Dale Coberly discusses an article written by Andrew Biggs “No, Social Security Isn’t ‘Earned’,” WSJ
[Dear reader: this is very long. It had to be to refute all the claims made by the author of the WSJ op ed. You don’t have to read it if you don’t want to, or all of it, or all in one sitting. But I hope it will help you understand the truth about how Social Security works.]
I read an article the other day [December 8] in the Wall Street Journal by Andrew Biggs. The article caught my attention because I like to think I know something about Social Security and it seemed to me that Biggs was counting on his readers not knowing anything.
Biggs starts with this title line:
Biggs “No, Social Security Isn’t ‘Earned’”
Me This is what he wants you to believe and remember. It doesn’t matter to him that nothing he says actually makes a case for believing it. He knows that all he has to do is sound like he is making a case by repeating his assertion in different words and readers will not be too picky if it doesn’t fit together very well, or match any actual facts about how SS works. The reader will take his word for it and go home believing that “workers don’t earn their Social Security”
Biggs “Promised benefits are far in excess of lifetime payroll taxes. That’s a compelling case for reform…”
Me No, this is not a case at all: it is an assertion.This is not a fact. In fact it is not true. He never tells you what “far in excess” means or why it “makes a compelling case,” or how Social Security benefits are related to.lifetime payroll taxes. Or why it was designed that way. Or why it has worked for over eighty years, paying everyone the benefits they paid for, without getting money from anyone except the people who parid for them.
Social Security works much like an ordinary bank plus an ordinary insurance policy. Workers save a reasonable part of their wages by means of a deduction from each paycheck. The size of the deduction, called “the payroll tax,” is calculated to be enough to provide a basic income when the worker retires or becomes disabled. It is not like ordinary taxes: the money does not go into a government black hole; It goes into a savings account with your name on it and earns interest until by the time you need it, it is enough to pay for your basic needs in retirement. The “interest,” just like with an ordinary bank savings account or other investment, comes from growth in the economy. The bank, or company you invest in, takes your money and lends it to smeone who builds something..a house, or a business..which creates value and adds its bit to the economy. The difference is that with Social Security the “company” you are investing in is “the United States of America.”
So, yes, you will get back more in benefits than you paid in via the payroll tax. But no one says that you “did not earn” the interest you collect from a bank, or the profit you get from a stock.
But Social Security is also insurance. If you don’t make enough money over a lifetime to save enough via the payroll tax, SS will add enough to your benefits to pay for a basic retirement. This extra comes from the “insurance premium” designed into the payroll tax. Ultimately this premium is paid by those whose lifetime pay is high enough so that, with the interest that Social Security pays they would get more than enough. Just like with fire insurance, if you have the fire you will get a higher “return” on your money than the person who does not have a fire. Most people still think it’s better not to have the fire.
Those who have higher incomes pay more in Social Security than those who have lower incomes. They also get back higher returns than those with lower lifetime incomes, The “insurance” comes from those who ended up rich getting a lower percent return on the money they paid in. They still get back all of what they paid in adjusted for inflation plus a small real interest. Even large businesses park some of their money in low-interest bonds because they value the security more than potentially higher returns. Or they buy insurance for the same reason.
So, yes, you get more back than you paid in, but you paid for the insurance. And in the aggregate all the workers together pay for the benefits they get including the insurance . But no one says that someone who collects on an insurance policy “did not pay for it.”
But something else is going on in Bigg’s mind. We will get to it later,.but just to note it here, he is actually comparing the benefits you will get IF “promised benefits” are paid in the future EVEN IF taxes are not raised to meet the need caused by demographic changes.
That raise in the taxes will be needed mostly because the people now paying the tax are going to live longer than preceding generations. It costs more money to live longer. The needed increase in the tax is small (about 2% of pay for the average worker), AND you get the money back, with interest, when you can no longer work. But Biggs does not talk about that.
