SOCIAL SECURITY A Mystery Story
by Dale Coberly
A few years ago, now getting to be many years ago, I solved a crime. Not because I was a Great Detective, but because I happened to be standing across the street where I saw it committed and took the number of the getaway car. Since then I have tried to tell the police what I saw, but they don’t want to hear about it.
I don’t want to go too far with this parable, just wanted to let you know in advance that I don’t claim to be smarter than anyone else, but what I am talking about is not an opinion and is a verifiable fact.
So back to facts. Sometime in the late 1990’s I heard on public radio (“radio for intelligent people”) an expert claiming that Social Security was bankrupt, a huge burden that was going to crush the taxpayers, especially the young.
Intuitively that didn’t seem very likely to me. How much could it cost to pay for the basic needs of retired people? I did a few calculations and saw that it wasn’t likely to be very much and certainly not unreasonable.
The simple equation to set some parameters goes something like this: If you expect to live twenty years after you can no longer work, and you can live . . . comfortably . . . on about 40% of what you were making while you were working . . . the kids are grown, the house is paid for, you don’t need expensive vacations . . . you can save enough money while you are working for forty years (age 25 to 65) by putting away 20% of your wages:
20% of wages times 40 years equals 40% of wages times 20 years
This neglects inflation and also neglects interest you might earn on savings or “win” in the stock market. It also neglects the possibility that you might live more than 20 years after you retire, or that you might not make enough while working in order for your savings to add up to enough to pay for basic needs when you can no longer work. [Because of growth in the economy, the amount you would need to save is about 16%, and because of Social Security, you would only “see” half of that.]
This is not a new problem.
In the long ago past . . . back to Neanderthal times . . . this problem was solved without anyone thinking about it (I assume: Those Neanderthal might have been better thinkers than we imagine). What people did then was raise their children. Feed them. Teach them to hunt. Build or find a shelter. And when they got old, their children, now grown, and strong, and knowing how to hunt, and having a shelter already built, would feed and shelter their now aged parents. Maybe they were grateful or maybe they just loved them, or maybe they figured that if they took care of their parents, their kids would take care of them in their turn.
This was such a good idea it lasted through the millennia and was coded into religious law: “honor thy father and thy mother so that thy days will be long in the land . . . ’ and to make sure people understood it when they began to drift from the old ways another religious teacher came along and reminded them that it was “all about the money . . .” [oddly enough, he said take care of your parents before you give to the church].
And that worked well enough until the age of capitalism which broke apart families, and whole families often did not make enough money to care for themselves let alone their mother and father.
I mention this history because when John Kerry was running for President, he said something about “honor your mother and father” when he was talking about Social Security. And the reporters and commentators said “what the hell does that have to do with Social Security ?!!”
So now you know.
For a hundred years or more before the present, working people tried to save enough to retire. Roughly they expected to live about another ten years after they could no longer work, so they tried to save about ten percent of their income for their old age: 10% times forty years equals 40% times ten years.
But because they lived in a world with inflation, they had to try to find a way to earn interest on their savings that would at least keep up with what their savings lost due to inflation. The trouble for them was the banks failed, and the stock market would let them down at the worst possible time. Also, they might lose their jobs, their health, or even their children.
And this happened often enough that it became a “national” problem. One of the reasons governments are constituted among men.
To shorten this story somewhat, in 1936 the government introduced a system of insurance whereby the government protected the savings of people so that most people would not face dire poverty when they were too old to work (and note that usually meant “when they got old and no one would hire them”).
Franklin Roosevelt, the President at the time, insisted that this government program not be “the dole.” That is, the government would NOT pay for it. The workers would pay for it themselves by a payroll deduction, called a “tax” by the press, but more properly thought of as a mandatory savings and insurance plan: the workers got their money back, with interest, insured by each other against inflation, market losses, and all the evils cash is heir to.
This system has worked very well for eighty years, but it has been under attack for all of those years by people who either don’t understand it or just hate it for “ideological” reasons: either they are genuinely afraid of “the government (of the people, by the people, for the people)” or they just hate the sight of a lower class person not working . . . even if he has paid for his own retirement.
And that is where all the noise about Social Security being broke, flat bust, a crushing burden on the young, has come from: It is simply a Big Lie and carefully constructed by “nonpartisan expert” liars.
To check my facts I actually read the Trustees Report . . . the one they claim predicts Trillions and Trillions of dollars of unfunded debt, and I discovered that . . . yes indeed, at the present payroll tax rate, with the expected increase in life expectancy, the income to Social Security will fall short by about the year 2034. It turns out the shortfall can be prevented, completely and forever by simply raising the payroll tax rate one tenth of one percent per year until it again matches the costs associated with increased life expectancy.
One tenth of one percent of the current average wage is about one dollar per week. If we start now, we will never see a shortfall in Social Security, and there will be other benefits (the government will never have to repay the money it has borrowed FROM Social Security…the so-called Trust Fund.) The tax raise will not continue indefinitely but will stop when it reaches about 2% of payroll in about twenty years when real wages will have increased by over 20%.
