WHAT THE TRUSTEES REPORT REALLY MEANS…REALLY “DOING THE MATH”
bu Dale Coberly
WHAT THE TRUSTEES REPORT REALLY MEANS
REALLY “DOING THE MATH”
[a few years ago the word “du jour” among journalists about SS was “it’s the math.” Of ourse none of them actually did the math.]
[note: i use the tax rate for each the worker and the employer because this is what the worker “sees” and it is what the employer sees. It is also the legally correct division. The Trustees Report usually combines the separate tax rates into one “combined” tax rate. So, where they say a 3% immediate and permanent increase, or an eventual increase of 4%, I say a 1.5% or 2% increase “each.” Debating which is “correct” is a waste of time: it is what it is.]
I wrote a recent post I called “What the Trustees Report Really says.” This post takes a little further look at the possible futures that can be mathematically deduced from the 2020 Report.
The 2020 Report says that Social Security is now not in “short range financial adequacy”. This means that ten years from now the Trust Fund will be less than the prudent reserve of one year’s full benefit payments. This is not an emergency, but it does mean the one tenth of one percent per year increase in the payroll tax, for each the worker and the employer, that would have avoided this projection will no longer work.
But even though it is now too late for the one tenth percent increase to avoid short term inadequacy, it is not too late for a two tenths percent raise in the tax per year to erase that short term inadequacy and keep SS solvent forever. This amounts to two dollars per week per year for the average worker making one thousand dollars per week. Wages are projected to rise ten dollars per week per year, and the tax increase does not go on forever. In fact in a very short time it will not be needed “per year” but only every other year, and then every third year, and then every fifth year year…pushing back the time the full 2% increase, that will otherwise be needed in 2035, to 2065.
Or, if we don’t act this year, a two tenth percent increase next year and the years after that will keep SS solvent forever.
Or, if we wait until 2030, a two tenths percent increase in the payroll tax per year will keep SS solvent forever.
Wait. What’s going on here: delaying the start of the gradual repair of SS actuarial solvency does not change the size of the per year tax increase that will be necessary?
Yes. What happens is the “per year” needs to be a litle more frequent in the later starts, and leaves the program in short range actuarial insolvency longer, without affecting it’s ultimate solvency or the ultimate tax rate needed to keep it solvent forever.
Finally, I did a calculation on the assumption that this year total wages for workers would fall 25% due to the coronavirus recession. Turned out that would have almost no effect at all if FICA was raised 0.2% “per year”. This result surprised me until I thought it through: The current Trust Fund is sufficient to see us through a few very bad years.That is what it is for. By gradually raising the payroll tax on those who are still working, the drain on the Trust Fund is slowed, and when the recession ends, the increasing tax will gradually restore the Trust Fund to full solvency, if we don’t panic from the “short range financial inadequacy” that we will have to live though for a few years.
But the biggest danger right now is the Trump payroll tax holiday, which the Democrats are “lukewarm” to. If they cut the payroll tax there is no law requiring them to replace the money. And if they get away with cutting it, they can probably get away with keeping it cut… until they can drown SS in the bathtub. At the very least they will call replacing the money lost to the tax cut “proof” that SS is a leading cause of budget deficits and the national debt.
I am relying on you to understand that two dollars per week per year is not a huge amount of money to pay for your eventual basic needs in retirement… which you will have to pay for one way or another. If you don’t understand that you are at the mercy of the politicians, Republican and Democrat, who do not have your interests at heart.
“which you will have to pay for one way or another”
There are a host of reasons why costs are increasing faster than receipts. The largest contributor is that we are living longer. “[T]he average worker making one thousand dollars per week” will need to put some of that increase into savings in order to be able to retire on their own terms. SS works for that average worker.
