FIX THE DEBT WANTS TO SAVE SOCIAL SECURITY BUT WHY?
by Dale Coberly
FIX THE DEBT
WANTS TO SAVE SOCIAL SECURITY
BUT WHY?
I received an email a few days ago from Chris Dreibelbis, Fix the Debt, purporting to explain “why the Social Security Trustees urge action.”
“Fix the Debt” is a project of the Committee for a Responsible Federal Budget (CRFB) which is funded in part by Peter Peterson, a very rich person who has made something of a second career writing and saying misleading things about Social Security. So have CRFB and “Fix the Debt.”
The present email from Dreibelibis looks reasonable enough, but also misleading enough, that I thought it worth writing this short post.
Dreibelbis quotes the Trustees, “Both Social Security and Medicare face long term shortfalls under currently scheduled benefits and financing….The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls…”
Dreibelbis says, “The newest report forecasts that Social Security’s combined trust fund will run dry by 2034. At that point, all recipients will see a 23% cut in benefits. For example a typical person born in 1990 … will see a cut of over $160,000 dollars in scheduled lifetime benefits.”
To check this, I assumed that person would pay FICA taxes on income equal to 12.4% of the average income each year from 2020 through 2054. I looked at Table V.C7 (Trustees Report p150} for a person who obtains age 65 in 2055 and retires at age 67 to find a scheduled yearly benefit of $33430. Since the numbers in the table are given as constant 2017 dollars, I assumed the “real” value of the benefit would not change and multiplied it by the 20 years that person could expect to live in retirement, for a total of 668600 dollars. Now, if the benefits are cut by 22% that person would lose $158,778 in total benefits over his lifetime. This is close enough to Dreibelbis figure, assuming he may have done the calculation slightly differently.
But what Dreibelbis did not do was calculate the cost of avoiding the benefit cut by raising the payroll tax 4%. This turns out to be $93566 or about 60% of the value of the lost benefits. Sounds to me like a better deal. Moreover the tax would be paid out of an income of 2.339,153, leaving him an after the tax total income of $2,245,587, or an average of about $64,159 per year (2017 dollars). Taking the benefit cut would leave him a total of $509,822 in benefits, or an average of about $25,491 per year to live on when he is old.
There are probably games you can play with “present value” or “what you could have earned from interest,” but that does introduce some “if’s.” In any case, a first look at the numbers suggest that paying the extra tax makes more sense than taking the benefit cut. It turns out that most workers would only see half the taxes (the other half being paid by the employer: (i am quite aware of the “employers share is “really” the employees money” argument, but that is a metaphysical argument meant to distract from the payroll facts on the ground.) Taking that employee’s share only, and phasing in his 2% tax increase one tenth of one percent (about a dollar per week at today’s average wage) per year would leave his total tax cost of avoiding the $153,778 benefit cut at about $35710. This means every dollar he pays in “extra” taxes would get him $4.31 in saved benefits.
By the way, these numbers are in “real” dollars. Accounting for inflation would make the benefit of paying the tax look much larger. Or BE much larger, since any attempt to make up for the SS tax by “personal savings” would have to first make up for what would be lost to inflation.
Dreibelbis does not address this. He strongly implies we need to cut SS now in order to “know what you can count on in the future.” He never considers that we could just pay an invisibly larger tax now and keep (earn) the benefits we will will most definitely need in the future.
Probably foolish question if the $127,000 limit on SS was raised.
Heim
your question is not foolish. but raising the limit on the tax would change Social Security from “paid for by the workers themselves” to “paid for by the rich.”
Roosevelt worked hard to avoid this. He called it “the dole.” He understood that if the rich paid for it, they would find a way to cut it and kill it.
As it is, the misleading things said by Peterson, CRFB, FixTheDebt, and Cato, among others have led nearly all politicians and journalists to talk about Social Security as if it were welfare. It is not. The money collected and spent by Social Security comes entirely from the workers who will get the benefits. It has nothing to do with the federal budget, federal deficit, national debt, general taxes, or “taxes on the rich” at all.
That’s why it has succeeded for 80 years.
To continue with the thought in comment above:
Workers like to be able to say “I paid for it myself.” But there are people who call themselves “Progressives” who have the idea that we are all victims and “demand” “the rich” “pay their fair share.”
The fact is the rich do pay their fair share…. as insurance against the possibility that something could happen and leave them “not rich.” Furthermore the benefit they collect is, while more than they paid in (just like everyone who pays in due to the “effective interest” from pay as you go financing, is less as a percent of what they paid in than what those who have earned less receive. This is a result of the progressive nature of the payout formula and is the means by which the poor are able to get the “insurance” benefit that enables them to make ends meet when they retire or are disabled or die with dependents.
SS is very elegantly designed. It’s too bad that 30 or 80 years of highly paid liars have left the people with no idea how it works.
Just had a funny thought.
The general idea anyway of Social Security retirement is for employed workers to support retirees — who in turn will be supported by current workers when they retire. That’s the general idea anyway.
But for some reason my generation(s) was detailed to save up a small portion of our future retirement needs: paying higher FICA rate than was required to cover current SS outgo — and when our time to retire came along, cashing in the TF bonds we’d been saving (lending the gov money for normally income tax paid items with our excess FICA tax).
Again, this trust fund was intended to cover only a small portion of our retirement: up to 25% just before the TF bonds finally all run out.
(Actually, not a good idea to let fund all run out — a truly practical use of the SS TF is to bridge automatically any shortfall in FICA incoming, giving Congress time to patch FICA tax to match SS outgoing. Happened a couple of times. TF is legally solvent with one year of full replacement. Currently has four years.)
Now, if current generations want to do the same “service” for themselves — wish to save to cover a small portion of their future retirement, rather than rely wholly and completely on current earners — they will hike their FICA rate enough to (presumably) cover my generation(s)’ retirement needs …
… which would leave us back where we came into this movie: each new generation of workers paying for the whole and entire retirement of the older generations — and expecting follow on generations to do the same for them. :-O
I don’t know what we’re supposed to do with the SS Trust Fund.
Denis
I think you are essentially correct. There may be a bit of confusion in the paragraph “if current generation wants to do the same for themselves…”
there is no need for them to “do the same.” they are not a larger than normal cohort that needs to pay a little more than “for current needs” to pay a fair price for their own future needs. the higher than normal Trust Fund had no other purpose than to approximate “generational fairness.”
The now worker, future retiree, can pay for his own future retirement by raising his tax. the larger tax would not run up the Trust fund if it were gradually introduced as the costs rise.. not due to any larger cohort, but due to the longer life expectancy of the present cohort.
what becomes of the trust fund is… in a way “nothing.” The amount of money currently in the trust fund will never be drawn down, but gradually become less and less “too much” because it will fall as a percent of current needs. So it remains on the books as a prudent reserve without ever having to actually pay out any of it’s cash.
The trust fund will then (when the higher tax trend meets the higher cost trend) remain at “one year’s reserve” while a portion of the interest on that trust fund is used to pay part of the cost of benefits holding down the tax rate by about one percent.
the Trustees “immediate and permanent” fix of raising the tax 2.8% now (1.4% for worker, 1.4% for employer) would do what you suggest: by taxing more than is needed now, it would build up the Trust Fund to help hold down the tax rate… to 2.8% higher than today vs the ultimately needed 4% higher than today) for seventy five years. After that the people alive at that time would be faced with the need to raise their own tax about another one percent. Something I think they can be trusted to decide for themselves.
btw
i don’t think you will ever see a discussion of SS at this level of detail/complexity. the politicians and journalists don’t understand it.
the Big Liars do, but they pay big money to keep the people from ever hearing about it, much less understanding it.
i suppose some future anthropologists will discover Angry Bear archives and shake their head. “The could have saved themselves. They knew the answer. Why didn’t they do it?”
Couple of thoughts. First, I am sure you are right Coberly that social security contributions/payouts are progressive in that the high income individuals do not get back quite as high a ratio to what they paid in as lower income individuals, but it is my understanding that there is a relationship between what you paid in and what you take out which means that simply raising the cap does not translate into the additional years of solvency one might expect. Further this is not really the well to do getting screwed to benefit the less well off for two reasons. First as I understand it you have to pay in for at least 10 years to get a full benefit so the desperately poor do not get social security. More importantly the rich live longer than the rest of us because of better health care throughout their lives and less stress–trying to get that new big contract is less stressful than trying to keep a roof over your head and food on the table everyday.That means that the people on the low end of the income stream may enjoy a better ratio of payout to contribution but they often do not see it for as long as the higher income folks. I am fine with that for the reasons you suggest Coberly. As to the trust fund, somebody has suggested that it was never intended to get as big as it did but rather was to pull Reagan’s budget into something that resembled balance and that rather than raise general income taxes they bumped social security. In any event, the way things have gone I am sort of glad about the trust fund because without it we would be having the fight about either cutting benefits or raising the taxes right now and given the GOP control of all branches of government I can predict how that would turn out. In retrospect, Obama should have used his first two years in office to deal with Medicare and Social Security rather than the ACA which caused the Dems to lose control of Congress and set us up for the chaos that currently exists. Although it would extend the trust fund, I am in favor of raising the taxes gradually as Coberly suggests and I could even sweeten it for the middle class by reducing their income taxes a small amount and making the rich pick up the slack such as by ending the dividend and capital gains rates.
The ACA did deal with Medicare by funding it further. The ACA also provides most of the funding for healthcare insurance subsidies to the poor and also the young. It was the right move in dealing with healthcare for the tens of millions uninsured.
Terry
I agree with you mostly, and am especially grateful that you see the advantages of raising the tax a tiny amount gradually.
But let me try to explain better some of what I think about the other things you mention:
You are right, simply raising the cap does not translate into additional years of solvency. At most it would solve about half the projected deficit. That is, it would save you fifty cents per week from the dollar per week per year that it would cost you to save social security yourself. Why would you want to have to beg from the rich, or give them the satisfaction of making true their lie that they pay for it? To save yourself fifty cents per week?
Raising the cap would not be the rich getting screwed at all. But that’s the way it would play out politically. It would make it easier for them to say: “See, we told you SS would cost (us) huge tax raises!” And it would make it easier for them to cut benefits in the future… because they would be paying for them.
I can’t address the cosmic justice of it all. I can say that raising the cap is politically suicidal for workers. Even calling to raise the cap is extremely bad politics.
The somebody who suggested the Trust Fund was intended to save Reagan’s budget was wrong. I have no way of knowing if the 1983 tax raise that led to the growing Trust Fund was sold to Reagan for it’s side effect of easing the rate of general taxes or the apparent budget deficit. But since that time Social Security has been blamed for the debt… because Social Security LENT money TO the government. This is backward thinking, but it’s what you get when Liars can make up stories that people don’t know enough to laugh at.
I agree that it is good that it (the Trust Fund) turned out the way it did. That’s the way it was planned. The lies told about it have been about what you would have expected from the people who said at the beginning that SS was a tax you would” pay and pay and never get anything back.”
If Obama had understood the idea of the gradual tax increase… even the Trutees “immediate and permanent” it would have been great if he had addressed SS. Instead he appointed a commission made up of the known cast of Big Liars and then offered to cut Social Security by adopting a phony reduced measure of the inflation rate.
People have said this was all a ploy. That Obama knew the R’s wouldn’t take the bait. I don’t believe it.
