Social Security and the NYT
(Dan here….) Via the New York Times comes an article on the Social Security shortfall. No explanations given for what the shortfall context is, and not till the end was a fix suggested. In comments calling SS a ponzi scheme (with no explanation) was common, or with the fix mostly was about lifting the cap. Only one commenter referred readers to a Bruce Bartlett article from 2013 on the matter,
From an e-mail by Dale Coberly
Forgive me, I have studied this problem and may actually know what I am talking about.All we have to do is pay an extra dollar per week per person per year. After next year It will be more like a dollar and ten cents. And if we wait another year it will be about a dollar and twenty cents for the first few years, then a great deal less than a dollar per week on average. This would keep Social Security solvent essentially forever. The Deputy Chief Actuary at Social Security agrees that this is true.This would mean people are paying more, but not a lot more, for their Social Security. That is they would be setting aside enough money through Social Security to save enough to live on when they will no longer be able to work. Don’t fool yourself: working longer is not going to be possible for at least half the population. And since they will have paid for it themselves, there is no reason they should not be able to retire if they want to even if they “could” work longer.The Social Security Trustees Report says that about a one and a half percent (about fifteen dollars per week) one time “immediate and permanent” increase would keep SS solvent for the next seventy five years.This would not be a real burden, or even noticeable once people got over their overreaction to the increase. Even the about twenty dollars per week that would come in 2035 or so if we wait to the last minute will not be a real burden. Wages will have risen by about two hundred dollars per week by then. Again, no no one would think twice about it if it weren’t for the Big Liars making it sound like some kind of tragedy: “You are going to have to put aside an extra twenty dollars per week, out of your two hundred dollar raise, in order to have enough to live on for the extra two to four years you will expect to live.” [Dollar amounts are in present terms. SS pay as you go financing automatically takes care of inflation and real interest.]The thing is they keep talking about it as if “we” — that is “the government”– can’t afford it. But we — that is each of us — certainly can afford it.But “they” want to talk about it as if “the government” was going to have to come up with trillions of dollars. And they call it “socialism.” Meanwhile the “progressives” want to make it socialism by “making the rich pay” for it.Social Security was carefully designed to NOT be welfare. It’s just the worker saving enough of his own money to pay for his own food and shelter when he will be too old to work, and insuring himself against the possibility that otherwise he might not be able to save enough. The government does not pay for any of this. The “rich” do not pay for more than they will get back with reasonable interest, including its insurance value.Since you have been lied to intensively for at least the last thirty years, you will not easily understand this or believe it. But it can be proven with attention to real math and real facts. There is no hope the people will understand it if no one tells them. The question is are you willing to do the work?
Dale:
The powers to be will keep lying until they get their way. As you said previously, to avoid the issue of running out of money to pay benefits a gradual increase in taxes on a yearly basis of 1 tenth of 1% for employees and the same for employers would resolve the shortfall in 10 years and well before 2035. Of course, my version is a simpler rendition for you detailed version.
– Of course, Trump deporting all the illegal aliens in the US, who pay into SS and will never collect, would not help.
– Of course, Corporate America who benfited from the excess SS funds being loaned to the General Fund do not want to pay back the funds needed to finance the yearly shortfalls in receipts.
– Of course too, there is the issue of people who still have student loans going into retirement. The gov will garnish SS to continue to get the funds back for the loans. Kill SS and there is another issue. We can thank Joe Biden for helping to pass a laws garnishing SS to pay back studen loans.
Coberly, I also saw the note from the Deputy SS Director about the Northwest Plan you helped to develop. It said the plan would solve the short fall in funds in 2035. So no Mr. Reischauer, no Prof.John Cogan, no Republicans, and no Heritage Foundation; there is no need to cut benefits or put funds into weak 401k programs, and yes Jeff Sommers you are fanning the flames of a false emergency when there is a sound solution to be implemented. You need to catch up on the solutions available and not be one of the naysayers going forward.
Krasting, . . . Krasting, . . . Krasting . . . if you say his name three times he will appear just like Beetle Juice.
“benefited from the excess SS funds being deposited into the General Fund”
Please write instead “benefited from the excess SS funds being loaned to the General Fund”.
I’ll say the same thing I say every time:
The Trust Fund has all of three years of full payout (lopping one year off for “solvency” which auto fills in any temp shortfall) after thirty five years of “saving” for retirement. It is to be paid out gradually over (to make a number up) fifteen years as FICA collections gradually short fall more and more over that time — making it sound more like a genuine trust fund intended to cover whole retirement.
