DAMNED LIARS AND SOCIAL SECURITY
by Dale Coberly
DAMNED LIARS
AND SOCIAL SECURITY
There are liars, damned liars, and “non partisan experts.” The non partisan experts are expert liars, “non partisan” because that’s the best lie of all. A damned liar need not be an expert, but he is usually pretty clever at mixing “true” facts, or at least “facts you can’t prove are not true,” with false implications that lead the people he wants to deceive into hurting themselves with false conclusions. Those false conclusions are ideally tied to other ideas that the mark really, really wants to believe, so he is never really able to let go of the lie he has been taught.
Robert J. Samuelson is not an expert, but he gets all his “facts” from them pre-twisted and designed to mislead. He published a pretty good example of the art of deception on Easter Sunday in the Washington Post.
Good enough, in fact, that when I started to deconstruct the lies for this post, I soon saw that I was in for a long job.. one too long to expect readers to put up with. So I will have to content myself, and you, dear reader, with “pointing at” the truth and leave you to decide for yourself how far you want to go to understand it for yourself.
Samuelson begins by claiming that FDR would not approve of Social Security today because it has become “the dole” that Roosevelt tried to avoid. His argument is entirely fallacious. And, as it turns out, he is telling these lies in order to encourage us to change Social Security so that it BECOMES the dole. One can’t be sure that Samuelson recognizes this himself. A career of telling lies for money must do terrible things to a man’s brain.
Samuelson is very confused… or wants you to be confused… about the differences between “pay as you go” and “the dole” and “contributory” pension plans.
He gets the history of the development of the Social Security idea exactly backwards. For a clearer understanding of that history I recommend “The Battle to Save Social Security,” by Nancy Altman.
But rather than get lost in the mazes of Samuelson’s mind, I will attempt to describe the development of “pay as you go,” not as a “plan” but as a fact on the ground. Let us begin by examining one of Samuelson’s lies… a very familiar one:
But now, demographics are unfriendly. In 1960, there were five workers per recipient; today, there are three, and by 2025 the ratio will approach two. Roosevelt’s fear has materialized. Paying all benefits requires higher taxes, cuts in other programs or large deficits.
This is intended to deceive. The ratio of workers to retirees will not cause large deficits or cuts in other programs, or higher taxes. The reason the ratio has changed over the years is mostly due to the arithmetic of phasing in a pay as you go plan.
Suppose there is a great nation in which workers have been working and saving for their future retirement by putting some of their earnings into bank accounts or into stocks and bonds. Then suppose that a great catastrophe comes to that nation and wipes out the savings. The older workers have lost the most..they had the most savings to lose. But even younger workers can now understand that their own future savings will be at risk of being lost just as the older workers have lost theirs.
The workers come up with a way to “insure” their savings. They agree to join a retirement insurance pool with a “pay as you go” financing plan. Every worker will contribute a small part of his weekly pay to a fund that will pay for the “benefits” of those who retire.
Suppose there are forty million workers. A million aged 64, a million aged 63, and so on down to a million aged 26 and a million aged 25. The first year there are forty million workers and zero retirees. The ratio of workers to retirees is 40 to zero. The next year the million 64 year olds turn 65 and retire. The 25 year olds turn 26… and a million new workers turn 25 and begin paying the “tax.” Now there are forty million workers and one million retirees. The ratio of workers to retirees is now 40 to 1. The next year another million workers will retire, and a million new workers will come in at age 25. Now there will be forty million workers and two million retirees.. the ratio of workers to retirees is now 40 to 2. And so on. But not forever. Because eventually some of the retirees will die, and eventually the number of retirees who die will be equal to the number of people who retire each year, so the ratio of workers to retirees will stabilize according to the life expectancy of retirees. If that life expectancy is about 12 years, the ratio of workers to retirees will stabilize at about 3 to 1. Note here that the ratio of workers to retirees is the same as the ratio of working years to retirement years for each worker (on average).
The workers designing our retirement insurance plan know this. They know that the early retirees will collect more in benefits than they paid in. But they decide that this is fair; in fact it is exactly what is needed: Those who will retire soon are those who have lost the most savings in the recent disaster, and have the least time to recover by saving up enough under a “contributory” financing plan. The workers also know that those older workers contributed to the previous system: a combination of welfare and old fashioned “honor your father and your mother” care of their own parents. The workers also know the older workers cared for them when they were younger and built the infrastructure by which they are able to make money at all. They “paid for” their retirement, even though the money did not go into the current plan. The workers understand that by ‘grandfathering in” the older workers they are merely doing the fair and honorable thing of providing a transition from the previous, failed, plan to the new, better, plan.
The workers also know that the younger workers will not be hurt by “paying for” the older workers. The younger workers will eventually pay the full cost of their own retirement. They will not have to pay “more” because part of that money was used to pay for those who went before them. This is one of the beauties of “pay as you go” : As long as new workers will need the same insurance, they will join the pool and their contributions will pay directly for the retirement of the older workers. But the new workers won’t lose anything by that because their own retirement will be paid for by the newer workers coming into the system.
This is not a Ponzi scheme. The workers ALL get what they are paying for, and they will keep coming into the system as long as they need a way to insure their own retirement.
The current ratio is near 3 to 1 and is expected to go to near 2 to 1. But this is not a catastrophe. The current payroll tax is about 6%. If 3 workers paying 6% of their pay can “support” one retiree. Two workers would need to pay about 9% of their pay to support one retiree. Or, and this is a better way to think of it, each worker would need to pay 6% to pay for a life expectancy of 12 years. If he expects to live 20 years, he will need to pay about 9%. This may look expensive to you until you realize it is exactly the amount of money you would need to save for twenty years of retirement whether there was Social Security or not. While it’s true you “might” do better on the stock market, it is also true you might do a whole lot worse. And having less than you need is much, much more painful than having more than you need is pleasurable.
The numbers are actually a little better than this, and it will take a long time to reach that 2:1 ratio, if ever. And if you read the Trustees Report… if you read it very carefully… it shows that under their predictions… including the increase in life expectancy and the reduced ratio of workers to retirees…the payroll tax would only have to be raised to just over 8% for the worker.
Moreover the need for the raise will be so gradual that it can be met by raising the tax an average of one half of one tenth of one percent per year while wages are going up over a full percent per year. This means that a tax increase of about forty cents per week each year, while wages are going up about eight dollars per week each year, would enable workers to continue to pay for their own retirement, as they always have, and would have TWICE AS MUCH MONEY in their pockets AFTER paying for their longer retirement as they have today.
This preserves the INSURANCE nature of Social Security. It will add NOTHING to “the deficit,” and it means YOU will get to collect YOUR money when the time comes without welfare “means testing.” having to beg the rich man to pay for it, benefit cuts, or increase in the retirement age…which you will not like, whatever you think while you are young.
If you read the Samuelson editorial, it is important to keep in mind that what Samuelson means by “contributory” is you “invest” in stocks and hope for the best while you build up your savings… exactly the plan that failed and led to the need for Social Security in the first place. There is nothing wrong with investing, but Social Security provides you with insurance “in case” you don’t do as well as you hoped. As the ad says, “priceless.”
You also need to keep in mind that Social Security contributes NOTHING to the deficit. It is NOT welfare. It is paid for entirely by the workers who will get the benefits. Social Security has NOTHING to do with “why America’s budget problems are so intractable.” That problem is caused by deficit spending to pay for arms buildups, actual wars, and recessions caused by the big money gambling schemes… that Samuelson’s friends want you to play with them.
Samuelson seems confused about “pay as you go.” He does not understand money at all. He thinks that if “your money” is used to pay the benefits of someone already retired that you have “lost” your money. But this is no more true than you have lost your money because when you put it in the bank, the bank gives it to someone else to use while waiting for you to ask for it back.
