SOCIAL SECURITY AT BERNIESTOCK
by Dale Coberly
SOCIAL SECURITY AT
BERNIESTOCK
Last Sunday I gave a very short talk about Social Security at a political rally and outdoor party called Berniestock in Lebanon, Oregon.
It was not a venue conducive to detailed explanations or suggesting ways people could try to tell what was true from what was pretending to be true, so I suggested that those interested in learning more should come to Angry Bear where we could explore the issue more carefully.
The purpose of this post is to give anyone who follows up on my invitation at least a place to start if they login to Angry Bear within the next few days.
What I said at Berniestock was limited to telling them that Social Security is paid for by the workers themselves and has nothing to do with the Federal government debt. Nor can Social Security borrow money…or acquire debt… on its own. So all the claims that Social Security was somehow responsible for a huge “looming deficit” were not true.
But, I told them, Social Security does have a problem of its own, which fortunately is easy to fix.
Social Security’s problem is that the present generation of young people is going to live longer than past generations. This means they will need to save more for their retirement. Making matters worse, this new generation of workers is not expected to have its wages grow as fast as in previous generations. This means they will have to save a higher percentage of their income for their retirement.
But this problem can be fixed by simply raising their own Social Security payroll tax by about one tenth of one percent per year…while wages are expected to grow one full percent per year, or ten times as fast. One tenth of one percent of a 50 thousand dollar a year income amounts to one dollar per week. Or they could just do what is suggested by the Trustees Report and raise their share of the payroll tax about 1.4%. all at once immediately, and not have to see another raise for at least seventy five years. This would be fourteen dollars per week for someone earning 50,000 dollars per year.
I said that if that looked like a lot of money to them, they should remember that they will get it back with interest when they retire and will need it much more than they do today. This is a much, much better solution than letting Congress cut benefits or raise the retirement age.
And then I said come to Angry Bear and we can talk about this.
well, i’d be disappointed, but not surprised, if no one came. so i’ll start off with this comment of my own so I can check the box and get a notice if there are followup comments.
I don’t know where the folks at Berniestock get their information but whenever I see worried coverage of the future of Social Security retirement in the media, the focus always drills like a searchlight on the SS Trust Fund — and the big question always seems “what are we going to do when the fund runs out of money.” 🙁
This eternally misguided hyped-up fear eternally detours the public conversation from the simple tax/productivity equation Dan prescribes. My first move with the public in general would be to explain to them how small and inconsequential the TF has always been in the first place.
The TF accumulates about one year of full replacement every ten years. If future gens go on “saving” via the TF (seems have been sicked on only current gen of retirees) for 100 more years …
… opps; in 100 years nobody should be dying of disease or old age.
Just in case the Trust Fund discussion tries to get in the way of the simple equation. Might even be a good idea to bring it up anyway just because the incongruities of perception about the TF are fun and entertaining — and then we can turn them towards the simplicities of the dismal science.
[Come to think of it, if the political muscle in this country continues to be as warped in favor of high incomes when the TF runs out as it is today (if our civil right to organize labor never gets protected), the folks who pay 40% income tax will not like cashing the TF bonds when it can be laid off on the folks who only pay payroll tax and …]
Denis
that’s where I started. one of the Berniestock people was complaining loudly about the Trust fund being “Stolen.” That is not true, and it wouldn’t matter much if it was. SS depends on the payroll tax, not on the Trust Fund. A normal Trust Fund is only there to even out the monthly ebbs and flows of taxes and benefits. And to provide a sufficient reserve to give Congress time to respond to any long term changes in the relationship between available taxes and needed benefits. Congress’ last response to such a secular change was to raise the payroll tax higher than needed for current benefits(creating a higher than normal trust fund) to allow the baby boomers to pay for their own expected greater numbers in retirement. That is exactly what is happening now. NO one stole the Trust Fund, and when it “runs out” nothing much will have happened.
But what NEEDS to happen before then is to adjust the tax rate again to provide for the fact that the after-the-boomers will be living longer than previous generations and need to save more of their income in order to be able to pay for those extra years.
If the tax is raise one tenth of one percent per year for a few years this will keep up with the growing need for benefits. IT will also stop the Trust Fund from “running out” or even running down. With no money withdrawn from the Trust Fund at all (meaning Congrees doesn’t have to find the money to pay back what it borrowed from SS) the paper amount of the TF will gradually be matched by the paper amount needed to have a fulll one year reserve for then-current benefits. After that the tax collected plus the interest from the trust fund will need to both pay for benefits and be applied to the TF to keep it at one full years reserve (a number that grows every year).
I don’t know where you get your ” one year of replacement for every ten years” but it doesn’t look like anything i have ever seen and doesn’t sound like anything i think is true.
When the TF “runs out” there will be no TF bonds to cash. That’s what “runs out” means. It’s not a good idea to let it happen, but in theory at least SS could go immediately to full pay as you go (with the higher tax needed) and no one would get hurt, see.
” one year of replacement for every ten years”
Didn’t the TF start about 35 years ago — and wont it “run out” around 5 years out? Just going by rough memory. Like even numbers anyway. 🙂
Specific number appreciated if anyone has them.
“will not like cashing the TF bonds when it can be laid off on the folks who only pay payroll tax”
Mmm; the TF bonds supposedly secure a small portion of our SS payout — but if the income tax paying folks don’t want like forking up they may not force the FICA tax higher to get out of it …
… they have the option (if they have the political muscle) to lower benefits below the cash out threshold — the TF actually making that portion of benefits more insecure. :-O
The Trust Fund stared in 1937 when the first taxes were collected. Special Treasuries were created in 1939. Congress had realized that the TF could get quite large and they created a clear rule to define how much interest the Special Treasuries would earn.