[In another articlle, Biggs would say that the “present value” of your benefit is LESS than the “present value” of what you paid for it in taxes. But the present value of a certain number of dollars in the future is always less than the same number of dollars in the present…you can put a smaller amount of money in the bank today to get a larger amount of money in the future due to the interst that money earns. Present value is useful in comparing investments. But most of us do not have the luxury of putting thousands of dollars into a bank today so the magic of compund interest will turn it into enough (more) money to pay for our groceries when we can no longer work. SS actually can do that for us. My point here is that Biggs can talk it both ways, and does, to suit his own purposes at the time. Kind of a “present value” view of the truth.
So, yes, if Congress won’t let you pay for what you will need, but somehow “promised” benefits will be paid, you would get more than you paid for. But I wouldn’t count on Congress paying for those benefits.
Social Security was built on the idea that workers can pay for their own future needs if only the government protects their savings from bad things that can happen in the market place. It was designed to be worker paid, not welfare, so the workers would own their own benefits and not have to depend on the generosity of “the rich” or “the politicians.”
I am a great believer in the free market. SS does not abolish the market; it just creates a new kind of investment —government protected but not government paid-for—that ordinary workers can trust their savings to.
Experience has shown that despite the claims of some politicians, the free market cannot provide a suficient level of protection for the workers. It’s like giving people the “freedom” to drive any way they want without traffic laws.
Experience has shown that without traffic laws and mandatory insurance, those people who think they are better drivers than everyone else will have accidents that the rest of us end up paying for. Social Security is necesary because we do not know in advance who will end up poor. With Social Security instead of welfare, at least those who do end up poor will have paid for most of their needs, instead of leaving the rest of us to pay for their needs or learn to avert our eyes while they starve. That would be bad for the economy.
[It may be worth noting that with traffic laws, people end up taking less time to get where they are going than they would by speeding on unregulated roads. The same is true for the economy: everyone gets richer than they would with unregulated markets, Similarly, with Social Security the economy grows faster, and the rich get richer than they would without it.]
Biggs “Joe Biden and Donald Trump have something in common: Neither wants to touch Social Security..The program’s benefits “belong to the American People,” Mr. Biden said in February. “They earned them.” A month later Mr Trump said: “We’re going to take care of our Social Security—people have earned that.”
Both men have used the programas a cudgel against political opponents who have supported reining in benefits to balance the program’s troubled finances.”…”
Me This is shameless. Mr Biggs wants you to think that if two politicians who don’t like each other agree that Social Security belongs to the American people “because they earned them,” this somehow proves that the people have not earned them. Apparently defending a popular program that the people pay for themselves is “using a cudgel” against those wise men who want to “rein in benefits” to “balance” the program’s “troubled” finances.
Not a word about raising the amount of money people need to save for their future needs. Just cut the benefits: The program will be “balanced. The people will starve, but the program will be balanced. After all, no one would think of spending more on groceries just because the cost of bread has gone up.
The cost of raising taxes to meet your future needs would be about 2% of payroll. The cost of cutting benefits would be 25% of your entire, already minimal, income in retirement. Back in the day, when Biggs was a commisioner at SSA, the Trustees Report said that the “actuarial deficit” [not a debt] would require either a 25% cut in benefits or a 33% increase in taxes. This was either very bad mathematics or a sneaky lie.
The tax increase would be 33% of a 6% tax: that is a 2% tax when you do the math honestly. I don’t know what Biggs had to do with reporting the choice that way, but after he was no longer a commisioner, the Trustees stopped reporting the misleading comparison and reported the honest numbers.
The cost of saving enough to be sure you will have enough to eat when you are old is going to go up two percent (of your present wages), because you are going to be living longer and will need to buy more bread for all those extra days. Meanwhile your real wages will go up about twenty percent by the time you need to start paying that two percent extra tax, and will continue to go up while the tax will not need to go up further than that two percent. This means that even with the increased tax you will have more money in your pocket after paying the tax than you do today. And you will get the money back, paying for your needs over a longer life expectancy.
Biggs “The same goes for Medicare…” [he is referring to Biden and Trump cudgeling those wise men who want to save the country by cutting the benefits you paid for.]