Samuelson cites Sylvester Schieber. I have not read Schieber’s new book. But his “The Real Deal” was a collection of clever lies. Schieber qualifies as a “non partisan expert.”
Samuelson says “Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits…” This is a lie. There is nothing false about the segregation. It is the law. Your payroll taxes pay for your benefits. No other taxes pay for your benefits, and your taxes cannot be used for any other reason. They do not contribute to “the deficit” in any way.
Samuelson seems to think that the fact that you receive more in benefits than you paid for… “even assuming (again, fictitiously) that they had been invested” is an argument AGAINST Social Security. It looks to me like an argument FOR it. You get more in benefits than you paid in, because the benefits are paid for out of taxes on incomes that increase over time, even when the tax rate does not. This IS an investment. It is an investment in the growth of a “corporation” called The United States of America.
Samuelson is conflating Social Security with Medicare. The growth in medical costs predicted over the next century will require that the Medicare tax be increased, or that medical costs be brought down. But cutting Medicare will not lower medical costs, and it’s a pretty stupid idea to cut your insurance because you expect your medical costs to increase.
Finally, Samuelson, after saying that Roosevelt would hate Social Security today because it is “the dole,” a statement that is a lie, calls for us to ask “who among the elderly need benefits?” because he thinks we need to turn Social Security into a needs based welfare program… the “dole.”
As I said, when a man chooses to tell lies for a living, it must do terrible things to his brain.
Social Security is an “entitlement” because YOU HAVE PAID FOR IT. Don’t let the liars confuse you. It does not need to be “fixed.” All of the “fixes” on the table are stealth plans to destroy it. They want your money for their gambling games, and they hate the idea of workers having the security to EVER be able to say, “I have enough. Now I want to retire and do something with my remaining years better than working for the boss.”
Really, how would a non- paygo system even work? If the government took people’s contributions, printed up dollars, and stored them until the money was needed would that make ANY difference? We live longer and have fewer kids than our grandparents. The demographics of this mean that we’re going to be consuming more depends, golf memberships, and nursing home beds per capita. And that change is going to occur NO MATTER WHAT accounting method we use to keep track of it. As you’ve pointe out, the difference IS affordable.
Investing people’s SS contributions in the stock market is such an obviously bad idea that I have to assume than anybody advocating it anticipates getting a cut of the ginormous fees generated. There are already numberous ways that the government encourages people to invest as a way to fund their retirement. And for good reason: that can make a difference between a comfortable retirement and scrimping and saving. But SS is supposed to be there to make the difference between scrimping and saving vs eating cat food and living in a poor house. Putting THAT at risk is a bad idea.
“The growth in medical costs predicted over the next century will require that the Medicare tax be increased, or that medical costs be brought down.”
There is a third possibility. The GDP could rise so that medical costs are a stable and acceptable percentage of GDP. We have already experienced this phenomenon in the 1990s. Our medical costs were higher than other developed countries, thanks to their rise in the 1980s. (In 1980 our costs were on par with them, as a percentage of GDP.) But they were stable with regard to GDP. IOW, we could afford them, and they were not spiraling out of control.
Add on Productivity Gains and higher incomes . .
Thanks Min
I could have said “rate of increase brought down” but like i said it gets too complicated to say all in one mouthful.
I think the only hope is some kind of European style health care… they seem to be able to control costs at about half the level of the current American system.
But at the end of the day if we are going to want the health care, we are going to have to pay for it.
The “rich” are fine with paying for their own. They don’t want to pay for yours. I would suggest that in the long run it is going to be best for us to pay for our own. It can be done.
Jim
Well said. I have yet to see an argument against the notion of SS that gets to the point of who would benefit in the absence of social insurance. We know that Pete Peterson has spent a billion tax-deductible dollars trying to convince people that SS is a fraud upon the people and, incidentally, a rotten scheme to keep all that money out of the hands of noble, self-sacrificing bond market investors like him. Something tells me that he wouldn’t have spent all that money if he didn’t expect to get it back, with interest, when we all rush to privatize our public retirement system.
The recent Great Recession has done the middle and working class people of this country no favors. When I hear Samuelson talking about ROI in 1940 versus now, I know I am listening to a sales pitch for a get-rich scheme. Something about the pitch tells me the person who’d be getting rich sure wouldn’t be me. NancyO
Nancy
it might be worth noting that those early retirees who got the high “return on investment” from Social Security had gotten about a zero return on their prior investments in the “contributory” plan that Samuelson wants to bring back while killing SS.
SS is insurance. Like all insurance, you will get a higher “roi” if you have the fire than if you don’t.
There are “experts”, not all of them bad, who can’t understand this. They keep thinking of SS as an “investment plan” and compare the “roi” to the “roi” on a magic investment in a magic bank with a magic interest rate and magically zero risks. This is the “present value” computation. Trouble is there is no such bank, no such guaranteed interest, no “zero risk” investment. Social Security was invented to take the risks out of at least basic savings for a basic retirement.
It won’t make you rich. But some days just having enough to eat is worth all the gold in Fort Knox.
that zero return is not 0% interest. it’s zero. nothing.
“but can’t i at least get my own money back?”
no. the man you bought the stocks from has the money.
Not going to happen, because medicare and medicaid are fundamentally broken – completely mismanged with no outcomes based strategy. As boomers bubble through the next decade it will be a disaster. The positive side, is that it will be such a disaster, we will be forced to fix it. Most of the problems will come from medicaid, as health costs bankrupt many seniors into that system – my parents are about a year away.
Let me give one such example that I have now experienced 4 times so far in 2012. My parents both have dementia. One severely, to where she cannot feed herself or even go to the bathroom by herself. The other is functional for now, but failing quickly. They are both in assisted living – well one still is.
Here comes the rub. Medicare is not synched up with the assisted living care (which we pay for privately). Mom’s dementia causes combativeness, and other situations that fall into a regulatory black hole of stupidity. The second she becomes combative, the AL facility ships her to geriatric psych on medicare’s dime. Very expensive 14 day stay. She goes back to AL, repeat, lather and rinse. Why do they do this? Simple, state regulations require it, even though they could easily deal with her in AL. I could go on about numerous other senseless regulations created in the name of”patient safety” (in other words, AL does not want the liability).
Why wouldn’t medicare be setting things up to keep people in AL, and have certain things managed there with limits on liability at a much lower cost. I would be fine wioth that tradeoff, becuase the hospital stays have been tortuous for my parents – and have done no good. Dementia is managed, not cured.
One cannot even find memory care beds, or nursing home beds easily as there is a shortage at least in the Rhode Island area.
coberly, you would enjoy (or not enjoy) the debate i got into a comment thread last week; i was told that unlike the Treausires that china holds, the Treasuries in the SSA trust fund were devoid of value, that “those “special” Treasuries are merely hollow artifacts, stripped of their store of wealth over the years to make the budgets look better than they really were.”
it’s here: “The Artificial Market for United States Treasuries…“: if you want to see the latest in madness…
Conservatives will never agree to any proposed plans to “fix” Social Security because they want to destroy it and all other social programs that help working class people and go back to the “good ol days” of poorhouses, debtor’s prisons, share-cropperdom and company towns. They won’t even admit it *can* be fixed with minor tweaks because its very existence is an anathema to their philosophy of social Darwinism.
Modern day American Conservative political philosophy in a nutshell:
“Choose your parents wisely”
“One dollar, one vote”
“I got mine so f**k you!”
“Socialism for the rich, capitalism for the poor”
mcwop
i am genuinely sorry about that. and i know that gummint sometimes does things badly.
but do you suppose there is nothing we can do about it? or that giving up Medicare entirely would be better?