Raising the tax gradually would “extend the Trust Fund” simply because the additional taxes would slow the rate at which the Trust Fund is “spent” down. Actually the money would not be spent at all. It’s just that as costs rise, the “prudent reserve” rises to meet the money already in the Trust Fund without ever actually spending a dime of it. After the tax rises enough to meet costs, the Trust Fund just exists on paper in case of some emergency. An additional benefit is that by raising the tax gradually, the date the Trust Fund “runs out” is put off forever.. this as the effect of reducing the rate at which the tax needs to be increased to LESS than one tenth percent per year. But these are minor points that no one would ever notice or feel.
And while it has nothing to do with Social Security, I don’t see any problem with raising the income tax to pay for the things the government has bought with the money it borrowed or needs to buy.
That is I don’t have any objection. There would be a real problem selling it to the rich.
Why I stopped getting upset or excited about this stuff.
People like the benefits provided by gov’t whether they pay for some of it out of pocket or not…. the fact is that they still pay in one form or another for those benefits. It really doesn’t matter at all that the benefits might be accelerated or delayed in time as long as everybody still gets the benefits over time.
We pay gas taxes…. benefits come in the future as highway’s are added, improved or maintained.
We pay sales taxes…. benefits pay for future training, salaries, and equipment for police & fire protection, emergency services, running gov’t.
We pay property taxes which pay for future education of our children, among many other benefits.
We pay income taxes for future defense materials and equipment, future health care.
Certainly some of what we pay in taxes, the minority, fund present (today or this year) benefits, but most cover future benefits which we see as present benefits only because somebody paid for them yesterday or last year or over the prior n years.
So what it comes down to is we like our benefits, but don’t like to pay for them. In then end we won’t give up the benefits, so we’ll always pay for them. That’s real life … everything else is political grand-standing and FUD.
Longtooth
unfortunately “political grandstanding” results in creating opinions under the guise of which the politicians can change policy without people even understanding what is being done.
FDR understood that making SS “worker paid” would protect it from politicians… but times change. Roosevelt is dead and so is the generation that understood SS. the politicians have been working for 80 years to change minds. and one day they will make a small change in social security… like changing it from “worker paid” to just a little bit “government paid” and then one day a new President will say “we have the will but we don’t have the wallet” and you will find your Social Security (in name only) won’t pay enough for your needs and you will have only yourself to blame because you thought it was so smart to “demand the rich pay their fair share.”
People like the benefits whether they pay for them or not. But “the rich,” who mostly have the power, don’t like the benefits especially when they really have to pay for them. Not quite the same as not liking the benefits because they hate the idea of poor people being able to retire, and pretending that they (the rich) are paying for them.
Coberly,
It’s quite true that “politicians can [ed. and do] change policy without people even understanding what is being done.”
But that’s always been true since representative gov’t and especially so in the days before wide-spread newspapers and periodicals when most of the nation was rural. its only since radio and tv that just some of what politicians did to change policies was available to the public ….. but only and always after the fact. Now that we have real-time internet the real time goings on in congress are more visible to more people in real time or shortly thereafter.
Being aware of what politicians are doing in real time is a huge benefit to the public that want to pay attention and get the word out. It doesn’t have much effect on politicians changing policies though and to the extent is does it has more effect now than it’s ever had.
Therefore I’m not sure what your issue or complaint is other than perhaps that representative gov’t is just representative of the constituents who pay to get their representative choices elected.
“But what Dreibelbis did not do was calculate the cost of avoiding the benefit cut by raising the payroll tax 4%.”
Or better yet, cutting Pentagon spending by 75%. Why is THAT never considered an option?
Coberly
I agree and sympathize with your lament:
“People like the benefits whether they pay for them or not. But “the rich,” who mostly have the power, don’t like the benefits especially when they really have to pay for them. Not quite the same as not liking the benefits because they hate the idea of poor people being able to retire, and pretending that they (the rich) are paying for them.”
What you’re (and we’re) facing though is the fact of gov’t always being controlled and run by the wealthy for their own benefits first and sometimes their benefits depend on the other 99% getting some benefits too…. mostly because of revolution or civil war potentials which takes down the wealthy with them.
I don’t think anybody has a remedy for this fact of gov’t (no matter what kind of gov’t it is). Despite this fact look back and see the slow progress made:
– all male voters over age 21 could vote was the first change
– Senators elected by popular vote was the next one.
– Female vote was the next one
– SS and Unemployment Insurance was the next one
– Civil Rights Act gave federal gov’t the power to enforce the post Civil War Constitutional Amendments (which pre-empted federal enforcement) and made some types of descrimination illegal… though enforcement was by civil suits for the most part, so money was required to enforce.
– Medicare was finally provided
– The semi-national health care system in bastardized form was enacted and implemented.
That there’s push-back on these changes is inevitable in a system of representative gov’t where “individualism” credo and racism are still a dominant aspect of the public’s preferences.
What is the point of placing additional tax incidence/burden on the current workforce, the repeated point the author is trying to drive home?
So retirees who worked forty to fifty years building an economy whose net wealth is near $90 Trillion want to shift even more burden on to their own group instead of claiming proportionate earnings from this net wealth you want to shift even more burden to labor!??
This is the point of the polemics here; that it, to stick it to the current workforce. It bothers me to think that this is your real goal — you represent wealthy interests who do not want any claims on their concentrating share of this net wealth.
We should pay retirees proportionately for building and sustaining this economy. They were workers before and it is a gut check to me that they would want to screw workers now, and as a retiree myself I am offended by the dissembling. Raise income taxes, lower payroll taxes, increase the earnings checks now and in the future too so they outlay dividends proportionate to net wealth, properly treated then as having been earned by human capital.
Please readers, do not get misled here, financing mechanisms are just that, nothing more, definitely not mythical, or a substitute for sound public policy. No need to raise payroll taxes. We have better alternatives.
I sound like a marxist, have to chuckle; but I have to say, we should not help the wealthy elite shift more burdens on to current labor as they continue to shortchange current retirees from their proper earnings.
JF
with all that I have written here, for you to so completely misunderstand me makes me think you have been listening to the shouting in your own head.
I have tried to tell people that the Social Security Crisis is a fraud. The 12 Trillion Dollar Unfunded Deficit amounts to a tax increase of a dollar per week per year for the workers who will get the benefits.
In order to save those workers that crushing burden you would turn over the keys to Social Security to the very “rich” you claim to hate.
So great, save yourself a dollar a week, and save the workers from the self respect they get from saying “i paid for it myself.” And give it to those who will kill it.
The reason “the rich” always win is that they can count on people like you to fall for the scam every time.
“In any case, a first look at the numbers suggest that paying the extra tax makes more sense than taking the benefit cut.”
It is hysterical how coberly, a social security recipient, consistently finds that the fairest solution to the social security problem is a 100% tax-on-other-people. Since the ratio of social security recipients to social security payer is 5:1, all you have to do is multiply whatever reduction-to-the-absurd number coberly comes up with by 5 then just apply it as a benefit cut, ie ” a $20 benefit cut per week? ya won’t even feel it, ya cheapskate.”
How about we split the difference?
Gee Sammy:
You must live in a static environment where productivity and income does not go up. It would be nice if they placed SS taxes on capital gains. Income grows as does the revenue. We are in a period when more people could be employed in which case that would also have an impact.
Sammy choses to avoid numbers.
Coberly you believe we are on the same side to a substantial degree.
If you agree to stop your one note call for raising payroll taxes I might believe you.
I am a retiree, worked hard all my life, I refuse to turn to my children and tell them I advocate more burdening of the labor market because of my generation when I know that the workforce has earned and is still earning but is not accruing or getting paid a proper dividend for the productivity gains and gains in net wealth arising because of our human capital (whether in compensated employment or as current or past caregivers, etc.). I will not say that to my children, why would they support social security if it is used as a wedge to effect policies that burden their opportunities and weaken their position in labor markets????
We are a very wealthy society, shares of gains dramatucally changed in just this generation for political power reasons it seems to me. We can do better here.
So we agree, raise revenues, and we agree that the social security ‘system’ works to make the economics more sensible over generational views.
So perhaps we also agree that the public policy here is intended to honor work and respect it as a fundamental of society.
So, let us both support the raising of revenues to support social security for current and for former employees. I ask you to stop advocating that all the burden is to be placed on the current workforce and labor market. This view is contrary to the spirit if this great public law. Unless that is precisely your point, an unctuous dissembling.
JF,
Overall increasing wages would help workers share in better times. SS is dependent on wages. The track record for ‘welfare’ is also not so great. The ‘fix’ is political in nature, so your bifurcation makes little sense. We all do our best to protect things that work. We can do better but it appears to me that a defensive stance has value, in that ‘I earned that’ has value. What other options have more impact on incomes?
JF
i have written thousands of words explaining why paying an extra dollar per week is the best chance working people have of saving Social Security for themselves and their children.
It seems you have not read those words, did not understand them, or think a dollar per week is a huge, unfair, burden on workers to pay for their own retirement in the best deal they have ever had.
I marvel also that you write in what at first appears to be a “reasonable tone” but rapidly descends into “unctious disembling.”
The vast majority of workers want only a fair wage… enough to pay for their own retirement as well as other needs. You want to be have money given to you in an unstructured and unending demand that someone you do not know should give you anything you ask for on the grounds that they have more than you have. I think most workers cringe to find people like you using the honorable name of “worker” to try to put an honorable face on greed and mendacity
Coberly said this: “You want to be have money given to you in an unstructured and unending demand that someone you do not know should give you anything you ask for on the grounds that they have more than you have.” What did you say?
Well I earned it, it shows in our overall economic success, just want a proper return. Perhaps you dont feel that to be the case for the workforce before and now (including those who worked in non-paid activities, like being a caregiver). Who do you think earned it, just those you are protecting?
It’s the McCarthy era again. Your side will say anything to ensure that labor markets are distorted, and economically unbalanced with the intentional raising of the taxation of labor incidence in the US, shifting public finance away from wealth and high incomes.
Public policy can be better here.
JF
you are clearly insane and there is no point talking to you.
as for my side: I am on the side of workers against the “side” of the Big Liars … on”both” sides. I used to think all the Big LIars were on the “right.” recently i have had to learn that some of them are on the “left” or wish to appear to be on the left.
no doubt “workers” deserve a better deal. but you have no idea how to go about getting them one. Roosevelt did have a good idea: “worker paid insurance for workers.”
you will never understand why that is necessary or why it works.
and people like you are half the reason workers never get ahead.
the other half, of course, is people on the “right” who think like you, only they think they are the ones who deserve more.,
I always get a kick out of the “I earned it” shtick Fantasy land..
Longtooth
there is a difference between “i paid for it myself” , which is demonstrably true, and “i earned it” which may or may not be true, but is hard to establish.
JF wants an economic system where merely stating “i earned it” gets you real cash in undetermined amounts. that is indeed fantasy land. not because it is pollyannish, but because it is simply practically unworkable.
Just because he does not get what you are saying does not make JF insane. I believe he is right that the rich should be expected to do more. They are able to become rich because they are part of the same society that includes the poorer people who work for them.
Their businesses benefit from literate, healthy workers who are able to get to the job site. They should not be allowed to “small government” their way out of supporting schools, health care, and infrastructure. However, they do.
We have a retirement insurance program that lets worker look out for themselves. We should keep it. That means not letting it depend on the rich. Even though money is fungible, it makes sense to talk about SS in isolation from other things that can be done with money.
Solve the issue, that it costs more to live longer, within the confines of SS. Solve the issue of the need for redistribution separately.
