to your intelligence to decide whether you’d rather take the tax raise and get by on 4275 dollars per month instead of 4333 dollars per month while you are young,  or have your pension cut from 1732 dollars a month to 1368 dollars a month when you are old and can’t work.

It should be pointed out that none of these ways is “more expensive” than another.  The ultimate cost will be the same:  the cost is the cost of basic expenses when you are old and can’t work.  The difference is in when those costs come.

I think it’s a lot less painful to pay a dollar a week more each year over twenty years than to pay an extra 14 dollars per week all at once right now, and certainly a lot less painful than paying nothing now and trying to find a way to pay for it after you are too old to work.

This  should give you enough to think about so you can read the Overview and the commentators without being misled by unduly pessimistic language, not to say hysterical distortions.