The tax rates were very low to start. They all knew they would need to go up. But receipts were so much higher by 1941 (because the war ended the Depression) that the TF had already exceeded expectations, and Congress blocked the planned raises.
After adding people to the pool and defining a scheduled benefit in the late 70s (and other changes – SS changed a lot in the first 40 years) Congress got it wrong and the TF dropped nearly to zero in 1981. The Greenspan Commission tried to get a 75 year fix. The existence of the Baby Boomers as a demographic bulge led to the TF increasing dramatically (even though the 75 year fix is looking like a 50 year fix).
The CBO and SS administration have their own analyses, but the TF will last at least 12 years. If nothing is done, it will be dropping faster when it runs out than it did in 1981-83.
Because the TF earns interest and is supposed to have one years benefits in reserve, it does allow full benefits to be paid even if benefits exceed payroll taxes. As such the people who say we have a problem because benefits already exceed taxes are numerically wrong. If SS were ever as steady as the long term predictions, taxes would never be as large as benefits.
However, the situation is not stable. We do have the retirement of Baby Boomer coming on us. We do have people living longer. We need people to understand that SS must change as conditions change, just as it did for the first 50 years.
In my opinion, the fact that SS has run on auto-pilot for over 40 years now has created a problem by allowing people to acquire unreasonable expectations about not touching it.
Denis Drew
“specific numbers” : see page 156 of the 2017 Trustees Report
Arne
is right. I hope he takes an interest in this and starts “telling the people.”
That doesn’t mean i won’t disagree with him from time to time.
Coberly:
Some of us do realize this. A tweak here and there.
Nice summation by Arne re TF history
With the inequality of compensation and wealth, why not make the current rate a truly flat tax- applied to all income with no cap? When this is suggested, it is ignored as if fair taxation is somehow unfair to the wealthy. Raising the rate is just more of the regressive taxation that is part and parcel of wealth distribution upwards.
SS is insurance. Rich people do not need more retirement insurance.
I believe upward distribution exists. I do not think SS is the right place to address it. SS is by workers and for workers. Keeping it that way means not depending on lots of downward distribution. Not keeping it that way opens it to more attacks by rich people who would rightly see it as them having to do more than “their share”.
SS does transfer more money to those who don’t earn enough during their working lives as well as to those who live longer than expected. That is its purpose. People who think they will never need retirement insurance tend to see that feature as a defect.
If you run into someone who cannot see the value of retirement insurance, settle in for a very long argument. It may take decades for them to find someone they know whose experience will start to make them change their mind.
As retirement insurance SS is actually very effective. It has lower administrative costs than any private insurance. Since the money goes out to people who decide how to spend it for themselves, administrative costs are THE meaningful way to analyze SS.
Many people who try to analyze SS as a retirement vehicle conclude it is not effective. When you get two contradictory answers, one analysis must be less useful. I suggest the one that ignores the value of the insurance is not just less useful, but actually wrong.
Arne
well said.
Bancroft,
Arne is right. I would put it more strongly. SS was designed to be “not the dole” but “insurance for workers paid for by the workers themselves, “so no damn politician can take it away from them.”
the rich already pay “their fair share”. they pay exactly as much as the insurance is worth to them as insurance. if it turns out they don’t need the insurance part of what they otherwise would have gotten as benefits at the same “interest” rate as everyone else is applied to the benefits of those who over a lifetime of work never made enough money to save enough for retirement,
unfortunately many of the rich, being greedy, believe that they pay far MORE than their fair share… because that is what the Big Lie tells them every day for the last forty or eighty years. They already believe SS IS welfare. If you turned it into welfare, it would go the way of “welfare as we knew it.” And that welfare, even before it went away, was an ugly experience for the people who got the benefits. And it made everyone else mad.
I don’t want to go too far with this. Or I’ll just make you mad. It’s hard… impossible… to change what people believe, want to believe.
no doubt wages in this country are “unfair.” fix them if you can. but don’t start by destroying Social Security, which works.
Bancroft
you do understand, don’t you, that we are talking about a one dollar increase i
coberly:
Do you know what the likely of Congress “just” doing a $1 increase is? If they do it, it will be more than $1.
Another reason I think SS is efficient.
In 2017 SS takes 4.9 percent of GDP. It is projected to require 6.4 percent in 2040. A 31 percent increase.
In 2017 over 65 years old are 15 percent of the population. In 2040 it will be 21 percent. A 35 percent increase.
SS will allow us to provide retirement security for an increasingly elder population for a reasonable increase in cost.
Bancroft (after the break)
a one dollar per week increase in the payroll tax. is that too much for you to pay for your own groceries when you are too old to work?
where do you draw the line between what you are willing to pay for yourself, and what you demand “the rich” pay for you?
and how do you propose to make them pay?
just calling for making them pay makes them more likely to elect a Trump or a Bush.
Better to expose their lie (that SS is welfare) by paying for it yourself, just as your parents and grandparents did.
“the fact that SS has run on auto-pilot for over 40 years now has created a problem by allowing people to acquire unreasonable expectations about not touching it”
One “benefit” of hiking FICA seriously higher than currently needed was to save politicians the embarrassment of facing up to regular SS tax increases — something truly I doubt our politicians had the intelligence to foresee they were doing for themselves.
“higher than currently needed”
It was not higher then needed. It barely dealt with workers already in the work force. Plenty of them could see more was needed. However, you are right that it was enough the let them avoid facing up.
I like to think of it as a reasonable compromise.
Raising the tax higher would have meant that people then were paying too much for their benefits. The raise needed to be enough to have the boomers pay for their own benefits. It wold have been better to have arranged to raise the tax gradually over a longer time.