I beleve… not sure… that the problem here is not Medicare. Medicare pays for the treatment, but the treatment is “private enterprise.” and it is private enterprise that can’t afford the liability.
not sure that’s the place to start, but willing to entertain better thoughts.
rjs
i think i would “not enjoy” but i may have to look just to keep up with the madness.
there are people who don’t think Special Treasuries are “real” because they can’t be “traded.” Which means, I think, that their price can’t go up or down. They are still real in the sense that the United States is legally obligated to pay interest and face value at maturity. That might make them more real than the traded variety.
rjs
oh, i see. you ran into don levitt. levitt has some peculiar ideas which he can’t shake. one of those appears to be that money you lend to “the bank” must be kept in the drawer with it’s little interest babies multiplying over time until you are ready to demand to be paid back.
the idea that the government might have to collect taxes to pay back the money it borrowed just shocks, shocks, him. why, it’s as if… as if… as if there was NO TRUST FUND AT ALL!
he doesn’t seem to understand the difference between “a borrower” and “a lender.” Because of course it’s all “the same government” and “money is fungible” and the fact that there is more than one person in the united states and there are laws governing how some of those people can borrow from others, through a government program… is completely incomprehensible to him.
Seems to me that I have read (Dean Baker, maybe) that the TF’s Treasuries are bearer bonds, payable in cash on demand of the Trustees at a set, guaranteed return. Other lenders have to take their licks in the bond market when they sell their Treasuries. No wonder they really, really want SS to go away. They could use another $2.6 trillion bucks to gamble with in the bond market. NancyO
Right you are, HARM. NancyO
One of the reasons that some people have trouble seeing the “beauty” of paygo is that they are so enamoured of the beauty of compounf interest. After all, if you have enough money to invest and you can get historical market returns, compounding interest can produce great results. They have probably seen the phrase “past returns are not indicative of future results” so many times that they believe it is just pro forma. I do have money to invest. My results in the decade I could so claim have left me me with fewer illusions about market return.
Dale has discussed why people did not have the money to invest when SS was started, but it is not just startup. If the prior generation did not have SS, this generation would need to set aside a chunk of their retirement investment money to support the prior generation (somehow). People who calculate the ROI for SS never include that factor.
Arne: “If the prior generation did not have SS, this generation would need to set aside a chunk of their retirement investment money to support the prior generation (somehow).”
Waddaya mean? Put granny in the attic and let her eat table scraps. Just like they did in the good ole days.
well, don levitt drew me into that, it was his agenda…i didnt go over there to argue social security, just wanted to footnote the politcal post on Treasury debt by pointing out its special use in the shadow banking system…so i hope you’ll pardon my slipping into snark to weasel my way out of arguing with him…
Thanks Arne
i think they also fail to realize that SS returns “compound interest” at the rate of the growth in the economy plus inflation. It’s not as much as you “might” make privately, but it’s more than you can guarantee you could make privately.
it does give you the option of not having to live with your son in law.
or your mother in law, if you prefer to look at it that way.
The trouble is these people just know they are going to make big money and they will retire to Love Boat cruises and champagne tete a tetes overlooking unspoiled white sand beaches. Just like in the magazine ads.
more power to ’em I say. but hang on to that SS just in case.
http://www.ourfuture.org/blog-entry/2012041510/why-do-so-many-elites-hate-social-security-and-medicare
Whatever else we can say about Mr. Samuelson’s latest WaPo article, one thing is clear. He sure did piss off a whole buncha people. 😉 NancyO
A lot of people were losing their attics and granny had to go to the poor house. Not very choice, but it was a reduction in funds available for (someone’s) investment. (And, yes, I know you know tables scraps aren’t free either.)
Nancy
gotta be careful with that. Samuelson seems to have Lawrence Hunter of Forbes calling him a liar too.
That’s fine, but then Hunter calls SS a Ponzi scheme, and apparently thinks a return on investment lower than some present value magic return from a magic bank with a magic zero risk makes SS a “negative return” on investment. Without knowing the assumptions of the pv calculation it is hard to show where Hunter goes wrong. But it is worth knowing that the “9% lower” pv return to SS than to his magic bank could be caused by a real interest rate 2 tenths of one percent lower than the one he assumes for his pv calculation over time. On the other hand, Hunter calls “government” a “criminal activity,” so i wouldn’t expect much to come from reasoning with him.
and of course the “present value” return on investment allows NOTHING for the insurance value of Social Security… which is the whole point of Social Security.
Reagan got rid of poorhouses, right? Fortunately, global warming will make it more comfortable to live in the street.
Arne
no, table scraps aren’t free, but when the cost of table scraps goes up, granny can always switch to roots and grubs. so really the cost of living is going down, you see.
Arne,
One of the reasons that some people have trouble seeing the “beauty” of paygo is that they are so enamoured of the beauty of compound interest.
The beauty is not in the compound interest, but in the SAVING. The way a normal retirement plan would work is that future retirees who do not need the money for a few years loan their money to people who need it now, say to build a factory or coal mine. They are then paid back, plus interest, out of the earnings of the asset they have developed.
That’s not the way Social Security works. Reitirees are paid directly from other taxpayers, so no capital is formed, and returns are subject to the whims of the administrator. This is why Social Security is best described as “welfare” or worse a “Ponzi Scheme” that would be illegal if anyone else tried to do it.
Sammy
i don’t know what you mean by the whims of the adminsistrator… do you mean Congress that sets the rules?
its not welfare if you pay for it yourself.
and it’s not a Ponzi scheme if it pays EVERYONE what they paid for… forever.
future retirees who do not need the money for a few years can delay collecting it, and it earns interest and pays them a higher monthly when they do need it… better than a coal mine.
As for all that compound interest funding coal mines… you do know that there are trillions of dollars washing around the economy looking for something to invest in. so if you are sitting on an undeveloped coal mine, you should let the big money people know. they’ll come right over.
on the other hand, SS invests in the retirement plans of a whole nation. everybody who invests gets a better than 2% real return, and then they don’t have to worry about at least their basic retirement needs.
so basically you are just free associating and don’t actually know what you are talking about.
you are kind of like some ignorant yahoo from, say 1880 who seeing his first car says, “a normal cart has a horse, therefore this cart can’t work.”
Levitt is a nut.
The DI Trust Fund (one of two that makes up what most people call THE Social Security Trust Fund) started taking a portion of its interest in cash transfers from Treasury in 2006 (or perhaps late 2005 it is not easy to pin it down precisely). The world did not come to an end, in fact the bond market didn’t even hickup, in part because Treasury doesn’t count such interest transfers as being cash transactions. Why not? Well it is a long story, but not one Levitt wants to listen to. I know because I have told it to him a couple dozen times at Baker’s Beat the Press and at econblog Econospeak (successor to the much missed MaxSpeak and featuring not only former lead Angry Bear PGL but also Prof Barkley Rosser for whom I cheekily named Rosser’s Equation (or Law) showing how even after a 23% cut in benefits after Trust Fund ‘exhaustion’ CBO shows that recipients will still get a 20-25% better real benefit) and Don isn’t hearing any part of it.