Arne
You are sensitive to my undiplomatic way of putting things. I am sorry for that. I try much harder than you can imagine to be kind to people. There are many people who do not understand what I am saying. I do not call them insane.
JF on the other hand is insane, not because he does not understand,
but because his reasoning is fantasy reasoning. And he started the insults out of left field.
And then along comes Krasting who presents us with word salad that can mean nothing at all, but because so many people can’t think at all, you can be sure that some of them will pick a few phrases out of Krasting’s fugue and think he has said something that might be true.
For what it is worth, I do not think YOU are insane because you disagree with me about the relative sense of increasing the retirement age one year vs increasing the payroll tax fifty cents per week per year as against the dollar per week it would take to keep the retirement age where it is.
Re Krasting’s fugue
It is not perfectly clear to me whether Krasting is insane or just pretending to be. He regularly appears on Angry Bear and talks nonsense in circles, and you cannot reason with him because he ignores anything you say unless he can twist it into some back-of-the-classroom loud noise that probably got him big laughs in high school.
I have been very careful to say only what the Trustees say. Except that I do the arithmetic that shows what it means. A 12 Trillion dollar “deficit” over 75 years does translate into a need for a 2.83% increase in the payroll tax immediately and permanent (for seventy five years.) But it would be easier and better to raise the payroll tax 2 tenths of a percent per year starting next year… that’s about a dollar per week for the worker and a dollar per week for the employer… and gradually raise the tax to 2% for the worker and 2% for the employer. This would fox the SS program “to the infinite horizon” and is exactly equal in Present Value to the Trustees 2.83% “immediate” and permanent” for 75 years plus another 1% after that seventy five years…. all of this is in the Trustees Report. Krasting either does not understand this, or he is just betting you won’t read the report or do the math that shows the numbers add up to the same thing. More below.
Arne
have you noticed how polite and reasonable Krasting is. Would you like to answer him for me…. politely, and show me how it’s done.
I am having trouble avoiding words like stupid, dishonest, insane.
Krasting seems to have disappeared.
“fox” in my reply to him above should have been “fix.” but “fox the program” seems to fit as well.
Since I still have Krasting’s comment on my computer, I will answer a little more of what he said, in case anyone was fooled by it.
Krasting said, “That comes to $202 BILLION in 20117”
Krasting likes big scary numbers. The $202 Billion dollars the “immediate and permanent” fix comes to needs to be divided by the about 200 million taxpayers for the number to mean anything. that’s 1000 dollars per year or about 20 dollars per week
this thousand dollars per year sounds like a lot of money, but you need to remember it is to pay for your living expenses after you can no longer work. assuming constant dollars, 35 years at a thousand per year adds up to 35 thousand dollars. from the table on p 150 of the report you can see that this would buy you a retirement benefit of about 33 thousand dollars per year. with a little more research (or reading my Angry Bear post of last week, you can see that the need for the extra money is to pay for two more years of life expectancy after your retire. So 35 thousand buys you 66 thousand dollars when you will need it a lot more than you need 20 dollars per week today.
by phasing in the tax increase at a dollar per week per year, you would actually only pay about half that 35 thousand. the reason is that the Trustees “immediate and permanent” actually raises the tax more than needed today and builds up a trust fund to help pay for costs fifty years from now by drawing down the trust fund without raising the tax again. unfortunately the tax would need to be raise about another one percent after 2095, but I think we can leave it to the people alive then to deal with that. As it happens the gradual tax increase that i propose avoids the higher early tax and the new enlarged trust fund and the additional tax raise in 2095. but I have explained all that in other posts on AB, which Krasting ignores.
Krasting says, ” The
number rises with the economy to $307B in 2026. The tax increase that is required to
stabilize SS is $2.5 Trillion over the next decade. This is mega bucks. The
Department of Education entire budget is $67 Billion. Coberly wants to raise taxes
by more than triple that amount! The entire military budget for the United states is
$587B. The tax increase that is required for SS is a 1/3 of the entire military
budget. Don’t let Coberly fool you into thinking that this is a drop in the bucket.”
Again, Krasting likes big scary numbers, but it is meaningless to compare SS costs to the education budget or the defense budget. SS costs are what they are because that’s what it is going to cost YOU to live when you can no longer work. All SS does is provide you a way to save for those costs in a way that is safe from inflation and market losses and some forms of bad luck that might prevent you from being able to save enough. I don’t pretend this is a drop in the bucket. I try to show you a way to pay for it that you will never feel or even notice without someone like Krasting screaming into your ear about how big it is over the whole country over years and years.
Krasting says, “Employers
will pay more than $100b a year extra – so they will hire less workers.”
The $100B a year extra is one tenth the normal raise each year. It is very likely that employers will just deduct their share of the needed FICA increase from what they would otherwise pay as a normal raise. They would not feel it at all, and it would not affect their hiring. What’s funny here is that when the Big Liars want to make you feel like you are getting a poor return on your money they say “most economists say the employers share is really the workers money.” But then they turn around and say it’s really a “jobs killing tax.” It can’t be both.
Krasting says, “1- There is no need to do anything with SS for years to come. Coberly wants to raise your taxes starting yesterday.”
But he says the Trustees say the “immediate and permanent” increase is needed. And when I say not really. It would be better to raise the tax gradually, he says I want to raise your taxes starting yesterday. This is the kind of thing that makes me think he is just saying whatever comes into his head that he thinks will make you think I must be wrong. He is counting on you not taking the time to think it through.
Krasting says, “2- There are many-many-many better alternatives to addressing the SS shortfall
(including the cap – thank you Heim) that are far superior to Coberly’s “make the workers pay even more”.
So instead of the workers paying for their own benefits, Krasting wants to “raise the cap” forcing “the rich” to pay ten times as much (there are ten workers under the cap for every “rich” person above the cap) for YOUR benefits. They will not get their money back. They will be so happy about this they will pat Krasting on the head and say “thank you.”
Actually, they might. By getting you to call for raising the cap, you will be calling for all “the rich” to fight to kill Social Security. And if you happen to get the cap raised, the rich will own your Social Security and they will kill it the death of a thousand cuts while making you see the government proctologist every quarter to prove you have no hidden assets.
It’s easy to shout and scream. Thinking is harder.
I note that Krasting somehow left you talking to someone who is not there.
coberly,
I am not sure whether you understand that I think raising taxes is a better choice than a compromise solution. I do. However, I fear that a sudden drop in benefits 14 years from now is likely to be the wedge that will let them destroy SS. Between compromising and letting SS fail, I prefer compromise.
Coberly – The taxable base for SS is about $7T. The increase in wages has been about 2% for the last decade. So the increase in wages is $140B a year. One tenth of that is $14B. So when you say that the tax required is “Only 1/10 of the raise” you are wrong by a factor of 8.
I have ever said that an I&P increase should be considered. You put words in my mouth to support your lies. The SSA does not support an I&P either. It is just a way of comparing apples to oranges. Any proposal that is considered (Including Coberly’s 25 years of tax increases) must be equal to the I&P on an NPV basis.
Coberly – you know these things – why do you lie about them?
Folks – 25% of all SS payroll taxes go to the Disability Fund. The imbalances at SS have little to do with the retirement program. What is wrong with SS today has nothing to do with Roosevelt dreamed about. Don’t let Coberly spin the facts and talk you into a very big and hurtful tax increase.
Note that Coberly calls anyone who disagrees with him “Insane”. That is rude and flat out stupid. Coberly is just a grumpy old man who thinks liberals and conservatives are out to steal his monthly check. Relax Coberly, no one is going to take your check away.
Arne
no, silly. i took some stuffing and put krastings name on it and talked to you, and anyone else who might be listening.
i would agree with you that “compromise” is the worst of possible worlds, but even waiting until 2035 or so and paying the full 4% all at once is not a bad thing. 4% is not going to cause anyone any real pain. the problem is that at that time it will be much harder to resist compromise.
i hope you will understand that fear of the worst is not a good reason for me to abandon advocating for the best.
i urge you, with your better manners, to take up the cause. i’d even suggest you practice on krasting, except the aggravation of talking to him might drive you mad.
Krasting,
SS projects rise in real wages to be about 1.1% per year. The tax increase I advocate 0.1% per year. That looks like about one tenth to me.
one tenth of one percent of average wage is one dollar per week. so i expect ten times that amount, ten dollars per week to be the average increase in wages.
you come at the problem from another direction payroll in 2017 is expected to be 7.1 Trillion dollars. using your 2% increase gets us to 140 billion dollars increase (real). (Trustees project 374 billion dollar nominal increase (about 5%)… not relevant to this calculation but good to keep in mind).
Covered population for 2017 is 172 million.
divide your total increase in wages by number of workers gets a wage increase of 814 dollars per employee. or 15 dollar per week. This is more than ten times as much as the one dollar per week per employee that i estimate for the years increase in the payroll tax for the employer. You need to check my work. I often make mistakes, but i usually find them before i publish anything.
looking for your mistake… well it looks like you calculate one tenth of the total wage increase and get $14 Billion, and then for some reason declare that i am off by a factor of eight. Actually i get $9 billion for the tax increase. Which is less than what you calculate, so I am at a loss as to where you get “a factor of 8” in the other direction. Are you saying I am calling for a tax increase of 112 billion dollars? where did you get that?
My proposal has exactly the same NPV as the Trustees “immediate and permanent.” As to what you have advocated, it has been hard to keep track. You seem to change your mind with every new amazing we’re all going to die discovery that you make.
As fpr calling me a liar, and urging folks not to be taken in by my spin, I think you should demonstrate something i have lied about or spun before you start that business of calling people liars. Because you make me mad and i say something back. Then you show your injured paw and plead for the audience to feel sorry for you and hate that mean old dale who says such hurtful things to you.
Instead, tell us all how you plan to insure that Social Security will be there for our children without a “big and hurtful” tax increase of a dollar a week per year … for thirteen years, actually, after that the dollar a week increases will only be needed about seven times over the following 60 years.
please not the “one dollar” is in something like PV… that is it is really “one tenth percent” of a wage that is itself rising over time partly due to inflation and partly due to real wage increases. Thing about it is that you will never feel the required tax increase any more than you would feel a dollar per week per day.
Oh, Roosevelt
didn’t “dream about” Social Security. He designed a plan that has kept old people out of dire poverty for eighty years now, and can do so forever if people are smart enough to keep paying for it… by raising their own payroll tax either a dollar per week per year for a few years. or all at once with 14 dollars per week (trustees “immediate and permanent”) plus about another one percent (combined) in seventy five years, or wait and raise their payroll tax about 20 dollars per week all at once in about 2034.
As for the nonsense about Disability Insurance and Krastings, “The imbalances at SS have little to do with the retirement program.” the fact is that without considering disability at all, The SS trust fund will run out in 2035 unless we increase the tax (or take a benefit cut which would hurt a lot and be fatal in some cases). By include DI in the calculation, the combined Trust Funds will run out in 2034. So it looks like DI is the smaller problem… making a change of only one part in 18… in the combined programs.
It really isn’t much fun talking to myself, and less fun talking to Krasting, so …. well that’s the reason I get grumpy. I am not worried about my SS check. I am worried about my daughter’s. And that means I am worried about yours and your children’s.
coberly:
You are doing fine. Do not get sucked in by ad hominems. Peterson’s NPV calculation out 75 years does stir up a lot of anguish. Usually when one using NPV, you are looking at risk. I can not imagine their being much risk when investing in special treasuries.