Want to do it again? Want to up today’s FICA tax so there is a surplus to build that can last a few short years sometime way out in the future? Pretty silly business. Don’t pay attention to the words — pay attention to the eighth grade math.
Denis:
I believe the intent is neutrality
Denis,
The annual cost is about $1T now. It will be about $2T in 2031 and about $3T in 2039 (according to the 2019 report, https://www.ssa.gov/OACT/tr/2019/lr6g10.html). If you gradually raise the FICA rate over the next 20 years so that the TF is not paid out, you will end up with the desired one year for solvency. That is approximately what the NW Plan does.
One detail that already is present but that has not been discussed much lately is the idea over “triggers”. If the TF is being drawn down more slowly than forecast, there is no rate increase. But as long as people are living longer, it will take more funds to maintain a balance.
The general rule for an endowment is that you can spend 4 to 5 percent. The same would be true for a fund covering retirement of every cohort. One of the failures of the Greenspan Commission fix was that it did allow people who cannot do eighth grade math to believe that it was a genuine permanent fix. They (the ones who did the math) knew at the time that it was not. It was never intended nor any where near capable of covering a whole retirement.
I don’t know how to add images, but here https://kenhoma.files.wordpress.com/2008/08/social-security-tax-rate-chart1.jpg is a chart of FICA rates over time.
The startling thing is not the sudden change in 1983. It is the lack of changes since 1990.
Arne,
And in the end income tax fills in shortfall of FICA — FWIW. ???
Denis,
Income tax will not fill in shortfall unless Congress changes the law to let that happen.
Arne,
What I am talking about is how the TF bonds are cashed — what source is used to cash them.
I think the following are correct. You’re free to disagree.
A There is no way in hell that either Congress or the White House is going to do anything with SS before 11/20.
B If Trump is reelected he will not do anything re SS cuts or tax increases. (He has no incentive – SS will be running like a clock).
C If Bernie, Elizabeth, Kamela etc are to win they will certainly not raise payroll taxes. These folks would eliminate the cap.
D) If Biden wins I’m not sure. But like Trump, he would have zero incentive to mess with SS in his first term. (There will be NO crisis with SS for another decade or so.)
I conclude: There will be no new payroll taxes or benefit cuts at SS for a minimum of six years.
Is there disagreement?
BK,
I predict that if people listen to you that nothing will happen. If people start paying more attention, something will happen.
Denis,
You are correct. It is the general budget, more income tax than corporate tax, that redeems Special Treasuries – whether there is a shortfall or an excess in SS, or as currently, simply a rolling over of those Special Treasuries.
That NYT article made me furious. SS was originally designed to be pay-go, but that was a problem with rising dependency ratios. So we had a big tax increase in the early 80s to build up a giant trust fund that could be used to get us over the demographic hump. The fund was designed from the beginning to be self-liquidating. As it happened (largely due, if I’m not mistaken, from a big increase in income inequality and the falling wage share) the fund wasn’t quite big enough to do the job, and SS won’t be balanced at the new rate even after the demographics are stabilized. So, yes, we have to do some more tweaks over the next 15 years and/or dramatically boost the share of income going to workers in the bottom 80%.
But meanwhile *the trust fund is doing just what it is supposed to do*. It wasn’t created to sit there looking awesome. It’s supposed to be spent down. The article is big-time disinformation.
Denis
i think you may misunderstand “income tax fills in shortfall of FICA ”
income tax pays back the money it borrowed FROM FICA. no one is being taxed (income tax) to make up a “shortfall” in FICA.
this is a bit of shorthand to hopefully get you to understand the relationship.
actually the money to PAY BACK the money congress borrowed from the SS trust fund to avoid having to increase income taxes or spend less is coming from borrowing from the public.
but it is important that you understand SS pays for itself through FICA or interest on money it lent to the government. this is NOT the poor taxpayer shouldering the burden of SS spending more than it pays in. this is the poor taxpayers (ultimately) paying back money they borrowed (via Congress).
Krasting
thank you for your shrewd analysis of what politicians will do if they don’t understand how Social Security works any better than you do.
i keep writing about SS in the hope that people will catch on. i do not propose to give up because you tell me there is no hope.
So, since there is no hope I will give up trying to tell people how easy, and sane, it is to “fix” SS, why don’t you give up trying to tell me there is no hope you will ever understand it.
Dorman
I think it might be a little misleading to say projected SS shortfall will be due to increase in inequality or falling wage share.