Me Actually, it doesn’t. Medicare is a very different problem than Social Security. The problem with Medicare is that the cost of medical care in America is about twice as high as in the rest of the world. This is because “the market” cannot control prices in a pay or die situation without some government reguation. Of course the people who are making the big money don’t want to be regulated, and right now they own the Congress. Cutting Medicare benefits “to balance the program’s troubled finances” would mean that poor and middle class people would die and the rich would get richer.
[Something else worth thinking about perhaps: It may be true that most people will still pay for the benefits they get. Much of the cost of Medicare goes to pay for a relatively small number of people who need very expensive medical treatment. This does not mean we should stop treating those people. After all, we do not know who will get very sick. But it does qualify somewhat Bigg’s “people don’t pay for their benefits.”
Biggs “…which the progressive group Social Security w
Works has described as “an EARNED benefit,” adding that “anyone who proposes cuts to this program is reaching into your pockets and stealing from you” Yet the numbers tell a different story…”
ME actually they don’t. People pay a tax for Medicare…2.9 percent of their income. That tax guarantees them medical care when they are over sixty five. Without Medicare they would be forced onto private insurance which costs about 10% of their income and will pay nothing for their medical care when they are old, at higher risk, and with not enough income to pay the higher premiums.
[note: i use the worker’s share of the SS payroll tax because that’s the part of it they see. Some people think I should use the “combined” share (which is what self-employed people pay). They have a point, but it introduces a complication which has no real effect on the argument. I use the “combined” cost of Medicare because Medicare finances have been so messed up by partial privatization and “make the rich pay” politics that i think it’s a better measure of “what the people pay.” In the end it doesn’t really change the reality of the costs vs benefits argument.]
Biggs “…The Congressional Budget Office and Social Security Administration both find that most Americans are promised Social Security Benefits substantially exceeding the taxes they’ll pay over their lifetimes, In other words, the benefits are neither earned nor paid for.
Me And yet …Social Security has paid benefits to everyone who has paid in for over eighty years without getting money from any other source than the payroll tax paid by the people who get the benefits. And Medicare is insurance, so it’s not clear to me how you parse “paid for” among those who actually collect the benefits and those who “just” paid for the insurance but never need to collect the benefits. Meanwhile the alternative is to cut benefits and throw people onto the private market which is where the high prices are coming from, and benefits are often not paid because of the fine print.
Biggs “… This ought to lead policy makers to consider fiscally prudent and generationally fair reforms, rather than force younger Americans to fund benefits that older Americans claim to have earned but haven’t fully paid for.”
Me Yes, because as we all know younger Americans will never become older Americans, so it is so unfair to make them pay in advance, while they have incomes, for what they will need when they have no incomes.
Talk about “fiscally prudent”. “Fiscally prudent” means to the people who pay Biggs’ salary, “we get the money.” They don’t pay workers enough so they can pay for their own needs. And if they can’t pay they can do without. That will teach them character. Meanwhile Biggs is claiming he has proved that “older Americans haven’t fully paid for” He hasn’t proved anything. He has waved his arms and talked fast, but he hasn’t come close to proving anything. He does hope you won’t notice that. He wants “the young” to believe “the old” are robbing them. “I know all that, Mom, but what have you done for me lately?”
You fool yourself with the illusion that “the young sre paying for the old.”
You don’t say the young are paying for the old when you go to the bankto dake money out of your savings account, and the bank gets the actual cash it uses to pay you your money from the person who paid INTO his own savings account the same day.
BIGGS “Social Security and Medicare were designed to be viewed as contributory social-insurance programs, not welfare, even though both redistribute money significantly from rich to poor. Over the years,politicians have portrayed their payouts as “earned benfits” that seniors receive via working and paying into the programs….”
Me Yes they were designed that way and they have worked that way for over eighty years for SS and sixty years for Medicare, and “politicians” have portrayed them that way. And we all know that “politicians” lie, so that proves they are NOT that way. We know this because Biggs has already said he has “proved” that they are not.