Anyway at some point in 2010 DI went from taking some of its interest in cash to taking all of it and then to cashing in principal in the form of Special Treasuries. Now in the normal course of events a fully solvent Social Security Trust Fund ‘cashes in’ maturing Special Treasuries when due and replaces them with new Special Treasuries with new maturities. And as long as either Trust Fund (DI or OAS) is in surplus this means that all current year Specials end up retired by the end of the maturity year and are replaced by new Specials to that same amount of principal plus new Specials to compensate for any interest accrued on the maturing Specials yet not needed for current benefits. But the principal rollover is in itself cash flow neutral. But what happens when Social Security cost exceeds the combination of FICA receipts, tax on benefits, and accrued interest? Well some Specials are not rolled over, instead they are redeemed for cash. Which happened a couple years ago for the DI Trust Fund, actual Trust Fund balances declined year over year. But what happens when the combination of FICA receipts, tax on benefits, accrued interest, and maturing Special Treasuries STILL doesn’t completely cover cost? Well it turns out that unlike those Marketable Regular Treasuries so beloved by Levitt and BTW Chuck Blahous, which are not calleable prior to maturity (the Chinese Central Bank can sell them to third parties but can’t demand redemption in advance) the Special Treasuries held by the Trust Funds are calleable at will prior to face maturity. And because they are not marketable are not subject to market fluctuations at the time, that is even though the Social Security Trustees are basically in a position of forced ‘sale’, they NEVER are forced to sell at a loss, every Special Treasury of whatever maturity is calleable at par at any time in whatever order is decided by the Managing Trustee of Social Security. And the Secretary of the Treasury has nothing to say about it, no discretion, nothing. He has to pay up (there never has been a she in the job) no matter what. Which since the Secretary of the Treasury and the Managing Trustee of Social Security wear the same pair of pants, sit at the same desk, and shave the same face each morning in the mirror doesn’t tend to create much interpersonal friction.
Each year the Trustees of Social Security publish an annual report that not only shows current and historical operations of the Trust Funds but also shows the bond portfolios at the beginning and end of each report year. And a careful analysis of those portfolios since 2008 shows that Special Treasuries have been cashed in in a way that preserves the value of the Trust Fund as a whole. That is while all Special Treasuries maturing in 2009 were cashed in in 2009, only some […]
Yep that substitution is what puts the “Chained” in “Chained CPI”.
Per the ‘Reformers’ the fact that granny is constrained to substitute grubs for the table scraps which she substituted for the roast beef she and grandpa used to eat shows that she isn’t really a victim of ‘actual’ inflation. I mean she is getting the same caloric value. Except when she isn’t. But heck! Things are a lot worse in Sub-Sahelian Africa!! Where drought and civil war have driven folk to places where there aren’t even roots and grubs to eat. Whereas granny prolly still has that 10″ Sylvania B&W TV grandpa bought with his first retirement check. (The one that didn’t have survivorship rights). And it is a well known fact that neither the Queen of Sheba or even King Midas had even a 7″ Phillips TV, meaning that granny should just quit her bitching.
Seriously the logic of Chained CPI, much touted as the ‘cure’ for ‘out of control’ Social Security costs going forward is that any substitution north of bare subsistance is fully equivalent. I mean steak is the same as pot roast is the same as chicken backs is the same as a piece of fat back pork in your pot of beans is the same as a handful of oatmeal. Now ‘reformers’ try to argue that Chained CPI only works within categories, as if poor people don’t sacrifice whole categories of consumption when it comes to it. Once you are shoved up against the lower bound of products fitting the ‘meat’ category you just end up not consuming ‘meat’ at all. It is not the question of substituting sirloin for filet mignon that the Beltway folk try to sell. (Oh and try to serve them jug wine and tell them it is the sames Veuve Cliquot and see how far that gets you).
Sammy only a moron would argue that Hoover Dam and the Interstate Highway System are not “formed capital” or that taxpayers don’t get some benefit, at least in right wing theory, from expenditures on domestic and foreign policy power that don’t form capital to start with.
Your implied argument that no government expenditure funded by excess FICA contributions either formed capital or served some other desireable function of government is nonsense. Hoover Dam exists, the USS Nimitz exists, to the extent that either was paid for even in part by bonds ‘sold’ to the Social Security Trust Funds, your argument (unlike the dam or the hull of the carrier) simply doesn’t hold water.
We call it ‘Glibertarianism’ for a reason. The soundbites slip easily off the tongue but have no rational content at all. Your motto might as well be “Good enough to convince the rubes”. Sorry dude, the carnival is over there, try your pitch on people who don’t know anything.
Bruce
thank you very much.
i don’t think levitt is a dissembler. He just doesn’t understand what he is talking about and can’t break out of his own logical circles.
thanks again Bruce.
and yet “serious people” talk about this stuff as if it wasn’t literally damned nonsense.
once again Bruce
you are unjust to Sammy. HE doesn’t know anything. He is not trying to fool us. He is one of the fooled.
I don’t know that the difference matters in the end. I like to think that those who have been fooled can be saved, while those who set out to fool them cannot. But I have to admit I never try to unfool the people who are my friends, because I know I would lose my friends and change no minds.
You can’t claim inflation is a type of “compound interest”.
“You get more in benefits than you paid in, because the benefits are paid for out of taxes on incomes that increase over time, even when the tax rate does not. This IS an investment. It is an investment in the growth of a “corporation” called The United States of America.”
You make no sense. You can’t get more out than you pay in unless someone at some point gets less out. Even if the US grows and contributions increase as a result if the future retirees then “get more out” eventually the system will collapse. You describe a Ponzi scheme. Also, if I use your definition you are now a liar as well. Why is the left so mean spirited?
I suggest you look at the maturity schedule of the TF holdings. Look what is maturing between now and 2016. You will see that almost all of the old high coupon bonds are maturing. I calculate that 580B will mature that have coupons greater than 4%. The bonds will be replaced with new bonds at 1.8% (or less – thank you Federal Reserve)
Yesterday the Fed’s Yellen said that zero interest would be with us to 2015. What does that do for SS’s interest income line???
Answer: It kills it.
Tons can be done about it, and some states like Georgia are starting to make changes as they spend billions on teh scenario I describe above. It is important becuase Medicare and teh general budget are so broken that politicians want to raid Social Security to fix the othyer side of the ledger.
We have a national health plan for seniors, and it is the worst national health plan amongst industrialized countries, and it is costing us a ton.
Tons can be done about it, and some states like Georgia are starting to make changes as they spend billions on the scenario I describe above. It is important because Medicare and the general budget are so broken that politicians want to raid Social Security to fix the other side of the ledger.
We have a national health plan for seniors, and it is the worst national health plan amongst industrialized countries, and it is costing us a ton.
maturing higher yielding investments are plaguing state, local & corporate pension plans as well, to say nothing of private 401-Ks…
most of them assume an 8% return….the two largest (CALPERS & CALSTRS) recently lowered their expected return to 7.5%, which has busted budgets around the state…
” . . . eventually the system will collapse.”
No. Eventually, the system may well end up paying less benefits than you put in (on average), but that is not what is commonly meant by the word “collapse.” Perhaps the word you’re looking for is “contract.”
“You describe a Ponzi scheme.” A Ponzi scheme will eventually collapse. SS won’t collapse, although the projected benefits could contract under certain economic conditions.
“Also, if I use your definition you are now a liar as well. Why is the left so mean spirited?”
Now you’re projecting.
In general, the estimates that I have seen show that contemporary SS receipts will be sufficient to fund 75-80% of promised benefits indefinitely. So that’s hardly a “colapse” that means we should eliminate the program. I AM a “trust fund skeptic” All that interest paid to the trust fund comes from taxpayers or borowing (aka future taxpayers). On the one hand that means that the trust funds are really a useful accounting measure, not a magic pot of money that will pay benefits. And it has nothing to do with whether the special bonds are or are not backed by the full faith and trust of the government. It has to do with the fact that the payer and payee spaces are both filled in with “US taxpayers.” There IS a bright side to being a SS TF skeptic though: the exhaustion point (or the crossover point) of the trust fund do not constitute crises, or even significant events, really. We’re going to have to deal with the demographic shifts in population: more retirees per worker. But that process is really quite gradual, and the change IS affordable. Any “crises” are artifacts of our accounting methods, not SUDDEN changes in the underlying facts. Kind of like the Debt Limit. Deficits ARE a problem. But there’s no reason to believe that 16,394,000,000,000,001 th dollar of debt is qualatatively different from the 16,394,000,000,000,000 th.
