Relevant and even prescient commentary on news, politics and the economy.

Dean Baker: “An Aging Society Is No Problem When Wages Rise”

The argument behind MJ.ABW in relation to Social Security (More Jobs. At Better Wages) by real economist and mentor Dean Baker of CEPR. Also an implicit underpinning of the Northwest Plan for a Real Social Security Fix. The whole thing is short if you want to read through: An Aging Society Is No Problem When Wages Rise

The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.

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Social Security Defender Archive: Including Northwest Plan Docs/Spreadsheets

I have been working off and on, well mostly off because of ‘life’ and ‘laziness’, since 2010 on a project I modestly called the Social Security Defender. It is all built around a Google account and so has a Google+ page, a blog, an e-mail address and a Google Drive.

Today I am going live with a Public Folder in its Google Drive called the Social Security Defender Archive. In this folder are a series of other folders including ones devoted to The Northwest Plan for a Real Social Security Fix and to Social Security Reports and to CBO & OMB Documents and Reports. Plus others. In all cases the documents should be viewable, linkable, and downloadable even as there is no ‘write’ capacity.

So this is an open invitation to try out the Archive, to see what works, what doesn’t, what is useless and could be deleted and what is missing that should be added. I expect to be actively curating the Archive over the next week or so, in particular adding in a lot of material relating to the 2015 Social Security Report, including broken out Figures and Tables, as well as updated versions of the Northwest Plan with 2015 Report data included.

The e-mail address for this account, which is also my e-mail for Angry Bear related matters is:
socsec dot defender at Comments there or left her are more than welcome. Thanx.

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Northwest Plan for Social Security: Conservative “Workers – Take Your Medicine”-ism (and why this Social Democrat likes it)

Long time readers of Angry Bear will be familiar with the Northwest Plan for a Real Social Security Fix. It has been pushed here in a series of posts and in innumerable comments (mostly by Dale Coberly) since 2009 including this core post: NW Plan for a Real Social Security Fix Ver 2.0: 2009 Trigger. Those who have questions about its details can ask them in Comments. But lets have the short version.

The Northwest Plan is inherently conservative in the old-fashioned sense of the word. It accepts that status quo that has resulted from the Social Security Act of 1935 and the important Amendments of 1939, 1950 and 1956 and for the sake of argument accepts the tests and Reporting imposed on Social Security by current law and the practice of the Social Security Trustees and the projections of the Social Security Office of the Chief Actuary. Having accepted that status quo in all its respects it then proceeds to ask a simple question: “What would it take to guarantee full Scheduled Benefits going forward under the constraints of current law and under the projections of the (standard) Intermediate Cost projection?” Or in other words “What would it take to Fix Social Security without Reforming it?” Where ‘Reform’ would include proposals from both the Right (which mostly take the form of benefit reductions) or from the Left (which generally take the form of modifying or eliminating the income cap formula). Or in still other words “What if we just made workers take their medicine and take the entire burden on themselves?”

In answering this question the authors of the Northwest Plan, primarily Dale Coberly with assists from Bruce Webb and Arne Larson, suggest starting from the arithmetic. Which in this case takes the form of “actuarial gap”. Now actuarial gap can be measured and presented in various ways over various time periods but is by the Trustees typically presented in the following form: “What is the gap between current rates of FICA and the rate currently needed to fully fund Scheduled Benefits over the 75 year Long Range Actuarial Window without changing either the Benefit formula or the Cap formula?” Now granted that there are a lot of barely buried assumptions in this formulation what would happen if we just ran with it? And answers to that under the fold.

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Northwest Plan 2013 – Extracts by Webb

2013Northwest-Bruce Sum 1
Click to embiggen. And then do some magnifying. Because even a selected file covering the whole 75 year projection period yields small type.