I agree wholeheartedly that Social Security is the most important remaining plank of the New Deal. I also agree that making it work is entirely workable. I wonder though that the most relevant question about Social Security is whether it is a far more reliable model for old age security than the private investment model had with IRAs, 401, and 457 accounts? Raised by two New Deal parents in a household where FDR’s name was sacred second only to Jesus Christ, then my answer is both inherited and rationally acquired from my understanding of math and capital markets. Lacking either of those insightful circumstances then other answers to that existential question might be plausible even if wrong. Perhaps economic conditions in the US over the next decade or two will lead more people to a better understanding of the volatility of capital investment markets, even if they get no better at math.
The second most relevant question regarding Social Security is how can it be made to work? Given the existential nature of social insurance to old age security absent the socialized family structure that existed before the industrial revolution displaced nearly all united family enterprise among any but the very wealthy, then there are countless possible answers to that when taken against the backdrop of “What are the alternatives?” If Social Security is state socialism then the family farm was family socialism.
Social Security has worked just fine for 80 years. All it needs is an honest Congress, and enough people who understand it to provide “herd immunity” afainst the Big Liars.
i think i have shown “how it can be made to work.” Simply let the workers continue to pay for it as they have for eighty years.
That will work forever… unless the Big Liars stampede us into “personal accounts” or the Left manages to “make the rich pay” until they won’t….which is what is happening to the “democratic socialism” retirement systems in the rest of the world.
Endless population growth in a finite world is a convenient assumption up to a point. We may have already passed that point.
Replacement rate for Europe and the US is down, China is up as well as India (last time I looked).
makes no differnce to SS as long as we last.
i will be out for the rest of the afternoon.
Yes, you have shown one way that SS can work within the context of your underlying assumptions. We all know what assumptions are. The general model of workers paying for their own benefits is perfect. The explicit model of personal accounts is terrible. An explicit model where work age cohorts pay their own way without intergenerational transfers on an ongoing basis has lower hurdles gaining support from younger voters and allows finite world solutions that fit to either a stable or declining population. To go from where we are to an age cohorts pay-go model would require a one time transfer and some adjustments to contributions as well.
If you want to compare programs, you must use assumptions. Coberly’s analysis uses the set provided by the Social Security Administration.
I believe Coberly describes SS as a cohort based system where each cohort (or even each worker) lends his contribution to the previous cohorts and gets it back when needed. When you talk about inter-generational transfer, I think you are trying to make better sense (to you) of the annual cash flow. If it helps you , fine, but I don’t think the inputs and outputs of the analysis spreadsheet change much.
I am more simple minded than that. People pay in to SS an amount which, given probable economic conditions and demographics up to the time they retire and the time after they retire, should provide a basic minimum retirement income.
Because the actuaries are pretty good at their job they have been telling it right for at least since 1983. At that time they predicted the need for the tax increase that I am calling for. Congress decided, reasonably, not to raise the tax before it would be needed. Congress may or may not have anticipated the political Lies that would make it hard to simply raise the tax as needed. The tax is always close to what an ordinary worker would need to save, expecting ordinary interest, for his future needs. Ordinary interest is provided through pay as you go financing in a growing economy.
What Ron gets wrong is he can’t free his mind entirely from the lies he has heard for the last fifty years, so he tries to fit what he “knows” with what he hears and it doesn’t work. certainly won’t work as well.
but i lose more friends trying to tell them that.
There are no intergeneratonal transfers, only the illusion of such for people who can’t follow the money, The boomers paid for their own retirement with the 1983 tax increase and the interest they earned from the larger than usual Trust Fund. The tax increase needed now is largely to pay for the longer life expectancy of the people who will be paying the larger tax.
The thing works like a well maintained Ferrari. Only trouble is the Congress drives with one foot on the brake and the other on the clutch, with the boss in the shotgun seat yelling turn here, stop, we’re all going to die. And the wife and kids in the back seat don’t say nothin.
in general it is foolish to omplain that one generation, or cohort, has it better or worse than another. Everyone faces hard times and injustice or unfairness in their lives. But it would be impossible to add up all the individual unearned gains and losses that fall to one genration or another.