As I said in my parable, no one wants to hear about this. The politicians and pundits are all in the thrall of the Big Liars.
And sadly, tragically, the “friends of Social Security ™” have been telling the people that a better solution is just to make the rich pay for it, and in fact to pay more for everybody whether they work or not. There may be some cosmic justice in this idea, but in American politics it will guarantee that “the rich” will kill Social Security entirely. And the poor (“us”) can’t seem to understand that if they pay for it themselves, “the rich” (aka Big Liars) can’t take it away from them.
I think this will be the year you will hear that Social Security is in “short term actuarial insolvency.” This means that in ten years the Trust Fund will fall short of the 100% prudent reserves against economic downturn. That means it is the last year that one tenth of one percent per year will avoid that shortfall. But even this is not a catastrophe, it just means it will take a little more than a dollar per week per year to get us back to “solvency.”
If we wait too long, it will take a sudden twenty dollars per week. By that time wages should be about two hundred dollars per week higher than they are now, but no one will notice that then. There will just be howling and scrambling about the crushing burden of an extra twenty dollars per week out of an income of twelve hundred dollars per week to pay for a retirement that will give back about five hundred dollars per week for twenty years or more.
Do the math. But DO the math. Think about what it means to you in the real world.
1990: “20% of wages times 40 years equals 40% of wages times 20 years”
1935: “10% times forty years equals 40% times ten years”
2020: 25% time 40 years equals 40% times 25 years
The Greenspan Commission did not “fix” rates for increasing life expectancy. We need to do that. Be informed enough – do the math – so that you understand why it works.
I also see SS as insurance. If you end up living longer than 20 or 25 years, you can still be comfortable. If you get laid off after 55, you will still have enough credited to you. Your foundational expenses will be covered as if you were able to plan 40 years work and 20 years retirement.
If you want those expensive vacations and don’t want to downsize when your kids leave the house, you need to save more on your own. You should do the math on that as well. If you live longer, you need to save more.
“There will just be howling and screaming about the crushing burden of an extra twenty dollars per week out of an ” extra “income of twelve hundred dollars per week”
Here is where we need to look to the rich to make sure they do not skim all than extra income. Just don’t try to force SS to fix the inequality problem when by doing so you risk giving the haters the wedge they want to break SS.
I don’t have the official numbers in front of me, but remember my “basic equation” was just to set some initial parameters for the likely percent of wages per year a person would need to save in order to retire in basic comfort. I think the projected life expectancy at retirement is 20 years now, not 25. And SS is designed to keep on paying if you live longer than that average life expectancy (the money coming from those people’s savings who live less than the average life expectancy. People who don’t understand “insurance” often complain that this is theft. in any case, with growth in the real economy SS earns a real interest high enough to hold the “tax” rate to 8% (that the worker sees. another 8% is paid by the employer. some people like to argue about whether this is “really” the worker’s money. its a useless argument.)
In fact, if we wanted to spend down the Trust Fund, we could just raise the payroll tax to about 7% (it is now 6.2%) immediately. SSA likes to call this “immediate and permanent” and then say that after 75 years another “substantial” raise would be required. So much for “permanent,” but the substantial raise would be about another one percent… at a time when incomes will have more than doubled. I don’t think a 1% raise 75 years from now is something we need to worry about…nor will it be a crushing burden on our great, great grandchildren.
Anyway, the point of all this is that it is YOU paying for YOUR OWN groceries when you are too old to work (or want to work. since you have paid for it yourself, who is the government to tell you you can’t retire?
Of course by then, if life expectancy have increased so much and you are healthy enough to keep working, or just love your job, there is no reason why you can’t keep working.
So, it’s you paying for yourself, with the government managing the insurance aspect and protecting your money from inflation and market failure. What’s the big problem?
It looks like the annual report shows an expected increase of 3.5 years to life expectancy for men at age 65 over a period of 30 years. 4.0 years for women. I am optimistic that I will need to save more.
Thanks Dale and Arne for the comments as well.
yes. apparently when i first wrote about SS the expected increase in life expectancy over the seventy five year window was to 20 years for men age sixty five. now the expected increase in life expectancy over the NEXT seventy five years is to about 22 years for men age 65 (in 2095).
gotta keep up with these things.
but from the Trustees Report for 2018 (came out in 2019), with the then predicted life expectancy increase (about 22 years then), the ultimate tax increase to pay for that life expectancy was to about 8% plus the boss’s contribution of another 8% [ if you think the boss would “really” give that money to you if he did not have to pay it into your Social Security you are a child. but it doesn’t really matter, even if you do pay the whole 16% that is what it will cost to pay for your basic needs in retirement, whether you get it from SS, the stock market, or under your mattress. and if you think it is too high, then i suppose you must think the cost of food and shelter today is too high, taking as it does all that money away from what you could spend on a new car or a week in Vegas.]
and i suppose the reason i only remembered the figure for men is that i am a male chauvinist pig.
but guess what, girls, for the same money as a man pays you get an extra five years of benefits. [
“…it has been under attack for all of those years by people who either don’t understand it or just hate it for ‘ideological’ reasons: either they are genuinely afraid of ‘the government (of the people, by the people, for the people)’ or they just hate the sight of a lower class person not working . . . even if he has paid for his own retirement.
