Larry Kotlikoff’s Social Security editorial in “The Hill”
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.
Dale as usual breaks down the issue in a manner people can understand. I also like to include the emotional side of the argument as well and that is life expectancy for working class and low wage workers are not rising like they are for the professional class. The Very Important People in Washington want to raise the retirement age to 70 on our kids and grand-kids and that is IMO insane and unnecessary. It also needs to be pointed out that SS will be the main source of income of a high percentage of workers in this low wage economy we have created and those people are unable to save in a IRA/401K etc.
it might have been clearer if i had said that Kotlikoff’s plan would force “someone” to pay a real tax to supplement the pensions of everyone whose income from their mandatory mutual fund did not equal the amount those people had “invested”. those people apparently would not get any interest on their investment. it’snot clear what would happen to those people whose mandatory 10% of their wages investment was not enough over a lifetime of low wages to return, even with interest, enough to pay for basic needs when they could no longer work. Kotlikoff does mention a”supplement” to the investments of “the poor.” presumably this would come from real taxes on “the rich.”
i wonder if Kotlikoff has calculated the infinite horizon present value of all those real taxes and the cost of managing the rube goldberg welfare system that implies.
Here is another reason to also discount the longevity argument the people who have an Ideological bias against SS and their desire to eliminate it or at minimum raise the retirement age to 70.
One of the most disquieting facts about life in the United States today is that the richest American men live 15 years longer than the poorest men, while for women it’s 10 years. Put a different way, the life expectancy gap between rich and poor in the U.S. is wider than the gap between the average American and the average Yemeni or Ethiopian.
This gap is only getting wider. According to a report by the Health Inequality Project, from 2001-2014, the richest Americans gained approximately three years in life expectancy while the poorest Americans experienced no gains.
Implementing a gradual plan like Dale suggests makes sense yet we also know that even if that does not happen the FICA was raised 2% on both sides of the equation under Reagan. People will not stand for a cut in payouts even if the political class is pushing for it. IMO
This guy Kotlikoff is a real gem.
Remember Fairtax?
This guy was their chief economist, and screwed up the numbers so badly the legislation had to be rewritten a couple of times.
Seems he still has a problem with numbers.
Aside from the simply terrible math of this obvious agenda driven analysis, I think something more urgent and critical is often left out: The impact of strengthening social security (and especially medicare) benefits on available jobs.
People are working longer in part because of fears about retirement security. In some cases these fears are well founded; there have been many stories written about the disastrous results of our 30 year experiment with 401Ks etc. A lot of boomers haven’t managed to save much and even if they have, they’ve seen account balances ravaged by a couple serious recessions, etc. Not to mention ripoff fees and often opaque mutual funds etc.
Securing retirement means giving younger people more needed job opportunities. It would be nice if the cat food democrats managed to seize on this as a useful political agenda. But Uncle Joe the media darling front runner doesn’t seem any more interested than his former boss in addressing the issue.
Kotlikoff apparently also believes that increasing everyone’s saving rate will have no effect on their spending rate. He assumes the economy is unaffected when changing from one massive program to a different more massive program.
it might be worth pointing out that infinite horizon PV is essentially the amount of money you would have to put in the bank today to pay all of a programs costs every year forever out of the real interest you expect to earn note “real” interest. you would have to add about 3% to the discount rate to get the nominal interest needed to cover inflation.
that’s if you can get that rate.
and it assumes there will never be a change in the programs covered. apparently, according to Kotlikoff, 20 Nobel Prize winners think this would be a sane way to so the books for government expenditures.
i wonder if he has calculated the infinite horizon PV for the Defense Department, which has no trust fund, so by Kotlikoff standards is already bankrupt.
Dale:
Didn’t you and Bruce have a conversation with him? I kind of remember him.
Barron’s weighs in reinforcing the lies… https://www.barrons.com/articles/dont-take-social-security-early-51558119173?mod=hp_INTERESTS_retirement&refsec=retirement
What was that thing about lies going half way round the world before the truth gets it boots on? I’m pretty sure that’s Facebook’s business model.
Thank you for putting it in human terms. My parents “inherited” debts. I didn’t. That is the difference a safety net makes.
Run
I talked to Kotlikoff a few years ago via email. Decent of him to talk to me. Most”experts” won’t, so it’s almost unfair of me to tell what he had to say.
but I did get the idea he didn’t really understand PV arithmetic. But that’s what he is telling us here.
Dale:
I remember you talking about it. He is a Prof at Boston. I do not recall what the conversation was about though.
For anyone who checked the comments on the piece in The Hill, every single one that I read called out the article as a complete fake. The debate among the commentariat was over the efficacy of the various apparently well-known ways to address any alleged shortfall in the program funds.
Hey lightly49:
You get one name to use here. Pick this one or the someofparts. Thank you.
some of the parts
thanks for the info. i am glad that people can see that Kotlikoff is making no sense. makes me wonder about those twenty Nobel Prize winners who want to use infinite horizon accounting in the government’s budget.
but i wish you had told those debating the most efficaccious way to pay for any alleged shortfall to come to Angry Bear and I would ex[plain it to them: an extra dollar per week in FICA. no cap raises. no turning SS into welfare as we knew it. the worker pays for his own retirement, insured by each other.. just the way FDR designed it. just the way it has worked for eighty years.
yes costs are expected to go up. wages are expected to go up faster, and even if they don’t, SS will still be necessary, even more necessary, as the only safe way to ,ave for basic living expenses in retirement, as well as insure against dissability and dying with dependents
just so you know… FICA is expected to have to go up to 16%. most workers will see only 8%. Kotlikoff told me in private correspondence that “no one would pay that much.” but 16% of your wages seems to me a quite reasonable amount to pay for groceries and rent,for when you won’t be able to work.
and if you really are going to need that new Lexus and vacation in Las Vegas every year, you will still have more money after paying FICA than you do today. If you can’t make a million dollars investing that, you were never going to be able to, SS or not.
Run
we talked about whether one tenth percent raise in FICA per year could catch up with 20 Trillion dollars (then) in infinite horizon PV deficit.
what he didn’t understand was that 20 Trillion was dollars in the bank at interest enough to pay the projected shortfall of 4% of wages. first i showed him that the 12 Trillion PV for the seventy five year actuarial deficit was part of that 20T in the bank. that would be used up paying for the first 75 years. the remaining 8T would need to generate enough real interest to pay the 4% of payroll deficit over the infinite horizon. but wait, we already have a machine generating 4% of payroll over the infinite horizon. it’s the 4% increase in the payroll tax.
he finally got it. but then instantly turned around and said no one would pay a 16% tax.
if you were born into a world with no prior expectations about what groceries and rent SHOULD cost, you would think nothing about paying 16% of your income (used to be about 50% when I was a kid) for those necessities all SS does is transfer part of your income while you have one from today to tomorrow when you won’t, and will need the money.
this seems hard for more people than Kotlikoff to understand.
sorry for the typos. my eyes are giving out.
(when I was young, I was never going to be old either.)
Dale:
I go around and tidy the place up, correct a little here and a little there. Don’t worry about the typos. Now I have dusted off that folder (with the detail of that conversation) in the long hallway of files in my head. Still have to convert to a data base
“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%.”
One can have so much fun with the infinite horizon Present Value approach. About 20 years ago Kevin Hassett and James Glassman used it to conclude that the DOW was about to hit 36000!