It will be due to increased life expectancy and lower rate of wage growth than in past.
even if the level of equality remained constant, or the wage share remained constant, the fact that wage growth is not keeping up with life expectancy would still produce a shortfall.
one reason wages are growing fast enough is that a greater share of worker compensation comes in the form of “benefits” not taxed.
it is true that if workers share of income grew, or inequality was less the growth in GDP would probably reduce the expected shortfall. but as things are currently projected, SS will take up about 1% more of GDP after 2030 or so than it does today.
this is not a huge amount. it is about what you would expect simply to pay for basic expenses over a longer life span however the finances were managed… except of course cutting benefits and letting people live out their retirement in grinding poverty.
and it’s not as if someone else will have to pay for those old people: they can pay for it themselves if we just let them…the way SS was designed to work.
coberly:
“increased life expectancy” is another dimension Peter did not include. His version is back to Productivity gains for Labor as opposed to Capital gains. Taxing the Overhead applied to Labor is an interesting concept which would include many of the laws legislated to protect Labor. If we choose Healthcare, the intent was to tax it once over a particular amount ($20,000?) even though it was partially (50%) subsidized by the Gov. Time off is already taxed in the pay they receive while off work whether sick or on vacation. If you were to do such, why not Capital Gains? Then your argument would be, SS would be accused of being welfare or an entitlement. I understand this argument.
In China/Asia, the benefits are eliminated which lowers the Overhead in those countries as compared to the US. This is an entirely different topic than SS.
this is something the Krastings don’t understand: SS is not a welfare program. it is just a way for people to set aside a small part of their own wages to have enough to live on when they retire.
pay as you go automatically provides “interest” because each generation in paying for its own retirement in advance AT THE SAME TIME provides the cash to pay for the needs of the current retired… paying them back the money they paid in, plus a modest interest that comes from the fact that the current workers are paying in more dollars (due to inflation and due to the general real rise in wages) than the current retired paid in in their turn.
i keep saying this, but people keep thinking “no, i’m paying for greedy granny and some poor young person will have to shoulder the staggering burden of paying for me.”
these people must have had a hell of a time with algebra. and no doubt they think their huge winnings on the stock market aren’t “paid” by someone else.
Pay as you go – this means that the size of the current economy covers the earnings payment due to retirees and ‘insurance’ recipients as then being claimed. Makes sense, invest in building and sustaining the economy draw on it for your earnings checks.
How we draw the funds out of the current economy to pay these lawful earnings, which are lawful obligations to pay, this has always been the question.
Of course the success of the economy ought to be used to calculate the earnings amounts too.
JF and Run
SS is a very simple concept…. simple and beautiful like a mathematical proof.
But everyone always wants to bring in other concepts, some of them entirely bogus and some of them quite reasonable from their point of view.
but they all… from my point of view… obscure the powerful simplicity and efficacy of Social Security as designed by FDR (his security commission did the basic design but at the last minute he overruled their intention to ultimately turn it into government welfare. he insisted it be and remain “worker paid” insurance for workers. it has worked very well on that basis for eighty years.
the ideas you are contributing here are perfectly reasonable, but they should be applied to government taxes being used to benefit the general welfare… including welfare for those people who don’t get enough help from Social Security’s worker paid insurance. But they should not be brought up as ideas for reforming or “paying for” Social Security which was designed to pay for itself, can pay for itself, and works very well by paying for itself.
please, keep it simple.
typo in my comment above “overhead” should have been “overruled”
Dorman
made me think more clearly about something i should have thought about before. unfortunately i don’t think i wrote about it very clearly in my reply.
there has been some discussion about “why” SS is facing a shortfall.
income inequality is often suggested as the reason.
even an SS expert has claimed the reason is the fall in birth rates…so “there are not enough younger workers to pay for the older retirees.
this can be “demonstrated” by a factors analysis of the data. unfortunately the “analysis” does not reach the “cause” of the shortfall, it merely demonstrates that by eliminating the birth rate as a factor the shortfall is reduced. this is a kind of error that is fairly common in statistical reasoning.
but look at the GDP: SS benefits are expected to account for about 6% of GDP in the future, as opposed to the about 5% today.
there is nothing to account for this increase in share of GDP but people living longer. whatever the birth rate, whatever the income inequality, the larger share of GDP going to the basic needs of the elderly is completely caused by the larger number of elderly, which is completely the result of the elderly living longer.
it is true the shortfall in SS could be closed by increasing the share of income going to the people who pay the SS tax… and thus increasing the money available to pay promised benefits at the current tax rate…. and, alternatively, the money available to pay benefits at the current tax rate could be (would be) increased if the number of working age people increases (higher birth rate, or immigration rate).
but these are ways to pay for the increased costs of more people living longer. since old people’s monthly benefits are NOT increased per person as a share of GDP, it must be the number of months that has increased.
not sure this helps anyone but me, who feels better saying “because we are all living longer” as opposed to “we aren’t having enough kids” or even “the rich are taking all the money” which they are but that wouldn’t be causing the increase in share of GDP going to SS…. which is tiny and goes to a good cause.
or is this all just another big “typo”?