Run
thanks. PV is just a way of comparing the values of money that you might have in the future to other money from other sources that you might have at a different time in the future. No big mystery, but most people don’t understand it, including people who use it every day.
The PV of the projected SS “deficit” (it’s not a debt) is 12 Trillion dollars over the next 75 years. This is exactly the same as the PV of my proposed fix, the Trustees “immediate and permanent” fix, and the “raise the tax all at once in 2034” fix.
The “deficit” is the difference between what it is going to cost to feed you and all the people who get too old to work between now and 2095… and how much we all will save via the payroll tax at the present tax rate over that same time.
The amount of that “deficit” is what it is. It’s the money we have to find to make sure we can eat when we get old. PV just means “what you’d have to put in the bank today at about 5% interest in order to have the money you’ll need. That “about” is critical. Interest rates change and you can’t count on staying ahead of inflation.
And there is no way to find 12 Trillion dollars today to put into the magic Present Value Bank.
But you can get the money by raising the payroll tax essentially 4% over that time (essentially, because there are several ways to do it but the all amount to the same thing, and most workers will only see half of that. And “early investors” will see only about half of that half.)
The PV of the “deficit” “over the infinite horizon” is about 34 Trillion dollars, but the PV of payroll over the same infinite horizon is about 850 Trillion dollars. Note that the “deficit” is 4% of the available money to pay for it.
Larry Kotlikoff who has been earning a living scaring people about “infinite horizon” Present Value debts, doesn’t understand this. He seems to think that unless we have an actual 35 Trillion dollars in the bank, we can’t possibly pay our SS “debt” (it’s not a debt.) And he blames the Trustees for their criminal irresponsibility in not telling us this. Except of course they do. And they also tell us that 4% of payroll will pay for it. But no one looks at that in the Report. They stop with the scary “34 Trillion Dollar Unfunded Deficit!” ™.
It’s still 4% folks. 2% if you work for a boss. one tenth of one percent per year at a time (a dollar per week per year) if you can convince your Congressmen to understand it and that you’d rather pay it than lose a dime of your scheduled benefits.
Oh, I”m sorry.
The above was the infinite horizon calculation… the cost of paying for SS forever….
The “immediate and permanent” (for seventy five years) cost of paying for it is 2.8% if you are willing to let the people alive in 2095 to pay another 1% at that time.
or 1.4% if you work for a boss.
or one tenth of one percent per year if you can get congress to understand it. and with this choice, the people alive in 2095 will still have to pay that 1% (combined) more, but it won’t come as a shock to them, as they will have been paying those one tenth percent increases about once every ten years. This means those alive and working in 2055 will be paying, in advance, for their own retirement.
the trustees “immediate and permanent” the workers today will at first be paying more than they need for their own retirement, and then getting more benefits than they paid for, paid for by the general taxpayers paying down the new “immediate and permanent” trust fund…
i know this is all too complicated and boring. but maybe you will retain some idea of it when you hear from the Krastings of the world.
Coberly, the “I paid for it” related to SS benefits is a fantasy.
SS Income at full retirement age based on 2017 law
Total Earnings = Sum of 35 years of highest annual employment earnings
Adjusted Total Earnings = Sum of values used in Total Earnings by Year x (1 + Annual CPI)
AIME = Preliminary Adjusted Monthly Earnings Index = Adjusted Total Earnings / 420
…..420 = 35 years x 12 months / year
Monthly Benefit =$885 *0.90 + ($5336 – AIMEx) * 0.32 + (AIMEy – $5336) *0.15.
– where
……. AIMEx = AIME = $5336. If AIME < $5336 then (AIMEy-$5335) = 0
https://www.usatoday.com/story/sponsor-story/motley-fool/2016/12/13/whats-maximum-social-security-benefit-2017/95088994/
So why do you think this is "I paid for it"? or "I earned it"?
Your SS benefit is only "related" to what you earned, but you sure as f…k didn't pay for your monthly retirement benefit.
Note that the $5536 monthly limit value in 2017 is $2.24 million in sum of highest 35 years of income earnings adjusted by CPI for inflation. The $885 & $5336 limit thresholds are adjusted by inflation each year.
Moreover, there's no telling how long you'll live after reaching full retirement age… the benefit remains until you die. The monthly benefit is based on the average actuarial age for your gender, not the age at which you kick he bucket.
If you live longer you're getting a greater benefit than those who live a shorter life so your total benefit doesn't depend on what you earned, but how long you live. If you die a young death, you receive no benefits, no matter what you earned, though survivors recieive some if you were married with dependent kids… otherwise not.
Roughly, for an average monthly benefit of ~ $1250 ($15k/year) the average AIMEy value is ~$1820 or ~ $21.8k/year. In other words that's your average annual 35 years worth of monthly earnings (Gross) adjusted for inflation which is about 45% over your monthly benefit.
Stated differently the benefit is ~ 69% of your inflation adjusted average annual earnings over 35 years. In order to have "earned" it therefore you would have had to put a high proportion of your annual Gross income into an interest bearing account which accumulated to equal ~45% of your average annual gross income over that 35 year period.
I didn't do the calculation, but the annual savings you would have had to put aside would have exceeded 10% of gross income by a considerable proportion. For most middle class incomes after taxes that's a hefty proportion of living costs, not to mention having to also cover for periods of loss of income due to illnesses or layoffs, or kids illness's or wife's, or other unforeseen circumstances.
My point is that it's a fantasy to believe "you earned" it or "you paid for it". It sounds good of course, but it's still fantasy (most fantasies sound good).
Longtooth
I have done the calculations myself very carefully, in great detail, and for several reasonable lifetime-experience paths.
Your expected lifetime benefit is what you could expect from putting your payroll tax into an account that earned anywhere from well over ten percent “real”… if you are very poor, with a wife who has no retirement of her own, and do not count the boss’s share as “your” money. At the other end, if you earn at the cap your whole life and pay the full 12.4% FICA for 35 years, and have no wife (or she has her own retirement) and live the normal life expectancy in retirement you would have had to earn about 2% real on you taxes to get the benefits you will get from SS.
I would take me more time than i want to spend to figure out your “calculation.” But in any case “I paid for it myself” includes the “interest” you earned on your “savings” under any normal understanding of “I paid for it myself” in any situation normal people are likely to talk about.
Furthermore “I paid for it myself” means you don’t take any money you didn’t pay for from “the government” or “welfare” or “other taxpayers”
Since it’s insurance you have no more right to complain about not getting your money back if you die, than you would have to complain about getting your fire insurance back if you don’t have a fire. What you are insuring is “having enough to live on”. If you die early, you don’t need any more to live on. On the other hand if you live to be a hundred, you will certainly get a higher “return” on your money than the average person. Perhaps you don’t consider getting an insurance settlement from a policy you paid for as “i paid for it myself.” But I think I may be permitted to include that as having paid for it “myself” without stretching the truth.
The “interest” or “insurance” value of SS comes from the other workers who are paying “for themselves” for their own retirement, disability, or death with dependents. They are paying for themselves not for you. Even if you… as many cannot… cannot understand pay-as-you-go financing. It’s really no different from a bank account or a stock. But people who are too word-bound to follow the reality seem not to be able to understand that..
I think you need to try to think through your calculation again. Or at least see if you can “show your work” in a manner someone with not much time can follow.
OR
you might want to look at page 150 of the Trustees Report. You will have to think a little to understand some things not readily apparent. The chart is given in 2017 dollars. The wage given for any year is the average wage for that year. To a fair approximation it represents the average wage of every year you paid taxes adjusted for inflation plus growth in the economy. So you may multiply that wage by 35 and then by 6 or 12 percent to get the amount you paid in taxes plus the interest that payment earned over that 35 years. Then look at the scheduled benefit for people who retired in that year. Since retirement benefits are adjusted for inflation every year, you can multiply the table benefit by 20 to get your total expected benefit in constant dollars. I think this will be approximately what you paid in taxes plus intereset.. the interest continuing for the twenty years of retirement as you draw down your savings.
This is not the way I did my calculations, but i think it’s probably a fair approximation if I haven’t made any serious mistakes here. IN ANY case what you need to note is that NOWHERE does any money enter the calculation that did not come ultimately from the worker himself.
you might need to add in the boss’s share to make this come out right (approximately right) but then you need to remember that “most economist say the boss’s share is really the employees money.” as of course it is, because while i don’t believe the boss would PAY you that money if SS didn’t force him to, I do believe that the boss gets that money from NOT paying it to you as a fair wage or normal raise.
And I probably wish I had not said that, because it makes me sound like the folks on the Left who think ALL of the boss’s money should really go to the workers who “earned” it. I am not one of those. I just think none of these calls turn out to be either black or white when you look at them honestly.
Well, I shouldn’t have tried it. Doing it in my head.
I seem to have lost the contribution from inflation (SS pays an effective interest to cover the cost of inflation. For some reason that I don’t yet understand, that does not emerge from the quick calculation based on the chart on page 150 of the Report.
Now I’ll have to look up my brute force calculation, or try to find may through Longtooth’s. Anyone who wants to try their hand should feel free, but don’t be oversure of your answer either.
IN any case, the fact remains that none of the money paid as benefits comes from anywhere but the workers who pay the FICA tax. They “pay for it themselves.” And “interest” counts.
When I did this eight years ago I got the table values of average income in current dollars for 1975 to 2009. Multiplied those by 12.4% to get the combined payroll tax, and summed that over the 35 years for total tax paid. then i calculated the interest those payroll taxes would have had to earn to buy an annuity at 6.5% nominal interest sufficient to pay 20 years of the benefit as calculated from the average indexes monthly earnings and the bend points for that year, i assumed that benefit would be adjusted to keep up with inflation at 3% per year. The interest rate the taxes would have had to earn on these assumptions (no wife’s benefit, combined tax) turned out to be 6.5% nominal (which is probably where i got the assumed interest on the annuity.
this calculation is similar to the one Longtooth did, but begins but moves in the opposite direction. I’ll now try to follow what Longtooth did. But the fact still remains that NO money comes to the worker as a benefit that did not come from him as the tax he paid plus the interest that tax would have earned.
a quibble Longtooth could make is that my “interest” rate also includes the growth in the payroll over time not only from increased wages but from an increased working population. i’ll take that as legitimate interest or “dividends” from his tax “investment.” because neither the population nor the wage rate will be increasing as fast in the future the effective “interest” on the tax will go down… which is why the tax has to go up to keep up with the benefits required over a longer life expectancy. i also made a calculation for that… .the future “interest” earned by the tax… but it would take me a little while to go through that calculation and look for mistakes.
instead i’ll look through Longtooths calculation for mistakes.
Longtooth
I really tried to understand what you are doing in your calculations. I can’t do it. Could you try presenting it in a more systematic way.
For what it’s worth, you DO contribute more than 10% of your income to Social Security… actually 12.4% counting the boss’s share. And whether that is a hefty proportion of living costs or not, It is exactly what you have to set aside to be able to pay living costs when you can no longer earn an income. And just to help you feel better, you don’t pay any tax at all for “periods of lost income,” but you will still get benefits because what you did pay when you had income counts as “insurance” to cover that loss. And the “insurance benefit” is paid for by other workers for exactly the reason anyone pays for insurance…. because it could happen to them.
Here is where I earn my reputation for being a mean person: I could be wrong, but it looks to me like your thinking is so confused you can’t come up with a correct answer. But I’d be delighted if you proved me wrong.