Anyway this is my first take from Dale Coberly’s numbers for 2013 Northwest Plan with three calculated columns added by me. Those are the three with “Cost-Non Interest Income” as part or all of their label. Which should actually be “Cost-New Non Interest Income”. In any event what this extract shows is that even after the series of FICA increases seen in “New Payroll Tax Rate” there would be a shortfall between FICA and Tax on Benefits on the one hand and Cost on the other, which difference would need to be made up from interest on the existing Trust Fund. The very last column shows this shortfall as a percentage of that year’s Trust Fund and so closely approximates the interest rates needed to have the Trust Fund break even, with any excess being devoted to building up the TF balance to maintain actuarial balance.

‘Approximates’ because there is a missing data point here in that calculated Trust Fund balances depend on a (here) hidden return based on assumed interest rates. So to really evaluate the last two columns you would need to view the entire spreadsheet (coming soon to a forum near you).

Which might have us turn to the column third from the right. This shows the non-interest cash deficiency before and after the series of FICA increases start in 2018. In this scenario the deficiency stabilizes at about 5% of Cost over the 30 years of maximum Boomer impact and then goes to a closer approximation of true Pay-Go after mid-century. The effect of this roughly 5% medium term cash shortfall would be to reduce the Trust Fund Ratio from its current level of nearly 4 times cost to a target level of around 1.25 times cost, a small cushion over the 1.00 requirement under current law for ‘actuarial balance’. The result is that the Trust Fund shrinks in relation to all of Cost, GDP and probably Total Public Debt even as its nominal principal value nevers goes negative. That is the NW Plan is designed to put Social Security on a glide path towards Pay-Go having taken care of the Boomer Bulge along the way. Which is to say providing the piece missing (and by some Commissioners by design) from the 1983 Greenspan Commission inspired Social Security legislative deal.

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Northwest Plan 2012 – Numbers by Request of Commenter BK

I am just beginning an attempt to tranform the Northwest Plan for a Real Social Security Fix into a series of Tables and Figures (and original spreadsheets) that people can review at length. But since the authors were effectively accused of not really having numbers at all here is an advanced peek at some of the future workproduct. This one extracted from Excel and tranformed into a graphic. Click to embiggen.

This is from the 2012 version of NW and shows the first increase in FICA in 2018. Which obviously explains why Revenue stays the same until 2017. Note that Trust Fund balances never decline in nominal dollar terms although the Trust Fund Ratio does. But in this data series never below 1.24 (or 124 in Trustee terms) or 24 points above the 100 level that represents ‘solvency’ as the Trustees define it.

The 2013 version differs in detail as will the 2014 once the Report is released (next week?) and we develop it. But the general outline remains the same, phased in increases in FICA over a 20 year period with adjustments at intervals after.

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Social Security: the Shape of Solvency

2011 II_project_IID6 (1)
Well lets try again (two hours of draft having just disappeared)/
The above figure is II.D6 from the 2011 Social Security Report. The reasons why I didn’t use the 2013 version will become clear later, short version is it doesn’t show ‘The Shape of Solvency’ while the longer version is, well, long.

This figure shows the projections of three different economic and demographic models for Social Security expressed in terms of Trust Fund Ratio where 100 = next year’s projected cost. Now Trust Fund Ratio is in some ways an odd beast because it is to some extent after the fact yet also prospective. This is because it reports Trust Fund balances AFTER the calculation of current revenue minus current cost and does so in terms of NEXT year’s cost. For example it is possible for Trust Fund balances to increase in a given year and have Trust Fund Ratio decline, that is SS can be in surplus and yet weakening by the metric deployed by the Trustees. And we can discuss the arithmetic of this in comments, for now let me just assert that there is a good reason to measure Solvency in terms of Trust Fund ratios even in a system that operates on a Pay-Go basis.

The Trustees measure ‘solvency’ in terms of ‘actuarial balance’ over periods of time including ‘short term’ (10 years), ‘long term’ (75 years) and ‘infinite future’. Figure II.D6 shows a combination of a prospective ‘long term’ 75 years and twenty retrospective years for 95 years total. This 95 year period also happens to cover the entire lifespan of nearly everyone in the workforce today. The three graphed lines going forward represent three different economic and demographic models where I represents the projection of ‘Low Cost’, III the projection of ‘High Cost’, and II the projection of ‘Intermediate Cost’.