Krasting
and it doesn’t matter. the Trust Fund runs out when it runs out. I suspect the Trustees knew the maturities when they made their projections… since I assume, as you are fond of pointing out, that SS is now “cash flow negative” it won’t be buying any more Bonds.
But when the Trust Fund runs out, SS returns to Pay As You Go… the way it was designed. With or without a tiny increase in the payroll tax.
Calguy
of course you can. in any case you need to earn compound interest in order to keep up with inflation. and that is just exactly what pay as you go does. it also keeps up with growth in average wages.. including both inflation and real growth, automatically, without political games about an inflation indesx.
oh, for the benefit of anyone else out their whose brains have calcified:
i did not claim inflation is a type of compound interest… i said SS returns compound interest at the rate of the growth in the economy plus inflation.
generally i have to hope people can think. but sometimes i have to settle for wishing they could read.
Calguy
you really are an idiot. if incomes grow, the same percent of income contributed over time also grows… creating an increase in benefits. the subsequent generations pay in more money, but the same percent of their incomes. and when they retire they get more money than they paid in because the following generation is making more money … everybody else seems to understand this… except for the paid liars and their tools.
Bruce,
SS financed the Hoover Dam and USS Nimitz? Ha, ha, ha. Any accidental contribution that the SS Trust fund provided would be too miniscule to measure. You should know this, so either you are not as smart as you say you are, or you are trying to mislead.
Besides SS is projected to be in deficit forever now. So even that tiny, ant-like crutch upon which you are balancing your argument is gone.
Jim A
mostly right. but the Trust Fund doesn’t matter much because it is only a bridge fund to pay for the Boomers. (who paid for the Fund). SS is normally pay as you go.
That 75% of “promised” benefits, turns out to be 75% of benefits that have grown to 160% of current benefits it real value. so the real value of the “75% of promised” is 120% of current real benefits.
as for the accounting mysteries… pretty much that’s what money is. the people who will pay back the trust fund are in general NOT the people who paid it in. they ARE in general the people who got the benefit of borrowing the money from the people who paid it in.
but even if they were exactly the same people, there would be no great mystery in people setting aside some of their money earmarked for a specific purpose and then “borrowing” it for another purpose.. even paying it back plus the interest it would have earned if someone else had borrowed it.
i shouldn’t say that because it conjures images of old uncle sam borrowing from his right pocket with iou’s from his left pocket. it is NOT that way, because uncle sam is not doing the borrowing. some of his nephews are borrowing from each other, and Sam only keeps the books.
the TF is not a magic pot of money. it is money the Boomers lent to the Big Taxpayers. the Big Taxpayers used it and will need to pay it back. The Big Taxpayers will ultimately have to pay taxes to pay it back, but because they had the use of the money they borrowed, they will have made money with the money and be able to afford to repay what they borrowed. this is the ordinary way that money works. not some mystery or scam…
it is only made to look that way by people like Sylvester Sheiber who write lying fairy tales for foolish children.
and it may not even need an increase in the payroll tax…only 58.5% of the population is employed today, compared with 64.6% at the peak…get us back to full employment, and raise the minimum wage to $10 (or $12, as jamie galbratih advocates), and social security’s cash flow will more than pay for the boomer’s benefits + COLA…
sammy
i tried to stick up for you, but you make it hard. Bruce was making a point about how the Trust Funds are borrowed by the government and used for government “investment” just like the tiny amount of money when you buy a Defense Bond… if you remember those. The size of the particular contribution does not change the principle. And as you ought to know “Railways through Africa. Dams across the Nile…. all from tuppence, tuppence invested in the …Bank!”
SS will never be in deficit. What you are calling “deficit” is SS cashing the bonds it bought exactly so it would have the surplus needed to help pay the Boomer retirement. I hope you don’t have to do your own taxes. You are too dumb. Honest, I am sure, as I told Bruce, but dumb.
Joel
i don’t think SS would ever pay less than you paid in.. unless population and wages actually fell over a long period of time. What is projected to be “less than promised” is a lower monthly rate in order to make up for the many more months you expect to live… at the end of the day the total comes out to be about what you put in adjusted for inflation and growth in the economy if any.
and the economy does shrink, then we won’t be any worse off with SS than we would be without it. in fact we should still be better off, because as you point out something, especially if it is “enough” is better than nothing, or “not enough.” for about the last two million years people have had to put up with “lean years” as well as “fat years.” we might have thought we had solved that problem forever, but it doesn’t look like it so much anymore.
that ol time SS will see you through the lean years better than your sure thing on Wall Street.
“You can’t get more out than you pay in unless someone at some point gets less out.”
Actually, you can. And that is exactly what the Trustees Reports have been showing.
Every year the “unfunded liability” increases. Mathematically it just keeps growing forever. Of course, infinity is a long ways away. Lack of water, a comet strike, or the second coming will all be bigger news before SS finances becomes the thing that destroys the future.
“contemporary SS receipts will be sufficient to fund 75-80% of promised benefits indefinitely”
I would like to see people stop using the term “promised benefits”. The term used by the SSA is “scheduled benefits”. The law does not permit SS to pay out more than it takes it (over the life of the program), so promised does not apply.
Arne
i am not sure i follow you here.
the “unfunded liability” means that without changing the current tax rate or the current benefit schedule there will be a shortage of money for the one to pay for the other. there are many solutions, the easiest and best is just to “fund” the difference by writing into the law a one tenth of one percent increase in the tax rate when the “shortfall” actually appears on the ten year horizon.
or we could simply raise the tax rate now one half of one tenth of one percent… or even one percent… and watch to see how that affects the “unfunded liability” going forward. if we overshoot, as seems likely, we could always cut the tax rate to “fine tune.” kind of like the way you drive down the road, as opposed to what, say, the non partisan experts recommend which is to set a speed and direction and shut our eyes and keep them shut until we reach the infinite horizon… or as they prefer, to just dismantle the car because it’s too risky to drive with our eyes shut.
but the thing to remember about the tax increase that would be needed: it’s tiny, and the workers will far more than make up for it in real dollars earned by the very modest pay increases projected over the same time. thus they end up with a longer, richer retirement they paid for themselves, AND more than twice as much money in their pockets AFTER paying the tax.
but people like calbrain can never understand how you can take money out of that deposit box in the bank and have more left in it than you started with. for some reason the same phenomenon does not worry them at all when the deposit box is on wall street… for which there are no “funded” obligations whatsoever.
“That’s not the way Social Security works. Retirees are paid directly from other taxpayers, so no capital is formed”
If sammy had stopped there I would have been inclined to agree more with him than with coberly. The addition of “the beauty is not in the compound interest, but in the SAVING” does enlighten the obsession that keeps people from understanding paygo, but I would still say it is compound interest paid on savings that has been deified. (Compound interest on an inheritance being nearly as good.)
SS just does not have this aspect of a growing pile of money attributable to the virtuous saver. To these people the fact that SS puts the money to work right away instead makes it hard to understand. The fact that it requires a compact amoung generations makes it hard to understand. But the fact that is hard to understand does not mean it does not work; it just means we need to put people who can understand hard things in charge of making the periodic adjustments that are an inherent part of a paygo program.
Sammy–SS is an earned right. You work, you pay your payroll tax, and when you’ve done that for 10 years, you have the right to receive a retirment check for the rest of your life. The basic amount of that check will never be less than it was to begin with. So, FICA in, retirement check out. (If you die, your surviving relatives will get survivors’ benefits.) There is a whole lot of complicated detail I left about how people can become eligible for benefits, but retirement benes are the easiest to understand and show how it works. You know this is true from your own experience because you know people who get retirment and widows’ checks.