But we would just be entering the period when the next 4% combined would be needed…. gradually, Just as we are just entering the period when workers can afford to pay the gradually increasing tax.
The trouble with “leaving it alone” is that all the people who don’t want to leave it alone want to do bad things to it.
I have been to people at SS (actuaries) foresaw all of this, but the politicians would rather cut benefits (raise the retirement age) than add another percent or two to the tax.
So here we are again.
People need to get a clearer idea of what it is they want:
their money or their life?
There were 5 incremental raises in the 1980s. The one to 6.2 percent in 1990 was the last. We went 40 years with at least 2 increases per decade. The end of the Trump presidency will be 3 decades with no increases. If I could employ my hindsight I would have it at 6.0 percent in 1992 and increase 0.1 percent every 4 years so that it would be 6.6 percent right now. There would still be a shortfall over the next 75 years, but people would be used to the idea that it changes regularly.
Arne
i know about the incremental raises since 1983
but i’d have to see how you get the 6.6% now and “still be a shortfall”
it’s 6.2% now and will need to rise to about 8% (one tenth of one percent at a time) to avoid a shortfall possibly forever according to current Trustees “infinite horizon” projections and my own results.
not worth taking the numbers too seriously because things can change between now and the infinite horizon, or even the seventy five year window.
the “at a time” is every year for about ten or thirteen years, and then at increasing intervals until it’s more like one tenth every ten years.
seeing what people do with numbers in their heads makes me think i’m gonna regret saying this out loud unless i’m grading the final.
Run
i have no idea what Congress will do if we can’t get them to listen to us.
That means we need a lot of people who understand the importance of keeping their benefits and keeping SS “worker paid.”
If Congress were to raise the tax one full percent, that would work for the next twenty years,
one and a half percent (the Trustees “immediate and permanent” ) would work for seventy five years.
and if they wait until 2034, two percent would work forever.
these are the”worker’s share” (the boss’s share would be the same).
none of them would be a hardship, though they might cause a shock at first, they would be forgotten in a week or month at most.
but without real pressure from the public, congress will most likely come up with a “compromise” that includes most of the tax increase, but also a retirement age increase, and a benefit cut, and an increase in the cap and a little means testing. that’s the way congress people think. it’s like trying to fix an airplane by a committee who know nothing about airplane mechanics, and some who don’t even believe in airplanes and don’t give a damn about the people inside the airplane.
coberly,
My 6.6% was off the cuff, but from the same increase numbers you quoted for run. The current 6.2% plus the 1.5% for 75 years is 7.9%. Clearly 6.6 is ahead of our current 6.2%, but still short. 11 more raises at 4 year intervals would be in the right ballpark (although short because delayed) for 2092, but I am not sure whether the TF would get below zero in the interval.
My point is to have the increases spread out to change the politics.
Arne
it might be possible to change the politics… though i am finding it too hard for me, my talents.
but you can’t change the math.
I have a spread sheet that easily shows the results of any changes in the tax or tax schedule. the one tenth of one percent starting next year, continuing for about thirteen years, and then at much longer intervals seems to me to be the fairest and easiest fix. it entirely avoids any “short term actuarial (potential) insolvency” , raises the tax “as needed” as we can pay for it most easily from increased wages, and just in time so those who will need the increased benefits will be those who pay the increased tax.
you are probably smarter than me, but that means you are likely working too hard with too-clever math which is probably not able to keep track of all the variables. I let the Trustees do all the hard work for me. I just recreated their results on a spreadsheet where I can vary the tax input and see how that changes the output.
then you have to argue with the people who hate the whole idea of Social Security, and those who want “the rich” to pay for their groceries and make so much noise they scare “the rich” into contributing to defeat ANY attempt to fix Social Security that does not involve cutting benefits to below where they would mean anything as insurance.
welfare may be necessary when it’s necessary, but in America at least, it is always ugly. The difference between calling SSA when you are 62 and want to retire and having them start sending you checks with no questions asked, and going to something called “Social Security” and having to prove you “need” the benefits or the “early” retirement is something you don’t want to experience.
Coberly and the ‘individualism”, “I paid for it myself” crowd won’t like this.
Civilian Employment / Population Ratio is ~ 60% at present and rising very slowly from it’s recent low at ~ 58.5% It averaged ~ 56% – 57% from 1948 to he mid 1970’s. For the period from mid-1970’s to the onset of the Great Recession it averaged ~62% give or take with big swings.
What’s this got to do with SS?
~ 15% of the present population is in retirement (> 65 years old), so the ration of employed ss contributions to retiree’s benefiting from contributions is ~ 4: 1. For equilibrium of inputs to outflows then benefits can be 4x the contribution of those employed. If those employed contribute 12.5% of their income, in present dollars, then in present dollars, the benefits can be ~50% of present average employed income from labor. That’s about 10% more than the basic ss plan which is designed to provide 40% in present dollar terms to retiree’s income relative to what they earned (uplifted to present dollars by inflation) during the highest earning 35 years of their employ, The other 10% is most likely the proportion used for SDI and Survivors benefits (my rough guess).
The problem is that the proportion in retirement (>65) increased almost linearly from ~ 9% in 1960 to ~ 12% in mid 1980’s, then remained flat averaging 12.5% until the onset of the Great Recession. Since then it’s increased linearly to ~ 15% and rising.
So looking at the ratio of employed to >65 over time:
The ratio declined from 6 to 5 from 1960 to the early 1980’s. It remained roughly flat at 5 from the early 1980’s until the onset of the Great Recession and had dropped rapidly from 5 to 4 since then ( charted the ratio from FRED data… the earliest FRED data for population proportion > 65 is in 1960).. The rapid decline isn’t an anomaly and will continue though to what level and when it flattens out again is part of the SS Administration’s projections into future.