And yes they do redistrbute some money from rich to poor…but I am not sure what “significantly” means, or whether it is a bad thing. The rich do not pay for more than they get from Social Security. They get insurance in case they do not stay rich, and even if they do stay rich, they get back everything they paid in, adjusted for inflation and a level of real return they might get from a “safe” investment. What they do not get is the level or return they might have gotten from riskier investments. Nor do they get the insurance benefit that Social Security provides for the very poor. ..unless they stop being rich by the time they have to retire, The rich regard “the employers’ share of the SS tax as “their money” even though when it is convenient they tell us that it is “really” our money, because if they didn’t have to pay it, they would, of course, give it to us in the form of higher pay. They say this when they want us to believe that Social Security does not pay us a fair return on our money…or at least not as much as if we put it into riskier investments, which for a small fee they would manage for us. What they say among themselves is a little different: they regard the WHOLE SS tax as theirs…the workers’ share as well as the employer’s…after all, it is their name on the check. Low income workers know what the chances are of getting any of that money if the government did not require that bosses pay the tax.
Biggs “…This framing was no accident. President Franklin D. Roosevelt said that funding Social Security with a dedicated tax was “politics all the way through.” “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions,” he added. “With those taxes in there, no damn politician can ever scrap my Social Security program.” “
Me And this is what’s ugly. Biggs is telling the truth here as if it were a bad thing. “politics all the way through” must be a bad thing, right? no politician would ever think of scrapping Social Security if the workers didn’t pay for it themselves, would they?
It’s like saying, “FDR pulled a cheap political trick by making the workers pay for their Social Security benefits themselves, so that I have to put a stain on my soul by claiming they don’t in order to save America from fiscal irresponsibility. And they really don’t pay for it themselves if you look at it just right.”
Biggs “…But consider some numbers. The Congressional Budget Office projects that when the Social Security trust funds are exhausted in 2032, benefits will have to be cut by around 25%. It likewise projects that the average American retiring in the 2030s is promised lifetime benefits 37% above the taxes he paid over his career, including interest.”
Me Why let a good lie go to waste: 37% of taxes above what he paid is 2% of his income while he was working. while 25% of benefits is 25% of what you need to live on when you can no longer work. And here Biggs is admitting that if the worker paid 2% more of his income while working he will have paid for ALL of the benefits he will get. Again, he is saying that IF Congress does not raise the tax AND IF they pay “promised” benefits, the workers WILL not have paid for his benefits. Compare this to what he started out saying: “No, Social Security Isn’t ‘Earned’”
Dear Reader, I hope you can tell the difference.
Biggs “The Social Security Administration’s actuaries reach similar conclusions..”
Me…So do I [the actuaries agree with me]. But I understand what they mean. Biggs is hoping you won’t: Raise the payroll tax enough to cover the increased costs of living longer. The workers will still need to pay enough taxes to pay for their benefits. Even if there were no Social Security at all, that is how much they would have to pay in advance (more if they waited until they actually needed it, forgoing the interest that Biggs hopes you will think they “don’t pay for”). The difference is that with Social Security they can be sure the money will be there. Without SS they would have to depend on luck or the charity of Congress and the rich.
Biggs…”Even letting Social Security go insolvent—which no one is proposing…”
Me No, they are proposing cutting benefits, keeping Social Security solvent at a level that makes it worthless as retirement savings or insurance: “We saved the program…the people are starving, but we saved the program.”
Biggs “…would result in most retirees receiving more or less the benefits they paid for.”
Me…he is saying that keeping taxes where they are and keeping benefits where they are [which is 25% less than what they will need] would mean the workers are getting the benefits they paid for…which means they are paying for the benefits they are getting now. Which is the opposite of what he said when he started.
Biggs “The disparity for Medicare is even greater. C.Eugere Steuerle and Karen Smith of the Urban Institute calculate that a middle income couple retiring in 2035 will be eligible for lifetime Medicare benefits that exceed their taxes and premiums by $644,000.”
Me note that this couple has paid taxes at the low level before 2035 and will be getting benefits.when medical care is projected to be a lot more expensive. It is not clear what “eligible” means, or if all the people paying the tax will need all the medical care for which they are “eligible.”