A 1930s economist noted that workweeks would shrink as progress unfolds. This economist was right, we have seen this in the US and in other wealthy countries.
We need to recognize that the Social Security system needs to evolve as well. Let us keep its return on investment fundamentals (that is, its human capital aspects, and its grounding and respect for the workforce who is truly earning a return from the economy upon retirement) and let us also keep its insurance aspects. The rest can and should be modernized.
We do not need to finance Social Security only by burdening the incidence of labor or work in the US. That is what the past would have us continue and I see that as being out of step with what we know, and worse, it furthers a political agenda that wants this burdening continued even as income flow concentrates more and more, wealth accumulates unnaturally too, in an elite who want this financing burden on everyone else but themselves.
Debates about modernizing the Social Security system for the benefit of society are very good, and needed. Thanks.
JF
i am afraid i don’t agree.
do you think there should be no relation between work and reward?
do you think people should not pay for their own groceries at least when they can afford to (absent disability or failure of the economy to provide paid work)?
i suppose i can imagine an economy where most of the people don’t have to work and their needs are supplied by those who do, but i really can’t imagine that such an economy would work for very long.
i am quite sympathetic to the idea that the work done by “the poor” should be remunerated much better than it is today… even to the point where the lawyer gets paid as much for his time as he pays his cleaning lady.
but i do not believe that what a person gets to live on “in retirement” should be at the hands of “the rich” or “the government.” it is a fairly simple idea that people can set aside enough of their current pay to provide for those years when they will no longer be able to work. All social Security does, needs to do, or should do, is provide a way where that money set aside is protected from inflation and “market losses.” further protection, “insurance” against personal losses is also quite reasonable. So far as I know or can imagine, the “government” is the only entity in a position to actually guarantee those savings or that insurance.
but this is a very different concept than “the government” simply relieves the people of any need to work and save whatsoever. if for no other reason than “welfare” or “government pension” is very susceptible to political manipulation or individual fraud without being tied in, legally and “morally” with that person’s work and contribution.
all that european style democratic socialism is under severe assault as we speak.. as is SS. but SS has the advantage of at least being “earned,” so that if it is taken away at least the people will be able to know it was stolen from them and not just a matter of “the government” not being able to afford it, or “the market” letting them down.
a time might come when we are either too poor to be able to save for retirement, or too rich to have to work. but that time is not yet here, and i think we should stick with the very old idea that you work for your groceries and save up for the day you can’t work.
it used to be that family somewhat insured us for this. families no longer have, or ever really had, the economic strength to ensure this. when the free market failed to meet this need, governments began to step in, but more along the lines of “the poor house” than anything as beautifully engineered as Social Security. we should be very slow to mess with that or give it up for some sure thing on the market, or government forcing “the rich” to pay for our needs.
if we want the rich to pay more…pay us more for our work or just pay more for what the government does., that’s a separate issue and we need the mental clarity to keep them separate.
JF
just so you know:
the funds are never “drawn out of the economy.
they are earned in the first place by workers contributing to the economy.
they are then “set aside” by the workers to pay for the workers future needs exactly the way any worker sets aside money on the bank or in “investments.” some of this money is immediately paid into the economy in the form of repaying prior savers the money they invested or saved in the “Social Security Bank”.. just like any investment or savings is paid back to the saver/investor together with interest earned by the bank/company.
tthis is exactly what happens to money you put into an investment or bank account. the money not used immediately to repay prior investors is used to pay for “investments”, in the case of SS part of this is money that SS lends the government which frees up money that would otherwise go to taxes, leaving the taxpayer with more money for commercial investment.. or just lending to people who are willing to pay for “money now” against their hopes of having more money later to pay back the loan.
this becomes part of the money invested directly or indirectly from the “lender” into future productivity.
and then is paid back to the investor with a premium (interest) based on the agreed payment for the use of the money… hopefully derived from that increased productivity. and that investor/ beneficiary immediately uses his return on investment to buy the things he wants or needs, possibly including making other investments.
i am trying to make the point that the money in SS never leaves the economy, not when the FICA is paid in, nor when benefits are paid out.
the economics is the same whether it is SS or private savings/investmen
t. the money never has to be “drawn out of the economy” any more than any investment, or return on investment, is drawn out of the economy.