So the benefits dropped from ~ 70% of pre retirement average income to ~ 60%, and now down to ~ 48% (assuming constant 12% contribution to ss)…. and dropping from there into the future. Since ss was designed to give ~ 40% of pre-retirement average income (as uplifted to account for inflation) then there was an excess of inflows to outflows by ~30% (70% – 40%) until the 1980’s and then an excess of ~ 20% until the Great Recession, and now presently an excess of only ~ 8% – 10%… and this is dropping
Hence the projections that the ss trust fund will run out at some near future point in time.. i.e. the excess will go to 0 and negative thereafter.
There are a couple of major other effects on the trust fund’s excess inflows to outflows though that have occurred and which is not well identified or to my knowledge even discussed or brought up.
1. The interests paid by the treasury has been dropping rapidly and linearly from 11%/year in 1986 to 3% year at present …the rate of linear decline is 0.23 percentage points per year or ~1% every 4 years. In other words (for example) for the last 35 years which is the basis for present 2017 full retirement, the average annual interest income has been ~ 7% and that 7% continues to drop each year and by ~1% every 4 years.
That means the ss trust fund’s interest income is continuing to drop and has been dropping., while from ~1960 to 1984 it was continually increasing (from 2.5% to 11.5% or averaging 7% for the 35 years from 1950. In other words the excess inflows to outflows for which the trust funds value is dominated by interest income (roughly 70% of total trust fund value) is dropping just due to the reduction in the interest rates being paid by the Treasury.
What drives or determines the interest rate? Well, according to treasury data, the ss interest rate paid on the trust fund is ~1.5 percentage points greater than the treasury Long Term (LT) rates paid on the open market. I’ve written before that this 1.5% “adder” is probably due to the trust fund only loaning for short term. But the treasury open market rates are and have been dropping to interest income is dropping with it, and thus projections have to account for this open market US treasury’s interest paid.
If the open market rates have been dropping continuously at ~0.25%/year and it’s presently at 3% (treasury paid rates on ss trust funds), then in 4 years it will be 2%, in 8 years 1%, and in 12 years 0% if present declining rate on LT rates continues at the rate of linear decline for the last 35 years. That reduces the excess of funds faster than what is based on the employment ratio’s with some assumed interest rate constant. Thus since the interest rate isn’t constant but declining linearly, then the ss trust fund income isn’t increasing at the same rate it used to be .. hence outflows exceed inflows plus interest on the inflows, therefore driving the trust fund to zero sooner. That’s one reason for the projections to when the trust fund runs out.
2. The other major source of income to the trust fund on contributions is the uplift to present value by inflation on contributions…. since the outflows are the inflated value of prior contributions to present consumer prices. That funding is ~27% of total trust funds from inflows and interest income in the past years to present. This is funded by the general tax funds in reality (though it can be “accounted” as if present employment contributions are funding it, but it’s still an extra amount of funding to pay retirement benefits over and above what was contributed in ss contributions).
BTW, the other 3% of funds is what is actually contributed (e.g. the 12% from employee and employer contributions on gross labor income).. Inflation for the last 35 years has been dropping on average from 4%/year to presently ~2%/year…. averaging 3% for the last 35 years If it continues at ~ 2% year, then it decreases the outflow from tax revenues to provide for the uplifted contributions to compensate for inflation. But that’s still the minor fraction (27%) of total trust fund outflows so an average reduction of inflation from 3% to 2% won’t have a major effect on reducing the depletion rate from the trust fund..
Note that discussion about reducing the cpi by using a different measure for seniors than the general population is a benefit reduction.. .what it does is reduce the general tax outlay to compensate for inflation in ss contributions for present and future retirees.
But the major issue is the huge reduction in market rates paid by the Treasury on Treasury borrowing, which is reducing the inflows to the trust fund from the contributions to it. That is 72% of the source of the trust funds value (based on the 35 years from 1960 to 1994 contributions to the trust fund. Dropping that income at a faster rate reduces the trust fund’s value faster and thus to maintain outflows to retires at even 4x 12% contributions (less whatever is used for SDI… assumedly 10% of more), reduces the trust fund’s value.
So there are two major sources of the trust fund’s depletion:
Population demographics which has accelerated dramatically since the Great Recession (due to reduction in the employment population ratio, not due to baby boomers retiring yet), and the reduction in income from interest paid which is due only to supply (borrowing) / demand (lending) for U.S treasury notes. If general demand for Treasury notes were greater, then so would the trust funds income from interest be greater and thus extending the trust funds value longer for payouts.
But the real issue is that the ratio of employed to retirees varies over the long term time horizon. Baby booms happen which increases the ratio until the baby’s start to retire. Baby births reductions occur which increases the ratio until those baby’s start to retire. Over the long term time horizon the average is constant… say over 4 to 5 generations.
The entire ss system though is based on the short term… basically a single generation (35 year basis), so it will thus clearly have booms and busts over the long term since it isn’t funded based on a long term average, but only on the present population ratios.
Dumb, but it satisfies those who love the whole “individualism” credo and think “I paid for it myself” Of course that’s a purely political (“values system”) choice and one which satisfies the right wing albeit reluctantly and if given a unilateral choice in the matter would shrink ss to subsistence living income or less and keep people working until they died.
So the reality is that ss is purely a political choice in how its constructed to be funded. Europeans have used an entirely different funding system.. contributions are still made from employment income, but the general progressive taxes, including on high incomes funds retirement…. if there are shortfalls in interest earnings, the tax-base pays the difference. If there is a increase in inflation, the tax base pays the costs.