Because most people can’t understand the difference between “I paid in advance for my benefits,” and “by paying in advance for my beneifts I am “paying for” the benefits people who paid in advance yesterday will need today” It is likely the people paying the higher tax needed to pay these benefits…will not realize that health care will likely be more expensive for each generation in turn, meaning they will pay more than the preceding generation, but they will be paying less for their own future needs than they would by waiting until they were old to pay for them They will benefit from the generation following them paying in advance for their own needs in advance. This is not a Ponzi scheme, it is a beautiful financial instument that saves you money by saving your money. The supply of “new investors is infinite as long as people need the same security and understand how it works.
This is not a bad thing in principle: paying for what you will need over a longer period of time, while you still have income, is a good idea. If prices keep going up, the tax will need to keep going up…with each generation enjoying more expensive medical care “than they paid for.” The only difficulty with this argument is that most people can’t understand the difference between “paying for” yourself in advance and “paying for” some old person they don’t care about. .
There is another problem of course: Medical care is more expensive than it should be. And may become more expensive than workers can pay for even with Medicare. I don’t know what the answer to that will have to be, but I am sure it will not be “cut Medicare.”
As for Steurele and Smith, I do not know how they “calculated” their result, but given the number of unknowns and ifs, not to mention the way people like Biggs calculate their results, I would not have too much faith that their numbers mean anything.
Biggs “It isn’t as if Americans weren’t warned..”
Me No people have been shouting it into their ears since 1935 at least…when there was some excuse for believing it, and especially since 1983 when there isn’t.
Biggs “In 1999 President Bill Clinton said that “by 2032, the trust fund will be exhausted and Social Security wil be unable to pay the full benefits older Americans have been promised.” Had Congress gradually increased the Social Security payroll tax to maintain the program’s long term solvency I estimate a middle-wage worker retiring in the mid 30’s would have paid an additional $123,000 over his career. That worker’s lifetime beneits would approximately match the taxes he paid, making his benefits truly earned
and paid for.”
Me I don’t know how Biggs calculated this…but SS did not need the worker to pay the extra tax at that time. The current benefits were fully paid for by the current tax. Biggs seems not to have heard of the “time value of money” or the “effective interest” that comes automatically from pay-as-you-go financing. Here, he is admitting that raising the tax will fully pay for the benefits.. His”plan” would make Social Security a truly bad deal indeed: “Give us your money now and we will give it back to you with zero interest after forty years.” It bothers him that the “following generation” will pay the interest out of their higher incomes, despite the fact that they will get the same good deal in their turn. He does not seem to understand that ALL investment interest and profit is paid for by “the following generation.” It doesn’t really matter if you say the worker paid in advance for his own benefits, or the “young pay for the old”…except morally. Financially it is exactly the same thing. Fine with me if the young think of it as paying for their parents’ old age (in love and gratitude for the parent’s investment in them…including building the infrastructure that enables them to make more money than their parents did), or if you think of it as the workers paying in advance for their own old age. It’s exactly the same thing. Been going on for about a hundred thousand years. Unless you are insisting on the first way of thinking about it in order to make the “young” feel like they are being cheated…or make the “old” feel like they are robbing their children.
Biggs “Yet those tax increases never happened because Americans preferred not to pay them and politicians preferred to get re-elected.”
Me I have been trying to avoid the word, but this is a bald faced lie.
The people, when asked, have said they prefer a tax increase to a benefit cut. But Bush said to his Social Security commission “Everything is on the table except a tax increase.” Benefit cuts, privatization, increase the retirement age, cut cost of living increases, …. but do not raise taxes even gradually so the people who pay the increased tax will pay it out of an increased income,which is the only thing that will fix the problem and actually “save Social Security.” Obama offered a stealth benefit cut…”don’t give them a cost of living increase. By the time they know what hit them they won’t remember where it came from.” As we speak, there are mumbles coming from the White House “we will need to compromise…”. And the other candidate is known for keeping his promises, right?
Biggs “Today those same Americans, and the politicians who seek their favor, insist benefits can’t be cut because American “earned” them.”