Coberly,
I have pay stubs (annual, breakdowns of Gross) for over 35 years of income. It was never even close to 5% out of my gross and that was long, long before my income exceeded the Cap. And my gross was as an employee (e.g. labor income)… not sole proprietorships or stock options, etc.
My calcs are straight out of the link I posted. The distribution of monthly SS benefits for 2015 is also shown in that link. The mean is on the order of ~1250 / month. If you don’t understand the calcs please be specific and I’ll walk you through them.
Coberly,
I don’t question your calculations or think they’re wrong or misleading or anything. I was simply pointing out that ss benefits are not what you paid for or earned…
….they are “related” to your highest 35 years of income, divided by the number of months in 35 years to arrive at a basic monthly value after accounting for inflation.
That basic monthly value is segmented: Your monthly benefit is the sum of 90% of the 1st $885 plus 32% of the value between $885 and $5336, plus 15% of anything over $5336 (all applied to 2017 for full retirement benefits).
That in and of itself says you didn’t earn or pay for your monthly benefits…
a) your earnings (or contributions to ss) don’t inflate by themselves… they have to be invested with accumulating interest AND then also adjusted for inflation. It’s an annually compounding accumulation.
b) You neither “earn” nor “pay for” inflated earnings contributions to ss. Who do you think pays for the inflated value of your earlier earnings contributions to ss? The treasury pays the going interest on ss trust funds borrowed by congress to pay for other expenses that don’t get paid from tax revenues. In other words, the going rate of interest paid is determined by the global market demand for US treasury bills in relation to their supply That interest is paid by income taxes on the general population of incomes, including corporate and unearned income. But you’ll note that there is zero relationship between your earnings contributions and benefits that takes the interest income into account…that’s just one reason the accumulated compounding interest causes variations in the Trust Fund total. In short your ss benefit actually depends on international demand for treasury bills and treasury’s borrowing needs on an ASSUMED basis… over which you have zero control.
When I started SS I received a detailed printout of every gross income by year from every job I’ve ever held…. starting in my Jr. year in high schoo.hin in high with every employer. For each gross income the printout showed my FICA contribution.. I added up my total contributions to ss, taking the top 35 years of contributions with and without annul CPI adjusted inflation.
I exhausted the uninflated contribution in less than two years of benefits. I will have exhausted the inflated contributions in another year (if memory serves)…. and I’ve only been taking SS for 9 years (2017 is my 9th year). I was a high income salaried worker-bee and for the last 12 or so years of my employ I maxed out (reached the Cap) sometime between early August and late October depending on the cap and my income those years.
My point is simple and uncomplicated … you, nor anybody else pays for or earns their social security benefit. You receive a benefit which is “related” to your highest 35 years of earnings and you make a contribution toward it depending on your earnings up to a cap… over the cap nobody pays a dime toward it.
In reality this is just a gov’t defined pension plan…. every advanced nation has them and they pay far more relative to costs of living than the US’s does — principally because the contributions are paid to insure the pension is paid and there’s no “cap”… the more you make the more you pay in percentage terms… a progressive tax applied to pensions…whether “earmarked” and in a “trust-fund” or not.
If the propaganda that “you earned it” or “I paid for it” makes you feel better that’s fine by me and I have no objections to you wanting to feel that way. I’m simply point out that it’s a propaganda to give people the impression they’re not on the welfare roles when they retire… e.g. not on the dole. But they, we, all are.
The US earmarks them as a “trust fund” by law so that it doesn’t disappear into the general tax revenue and get used for non-pension plan spending.
Longtooth
I would be interested in following your calculation step by step.
But what we are going to find out is that you don’t think the “interest” (turns out to be about 6% nominal) on the tax collected from the time it is collected until the time it is paid out as benefit is “earned.”
I think that if you ask people if they get paid 100 dollars and put it in the bank at 6% and take out 112 dollars two years later to buy something that costs 112 dollars, “did you pay for it yourself?” They will say “Yes, I paid for it myself.”
As to where the interest comes from, it comes from the increase in wages over the time between when the tax was collected and when the benefit was paid.
This is not money taken “from” all the new taxpayers. They are paying the money for their own future retirement, and they will get the same “interest” from the same growth in the economy over their time working and time retired. It’s worth noting that the workers in 2017 when our hero started collecting benefits are making 3.5 times as much as he was when he started.
You can pretend that this money is not “earned” by the worker. But you would be wrong. He earned it by the time value of money the same way any interest is earned. When you collect interest on a bond, or dividends you do not worry yourself that the money came from the workers in the company whose bond or stock you bought, but that’s exactly where it comes from.
Longtooth
you say you have paystubs and “it was never even close to five percent
I don’t know when you worked or how old you are now, but OASDI has been 6.2% for some time. probably strictly i should only be counting OASI, but it wouldn’t make any real difference to our disagreement.
Coberly
The multiplier for the accumulated inflation rate for each year of earnings isn’t anything any of us “earned” or “paid for”. to Illustrate simply”
Say that my lowest year of earnings in the top 35 years of my earnings was $500 (which is about right for me in my Jr year of high school… but I also receive about twice that in tips). FICA withheld a miniscule amount of this… and I don’t recall precisely but it was on the order of maybe $15 -$20 bucks for the year … roughly
Call it $20.
Assume inflation was 15x since that time until I retired.
So my $20 contribution adjusted for inflation = $300. Who paid the $280 difference? I didn’t, that’s for certain.
If I had wanted to invest that $20 in something what could I have invested it in? Bank savings account, less fees and it might have been something on the order of 1% that year and not much more in the issuing years. If inflation was 2% that year then I lost 1% of the $20 that year… I made nothing.
I’m keeping this simple for illustrative purposes… but real. Until the 1980’s the options for a retail investor to invest money in anything that beat the rate of inflation was near nil. You could bet on some stocks in the market but the brokerage fees were huge relative to investments for the retail investor…. and unless you were widely diversified and paid close enough attention to the diversified portfolio you probably lost money over the long haul, but you might have met the rate of inflation. If you had enough to invest, you could pay somebody to manage your investment for you…. brokerages offered this service… it cost ~ 2% – 4% of the total market value of your investments.
Now you can quibble about the numbers but the fact is that only high income earners had the where-withal (means or methods or time) to invest any savings for the long term that earned at the rate of inflation or better. For most income earners fees and charges on savings ate up more than the rate of inflation. You still saved and you still accumulated savings, but not enough to cover inflation.
Next consider that most income earners save for the near and medium term at most… pay for vacations, new cars, down payment on a house, new furniture, new TV, etc. And that’s only possible if they have enough left over after absolute essentials to put anything in savings.
A little aside: My wife & I started out with zero, zilch, nadda, not a penny in my bank account or hers. Her father let us use the car the had let her use in college, but we had to pay for annual license fees, insurance and maintenance. She quit college, I continued working part-time jobs while finishing college… by necessity we lived in the lowest income part of town, found enough furniture for free to have a bed with a matrass and a table and chairs, one dresser and that was all. We barely had enough to eat and made clothes last a long time. I finally graduated and lucked out with a great job at huge income, which disappeared as fast as it came in for several years with new baby’s, a sturdier table and chairs, a better (but still used) large matrass & box springs… no frame. We split for one movie a month and treated ourselves to a steak dinner once a month… sometimes only once every two months, a used old Black and white small screen TV and playing cards or scrabble or whatever with our friends was our entertainment. We washed clothes and diapers at the Laundromat, and rode bicycles whenever possible to avoid wear and tear and gasoline costs on the cars… big baskets on the back fender to carry wash clothes and groceries, with a backpack for the baby We finally saved enough to buy a small cheap piece of property way outside town and pay for an architect and engineering and finally actual ground breaking for a small, but designed for expansion, little house. I did all the flooring (tile and hardwood) myself, all sheetrock and insulation work, all interior cabinets, wood-work, finish work, hug interior doors, and interior painting and exterior staining/painting myself after work and on week ends, plus a decent part of the house framing work, roofing, (and foundation forms)… grunt labor. We used $0.50 ceramic construction light fixtures for the first five years we lived there. True sweat equity.
We could afford the mortgage but barely, and probably only because I worked for a fine company that the bank felt was sound and thus my employ probably sound as well.
‘Do you think for one second that we had enough left over to put away for long term retirement savings??? And I was a relatively very high paid professional (though still starting in my career).
Now consider most of income earners. I was one of 10% of the 4 year degreed workforce in the US and 1 of 3% of the engineering/science professional work force at that time. And I was in what was eventually to be called Silicon Valley before there was an Intel or Zylog or Seagate, or any of the other high tech firms in the Valley… my company was one of two high tech advance research companies in the Valley at that time… Oh, National Semi-conductor also came to the Valley about that time. I still drove our original car — the one my father-in-law eventually signed over to us after it was 10 years old already.
So where was this miraculous rate of interest above and beyond the rate of inflation and compounding supposed to come from? And I was in the lucky group of income earners. Shit it was almost all we could do to pay our way and save enough to buy another car when the old one finally crapped out… when it was 22 years old I sold it for $50 and kid costs (2), and dressing decently for work and keeping our belly’s full for a change… and eventually splitting for light fixtures finally, and a nice sofa to replace our bean-bag furniture. oh, and then how was I going to afford to pay for my kid’s college assuming they had the grades when it got to that point? We did, but it was back to beans and bacon again for 8 years (kids were 5 years apart in age on purpose precisely for this reason… thank god for the pill). And we had great health care insurance from my company.. no copays, no costs to have kids, no costs for any hospitalization, no costs for specialists my daughter needed to see frequently for 18 years, no costs for major sports injuries and surgeries from my son, and minor outlays for pills.
The ;point is only that it is a fiction to believe most income earners had money enough to invest (assuming no ss contribution) at net compound earnings equal or greater than rates of inflation for 35 years. I didn’t until I had about 20 years in my career under my belt and a good run in a series of good luck in my work, and I was in a higher bracket than most and didn’t live high on the hog — and still don’t. After that 20 years we began to save and invest for retirement income, with a hefty amount of pure luck — the population in Silicon Valley began to move to our location and property values went through the roof and are still high. Just luck. That plus full pension, ss, and investment income now keep us comfortable except for health care costs which without Medicare we would have already been bankrupt .. literally.
So you’re kidding yourself if you think ‘you earned your ss benefits’ or ‘you paid for them’ You contributed a minor part to it is all. The rest was paid by general taxes on a progressive tax basis and a gov’t assured interest rate on US treasury bills.
Coberly,
1. Can you show the interest rate paid each year on the ss Trust Fund for say the last 50 years? Just as a marker, an average annual 2% rate of return on investment over 35 years doubles the 35 year old amount invested if compounded.
fyi here’s the effective anujnal interest paid on ss trust funds from 1940 through 2016.
https://www.ssa.gov/oact/progdata/annualinterestrates.html
and here’s the chart of average annual interest paid since 1960 on long term treasury notes
https://fred.stlouisfed.org/graph/fredgraph.png?g=ex9z
Notice any difference?
2. Can you tell me who was paying that interest? (Answer: The Treasury was paying it, but where did the treasury get the funds to pay those interest charges?)
3. Can you show me how the average income earner could earn that interest each year, net of fees and charges on the meager annual contribution from their ss contribution?
On adjustment for inflation, just to level set: From 1960 through 2016 (57 years) a value earned or paid in 1960 is 8.11 time that in 2016 dollars. For a 35 year period from 1960 inflation 5.136 . (my prior 15x inflator was 3x reality)
On compounded interest I did the numbers for you.