There was the depression, WW2, the Red scare, Korea, Vietnam, various recessions and interest rate changes, and rises in the cost of bread, the sixties, the seventies… etc etc.. and anyone who worries over a few pennies difference in the payroll tax or benefit schedule is on the edge of a mental illness or what they used to call “sin”… the sin is envy, and it is always unwarranted. The Greeks liked to say “call no man fortunate until he is dead. Make the best of what comes your way and don’t worry about the other guy.. he has troubles you know not of.
The Bible (an old book sometimes wise whetehr you worship it or not) starts with Eve envying the gods who know good and evil…and finds evil. Cain envies Able… and it goes right on through, until Peter asks about John, the disciple Jesus loves, “what about him?” and Jesus said, “what is that to you? Follow thou ME.”
Didn’t mean to get into a sermon here, but really, I hate to see people crying beause some other cohort got the biggest piece of burfday cake…and they don’t even know if it’s true.
Thanks Arne and Coberly,
Nothing lost on me here. I have always been for preserving SS, whatever it takes. SS is effectively existential in our economic context. We do seem to have a problem consistently selling it though so I was just expressing what I have understood as the fracture lines. Truth is a wonderful thing, but perception is reality even if incorrect.
I am not sure that the perception of young people regarding Social Security is the same as those over 65.
The US annual population growth rate was down to 0.6% in 2018 while the world then was down to 1.1%. The really good news is that this global pandemic atop all else that has been structurally limiting to the global economy in this century has a high probability of keeping people feeling poor enough to continue to procreate less for many years in the future. So, I guess that the political and economic establishments really are looking out for our welfare after all :<)
What happens to GDP and interest rates when both population and standard of living decline? What effect would that have upon financial liabilities? Is a solution more robust if it only works under a certain set of assumptions drawn from recent past experience or if it works under any conceivably realistic set of assumptions drawn from awareness of risks as varied as the dot.com crash, 9/11, 2008, Covid-19, and anthropogenic climate change (either bigger disasters or serious abatement)?
OTOH, we can skip the risk of an asteroid strike because we know how that ends.
Coberly has this to say above:
“There are no intergeneratonal transfers,
only the illusion of such for people who
can’t follow the money”
• Social Security is an intergenerational transfer system: today’s workers help pay for current retirees’ and other beneficiaries’ benefits, not their own future benefits. There’s no account set aside with your name and contributions on it.
This is so basic. To get this wrong means one does not understand how SS works.
coberly: “but i lose more friends trying to tell them that”
krasting: “To get this wrong means one does not understand how SS works.”
I think coberly would lose fewer friends if he understood that you can see SS more than one way. Whether the funds go immediately to beneficiaries or are saved until needed does not effect the flows documented in any one year’s report. Either way can be meaningful.
Contrary to Krasting – you can understand SS (get the numbers right) without treating it as an inter-generational transfer system.
TF + Interest paying what is necessary each month?
What happens to GDP and interest rates when both population and standard of living decline?
Why on earth would that happen? If population is decreasing, people can choose the most productive work and standards of living will increase.
“TF + Interest paying what is necessary each month?”
Neither the benefits paid nor the taxes collected have anything to do with the size of the trust fund or with each other. That is the problem with the current program structure. It means that knowing the size of the TF does not change whether one or the other perspective is invalid.
Either way of looking at the issue of TF depletion requires making adjustments. The NW Plan contains “triggers” to fix the problem.
“…Why on earth would that happen? …”
[Exactly -Earth. Standard of living is stuff, not money. Money does not matter unless it can buy stuff. Anthropogenic climate change is going to change a lot of stuff, maybe not in my life (now 71) since I am running out of life before we run out of stuff. Sometime later in this century, currently guesstimated at mid-century, most of what we have long held as true about economics fades into the sunset.]