Me As they surely did, despite Biggs assertions to the contrary. The trouble with those who don’t want to cut benefits is they don’t want to increase the payroll tax either, not even by the gradual “dollar per week per year” that is all that it would take. Instead they want to “make the rich pay their fair share [which they already do…unless your idea of “fair” is that “he makes more money than i do so he should pay for my suppers for twenty years.” This is just as sure a way to destroy Social Security as Biggs’ benefit cut. It turns Social Security into welfare which the rich will know how to kill at their leisure.
Biggs “The debate over whether to fix entitlements through tax increases or benefit reductions has never been settled.”
Me Because it’s never been had, “Everything is on the table except tax increases.” Remember? NO one in Washington ever mentions a tax increase, not Republicans. Not Democrats. Not non partisan experts. Not journalists…No one except the actuaries, but who listens to them?
Biggs “But Americans retiring in the same decade in which Social Security will become insolvent are promised benefits far in excess of their lifetime taxes.
Me Yes. people retiring at the exact time the tax will need to be increased but somehow getting “promised” benefits would get more than they paid for. But don’t count on those promises. Biggs’ friends, and they are powerful, want to cut benefits, and the best way to do that is to not raise the tax the tiny amount it would take to pay for them. [yes, tiny. you are not going to miss 2% of your income, especially if you remember you will get the money back with interest when you need it most. You would especially not miss it if the tax were raised one tenth of one percent at a time each year while incomes are growing a real one full percent per year.
Biggs “This reasonably counsels in favor of reducing benefits for those able to absorb the loss. Benefits shouldn’t and needn;t be cut for seniors who rely most heavily on Social Security…”
Me Oh, so now he wants to sound reasonable. Instead of people getting more than they paid for, now he wants the rich to get less than they paid for. How long does he think the rich would put up with that? He would turn Social Security into welfare…where you would have to prove you weren’t “rich” in order to collect more than you paid for… which is what Biggs started this essay by being against. Well, who needs to be consistent when you are just trying to rile the masses into acting against their own best interests?
Biggs “But many current retirees—some of the richest in U.S. history and among the richest in the world— are slated to receive hundreds of thousands of dollars they don’t need and didn’t pay for.”
Me actually they did pay for them. They pay more into Social Security than the poor, and they get less out as a percent of what they paid in. The difference is what enables SS to pay an insurance benefit to those too poor to have paid in enough to get enough benefits to cover their basic needs. The amount of benefits “the rich” receive,“hundreds of thousands of dollars,” over twenty years amounts to about 30,000 a year [and they paid in about 15000 per year over 40 years]. Enough to live on if they stopped being rich at the end of their career, but not enough to make a percievable difference in the cost of Social Security. But Biggs isn’t being serious here. He is just trying to establish his credentials as one not in favor of “giving the rich money they don’t need” It sounds so right, so obvious, so moral, so reasonable in Progressive circles. “Why should I pay taxes to give money to the rich?” Relax, kid. you don’t.
Biggs “Advancing this argument will take courage…”
Me Yes, It must take a lot of courage to stand up in front of the country and propose something that will harm millions of people…even cause many of them to die from “lack of benefits” by claiming “they did not eaarn them” in spite of the fact that they paid the “tax” that was designed to make sure they did not face old age or disabilitty in grinding poverty. The fact is that Social Security has never taken money from anywhere or anyone but the future beneficiares and saved that money for them with interest derived from the growth of the economy that they contributed to throughout their working lives.
Biggs “Yet without it the moral framing of entitlement benefits as earned and paid for will forestall reforms necessary to ensure the government’s long-term fiscal viability.
Me The fact is that Social Security…the benficiaries…do not take any money from “the government.” The workers pay into a program that manages their money and returns it to them with interest when they need it to pay for their needs in retirement or because of disability. Social Security contributes NOTHING to the Nationa Debt.
The only threat to “the government’s long term fiscal viability” is the people who pay Bigg’s salary, who demand services from the government and then demand tax cuts so they don’t have to pay for them, while lying about Social Security , saying it is the leading driver of the government debt.
Meanwhile, I am not sure if Biggs is advocating “moral framing,” or complaing about moral framing…that is, being honest and keeping promises we made to people who paid for their own benefits.