In this figure from the 2011 Report both High Cost and Intermediate Cost project to intersect the bottom line representing a Trust Fund Ratio of 0%. Which is to say a Trust Fund with no remaining principal. Now under a Pay-Go system where all or most benefits are paid from current revenue, or in SS terms where ‘revenue’ entirely or mostly meets ‘cost’, a Trust Fund with a zero balance/Trust Fund ratio doesn’t equate to “No check for you”. But it DOES mean no reserve funds to maintain Scheduled Benefits. Instead under current law the intersection of the graphed line of II and III would require a reset from Scheduled Benefits to Payable Benefits of greater or lesser severity. On the other hand if the graphed line NEVER hits zero then Scheduled Benefits can be paid in full and so ARE Payable Benefits.

But for very good reasons the Trustees are mandated to not allow things to get that close to disrupting the relation between Scheduled and Payable and instead have set up a test point that serve as the Canary in Social Security’s Coal Mine. And that test point is a Trust Fund Ratio of 100, or one year of next year’s cost for any given year tested. If that tested or projected ratio is set to stay above 100 for each year of the selected time window then Social Security is ‘solvent’. Which gets us back to our Figure II.D6.

In 2011 Figure II.D6 showed High Cost and Intermediate Cost not only busting downwards through the 100 mark and so failing the test for solvency in that year, but also hitting the zero bound of Trust Fund Depletion. On the other hand Low Cost or line I only nudges the 200 mark and then rebounds from there. Making this curve A shape of solvency. But many other curves would meet that test and in fact any such curve that exited the 75 year window between 100 and 200 would equally be A shape of solvency and in some important respects THE Shape of Solvency. Because odd as it may seem an overfunded Trust Fund would be a bad thing. On the other hand so preventable as to not even be a concern. Questions about that can be deferred until comments.

Backtracking a little bit, there are good reasons to call Intermediate Cost projections ‘realistic’ and Low Cost and High Cost ‘artificial’. But this does not have to do so much with a committment to ALL of Intermediate Cost projections as hitting the EXACT median point but instead to a methodology that has Low Cost having all its variables come in in a way positive for solvency while High Cost has them all coming in negative even where there is no reason a priori to believe that all dozen or so will move in the same direction. So while it is tempting to call Low Cost ‘optimistic’ and High Cost ‘pessimistic’ this is only true as narrowly applied to Social Security Solvency as defined. For example people living longer, healthier and happier lives is taken in isolation bad news for Social Security solvency. Yet most of us wouldn’t consider a wave of untreatable pneumonia that wiped out 90% of all residents of nursing homes overnight ‘Good News!’. But it would do wonders for Social Security Solvency and after the immediate medical expense for Medicare as well.

On the flip side most of the economic numbers that undergird Low Cost and nearer to Low Cost outcomes would be positive for society as a whole. For example lower levels of unemployment coupled with higher real wage would go a long way towards restoring Social Security to solvency even if that better resulting standard of living meant more workers living to be Great Grandpas and Grandmas. So we can with a clear conscience root for Full Employment while avoiding construction of Soylent Green facilities or ramping up Ice Floe manufacturing to launch Gramma on a one-way trip into the Artic.

Snark aside what this means is that we don’t have to commit without reservation to every particular projection that goes into Low Cost, just enough of them to bring the tail of Intermediate Cost first above a TF Ratio of 0% and then ideally to a level that never hits 100 from the upside. We DON’T need a tail going out through the 75 year window at the 300 level and trending up. On the other hand a curve that bottoms out at say 128 and stays steady from there would be almost ideal. Though to be safe one would want to have that tail tick up a bit. But there are any number of ways to accomplish that. One way is just to assume Intermediate Cost economic and demographic numbers and make up the difference on the revenue side. This is basically the position of the ‘Raise the Cap’ folks. Another would be to make a conscious and sustained effort to postively change those economic and demographic numbers of Intermediate Cost in a way that moves them towards Low Cost without resorting to putting Gramma on the Ice Floe. That is basically the little known position of the ‘Rosser-Webb’ folks. Or you could go for the ‘First Do No Harm’ position of baking revenue increases into the pie while having a mechanism to back off if ‘Rosser-Webb’ actually comes through.