So, everybody who works kicks in every pay period to pay benefits for current beneficiaries. A particularly deceitful aspect of all the anti-SS propoganda out there is the “it’s in deficit forever and going broke” stuff. When Congress and this administration decided to reduce the FICA payroll contribution as part of their Dec 2011 deal, they added a provision to have regular tax revenue make up the difference between what should be collected and what was being collected after the temporary FICA tax reduction. So, there is more than enough money coming in to pay all benefits owed. No deficit in SS revenue exists and in fact it is still got a surplus. And, the bonds in the TF generate interest payments from the Treasury to the TF. So, the TF is still growing and is not running out of money.
So, why did those writers in the Washington Post and Wall Street Journal say it’s got a deficit and is going broke? Well, it’s cause they lied to make you think you’ve got nothing coming to you from SS and you’ll let them use your money to gamble on the stock market with. Like they just got caught doing that caused the Great Recession that we’re not out of yet in my opinion. (Not that my opinion matters, but FWIW.)
Now, to keep SS going on forever, all we have to do is pay 1/10th of a percent more FICA tax per year into the future. That will make up anything that will be lacking in 2036 when the TF is scheduled to run out by current estimates. And, as Coberly and Bruce always say, it’s about 40 cents a week more FICA to keep the system going forever.
So, that’s me and Coberly and Bruce all telling you the same thing. And, we’re right and the Chief Actuary of SS says the same thing and it’s true whether we say it or not because we’re not lying and other people are. The End. NancyO
Jim–See my remarks to sammy above as well as Bruce’s. NancyO
In thinking about SS, it’s helpful to think about the meaning of the phrase, “Sure thing on Wall Street.” It is exactly the same as, “Sure thing at the track,” except the horses actually try to win at the race track. If they don’t, it’s not for want of trying. In the market, computers execute the trades and are programmed to produce profits for Goldman, Citibank, BoA, etc and not for the individual buying and selling stock on his own account. In short, all the sure things pay off for the TBTF guys and not the small stockholder. Talk about a con. NancyO
Arne
you need to loosen up your concepts just a bit.
the people who put their money into SS ARE “saving it” perhaps not “virtuously” since the government makes them do it.
and the fact that the money is put to work right away is no different from any other savings of investment.
you might think of it as investing in a corporation called the United States of America, which uses the money to pay for the retirements of those who have “invested.” and relies on a growing number of richer customers buying it’s product… retirement insurance… to pay it’s investors an “interest” premium.
this is no more a Ponzi scheme than a bank or any corporation… which depends upon future customers and investors to pay the dividends to earlier investors. it’s “assets” are its customer base. the difference is, of course that a bank or corporation can go broke. the United States can’t.
oh, if you need “capital formation” you might look at the “wealth”of the United States… created by all those workers. All SS is, in that sense, is an “accounting device” to separate some of the income of that corporation and use it to pay the “investors”.
It may not be obvious, but this is just what a corporation does. All that money you “invest” plus the profits it earns is not “plowed back in” but some of it is distributed to the investors. The Social Security account just tracks the amount of the investment plus profits that has to be returned to the investors.
not sure how clear this is, but i have confidence if you think about it you will get the point.
“you need to loosen up your concepts just a bit”
“i have confidence if you think about it you will get the point”
I am trying to describe what I think other people are saying. If you would bother to think a bit more and react a little less you would be a better spokesperson.
“you need to loosen up your concepts just a bit”
“i have confidence if you think about it you will get the point”
I am trying to describe why people have trouble understanding SS. If you would bother to think a bit more and react a little less you would be a better spokesperson.
Masterful column. I have already shared with my students.
“unless population and wages actually fell over a long period of time.”
That’s what I was acknowledging. While I don’t claim the gift of prophecy, I have sufficient imagination to contemplate the possibility that the US population and economy will not continue to grow forever.
joel
if it doesn’t, that won’t affect SS any more than it affects any other investment. SS works exactly the way human societies have worked since the beginning of time. the adults feed the children, and then when they get old, the grown children feed the old folks.. as well as their own children.
some years are better than others. and if we ever do starve to death as a society, it won’t be the fault of SS.
Arne
my trouble is i think too much. at least that’s what they always told me.
i wasn’t yelling at you. just trying to explain the hard parts.
i am a terrible spokesman, but i seem to be the only one i got.
oh, i just realized you thought “i have confidence…” was snark. Nope. Not meant that way at all.
Mr. Coberly: When you say an increase 6% to 9% does that mean the employer’s contribution increases to 9% as well? I think in the past you mentioned that LC assumptions were used in the NW Plan. Have you plugged in IC or HC assumptions? Also can either you or Bruce (I recall Bruce touching on this subject years ago) discuss the future of the DI portion of OASDI? The DI on-claim trendline over the past 20 years looks pretty ominous.
Dale –
Very informative and well written.
Bruce –
Ditto.
Cheers!
JzB
Krasting from earlier today:
“Bruce Krasting
I suggest you look at the maturity schedule of the TF holdings. Look what is maturing between now and 2016. You will see that almost all of the old high coupon bonds are maturing. I calculate that 580B will mature that have coupons greater than 4%. The bonds will be replaced with new bonds at 1.8% (or less – thank you Federal Reserve)
Yesterday the Fed’s Yellen said that zero interest would be with us to 2015. What does that do for SS’s interest income line???
Answer: It kills it.”
The facts from the Social Secority web site:What interest rate do the trust funds’ assets earn?The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.
The numeric average of the 12 monthly interest rates for 2011 was 2.417 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.401 percent in 2011. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.
What interest rate do the trust funds’ assets earn?The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.
The numeric average of the 12 monthly interest rates for 2011 was 2.417 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.401 percent in 2011. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.
http://www.ssa.gov/oact/ProgData/fundFAQ.html#n3
“The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.
The numeric average of the 12 monthly interest rates for 2011 was 2.417 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.401 percent in 2011. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.”
I’ve emboldened the key sentence. If the rate is determined on a monthly basis how is it that Bruce kknows the replacement rates for […]
Krasting from earlier today:
“Bruce Krasting
I suggest you look at the maturity schedule of the TF holdings. Look what is maturing between now and 2016. You will see that almost all of the old high coupon bonds are maturing. I calculate that 580B will mature that have coupons greater than 4%. The bonds will be replaced with new bonds at 1.8% (or less – thank you Federal Reserve)
Yesterday the Fed’s Yellen said that zero interest would be with us to 2015. What does that do for SS’s interest income line???
Answer: It kills it.”
The facts from the Social Secority web site:
http://www.ssa.gov/oact/ProgData/fundFAQ.html#n3
What interest rate do the trust funds’ assets earn?
“The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.
The numeric average of the 12 monthly interest rates for 2011 was 2.417 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.401 percent in 2011. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.”
I’ve emboldened the key sentence. If the rate is determined on a monthly basis how is it that Krasting knows the replacement rates for 2016? Note that the rate averaged over 2011 was 2.417%. Seems like a pretty good return in the current market for good as gold assets.
Bruce Krasting, Are you playing lose with the facts?
Krasting you persist in apply concepts relevant to investment based pension funds on a Social Security system that operates upon entirely different principles.
Social Security does not in any significant way rely on investment returns on the Trust Funds. And if fixed along the lines it always has been before and would be if the NW Plan was adopted never would.
You just don’t fucking get it. The health of Social Security is almost entirely tied to the growth in Real Wage WHICH IS BY DEFINITION POST INFLATION!!!. And to the extent that the yield on 10 year bonds closely tracks inflation it DOESN’T FUCKING MATTER WHETHER THE YIELD IS 7.00% OR 2.025%. Because REAL BENEFITS TRACK REAL INFLATION.