In the U.S. the upper income segment which doesn’t need SS also thinks they aren’t benefiting from it — though they are in fact, and would be the poorer for it not being paid over the long term (since ss benefit accrue to consumer spending in the economy, which is 70% Of GDP and thus a huge component of production demand, hence producers and capital owners income streams. Take that away and watch what happens.
longtooth
it’s easy to get lost in a very long calculation like that. you could look up most of that in the Trustees Report.
but you miss two points, maybe three: first your calcualtion has nothing to do with the effective interest on your ss tax. that is and remains and will always remain the difference between what you paid in taxes and what you received in benefits… current dollars, nominal interest.
it has nothing to do with the bank rate, the fed rate, or whatever you think of as “the” rate of interest.
doing the calculation for an average earner retiring in 2017 after paying the tax on the current average wage since 1932 and collecting benefits (no spouse) for twenty years of life expecancy shows an “effective interest” of about 6%, nominal
your need to claim that that interest is NOT the worker “paying for it himself” is contrary to what normal people think of when they buy something using interest they have earned on their money.
and your idea that “current workers” are paying for “current retirees” is a way of playing with words that satisfies a political agenda, but the fact is that current retirees paid for their benefits. just as current workers are paying for their future benefits. you act like you never heard of anyone paying for something they will need in the future… and relying in part on the interest earned by their early payment.
i don’t think i can change your mind. i know you can’t change mine. i doubt if anyone else is interested in the question, except some other folks who have a deep psychological need to find fault with Social Security.
if you did the same calculation using an average worker who started working today and worked for 40 years retiring in 2057, you would get a different ‘effective interest”. That’s what all the shouting is about.. or some of the shouting. The real effective interest is expected to be lower, that’s why you need to raise the tax in order to get the same benefits.
BUT the worker will still have paid for his own benefits. It can work no other way, unless you tax people who will not get the benefits they pay for. That’s one of the things I am trying to tell people they need to avoid. Not only will “the rich” fight (and win) against that, it is a bad idea on mental health grounds. People have a need to be able to say “I paid for it myself” and have it be true.
I’m sorry, Coberly, but you’re fos about where interest income on the ss trust fund comes from.
And also, Coberly, “normal people” don’t have any understanding of ss trust fund income eiher, any more than you do.
Coberly, here’s what the ss administration says it’s ss trust fund interest income interest rates have been on lending ss trust funds to the treasury since 1940 for each year to present. I’ve posted this link before, though you apparently haven’t paid a bit of attention to it.
There are two interest rates shown, The spot rate and the effective rate. The effective rate is based on total funds in proportion to how much was paid by the treasury on the overall funds lent to them that year… some short-term, some longer term.
Whoops, here’s the link
https://www.ssa.gov/oact/progdata/annualinterestrates.html
And,
I have said this before.
The interest paid TO the Trust Fund is not money paid to Social Seurity, it is money paid for the use of the money.
Same as when I cash a savings bond, the government is not giving me a gift: it is paying me for the use of my money over a period of time.
And the money received by the Trust Fund is not a gift from the government. It is money the TF earned by lending it to the government.
One of us doesn’t understand trust fund income, that’s for sure. I’m not sure you even understand the concept of “interest.”
Coberly,
Why is?
“The real effective interest is expected to be lower,”
and why is it 😕
” that’s why you need to raise the tax [I presume you actually mean ss payroll contribution?] in order to get the same benefits.”.
And just btw, I’ve done the calcs for contributions for employment from 1960 for the 35 years over which the benefits are defined.. i.e. the highest 35 years of incomes over the course of employment for which contributions made. If I use 40 years, it only increases the interest income proportion of ss trust fund income… which the treasury pays to borrow ss trust funds, and which the general taxpayer pays for.
You are aware, are you not, that whatever the treasury borrows costs interest and that the interest is paid out of the general tax revenues
What the f….????
“The interest paid TO the Trust Fund is not money paid to Social Seurity, it is money paid for the use of the money.”
The trust fund IS the SOCIAL SECURTY trust fund. Is there some other trust fund that receives the interest income when the ss trust fund lends it to the treasury your thinking about? If the interest paid to the ss trust fund isn’t to ss then who get’s it?
yes, the sstf gets the money. but the treasury doesn’t pay the money “for” (as a gift to) SS. it pays the money because it is the interest on the money it borrowed from Social Security.
you don’t get to borrow money from someone and then act as if the interest you pay is some kind of gift to him, or some kind of theft from the taxpayer.
i think you are entirely wrong with your analysis in the second comment above this. but i really don’t have time to try to sort it out.
Oh,… now I see:
” Same as when I cash a savings bond, the government is not giving me a gift: it is paying me for the use of my money over a period of time.”
And the money received by the Trust Fund is not a gift from the government. It is money the TF earned by lending it to the government”
I never said it was a gift, I said it’s paid for by the general tax payer.. I said that’s an “entitlement” relative to the interest you would have otherwise received it you’d earned interest on a retail account… which pays far, far lower interest than the treasury pays.. i.e. than the tax payer is paying.
The difference between “I earned it” and an “entitlement” is the difference in interest income between what the taxpayer is paying you for borrow your money through the treasury, and what you could receive if you “earned it” by lending it to the open market retail sector.
This is not semantics. When I as a taxpayer pay you more to borrow you money than you can get by lending it on the open market retail level.. ie saving your ss contribution yourself in the “I paid for it” version and getting interest income on that saving from any source you as a retail investor can find, then I’m paying for the additional interest you get from the treasury.. i.e. my funds are paying you… they are therefore not “I earned it,” or “I paid for it”.
