by Dale Coberly
KOTLICOFF ON THE HILL
with Social Security
Larry Kotlikoff wrote an editorial that appeared May 14 in “The Hill:” “Social Security Just Ran a $9 Trillion Deficit and Nobody Noticed“
He cried, “Wolf! Wolf! Social Security ran a 9 Trillion Dollar Deficit last year and nobody noticed!”
He went on to explain this was the increase in the “infinite horizon Present Value of the Unfunded Deficit” from 2017 to 2018.
He neglected to explain that the infinite horizon Present Value of the Taxable Payroll is over ONE THOUSAND TRILLION Dollars. Or that the 9 trillion dollars did not come from Social Security spending any more money, or old people getting more benefits, or taxpayers running out of money. It came from revising the Discount Rate from 2.7% to 2.5%.
The discount rate is a kind of imaginary number at the heart of Present Value calculations. It is a guess about the real interest rate you might have to pay or might expect to get on or from an investment. Change the guess and you change the PV calculated. The PV is a useful concept if you know what you are doing. And insane if you don’t.
A more useful number for evaluating the ACTUARIAL deficit (NOT a debt) in Social Security finances is the percent difference between expected expenses and expected income. That turns out to be about 4%. This deficit starts in about 2030 and remains the same essentially forever. That means an increase in the FICA so-called “payroll tax” (it’s really a savings and insurance plan: you get your money back with interest, more if your luck is bad)… an increase of about 4% starting in about 2030 or so will pay all future needed benefits essentially forever.
Kotlikoff even says as much, though in a way that neither you nor he noticed.
This is the amount of money you (we) will have to pay whether we have SS or not. It is the amount that will be needed to keep old people from living (dying) in the streets and eating out of garbage cans (this means YOU when you can no longer work). This can come from personal savings, redirecting investment profits, real government taxes (that you don’t get back), or living with your son-in-law. What Social Security does is let you pay for it yourself while you are still working. Protects your money from inflation. Pays interest that keeps up with the standard of living, and insures you against the accidents that all cash is heir to.
And since the worker only sees half of the FICA, he won’t feel the extra 2% deducted from his paycheck… especially as his paycheck will be more than 20% bigger. Moreover, since there is still time to raise the “tax” gradually about one tenth of one percent per year (or less, because as you raise the tax the “deficit” recedes into the future), no sane person will even notice it. One tenth of one percent of a 50k per year salary is one dollar per week.
Kotlikoff offers his own plan: force you to pay 10% of your income to a mutual fund. Then force you to pay real taxes to make up for the difference between what the mutual fund pays you and what you paid in (that’s 0% interest), with no guarantees if you lose your job, become disabled, or die with dependents.
You can find all of this out for yourself by actually reading the Trustees Report, page 200, (NOT the summary) and “doing the math” as opposed to just prating “it’s the math” like the reporters and commentators who have NEVER done the math, or understood it. OR you can run around screaming we are all going to die, and cutting off your own head because Larry Kotlikoff has bad dreams, for which he gets paid.