I apologize to everyone else for shouting but this other Bruce simply refuses to engage with the facts involved. He has his own Hobbyhorse (much like Levit) and is bound and determined to ride even as people point out that horses need actual legs to run.
The definition of Actuarial Balance in relation to the Social Security Trust Fund is to have each year end with a reserve equal to the next years projected cost. For planning purposes the Trustees take both a medium, a long, and since 2003 a REALLY long term measure of Actuarial Balance where ‘Short term’ is defined as ‘each of the next ten years’, ‘Long term’ as ‘each of the next seventy five years, while a newish ‘Infinite Future’ PV projection is tacked onto that just because.
Now Social Security total costs increase year over year because of one or more, and typically all three of three factors. One is an increase in beneficiary population, a second is an increase in inflation, a third is an increase in Real Wage with the first two factors boosting near term costs immediately while the latter mostly has a lagged effect. This increase in cost in turn requires that year end balances increase year over year to keep up, or at least to not decrease in a way that would take Actuarial Balance to below one year of cost. If there is in fact a risk of Social Security on a combined basis (or in some cases separated into OAS and DI) of failing the test of Short Term Actuarial Balance it is incumbant on the Trustees by law to inform Congress of that fact so that they can make timely adjustments. Which adjustments are generally quite small and just a fraction of Real Wage increases over the relevant period.
This requirement to maintain Actuarial Balance has some odd effects. It turns out that in a perfectly balanced Social Security system, something like 60% of all interest earnings have to be retained to build year end principal in a way that meets next years projected cost. Which means that only 40% of such earnings actually need to be paid in cash by Treasury which in turn only works out to be around 2% of total annual cost.
Yes you read that right. Even though Social Security can be forced to turn to its Trust Fund in times of lagging economy, which is what has happened to the DI Trust Fund since 2006, in normal operation some 98% of all cost is covered by current receipts taken directly from workers and certain retirees. And the 2% of such cost that has to be paid by taxpayers as a whole is actually discounted from the interest actually accruing to the fund, over half of which is simply credited in the form of new Special Treasuries simply to maintain Actuarial Balance.
Yeah it is confusing. But not so confusing that a self proclaimed numbers guy and veteran of the bond markets like Krasting can’t figure it out. If he wanted to. Which he clearly doesn’t. Dale and I have slightly different takes on the Trust Fund, in his formulation it doesn’t really matter at all, while me in following the Trustees’ methodolgy think it is important in its own right but ultimately of not […]
little john,.. i use the Trustees intermediate Projections. DI has a problem. but the poblem could be fixed with an immediate increase in the payroll tax of 0.3 percent (combined) and another 0.1% in about 2050. … this was before the Great Recession, things may have changed since… but NOT BY MUCH.
the 6 and 9 percents are “each.” and yes i know that looks like a lot of money… but as i tried to point out it can be reached one half of one tenth of one percent at a time (even including DI if that is folded in to the whole OASDI “shortfall,” while wages are going up over a full 1% per year… leaving the worker at the end of the day (seventy years from now) with a richer, longer retirement AND twice as much money in his pocket AFTER paying the tax.
Bruce Webb likes the LC assumptions. I don’t. I accept the Trusteed “best guess.” IT’s too hard talking about guesses fifty , seventy five years in the future without pretending to any kind of precision at all… low, medium, or hight.
JimZ
you have students?
i am not optimistic about the near term for SS. maybe after people mess it up, in a few years from now they will realize their folly and some of your students can tell them how to put it back together.
“You can’t get more out than you pay in unless someone at some point gets less out. Even if the US grows and contributions increase as a result if the future retirees then “get more out” eventually the system will collapse.”
Somebody better tell the stock market. Because you have just claimed that no joint stock company can ever be anything but a zero-sum enterprise.
If the real economy grows in ways that exceed total increases in real wage, that is as long as there is any kind of real return on investment on capital, then everyone in principal wins. That is you don’t have to have perfect distribution of gains from productivity in strict relation to actual relative inputs of labor and capital to have even unfairly small slices of the resulting pie still be larger than the year before. And since no one looking at actual data over the last thirty years can argue with a straight face that Real Wage is actually keeping pace with increases in Total Productivity, meaning that capital is retaining every larger Real slices of the Productivity Pie, the idea that Social Security is inevitably going to some zero-sum smash is ridiculous. That just isn’t the way the system works and given current political realities will never be the way the system works, labor would be fortunate in the extreme to even approximate the shares of productivity it retained in the fifties and sixties. But even where Real Wage lags what the left thinks it should that only makes Social Security MORE affordable to the economy at large.
That is even as Social Security is projected to grow from just under 5% of GDP to something over 6% this simply tracks the increase in beneficiary population, the actual share of GDP per capita barely budges even as the rate of growth of GDP vastly swamps the mininscule percentage reductions in GDP actually taken by capital. That is 94% of 150% is greater than 95% of 100%.
Which by the way is the fundamental flaw of all privatization schemes. Each of them relies on an implicit rate of economic growth and ROI that swamps any increases in Real Wage over that period. Meaning that if their long term assumptions are correct Social Security will be able to fund the current scheduled benefit with no problem at all. While all the predictions of ‘crisis’ rely on real productivity and GDP lagging historic rates in ways that would cripple overall ROI for capital.
I came up with a ditty back in 2005 that encapsulated this reality: “If Privatization is Necesssary, it Won’t be Possible. If Privatization is Possible, it Won’t be Necessary”. Meanwhile Dean Baker along with some little known (then) economists named Bradford J DeLong and Paul Krugman authored a paper which made the same point with mathematical rigor. The paper is popularly(?) known as BDK after the three authors but more formally as “Asset Returns and Economic Growth” http://www.j-bradford-delong.net/movable_type/bdk-bpea.pdf and in turn provided the base for Baker’s ‘No Economist Left Behind Challenge’. Which challenge has not been met to my knowledge. My takeaway is exactly what the ditty holds: under the current models that predict Social Security ‘crisis’ there are no solutions that rest on returns on equities. And if you plug in values that make private accounts work arithmetically those values exceed those which would be needed to totally fund the current Social Security schedule.
Disagree? Well say it with numbers and not impressionistic appeals to zero-sum games that don’t actually match the reality involved.
Dale I think you and Arne are expressing the same aritmetic fact in different ways.
Per the Trustees the change in 75 year actuarial period that results each year by retiring old year one and moving old year 76 to 75 in and of itself adds 0.06% to long term actuarial imbalance. Now in practice changes in current year outcomes or changes in methodology can introduce variations that swamp that 0.06% either to the upside or downside, but even if we had a perfect crystal ball we would need to boost payroll tax by that amount each year just to keep up. Now as it happens this is a small fraction of even pessimistic assumptions of Real Wage increases over that period, but even a fleabite is a bite, all other things being equal Actuarial Imbalance or ‘unfunded liability’ goes up every year that passes. Now I would argue that given the probability spread we see in the Trustees Reports over even the first 25 year sub-period, the AEI insistance that we hyperfocus on year 76 and subsequent years until heat death of the Sun is ridiculous special pleading.
Still there is an arithmetic kernal of truth to that ‘unfunded liability’.
Jack, I know it’s unkind to think so and terribly snarky to say so, but I’ve always thought that Krasting’s helpful analyses are intended solely to sell us some bonds, annuities, or bridges to insure he has nice fat commission payments until the end of time. Sigh. NancyO
Dale just between us old farts, the distinction between “yelling at you” and yelling “you are telling that story ALL WRONG, let me tell it MY WAY” is maybe not felt by the recipient in the nice way you intend it.