The gov’t is giving we ss benefit recipients an “entitlement”. If the gov’t weren’t doing it, then either your interest income would be tiny by comparison OR you would have to have a private insurance plan to which voluntary contributions were made and by a large composite insurance plan business, overhead would be far greater than gov’t overhead, profits would be taken out of that income, and the principle (contributions to it) would be lent to other private investors and business’s without insurance of those lent funds being paid back .. not even FDIC insured. That’s the basic laissez-faire system.
And if you think about it for a moment private pension plan fund as Iv’e outlined above is precisely what the ACA does but with the gov’t mandate that ALL people contribute, not voluntarily, whether by making the contribution in return for medical benefits received or as a penalty tax instead (with no medical benefits).. the penalty goes toward compensating the insurance company for it’s lower than 100% participation rate by the population… basically to provide a profit to keep them in business at all. And btw, that’s Trumps push .. reduce or eliminate the mandate or eliminate the penalty or reduce it dramatically or not enforce it. Remove that and the insurance company doesn’t make enough profit to remain in that business..
When a gov’t gets in the act and gives you a benefit you can’t otherwise receive without the gov’ts involvement it’s called an “entitlement.”
When the gov’t decided to make federal highways, it gave you those highways by charging you an 18 cent tax on every gallon of gasoline to pay for them… gasoline tax because all vehicles using those highways required gasoline. It could have just increased the general tax rate instead.. but in either event you get to use the highways at a far lower cost than you would be able to if they were all toll roads owned by private profit making enterprises. That’s an “entitlement”..
So you don’t “pay for it yourself” Coberly. Most of ss benefits are a straight out “entitlement” courtesy of the general taxpapyer.
Coberly,
I’m glad were finally making some progress
So you agree that the treasury pays interest income to the ss trust fund on funds it borrows from the ss trust fund. Right?
And you agree that general taxpayers pay that interest cost, Right?
And then do you also agree that the interest rate the treasury pays is based directly on the global demand for Treasury notes in relation to the Treasury’s supply of them?
I’ve charted the difference between what the Treasury pays for ss funds and what it pays for long term borrowing, and since 1985 it averages a straight line 1.5% more +/- 0.5% … random variation about 1.5% with no trend up or down. so no matter what the long term global cost of interest the Treasury has to pay for borrowing, it pays the ss trust fund a constant average of 1.5% more. .. which I presume is the difference between Long term interest rates and some mix of shorter and longer term rates borrowed from the ss trust fund. I don’t presume it’s a preferred rate paid to ss trust funds., but a market based rate.
Coberly,
If the treasury’s +1.5% rate over LT rates it pays to borrow ss trust funds is NOT market based then it’s a direct GIFT by taxpayers and would be written into the ss laws to pay x% more than the Long Term cost of borrowing by the Treasury or some formula which gives the ss a preferentially higher rate over the market based rate.
Like I said, I don’t presume the +1.5% average differential is due to a preferential rate, but presume it’s a market rate based on the market rates for some mix of short and long term borrowing by the treasury from the ss trust fund..
Longtooth
get a copy of the Trustees Report. they tell you how they set Trust Fund rates.
The Trust Fund has very little to do with Social Security.
The effective interest is based on the rise in wages over time, including inflation, real growth in wages, increased population…
NO one is paying this “interest” except the workers who will get their own benefits in time, including the “effective interest.”
If this doesn’t work the way you would have designed it, that may be why you weren’t asked to design it.
If you keep insisting the mone comes out of general taxes, you are dead wrong.
The interest paid “out of general taxes” TO the Trust fund is a payment for the cost of borrowing money. It is NOT “paying for Social Securiy.,
If you lend someone money at interest, and he pays you back including the interest. And you go out and buy lunch, he does NOT get to say he bought your lunch.
I don’t have time to keep going over and over this.
Gee Coberly,
This is what the Social Security Administration says:
“The Social Security trust funds are financial accounts in the U.S. Treasury. There are two separate Social Security trust funds, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits.”
https://www.ssa.gov/news/press/factsheets/WhatAreTheTrust.htm
So please explain why you think what you said:
“The Trust Fund has very little to do with Social Security”.
I’m not absolutely sure, but I’d have to say right off the top on a quick take that the Social Security Administration’s view is probably more likely to be a better, more accurate reality than your perception of it.
Coberly
This is on page 1 of the 2017 Trustees Report…in fact it’s the 1st sentence of the 2nd paragraph, and the 1st paragraph was really a short one.
“The Social Security Act established the Board of Trustees to oversee the financial operations of the OASI and DI Trust Funds.”
Sounds pretty much to me like ss and the ss trust fund are one in the same doncha think?
Longtooth
in a normal year the interest on the trust fund would pay about 1/18 of the cost of benefits. i’d call that “very little” And since the interest comes from money the people receiving the benefits paid in taxes, I”d say it still counts as “I paid for it myself.”
you seem to be unable to see what words might mean in the context of the point someone is trying to make. Instead you force them to mean what you want them to mean.
SS discussion of interest rates on the TF bonds begins on page 110 of the 2017 Report.
And I am perfectly clear, right of the top. What Social Security said about the Trust Funds is not what you think it said.
If I said, that box is where I keep my money overnight. You would be wrong to think that box is an important part of my financial affairs.
Now, I am going away.
Longtooth said,
“he Social Security Act established the Board of Trustees to oversee the financial operations of the OASI and DI Trust Funds.”
Sounds pretty much to me like ss and the ss trust fund are one in the same doncha think?”
This is the logical fallacy known as begging the question. YOu assume that the
You assume that SS and the TF are “one and the same” so you think that the sentence proves that SS and the TF are one and the same.
What the sentence says is that “The act established..