For a 35 year period commencing from year shown, the cumulative compounded multiplier on whatever you put into a retirement account each year beginning in that year is::
1950 – 1.83x
1955 – 6.71x
1960 – 9.37x
1965 – 11.88x
1970 – 13.53x
1975 – 13.30x
1980 -11.89x
and it keeps dropping since the interest rate from 1980 to present has been is dropping at a nearly perfect linear rate of -0.23% per year (Rsqr = 0.995) and it was 3.2% in 2016.
Compensating for annual inflation from that time for 35 years rsults in another multiplier.
If you combine both interest and inflation multipliers and divide by 35 years the Average ANNUAL multiplier is (from year shown):
1950 – 0.182
1955 – 0.712
1960 – 1.092
1965 – 1.486
1970 – 1.563
1975 – 1.195
1980 – 0.696
That is, take a constant dollar value of gross income in nominal terms each year and place it in the interest bearing account that the treasury used on borrowings from the ss trust fund and inflate it to year of retirement and that’s the multiplier you have on the amount you put into the account over that time, on an average annual basis. In other words interest earned plus inflating it by the annual CPI compounded over 35 years.
If you were lucky and your last 35 years of work began in 1965 or 1970 (or around that time) you “earned” ~ 1.5x whatever you put into that account. So if you put in 1 each year, you ended up with that 1 plus 1.5 in that account on an annual average basis. If you’re unlucky and started putting money into that account in 1975 you “earned” ~ 1.2 plus the 1 you put into it each year…. and if you’re really unlucky and started putting money into that account in 1980 for 35 years you “earned” ~0.7 and still have the 1 you put into it.
Now make that last for 20 years after the 35 years.
In other words divide that average annual earned plus inflation plus what you actually put into it yourself by 20 to figure out how much of that money you can take out of the account each year for the next 20 years… assuming also that you pay taxes on it as you take it out.
So if you were a lucky one, you can take out ~ 12.5% of it per year for 20 years (= ( 1.5 multiplier + 1 ) / 20) of which 7.5% was the interest and inflation compensation part…. and don’t forget to take out federal and state taxes on it.. say 10% total tax, so you actually get to net only 11.25% of it per year.
Since I can’t figure anybody’s average annual gross income from labor over 35 years nor how much of it they put into this account each year, I can’t compute an actual amount of withdrawal (e.g. the 12.5% if you were a lucky one) they can have over the next 20 years either.
But a rough number is multiply the 2.5 (=1.5 + 1) x 10% if you put 10% of your gross into the account every year (but after tax since this is your own “earnings”.. not social security. If it’s a ss contribution it isn’t taxed as income until you with draw it).
At 10% rate of savings on gross after taxes, the 2.5 becomes 0.25 in terms of average annual after tax gross income and now divide that by the 20 years it’s supposed to provide your retirement income each ear and now you’re down to 1.25% in annual retirement income before taxes where the 1.25% is the factor on average annual gross income per year for 35 years of earning.
For kicks assume you started working at $6k/year and after 5 years it was a gross of $8k and you worked for a total of 40 years so that your gross was $100k when you retired. Assume for rough simplicities sake the gross income increased linearly each year from $8k to $100k If that was the case then your average annual gross income for the last 35 years was $54k/year.
Assume 15% tax rate so your net after tax was $49.5k/year. If you put 10% of that into your retirement account than the average annual nominal amount you put into the account was $4.95k / year. Multiply that by 35 for the total you put into the account (what you actually earned) for $17.325k. The interest and inflation “earned’ was 1.5x that or $259.9k for a sum of $277.2k available to last you the next 20 years.
That’s an annual retirement income before tax of $13.86k/year x 90% (assume 10% taxes) or $12.47k/year net of taxes in retirement savings annual withdrawal rate.
And that’s only if you earned interest at the same rate the treasury paid in interest on it’s borrowings from the ss trust fund AND if somebody paid for the inflation that occurred over that 35 years.
But in any event you only contributed 1 out of 2.5 or 40% of it… if you were / are among the lucky ones whose last 35 years of earned income began around 1965 to around 1970.
You see that most of the interest earning was because of Volker’s Fed policy which jammed both inflation and interest rates sky high, but that was what the treasury paid in interest. No bank paid those rates for personal savings accounts nor did credit unions So the reality is that you couldn’t even have a $12.7k per year in retirement income on your own “earnings” not to mention that somebody had to come up with the money to compensate you for inflation which you didn’t earn either.
And that includes having had the ability to put out 10% of your net after tax gross income in savings every year for retirement only.. and most income earners didn’t have that much to spare. I didn’t until less than 20 years before I retired and I didn’t spend a lot on stuff either. Cars were only sold after 20 years and not replaced until then… and I paid cash for the cars so I wouldn’t have to pay interest on top of the price. Saving for a car and the kids things, and their college ate up most of the savings we could afford (oh, and the kids had to earn their on spending money, car insurance, gasoline, maintenance, etc.) I paid for tuition (State University system), books, and only for up to 4 years whether they got their degree in that time or not), and a “dorm” rate for food and housing. If they wanted to spend on better housing and more beer and food, that was on their dime.
So if you want to persist in thinking that “you earned your ss benefits” or you “paid for them” that’s fine… but you’re eating the propaganda hook, line, and sinker.
Longtooth
your argument assumes what you are trying to prove. i don’t know how to convince you that interest is something you earn.
two thoughts:
the whole world acts as though interest is earned. it is fundamental to modern economy. i think muslims and maybe orthodox jews don’t think interest is religiously allowed. but they goto elaborate lengths to accomplish the same thing.
(two) it i agree to work for you for an hour for 100 dollars, it is the same for both of us if i lend you, say, 200 thousand dollars for an hour and you pay me 100 dollars interest. i (arguably) worked to earn that 200,000, and you wanted to use it for an hour and were willing to pay me a hundred bucks for the use, and i was willing to accept the 100 bucks to let you use it. same as if i had a baseball signed by mickey mantle and you wanted it enough to give me a hundred bucks for it, and i wanted the hundred bucks more than i wanted the ball.
there doesn’t need to be any objective “value” to the exchange of something for money.. just an agreement between the parties that each is willing to exchange one for the other.
i am currently involved in a land sale i agreed to a year ago. the purchaser has taken a year to find the money. the value of the money i agreed to has declined over the year (by quite a bit as measured by opportunity costs). i wish i had been smart enough to include an interest charge to cover the time between the agreement and the delivery of payment.
i am trying to avoid words like “fantasy” and “propaganda” and “hook line and sinker” because they really are insulting, but you don’t mean to be insulting. but try to believe that i man not be a fool. interest is a part, a vital part, of the use of money. you don’t have to believe me, but it would probably be better (for you) if you could teach yourself that people who do believe that money they got for interest is “their money” and anything they bought with that money is something they “paid for themselves” are not deluded fools falling for a fantasy.
Longtooth
the interest earned by your FICA tax is about 6% nominal. nominal counts. it’s what makes the math work. real interest is important too, but the fact is that you pay and get paid nominal interest. you can really mess up your thinking if you try to think in terms of “real” interest while comparing money you paid with money you get over time.
and the interest does not come from the interest on the trust fund for the most part (the TF interest is only paid on the surplus between the tax taken in and the amount needed that day.)
the interest on the tax paid to the tax-payer is paid by the growth in wages over the time between the time the tax is paid and the time benefits are received.
Coberly – How much did the NPV of the unfunded portion of SS grow in 2016? Answer: $1.2 Trillion – $1,200,000,000,000. The total unfunded is now $12.5T – $12,500,000,000,000.
This is the NPV. This is the amount of the check that has to be written today to offset the unfunded liability. This comes to $75,000 per worker. The increase just last year comes to $7,300 per worker.
Coberly likes to tell people it is only 20 cents a day. Don’t listen to him.
Coberly says:
the interest does not come from the interest on the trust fund for the most part (the TF interest is only paid on the surplus between the tax taken in and the amount needed that day.)
the interest on the tax paid to the tax-payer is paid by the growth in wages over the time between the time the tax is paid and the time benefits are received.
RUBBISH!
Krasting
“Rubbish!” is quite a good argument when you don’t know the facts and couldn’t understand them if you did know them.
But as for the growth in the unfunded part of the next 75 years of SS costs, the growth has nothing to do with any increase in costs or deficit. It comes in the difference between last year which was entirely funded and the year 2095 which is about 4% of payroll unfunded. You are looking through a moving window.
And no one has to write a check today to cover 75 years of unfunded costs. What they need to do is increase the tax, gradually, by about two percent of payroll for each worker and his employer. That’s about a thousand dollars per year eventually, but the good news is that if reached gradually it can be increased about 50 dollars per year each year for 20 years, while incomes will go up about 500 dollars per year so that when the extra 1000 per year is needed your income will have increased by 10,000 dollars per year.
I realize that the concepts and the math are too hard for you, but you should really stop shouting your ignorance out to the world.
Go read the Trustees Report, table on page 200 should tell you something: The 12 Trillion Dollar (PV) deficit can be closed by raising the payroll tax 2.8 percent “immediately and permanently” . Thats 1.4% for the worker and 1.4% for the boss. At an average pay of 1000 dollars per week, that’s 14 dollars per week for each. But, once again, it’s easier to get there by raising the tax one dollar per week each year. This means that you would eventually have to raise the tax more than 14 dollars per week, but that raise would only be “instead of” raising the income tax to pay for the Trust Fund that the 14 dollars “immediate..” would create, and it would be “instead of” raising the tax another 10 dollars per week in 2095 if you want to worry about that huge tax increase long after you are dead, that the people making more than twice as much in real dollars by then will be able to handle quite easily themselves.
But really, seriously, do you imagine anyone would be stupid enough to raise 12 Trillion dollars today and put it in the bank so that it would the interest needed to pay your retirement costs without you paying a dime?
Please tell us, in detail, how you would pay the retirement costs of fifty million people (more by then) for twenty years of life expectancy. Account for the fact that some of them will never make enough money in a lifetime to save enough to pay those costs, that inflation would eat half or more of everything they could save in a “safe” account, and that bad days on the stock market could wipe out half or more of what they saved when it is too late for them to recover.
Please stop trying to scream your way through a problem you don’t understand.
Coberly:
I was hoping you would say this. “But as for the growth in the unfunded part of the next 75 years of SS costs, the growth has nothing to do with any increase in costs or deficit. It comes in the difference between last year which was entirely funded and the year 2095 which is about 4% of payroll unfunded. You are looking through a moving window.
And no one has to write a check today to cover 75 years of unfunded costs. What they need to do is increase the tax, gradually, by about two percent of payroll for each worker and his employer.”
Planning out 75 years is ridiculous as the economy and environment change. It is a moving target as you say. I believe the most one can do is take a 10 year projection and adjust accordingly to what has changed using your suggested increase. Putting $12 trillion into a TF today or overtime which would be loaned to the government via special treasuries and end up in the GF would only give political interests another excuse to alleviate taxes. As it is now, they do not want to pay the TF back and would rather adjust payout in benefits on the backs of recipients to balance payout with receipts.
I need to point out that Krasting has been told the answer many, many times. He never responds to the answer. He just goes back and looks for another “fact” he can take out of context and scream about hoping to scare whoever hears him into thinking they are facing a huge, unsolvable problem
The solution is easy, raise the payroll tax… that is increase the amount you put in a safe place in order to have it (plus interest) when you will need it a lot more than you do today. The raise needed is about 1.4%, but it would be easier to reach it by raising the needed amount one tenth of one percent per year.