After all these years I suspect Arne, like me, understands your explanation full well. But feels, again like I do, that certain audiences require alternative modes of story-telling, that in order to try to make the point you need to work up to or alternately down to their level of argumentation. Even if that seems to spoil what is after all a pretty simple story. From your perspective.
Well it it was really that simple you would have won the war years ago. And slowing and dumbing down the story so that even the rubes should be able to get it doesn’t work so well when many of the seeming rubes are actually carnies and confidence tricksters working their own agendas.
Well I don’t like the LC assumptions as much as I did in 1997 or even 2005. Over that period of time the 75 year actuarial gap dropped from 2.23% of payroll to 1.89% and the date of Trust Fund exhaustion pushed out from 2029 to 2042. Given that very few economists not named Baker or Roubini were bucking the Washington Consensus that permanent productivity growth of 3% was not only reasonable but per Greenspan and others almost incontestable and so reasons to slash top rates so as not to wipe out the long bond, I offer no excuses for embracing a set of assumptions that only required 2.2% productivity in the short term and 2.00% ultimate to achieve Social Security Solvency.
But the NW Plan NEVER relied on LC assumptions. Instead Dale was operating off of IC mostly for reasons of apples to apples comparisons, while Arne was wary of certain demographic projections. Meanwhile I went along with IC because if the results were really more in accord with LC the solution under the NW Plan would simply be to cancel certain projected FICA increases in our spreadsheet. Which would have been a win-win for me, I mean who would bitch about an argument that starts “Crap I was wrong, I WON’T be taking an extra 0.1% of your paycheck come 2037. Dang!!’
Krasting’s error is more fundamental than that. Within limits Social Security costs track the yield on the 10 year. Which is one answer as to why there was no Social Security COLA for two years in a row, the low yield on the 10 year mirrored the low rate of inflation, a relation which Krasting as an ex bond guy should understand full well. What he doesn’t understand it that low inflation also results in low cost increases for Social Security. To the extent that low domestic inflation is reflected in yields on the Ten Year (and despite all appeals to the Confidence Fairies and Invisible Bond Vigilantes that relation continues to hold) the effect of low yields are mostly offset by those decreased costs.
This doesn’t always work, for example the stagflation of the late 70s and early 80s is largely what caused the very real crisis that resulted in the 1983 Greenspan Commission. But despite the best efforts of the nay-sayers we are just not seeing the disconnect between inflation and real growth needed to justify Krasting’s henny-pennyism. Now if we see both inflation and unemployment return to double digit range all bets are off. But in that event Social Security won’t be our only or most immediate problem.
Bruce
it’s only unfunded until it is funded. by raising the tax that one half of one tenth of one percent per year we fund it. not only for the seventy five years, but over that infinite horizon. once you raise the tax to the necessary level there is no “last year problem.”
Bruce
it is only unfunded until we fund it. by raising the tax one half of one tenth of one percent per year for seventy years we fund it… not only for the seventy five years, but over the infinite horizon.
the “last year problem” only arises when it’s not funded.
Bruce
no doubt you and Arne are right. I just can’t help myself.
coberly:
JimZ is different JimA
coberly:
JimZ is different then JimA
“We live longer and have fewer kids than our grandparents.” If you believe that I must conclude you have an income well above the median. The people with lower incomes aren’t living enough longer to make a significant difference. The bottom decile, one year longer than in 1938. Oh, sure, the top decile five years longer. Big deal. Fewer kids, yes, but not that many fewer, and that’s really irrelevant because how many kids you have is irrelevant to SS. Go back and reread the article, about how the incoming new workers PLUS constant productivity increases affects the system. Don’t let the “experts” insert those plausible-sounding but distracting irrelevant “facts” into your head.
I am sorry for your problems, but I think you are mistaken that “politicians want to raid Social Security to fix the other side of the ledger.” I believe they want to raid Social Security because sociopathic billionaires pay them to make such arguments, and they really just want to force everybody to put their money in programs where the bankers and brokers can get their hands on the big fees they will charge. Perhaps you are right about some of them, though. I remember reading, many years ago, “Never ascribe to evil what can be explained by stupidity.”
I realize Sammy and Krasting and who the hell ever wants gets to post here. That’s a fine thing really. I only wish I could get their stuff to show up in a special clueless liar’s font. Or a specially transparent color. It would save time really.
Also true for “saving” in a bank account, no? Young working folks deposit savings from paychecks, old retired folks withdraw that money from their savings accounts–let’s call it paygo. The retired folks’ accounts were built-up earlier from their paychecks, but their diollars were “stolen” by the bank rather than physically put into a vault. I guess some would call it a Ponzi scheme and warn that the whole banking system will collapse because the number of workers is shrinking relative to the number of retirees. It should collapse about the same time that the stock market and SS system collapse. The only solution is to reduce the amounts that retirees can withdraw from any of these systems.
Have to disagree. Obama has already been complicit in raiding it it to give payroll tax cuts as stimulus.
coberly,
I’m basically agreeing with you–if you’ll let me.
Well Krasting tells us he is retired. Then again Peter G Peterson is no longer in day to day control of Blackstone. Which just seems to give both of them unlimited time to continue to try to sell their own class interest. Which depending on their portfolios in retirement may also serve to boost their own self interest.
So Krasting’s motivation maybe is not direct commissions but more a “Solidarity Now! Solidarity Forever!” thing. Only shouted out in the bar at the Yacht Club rather than at the barricades.
mcwop
Procopius didn’t say they don’t want to raid it… he said they want to raid it to force you to let them gamble with your money. I think he is right. I also think the people who really want to kill SS just hate the idea of poor people being “idle,” even if they paid for their own retirement.
USA today (ithink) ran an article a few years ago claiming that for everyone who does NOT retire, “the economy” gains 90,000 dollars per year. You can be sure “the boss” gets a pretty big share of that 90k. If nothing else he gets the satisfaction of having you dust his wine collection.
Joel
I will let you. Will you let me agree with you, if I re-say it in my own way? Plenty of room here for different takes. then the reader can choose what works for him.
Bruce Webb
I don’t think you make enough allowance for “dumb.”
It’s true that Krasting and Peterson see things through a lens favorable to their own class interests. But the sad fact of human thought is that it stops at that point. Once they believe what they want to believe they become incapable of further thought.
I looked back at the annual report and find that “unfunded liability” was not at all what I wanted to say. Somewhere else I saw a analysis that tried to use a number based on how much a particular cohort has put in compared to what it has received at any point in time. The author felt that because it was a large number it meant something, but it was another example of not understanding paygo.
What I did find interesting was that this value always increased. Thus, it actually did show that (unlike fraululent schemes) Social Security’s paygo can go on forever.
People who trot out different ways of looking at the numbers often have to be shown how their numbers really relate to SS. (Or people who look at numbers trotted out by people who do know better need to be shown why what seems to make sense to them is not really an issue for SS.)
Krasting seems pretty active in publishing his views on the web, retired or not. And, we must all recognize that people “work longer and live longer” these days, esp. people who clip coupons and collect dividends for a living. Obviously, I’m speculating when I attribute his thinking to a profit motive. I don’t have a high opinion of Krasting’s analyses, for sure. NancyO
Arne
thanks for the clarification. The basic facts of SS are plain enough, I think, if we can get a fair hearing. But enough of the details are complex enough that they might need to be explained more than once, more than one way.
Yes
I would bet that Krasting is being paid to publish his opinions. But the thing these days for published opinions is that they don’t need to be even approximately fact based. They just need to “sound” true… which anymore means “sound like the lies they have already been told.”
I just took it at face value from reading his uh contributions to this and every other thing I’ve seen him write about Social Security (not just at AB but elsewhere ) that he was one of the subjects of the post.
A Damned Liar.