“the Board of Trustees to oversee
“the Trust fund.”
neither the Trust Fund, nor the Board of Trustees. or even “the act” are Social Security. SS is the real world consequences of the act, which is mostly collecting the payroll tax, setting the rate, paying the benefits, setting the rate… none of which the Trustees do. The Trustees merely keep track of the money, and make projections about the effect of present policies on the ability of SS to meet it’s scheduled benefits.
The trust fund is “merely” the accounting devise that keeps track of keeping track.. It is also the legally separate entity that “holds” surplus SS money, keeping it out of the “fungibility” of Federal funds.
You have mind like a steel trap. Completely inflexible and rather dangerous, having no discrimination whatsoever. But don’t feel like you are alone. It’s what enables politicians to get away with lying to people who don’t know anything.
Coberly, BTW, 2017 Trustee Report shows, (Table II.B1, page 7) interest income on the trust fund in 2016 was 3%, just as the link I referred you to shows (ss Trust fund interest rate received on lending funds to the treasury) from 1940.
Also note the items required that make up the inputs to and outputs from the ss for benefits in Table II.C1, page 9.
You’ll note that inflation is included and subtracted form nominal wages. Inflation eats up (assumed for future) 68% of wages, so who do you think makes up the difference to pay benefits in the inflated value of some percentage of wages contributed to the ss trust fund by ss contributions?
Coberly,
You’lllalso note in the figure II.D3 and text related to it that the employment to retired beneficiaries “had been extremely stable,
remaining between 3.2 and 3.4 from 1974 through 2008,…”
This is the period which I described in my prior note as having an EPOP/>65 ratio stable at 5. Apparently the actual employed population contributing to the ss trust fund during that period was lower than EPOP since the >65 proportion of the population was stable at 12% The apparent difference to EPOP was thus ~ 66% of EPOP… which may be or perhaps is the empirical constant for employed persons contributing to ss (through payroll deductions or self -employment contributions to ss).
What this means is that the ability of present employed to cover present ss beneficiaries is 3.3 x 12% of wages = 40% instead of 5 x 12% or 60%.
Since ss is designed to pay 40% of average wages during retirement in inflation up-adjusted terms, then for the period 1984 – 2008 the actual proportion of employed persons paying into ss was about equal to the outflows to beneficiary’s (40% of wages = 40% retirees benefit from inflation adjusted wages) income more or less in gross terms.
The discrepancy to EPOP/>65 proportion isn’t explained however by the trustees report. Basically 1/3rd of what are counted as the civilian employed percentage of the population aren’t contributing to ss.
Hmmm, has anybody asked for an explanation of why this is? Employed means earning income from labor supplied (as opposed to earning income from capital investments). Is it the case that self employed persons are largely not contributing at all to ss contributions, since that’s voluntary?
Also, pay attention to this:
I noted in my prior note that since the Great Recession there’s been a fast and dramatic reduction in the ratio of EPOP/>65 age proportions and that this IS NOT DUE TO BOOMERS retiring at a greater rate. The > 65 age group has actually increased their proportion of employment beginning even much earlier than the Great Recession so there are actually fewer retirees beginning at age 65 than there have been in the past, meaning that the effective EPOP/>65 ratio is even larger than indicated (“effective” meaning a higher proportion of those >65 are in the EPOP group and a lower proportion in the retired group).
Why is this something you should be paying attention to?
Simply because it highlights the fact that you didn’t pay for or earn your retirement benefits. Your retirement is mostly funded by present workers paying your benefits (and interest from the treasury borrowing) in present dollar terms (uplifted inflation from your own contributions over the prior 35 years before you retired.
Why are your benefits subject to whether or not employment after you retire remains high or higher than when you were working? And why should present workers pay a higher ss contribution to maintain benefits simply because their proportion of the employed population is lower than when you were working?
I mean if they’re “earning their own benefits” or “paying for them” then why should they have to pay a greater contribution than you paid for the same benefits you receive?
The only answer to that is because you’ didn’t earn your own benefits like you keep trying to say you did. And neither are the present workers since they’ll also depend, when they retire, on what others are contributing for them.
The ss system as designed isn’t designed to work with reductions in employment ratio’s or lower interest rates or higher inflation rates. It was predicated on a perpetual increase in or stable employment ratio’s, inflation rates, interest rates, and life-spans.
Now do you think for even one second that the designers didn’t know these variables would change with time over a couple or few generations? Of course they did, because they’ed always changed iin the past.
It was politically expedience to pass the ss act though only by portraying it as “you earn your own benefits”… which was and remains pure political propaganda… of which you, among millions of others till believe. In reality the general taxpayer is paying for your ss benefits but by “accounting” rules you think you’re paying your own because our younger generation of workers contributions are “accounted” to pay your benefits. This is pure accounting practices… which are in fact a set of rules used… they’re made up to suit the circumstances and objectives… much of which is to support the notion of “individualism’s” credo.
Longtooth,
Why go the trouble of estimating the number of covered workers from EPOP? The annual report gives you the number directly.
As you observed, interest on the trust fund varies. Most people looking at long term solvency ignore interest. I think that is a mistake even though the interest is less than the uncertainty since the interest cannot be negative. It is a second order factor, so getting worried over the rate is pointless.
Long term solvency of a PAYGO program depends on the ratio of workers to beneficiaries along with the average taxes and benefits. It turns out that in the early part of this century it takes about 2.7 workers to provide for one beneficiary. As wages go up with productivity (worth a different post), that ratio will reduce.
As lifespans increase and fertility decreases the actual ratio will continue to drop below 2.7 and we will start cashing in those special treasuries at increasing rates. The general fund will have to find the money to repay the principle as well as the interest. Some people won’t be happy about it, but it will not matter – it is already owed and already within the debt ceiling.
coberly,
I think you interpreted some of my comments about what they should have done 30 years ago as what they should do now. I may have gone on overlong about my theme that change (adjustments) should be the norm rather than the exception.