Which is in a nutshell the meat of the Northwest Plan. It seeks to achieve as close to a perfect Shape of Solvency as possible by introducing the right changes to the formula at the right time in reaction to real time data as it comes in. The various authors of Northwest have varying opinions as to the merits of say Intermediate Cost vs Low Cost but in the end it matters not. Because the methodology adapts to the data and targets the Shape.

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Social Security payroll contribution not a problem

This item confirms that the Northwest Plan for Social Security would work rather well for Congress, Social Security, and beneficiaries. Beltway conventional wisdom thought otherwise. My own reaction was of puzzlement by the Beltway conventional wisdom.

Fiscal Times reports:

We’ve already seen evidence that consumers have largely shrugged off this year’s expiration of the payroll tax holiday. A new survey from suggests one reason, beyond the housing rebound and stock market rally: many simply haven’t seen the hit to their paychecks. Tax hike? What tax hike?

The payroll tax rate reverted to 6.2 percent this year after two years at 4.2 percent. Yet nearly half of working Americans surveyed (48 percent) said they haven’t noticed the higher taxes. Another 7 percent said they haven’t been affected.

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Dean Baker on Social Security and Obama

Via Truthout Dean Baker points to continuing insistent of President Obama to keep Social Security ‘on the table’. Dean Baker has a take on some numbers surrounding the politics and stories politicans offer:

While most of the DC insiders probably don’t understand the chained CPI, everyone else should recognize that this technical fix amounts to a serious cut in benefits. It reduces benefits compared to the current schedule by 0.3 percent annually. This adds up through time. After someone has been getting benefits for 10 years, the cut in annual benefits is 3 percent. After 20 years, people would be seeing a benefit that is 6 percent lower, and after 30 years their benefit would be reduced by 9 percent. (AARP has a nice calculator which shows how much retirees can expect to lose from the chained CPI.)

We can debate whether the chained CPI benefit cut should be viewed as “large,” but there is no debate that chained CPI cut is a bigger hit to the typical retiree than the ending of the Bush tax cuts were to the typical high-end earner. Social Security provides more than half of the income for almost 70 percent of retirees. This means that the 3 percent cut in Social Security benefits amounts to a reduction in their income of more than 1.5 percent.

By contrast, if a wealthy couple has an income of $500,000 a year, as a result of President Obama’s tax hikes, they would be paying an addition three percentage points in taxes, or $3,000, on the income above $400,000. That comes to just 0.6 percent of their income.

If the proponents of using the chained CPI to cut Social Security want to claim that this cut is not a big deal, then they must also believe that the tax increases on the wealthy were not a big deal. That’s what the arithmetic says, and there is no way around it.

(h/t Nancy Ortiz)

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NW Plan for Social Security: Abridged Spreadsheet

First attempt at putting the NW Plan 2012 into viewable form. This graphic compresses the original spreadsheet in both axes. I will be putting links to the full spreadsheet in comments because I am not sure this one will share correctly (I am bouncing between Google Accts) link.

In any event the key columns are those marked NEW, especially the fourth column from the left ‘New Payroll Tax Rate’ and the last two ‘New Calculated Trust Fund’ and ‘New Trust Fund Ratio’.

This version of the spreadsheet terminates at 2045 simply because of graphic limitations, the original extends right through the 75 year window, but the key factor is that the Trust Fund Ratio stabilizes right at the 125 level right into the 2080s and still remains above 100 through the end of the range. In Social Security talk this means the NW Plan passes the Long Term Actuarial Balance test but just fails to meet the threshold for the stricter Sustainable Solvency measure which requires the TF Ratio to be trending at least slightly up.