By raising it a little at a time, you only pay the increased tax when your income has increased by ten times the amount of the tax increase. You avoid creating a new ‘larger-than-needed” Trust fund that people like Krasting will be scraming about for the text seventy five years “The Trust Fund is Going Broke! Social Security is Going Broke! “Social Security IS Broke! Flat Busted!” And you have the people paying the increased tax who are the same people who will get the increased benefits.
But if that is too hard for you to understand, by all means take the Trustees “immediate and permanent.” You will never miss the 1.4% (about fourteen dollars per week for a person making one thousand dollars per week). For one thing, “normal” raises will make up the difference in less than two years.
Run
thanks.
i’m not so sure the Big Liars even care about paying back the Trust Fund. It is likely that Congessmen think that way, to the extent they can be said to think at all.
Mostly it’s just something they can scream about to convince the public that Social Security is costing them a huge amount of money… so they will stand by silent as the lambs, while the Big People cut Social Security below where it needs to be to provide meaningful retirement insurance.
I think the Bad Guys just hate the idea of the “common people” being able to retire at all. They hate to see workers “idle.” That’s drilled into their bones, but they also make money on workers, and every retired worker is not making money for them. A few years ago U>S>News wrote an article which said every year of retirement per person “cost the economy” 90 thousand dollars. Probably twice that now. But the worker is not making that 90 thousand, not even half of it. Most of the 90 thousand goes to his boss.
Some of it might go to the stores that sell him things. But he’d probably buy most of those things anyway out of his retirement check which will be not much less than an old person would get paid for his work if he couldn’t retire.
Another place the Bad People might make money by ending SS would be in managing the “investments” that workers would have to make in order to have any hope of retirement. The Big Investment Companies have figured out how to make money on small investors, leaving those investors with not much more than what they would get from Social Security. That is if their luck doesn’t turn bad and the “market” leave them with less, a lot less, less than they need.
Anyway,
it sure is funny to watch “Fix The Debt” scream about the Trust Fund “running out of money.” The Trust Fund is debt owed by “the Federal Budget” TO the people who paid the Social Security tax.
Reducing the Trust Fund IS reducing “The Debt.”
These people have no shame. They talk backwards because they know no one will catch them at it. Their real purpose is to destroy Social Security. It always has been.
Krasting,
Coberly responds to you questions/statements with arguments to refute what he is saying. Why don’t you? Instead you say things like “rubbish”, and change the subject. That is a technique of someone who is wrong.
I don’t know how else to take it. You are not advancing your point of view.
Coberly,
A couple of points you must have missed.
1. The numbers I gave you after paying interest and accounting for inflation with compounding both (e.g. the 1.5 mulitplyer if you saved for 35 years from 1965 or 1970) is the real dollar factor in present time (at the 35 year mark when you retire). You put in a nominal amount each year to the trust fund. After 35 years including interest and inflation real dollar amount is 1.5 times what you put in over time for 35 years as an annual average “earned” on what you put in converted to real dollars. These are the compounded composite of known & published numbers.. not fictional numbers or “approximates”..
– the ss trust fund publishes the average annual interest yield it receives each year on lending the trust funds capital to the treasury. I used their numbers for the “effective yield”.
– Inflation is set by annual CPI-U. The gov’ publishes those annual numbers going back to whenever… I used the values from 1950 through 2016..
– the composite compounded over time is a simple straight forward:
((Ri+1)^n) -1, where Ri is the decimil interest rate (Percent/100) in year i and n the number of years compounding from year i through year i+n,
That’s the earned interest multiplier or the composite inflation raised to the real value in present time..
– multiplying the compounded interest and inflation factor gives the combined multiplier for what ever nominal amount was put into the account each year over n years. That’s what was earned in compounded interest raise to real dollars in the present year.
– if you don’t understand this I can’t help you…this is standard stuff.
2. I understand interest (time cost of money) just fine.
3. You still don’t seem to get who pays the trust fund interest on it’s funds. Interest is earned by lending it. The trust fund lends it to the treasury by law. The treasury uses it to pay other bills and pays the trust fund interest on what it borrows… essentially it borrows all available funds in the trust fund less the amounts the trust fund has to pay out each month..
4. Where does the treasury get the money to pay the interest on the trust fund money it borrows? That money comes from the general tax-payers — individual income tax, corporate tax, tax on capital earnings, and any other sources of federal tax revenues.
5. What does the treasury pay to ss in interest. SS publishes the interest yield they receive annually from the treasurey. I gave you the link to the annual interest rate the ss trust fund recieves each year on its funds.
– It’s not a constant
-It ‘s directly related to the treasury’s cost of borrowing on the open market, but adjusted by some detailed law or annual changes in laws. I looked at the annual difference between what the treasury pays on LT borrowings on the open market at what it pays ss to borrow their funds.
– Interestingly until 1985 ss was paid less in interest than the going open market rate on treasury borrowings. Beginning 1985 it has paid a higher rate than the going market rate for LT borrowing… averaging 1.5 points more +/- ~ 0.5 points in any given year.
– This brings up and interesting new question: Why is the treasury paying more to borrow ss trust funds than it has to pay for LT rates from the rest of the world that lends the federal gov’t money? Perhaps it’s because the trust funds are borrowed for short term loans only — which have a higher interest rate charge than LT borrowing. But then why is it borrowing ss funds on a short term rate basis? when it could be paying 1.5 percentage points less by borrowing on a LT basis? Or to put it differently, why is the ss trust fund only lending on a short term basis?
-I think the answer is simple… the trust fund receives more interest by lending on a short term basis, but taxpayers are paying more for short term rates the treasury is borrowing from the trust fund. But since the tax rate is progressive, the taxpayers paying the difference between LT and short term rates are biased to higher incomes ..and so can afford it better than the predominant ss income recipient / ss contributor.
-This is a straight out xfer of incomes from higher income earnings to lower income earners… just an additional xfer over and above the progressive tax rate transfer. Unfortunately higher income earners don’t pay as much into the ss trust fund as lower incomes (because of the Cap), so in real effect the higher income earners don’t actually end up paying as much as one might assume of the extra 1.5 percentage points for short term v long term rates if there were no Cap. More-over capital income earners pay nothing toward the ss trust fund.
6. Furthermore the inflation compensation cost which brings the earnings and your contribution to the fund back up to real dollars in present value when you retire has to be paid by somebody. It’ not coming out of your pocket and into the trust fund. Who is paying for that?
– that also comes out of the general federal gov tax revenues of which the amount is borrowed by the treasury if there is a deficit.. but at least that part is borrowed at LT rates (I presume) to keep total annual federal interest charges lower on us tax payers, corporate tax payers, and capital earnings tax payers.
What I think you are failing to recognize is that the interest income received is not an interest income you can receive as a retail investor… take a look at the average annual APR on 5 year money market savinss which aren’t insured, or on average bank savings returns or any other guaranteed insured returns. They are always far, far lower than what the ss funds are returning in interest by lending to the treasury so the difference is what general tax payers are paying the ss trust fund in interest…. it’s not labor’s “I earned it” money.
You are also not taking the inflation multiplier into account that the contributions to ss in nominal terms don’t pay for either. that multiple of your contribution to ss comes out of the general tax revenues .. paid by all tax payers. It’s an additional cost of ss payments to recipients. It certainly can’t be made by putting your ss contribution into a savings account or money markets. So you didn’t earn that either.
Thus most of the compounding interest earned and all of the inflation multiple is an “entitlement” … a xfer of revenues including borrowing by the treasury from the general tax revenue to your ss benefit.
What is it about this you don’t understand?
Longtooth
we are not getting anywhere. should I ask you what is it about this you don’t understand?
two points: interest on the trust fund has almost nothing to do with the the effective interest the taxpayer gets on his payroll tax as measured by his return in benefits. The nominal return using the numbers for a person who retires in 2017 after paying the 12% tax for 35 years, and getting the published, or calculated, benefit for 20 years is about 6%.
The real return would be about two or three percent depending on what you think “inflation” is.
I am quite aware you don’t think that interest is “earned.” Nevertheless you can’t point to any source of money to pay benefits that does not come from payroll taxes.
The “effective interest” comes from the fact that the people paying into SS after you retire are paying their 12% on an income that is about 3 and a half times as large in current dollars. Those people are not “paying for your retiement” they are paying their own 12% for their own future retirement and will get the same “effective interest” that you got on your own money.
There is nothing strange about this, it is the way “normal” interest works. You are just confused because someone taught you to think of “interest” as being generated by new work or new products. that is often the case, but by no means the only case. Interest is simply the rent you pay, or someone pays you, for the use of money over a period of time. All it need is to be what someone is willing to pay for the use, and someone willing to accept that pay for the temporary loss of use of his money.
You seem to have some sort of background in finance or financial calculations, but that doesn’t mean you didn’t get an idea about interest that is too narrow to cover what interest is “in general.”
I believe your calculations give the same result as mine… I haven’t checked… so the only problem remaining is whether or not you consider the “interest” i earned by “lending” my money to SS is “my money” so i can say of my benefits that “i paid for it myself.”
If you chose to believe something else, there is no way I can change your mind. But rather than confuse yourself with words, look at the actual facts… “follow the money.”
Coberly – It is not possible for you to calculate if you, as an individual, have paid in an appropriate amount to justify your benefits. We will not be able to make that calculation until after you die.
But we can conclude if all participants in SS have contributed sufficient funds. The answer is “No”. SSA tells us that to be in balance benefits have to be reduced, across the board by 23%.
You know these numbers. So why do you spend a few thousand words trying to convince people that it is not the case?
Just say it: “Workers, and their employers, pay in about 75 cents on the dollar.”
Krasting
No. you are wrong. The extra tax won’t be needed until 2034, if then. Until that time workers will have paid in exactly what they have taken out as a whole. Some will live longer than others. They get the “insurance” benefit. As do those whose lifetime earnings are lower than average.
Even if you refuse to understand this.
If the tax is not raised before 2034 and benefits are cut, then indeed some workers will have paid in more than they will get back. But this is not the normal way social security works, and if it happens it will be because the Congress is criminally negligent.
You are confusing what happens and what is suppose to happen with what might happen and is not supposed to happen.
What SSA tells us is that in order to balance benefits after 2034 or so, there needs to be a tax increase or a benefit cut. I have tried to tell people how easily they can afford the needed tax increase… which would pay for their own future benefits, and how catastrophic it would be to accept the benefit cuts. But I am always careful to tell them they have to pay for those benefits, as did their parents and grandparents (pay for their own benefits).
You have been told this probably several hundred times. You have never shown that you understand it. If you understood it and just disagreed with you you would make some at least colorable argument. Instead you just insult me and then cry foul when I insult you back.
Only I do not insult you. I only describe your medical condition. I think it’s Korsakoff syndrome.
“and just disagreed with it, you” not (f course) “and just disagreed with you you”
Coberly,
So you believe that what labor contributes in ss contributions over 35 years of those contributions they get out of it on an assumed actuarial life after reaching full retirement age of 20 years, purely from their contributions?
If you think this is correct please show the precise equations without restoring to IRS tables or trust fund tables. Stat with the actual annual nominal interest rates paid on ss trust funds (for which I gave you the direct linki) and the actual annual CPI as published on FRED or by BEA. Use unit input = 1 for the annual ss contribution paid by each laborer’s earned income.
Next after you do this, compare it to what the same contribution would earn IF the contribution put into an interest bearing savings account at retail interest rates for the same 35 year period.