Coberly,
The annual nominal interest rates assumed by the trust fund projections are (Table V.B2, page 112)
3.7% in 2018,
4.3% in 2019,
4.6% in 2020
4.8% in 2021
5.0%in 2022
rising to 5.3% by 2025 and remaining constant thereafter.
These are all in large excess of interest rates in the past all the way until the onset the 2000 recession and in excess of most rates until onset of the Great Recession.
So naturally with dropping interest rates, the interest income drops and thus so does the balance in the trust fund so that the trust fund goes to zero + current inflows friom contributions to ss from payrolls. But since there will be fewer employed than retired the outflows are greater than current inflows and so there’s a negative balance (deficit) what either has to be:
1. Made up by current employees paying more to retain current retiree benefits, or
2. Made up by reducing current retiree benefits, or
3. Made up from current general tax revenues.
It’s a system that doesn’t work except if by using item 3) to cover the variances in interest rates, employment rates, employment- population ratio’s, and inflation, none of which are variables in control or controllable by gov’t.
Arne,
the EPOP/>65 population ratio’s are obtainable, divisible, and chartable in 5 minutes … 2 minutes to get the data downloaded from FRED, and 3 minutes to do one calculation (divide a/b) and chart the results (5 sec’s for the calc and 2 minutes 55 sec’s to create the chart. in legible, publishable formatting.
That’s faster than downloading the Trustee report and hunting though it to find their version. I subsequently did that and find that the ss applicable employment to >65 years olds is 2/3’s of the actual EPOP/?>65 year old ratio. Go figure…. the trustee report makes no explanation or reconciliation to the EPOP ratio. They use an empirical number from collections of ss contributions and the number of people actually receiving ss benefits.
that’s an interesting (and common) way to do it, but without reconciling it to the EPOP/>65 year old ratio’s the empirics have no justified or understood foundation to support them, thus neither do their projections of those ratios. The fact that the ratio’s were stable from 1984 to 2008 or so is in stark contrast to prior data which wasn’t stable, but falling since 1960. Why assume stability when prior information says it’s not a given fact of life…. unless you understand the differences and why they occur or what variables have the greatest effects on them you have no basis for projections on a rational scale.
Now I admit there may be some econ published paper somewhere at some time that did reconcile the differences and causes, but the trustee report doesn’t even mention the difference, much less reference a paper describing why it exists.
This aint rocket science by the way so it’s a relatively simple task for those that have the raw data to go find out why the difference exists and determine what the causes are.
Coberly,
The last time I read the Trustee Report in detail was about the time I retired or shortly before that. From that reading I understood the entire ss system’s methods and basis. It is not at all new to me.
But I just read the 2017 Trustee Report to get current information .. numbers and if there were any major changes in ss laws. While going through it in detail and in the tables and charts and footnote explanations, I kept thinking that this is what Coberly reads and sees and also presumably any others who are interested.
So it occurred to me to explain what you’re seeing in a simple and concise way and probably why you see it the way and in the perception of it that you do.
So the simplest explanation I can come up with (and I don’t think it’s oversimplified) is as follows:
You and others don’t want to think that when you retire you’ll have to be on the dole or otherwise on subsistence level living. Because you don’t want to be on the dole, you can’t ask others to give you a dime. So what you do instead is ask gov’t to give you a dime, which they do by taking it from those you won’t ask to give you a dime, earning interest on it, and giving you the dime.
To make this palatable so you don’t think your on the dole, the gov’t says “you have to pay a ss tax” (payroll deducted ss contribution) and tells you that “this is paying for the dime” they give you back later when you retire
But what they’re doing is taking the dime from others who aren’t retired yet (the people you won’t ask to give you a dime) and turning around and giving it to you as the intermediary. And since they collected that dime from you when you were working (and turned it right over to the retiree’s ahead of you) you think you paid for your retirement income.
It’s actually a pass it forward con .. aka I pass it forward to current retires while I’m working and assume the new generation will pass their’s forward to me when I retire so I’ll get in benefits what I paid for the retirees ahead of me for the same price.
For this con to work, you have to believe the gov’t (new generation of employees) will do unto you when you retire as the gov’t did unto those who retired before you using your dime. They’ve already reneged once (increasing full retirement age to 67 from 65), so what gives you the confidence in this con game to think you’ll either lose more benefits or have to more to keep the same benefits.
The reality is that each person paying into the retirement account set up by the ss administration and ss law is getting their benefits mostly from the accumulated interest earned on their contributions over time and a free-be to raise your contribution amounts to current cost of living levels when you retire (i.e. pay you for the inflation that occurred since you put your money into the account). How the retirement account get’s the funds to pay you your benefits when you retire is completely beside the point as long as they pay you what you were supposed to receive based on your contributions when you started making them. Whether they borrow them from current employed people or get an advance from them, or use the account balance of excess funds to obtain interest on it, is just an accounting thing.
The fact that the money available to pay you in retirement what you were expecting may change because the gov’t doesn’t have a funded system or back-up funding system in place is the problem. You think this problem goes away if current employed people pay more into the fund to pay your retirement income from ss. It doesn’t… it just extends the con further…. sooner or later the shit will hit the fan and then finally you may understand how ss really works, though you may be dead by then so you’ll never understand that your’ on the dole when you retire.
Coberly,
I’m sure you must have noticed by your reading the 2017 ss Trustee Report hat the ss contribution mandate has increased from 7% to over 12% already… it’s done that because outflows were greater than inflows plus interest plus inflation plus longer life-spans to cover the deficits the increased how much you have to pay forward and reduced the benefits too (2 years less income from ss).
Well, what was a decent thread on SS has devolved. I am closing down comments