On a final note. In the 2012 based NW Plan year end TF balances never drop in nominal terms meaning there is NEVER any net redemption of Trust Fund Principal. Which throws a whole new light on the asset/debt conundrum. But of that more in comments.

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2013 Northwest Plan for a Real Social Security Fix

The Northwest Plan for a Real Social Security Fix was first introduced and revised in 2009. Obviously it was never adopted. Still the basic mechanism remains the same as does the rationale and working assumptions and in what follows I am going to assume a certain knowledge of the mechanics of Social Security finance and reporting. For those who get lost I can only suggest revisiting the 2009 version and all the posts surrounding it or just place your questions in comments.

 The NW Plan can be described in a variety of ways but here I want to present it as the answer to a question: “Under the Social Security Trustees Intermediate Cost Alternative and given current law Scheduled Benefits and Cap Formula what would be the minimally disruptive revenue only fix to deliver those benefits with no changes in retirement age?” Note the questions that are not being addressed: “Is Intermediate Cost a realistic mid-point projection?” “Are current Scheduled Benefits adequate? too generous? equitable?” “Why NOT adjust the Cap Formula?” While these are all important questions and ones the authors of the NW Plan have plenty of opinions on, they just are not the question at hand.

For the purposes of establishing a baseline for further discussion the NW Plan simply assumes IC and current law benefit and cap formulae, and also adopts the Trustees tests for ‘adequacy’ ‘solvency’ and ‘actuarial balance’. For the Trustees Social Security is in actuarial balance if it is projected under IC assumptions to end each year of the short term window and the last year of the long term window with an asset reserve equal to 100% or more of the next year’s projected cost. The short term window is 10 years and so coincides with the standard budget window used by CBO and OMB. Which in turn means that anytime Social Security is in ‘short term actuarial balance’ it properly has no NECESSARY role in budget talks. This BTW is doubly true if all proposed ‘fixes’ start operating outside that window.

 On the other hand the Trustees also take a longer view. Under their definition a ‘current participant’ in Social Security is anyone 15 and older and their long term window is 75 years. Meaning long enough that anyone who could reasonably be contributing today has their retirement interests taken into consideration for the entire working and retirement lives of all but the longest lived of todays teenagers. Who of course are for older workers their grandchildren. The NW Plan provides for ALL those cohorts. Details below.
The NW Plan starts by examining the following Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2012-90 and fixing the point at which combined OASDI projects to fail the Short Term Test. By interpolation TF Assets will fall below Total Cost around 2027. But since the Test covers all years to then Year Ten test FAILURE projects to occur in 2018 and the NW Plan adopts the former year as the action point. This even though the combination of revenues and reserves in 2018 would still be sufficient to pay full scheduled benefits for 15 more years. Because that would be small comfort for the over 40s among us.

 The NW Plan takes this 2018 failure point and calculates a series of 0.1% FICA increases that would under IC assumptions keep 2027 and immediately following years in actuarial balance (Trust Fund ratios in excess of 100). And for good measure does the same for the entire long term window. Not because we have any real confidence in numbers outside the short to medium term but because once engaged on the exercise of addressing Short Term it is trivial to suggest numbers to address the largely theoretical gaps of the Long Term. One just has to take the numbers supplied by the Reports and mechanically insert some FICA rate changes.

 In short the NW Plan imposes a permanent (actually 75 year) fix given best available information in the Plan year. On the other hand that best available information changes with each Report year. But here is the key, by accepting a diagnostic that places ‘failure’ 13-15 years in advance of the real world consequences and starts the fix at the earlier date almost any conceivable change in outlook can be addressed by tweaking the FICA numbers at the tail, in almost all conceivable circumstances you have that 10-13 year lead time and an existing fix that at worst addresses the vast majority of the new projected gap. Which in most cases will not have actual incidence until 30 or 40 years down the road. In posts to come I will be putting up results of the new NW Plan spreadsheet based on the 2012 Report (the latest available). This post on the other hand is designed to let some of the conceptual objections be aired before diving into the actual numbers and assumptions.

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