The values can only be the same IF and ONLY IF
A. The retail interest rate is equal to or greater than the rate the treasury pays to borrow ss funds from the trust fund.
B. Somebody supplies the money to bring the nominal value in contributions made each year (to the trust fund or to the savings account) up to the inflation adjusted value of those contributions at the end of the 35 year’s worth of nominal contributions.
If you can’t do the computations you need to consult with an economist.
Coberly,
what you wil find if you do this is that there’s a huge difference between:
A. what the same contribution to a retail interest bearing account (net of charges and fees) accumulates to relative to what the ss trust fund’s interest accumulates to. The difference is huge and the retail interest bearing accumulation is far less than the treasury pays on the ss trust funds in borrows. That difference is called an “entitlement”
B the inflation adjusted additional funds required to bring the nominal contribution each year up to current dollar values up to each year’s inflation over that 35 years and what you have in either the retail or ss trust fund account without those additional funds. Those funds are also and “entitlement” Labor contributions do not pay those inflation adjusted adder.
“Entitlements” are not earned and you didn’t pay for them out of your labor contribution to ss. They are provided gratis by gov’t and the gov’t provides them by charging taxpayers (income taxes, and other tax revenue sources) to provide those gratis entitlements.
I’ll end now with this. I’ve sincerely tried to give you all the relevant determinates of where in fact your ss benefits actually come from. Only a minority of your (and my) ss benefits come from labor ss contributions. It doesn’t matter an iota what the contribution rate is …6%, 12%, 20%. in terms of the difference between what you think you “paid for” and what the entitlements are.
I’m not debating at all whether the trust fund will or won’t run out in year x or what it takes to extend it or not. That’s a function of
1) relative inflation rates
2) treasury’s interest rates they pay to borrow ss trust funds, which is a function of the demand for treasury notes relative to their supply in gov’t borrowing needs and whether other national currencies are in more or less demand than the US dollar’s demand
3) total labor income which is both a function of a) population growth rate differences over time, b) employment rate changes, c) average labor wage and salary, wage and salary,
4) The cap on earned income above which no ss contribution is made.
Longtooth
thanks for trying.
i think you are entirely wrong, but i can’t think of any way to convince you.
the money that pays SS benefit checks comes entirely from the money paid in SS taxes.
with the arguable exception of the interest earned by the Trust fund from money it lends TO” the government. but this interest is FIRST not the important source of benefit money, and .second, it is EARNED by the money that the person who ultimately gets the benefit paid for his benefits.
you seem to have a lot of iron-clad rules for what is and is not earned, but your rules do not conform to normal usage of what people mean when they say “i paid for it myself.” Any interest i earn from any source becomes “my” money, and when i use it to pay for something i need, i “paid for it myself.” And that is all I mean by the expression.
i am afraid you would go quite insane if you tried to trace every dollar everyone uses to “pay for it myself” in situations that have nothing to do with social security to prove they “earned” it by the sweat of their brow. you end up saying things like “profit is theft” or “taxes are theft” or … well, other things that a lot of people take quite seriously that make other people know it’s time to end the conversation.
I won’t do it now because I am tired of it and I think everyone else would be bored by it. But if Angry Bear wants to put up with it, I will offer in a few days a complete description of how I calculated “effective interest” for an “average” earner, on the money he paid in payroll taxes to get the money he received in benefits.
But as far as Longtooth’s argument is concerned, this will all be beside the point. Because he thinks some money is coming from somewhere other than the payroll tax. It is not, except in the minor case of money earned by the Trust Fund. But that interest is entirely different from the effective interest earned by the worker’s payroll tax contribution. It is still money earned by the worker’s contribution, but not an important part of the money earned by the worker’s contribution. when SS returns to operating with a “normal” trust fund, the Trust Fund interest will contribute about 1% to the amount needed for benefits. But this is no more “not earned” by the worker’s contribution than money i get from cashing a savings bond is money i did not earn.
and at this point i need to stop before getting involved in a meaningless semantic argument. you can make words mean whatever you want to yourself… though you may have trouble talking to people who make them mean something else…. but if you take the trouble to follow the money paid in benefits back to it’s source you will find that it all comes ultimately from the workers who get the benefits and not from taxes on people who do not get the benefits
except to the extent those taxes are interest they pay for the money they borrowed FROM the workers… a small part of the SS equation.
Really, all of this talk about interest rates and “who paid it” is just a dirversion. The facts are that the money paid in SS benefits comes from the people and their employer only, and is guaranteed for as long as you live. There are no benefits paid from the General Taxes. There can’t be by law!
Jerry – Unfortunately you missed the essence of the entire thread. You say:
(SS) “is guaranteed for as long as you live.”
That is not remotely true. Existing SS benefits will be automatically cut across the board in 2034 (or earlier) by 25% unless significant new steps are taken. This means that a very high percentage of people born after 1950 will have their benefits cut by a significant amount during their lifetime.
This discussion is about what steps can be taken and when they should be taken to avoid these cuts. But there is no question that at sometime in the future (about 15 years from now) there will be cuts in SS benefits. THAT IS CURRENT LAW! That is precisely the opposite of what you have stated.
Krasting
as usual misses Jerry’s point and puts a misleading spin on one of his “facts.”
Jerry said, “There are no benefits paid by general taxes.” That is true, unless you want to argue that the interest on the money lent TO the government is paid by general taxes. That would be true, But the money the interest is paid on came from the worker. It is a little disgusting to pretend that paying someone back the money you borrowed from him plus the interest you agreed to somehow means that you are paying for his benefits. No. you are paying interest on the money you borrowed. He is paying for his own benefits with, in small part, the interest he got from lending you money.
And while it is true that “if nothing is done” some benefits scheduled for after 2034 will not be able to be paid. The “if nothing is done” is the critical phrase. If the Congress is honest the tax will be increased a small amount so the benefits can be paid as scheduled. This is no injustice to the people who will be paying the higher tax. That tax will be exactly what is needed to pay for their own future benefits.
If the tax is not increased, the people whose benefits are cut from what was “scheduled” will still get the benefits they paid for… at the lower tax rate. Those benefits will just be less than they would have been with the higher tax.
re Krasting, continued.
The lower benefits may not be enough to provide a reasonable standard of living through the longer life expectancy of future beneficiaries, but they will be what those people paid for.
I have been trying to tell these people they will be a lot happier if they raise their own tax than they will be if they let their benefits be cut.
The only way they can actually not get the benefits they paid for is if the Congress changes SS… as by cutting benefits and, say, means testing them, so that the majority of people who pay the tax don’t qualify for what would then be “welfare,” Or, unlikely, the Congress could raise taxes on “the rich” who would not get the benefits they paid for. This is what the Left wants to do. It is almost as bad an idea, because of the political consequences, as cutting benefits …which would be a crime against humanity.
Boy I dropped out of this thread way to early. I have got to say that on the issue of who pays for the benefits it is labor as almost all agree that the employer share would be available as wages if it was not paid to social security. I question that at the low end, but it is undoubtedly true at the high end. Then there are all the self employed folks who pay both shares of social security. Whether I get more in benefits than I and my employer paid in is very uncertain. I started paying into social security in 1968 but did not really start working full time all year until 1978. Between me and my employer–I was self employed for a number of years–I have paid in a little over $300,000. I have not taken a nickel out although it was a benefit not to see my grandmother cast out in the street and my father has been able to accumulate more wealth which I will share with my siblings sometime soon because of social security. He was the guy who told me I would not ever see a nickel of social security back in 1968 when I asked him what the taxes were. Whether he is proven right will depend on whether my wife and I live another 5 years, because we do not plan to draw on social security until we are 70. If we are both alive, I will be drawing about $3600 a month from social security and my wife will be drawing considerably less from hers. If my wife is dead I will still be drawing the $3600 a month from mine but my wife will not have recieved any benefit from hers–she and her employers paid in less than me, but still around $200,000 I believe. If I am dead my wife will draw the $3600 from my account as a survivor but nothing from her account. So based on what I paid in I will not get a full payout unless I or my wife make it to 80. If only one of us does, my “earned” benefit will be gone but my wife’s will not–assuming I do not die at the last minute. After 80 if we are both around I concede that we will be living off the contributions made by our children and if we live long enough our grandchildren, but given the contributions we made to them—and all the other children in our community–that does not bother me. It is what comes from living in a society.
Terry
you are almost right, but you may be missing on a few points.
If you earned near the cap every year for at least 35 years your “real” return will be fairly small but positive… about 1%. unless you add your wife to your pension… which you would not do unless her earned pension was less than half of yours. And if you live longer than 20 years after you retire, you will get a larger real return. that is fairly likely if you are “upper class” and don’t have any serious illnesses yet.
but… you really need to look at your income in then-current dollars, because inflation is one of the important reasons for Social Security. Inflation would wipe out most of most workers savings. Social Security is automatically “indexed” for inflation by pas as you go financing. the “next generation” paying the same tax rate as you paid would be paying in from an income that is nominally 3 and a half times what yours was. part of that is ‘real” and maybe half of it is “inflation<" but remember that any private savings or investment you make first has to pay enough to meet inflation before you can start counting "real" earning. you might actually make more in real earnings than SS, but on the other hand you could have a bad day and lose most of it. also, you need to remember that the current cohort of workers not only makes more money than the last, it is larger, so the money available to pay your benefits is quite sufficient, and it does not "come on the backs" of those younger workers. they will get the same deal when they retire, and so on from generation to generation.
there are people who can't stop thinking this is "the young paying for the old" but the old already paid their tax and are entitled to the interest on that tax.
the enemies of social security have no shame. when it suits them they say Social Security doesn't pay enough to be a good deal. then they turn around and say Social Security pays too much, we need to cut the CPI adjustment.
I have been though all this a dozen or more times. Consider that i might possibly know what I am talking about. and then go back through your own calculations and be careful how you count them. I find using current dollars and nominal interest avoids a lot of confusion. you can if you want to convert to constant dollars and real interest when you are done. but even then you need to try to keep your thinking straight about just what you have done. it's not easy.
and it's insurance, if you are a high earner part of what you might have got in "interest" is instead applied to the benefits of someone who was a low earner after a lifetime of work.
you paid for your benefits. but you can't do something like take a "wife's benefit" and then complain that she doesn't get to claim her own. that would be trying to collect her benefit twice. you get to pick the highest of the two, but not both.
And it might be worth remembering that the new generation’s real income is larger than the last BECAUSE the last built the economy the young now enjoy… with its higher wages.
this is no different in concept when long before there was social security, the kids took care of the old folks because the old folks took care of them when they were kids.. including building the house and barn and fencing the pasture. they might have done it simply out of love, but for the “economists” among us, they also did it because they were smart enough to see that if they took care of the kids the kids would take care of them. and if the kids did not love them, the kids were smart enough to see that if they did not take care of their own parents then their own kids would not take care of them when they were old.
this was something people used to understand. the lies of the people who hate “working people” has confused their minds, and the conditions of modern life… work away from home, kids moving to different states to find work, having no kids, having your kids killed in a war … have almost killed what used to be “family”. but for a while at least we have still have some sense of “we are all in this together.” that might not survive too much longer.
Krasting,
You hit a twofer.
First, you attribute to me a quote “(( SS) “is guaranteed for as long as you live.”)” that I never said. If I am wrong, show it to me.
Second, you take the misquote and say it is wrong because the SS benefit may be cut at some time in the future. Even if it is cut, SS will still exist.
Excuse me but do you even think before you write, or at least before you hit the Post Comment button?