And that is where all the noise about Social Security being broke, flat bust, a crushing burden on the young, has come from: It is simply a Big Lie and carefully constructed by ‘nonpartisan expert’ liars…”
[It is in the interest of the owners of capital that taxes remain low on them and that working people must save for themselves in banks and financial markets. Just as ancient aristocracies had Gods to keep their people in line the mythology of capitalism invests itself in the Lords of Finance.
Keep up the good work. It was in no small part because of Bruce Webb’s efforts on defending Social Security that I began reading and commenting here at AB.]
i am still doing this from memory: if i remember correctly the life expectancy of women is greater than the life expectancy of men, but the difference (at age 65) has been getting smaller. it may only be two years by 2095. how old will you be then?
hint: i am trying to persuade you not to get sidetracked into worrying about something so far away it might as well be science fiction. your kids and grandkids will be able to take care of it as it approaches reality for them.
Any of those who follow the periodic discussions of social security on Angry Bear know I am generally in favor of the gradual increase idea and very much opposed to just raising or eliminating the cap for several reasons including turning it into a “welfare program”, but I would like to know the basis for the assertion that in 20 years “ real wages will have gone up by over 20%” when real wages have been unchanged for the last 40 years for the average worker—I recognize that this is not strictly true because while you pay more for many consumer goods than you did in the late 1970s, the products are in many instances much better. I do not see this trend changing given globalization and technological advances which make the folks at the top very, very rich and reduce all but a few highly educated service providers to subsistence income. I find a lot of the ideas being promulgated by the AOC, Bernie, Warren wing of the Democratic Party disturbing, but recognize that I am an old guy sort of set in my ways and the way I view the world and the fact remains that the inequality of both wealth and income is right now the greatest it has ever been in my lifetime. Perhaps it is just a coincidence that the polarization of politics is also the greatest now that it has ever been in my lifetime. I blame the first on Reagan and the second on Gingerich, but even if I am wrong, I do not see the current situation as sustainable and the shortfall in funding of social security is the least of our problems. That being said, I would embrace any candidate who can reassure old people while not alienating the young—I know back in 1986, I was seriously pissed about the increased social security contributions I had to make while raising children, paying down a mortgage and trying to put a few bucks in my 401K. And be ready for the GOP to claim in the most dire terms possible that the boomers are trying to steal the futures of everybody under 40 to satisfy their own selfish desire to get “ free stuff”
but it is important to remember that the lords of finance to NOT pay for Social Security. the workers pay for it themselves. that was the genius of Roosevelt.
of course there are people who think they can do better than SS by investing their own money. they are like the people who think that because they are such good drivers they shouldn’t have to obey the speed limit or other gummint infringements on their liberty. they forget that the rest of us inferior driers aren’t good enough to drive safely on a road with all those superior drivers doing whatever they want. and we paid for the road.
I base my “predictions” on those of the Social Security actuaries in the Trustees Report… the same Report that the enemies of SS point at every year or more often and scream “we are all going to die! SS is broke, a huge debt, a crushing burden on the young.” These are all lies.
The SS actuaries project a growth in real incomes of about one full percent per year. I gave 20% in 20 years to avoid the complications of compounding. It will actually be larger, eventually much larger.
Or it might not. As you say, the people who run the economy, and determine your wages, the same people as the ones who lie about Social Security, may hold wages down to a level where NO savings for old age are possible. But we are not there yet, and if we get there, we may need stronger measures than raising the payroll tax… or cutting benefits.
i agree with about much, most. not time now to go into details. but yes, us greedy geezers ARE paying for the young right now who cannot find decent paying jobs.
When people to boil things down to one number, they use averages. One result of the increase in inequality is that median income has not gone up as much as average income. The projections in the annual report are that this disparity will not continue so dramatically. You should worry, but, IMHO, you should not try to use SS to fix the inequality. Instead, you should realize that improving inequality will also make SS work more smoothly.
i have to go out for awhile. will try to answer any questions when i get back.
enjoy the conversation.
Understand Arne and Coberly I am not trying to fix inequality through social security but social security is being put in more danger because of increasing inequality of income.
Terry, pretty sure I understood that. In fact, rereading your comment I can’t find anything I don’t agree with.
Given that the Republicans have seized power (vote rigging and gerrymandering mostly, but also some pretty sophisticated playing of the political game) and declared that Trump is king who can do no wrong by definition, we may be in for some very hard times indeed.
But short of that if we can just get the people to understand the they pay for their own Social Security… it is not the government’s right to cut benefits or change it in any way by yelling “bankrupt” “we can’t afford it”.
But people don’t think very clearly about money, especially future money, so it may be hard to explain this all to them. What’s tragic is that no one with a forum is trying.