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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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Who is not retiring, and why?

Via Bloomberg comes this note on demographics and the work force, and continues a conversation about how that impacts all of us. Probably not in the way most often provided in punditry…such as taking jobs away from the millenium generation, wealthy old geezers stereotypes, or alarms sounded about who is to pay for services we want, etc.

It’s well known that the U.S. is turning gray. It’s less well known that the workforce is turning gray as well. The percentage of Americans who are 65 and older will rise from 13 percent in 2010 to 20 percent by 2030 — and, if the recent trend continues, a growing share of those elderly Americans will carry on working past the normal retirement age.

Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics

In 1990, 11.8 percent of those 65 and older worked. In 2010 the figure was 17.4 percent. By 2020, the Bureau of Labor Statistics expects it to be 22.6 percent. The numbers are even more surprising for Americans older than 75. Less than 5 percent of them worked in 1990. In 2010, it was 7.4 percent. By 2020, according to the BLS, 10 percent of them will still be toiling away.

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Worms, Pond Scum and Economists

Dean Baker writes

Worms, Pond Scum and Economists

The effort to blame the awful plight of the young on Social Security and Medicare is picking up steam.
In the last week, there were several pieces in The Washington Post and The New York Times that either implicitly or explicitly blamed older workers and retirees for the bad economic plight facing young people today. There is now a full-court press to cut Social Security and Medicare benefits, ostensibly out of a desire to help young workers today and in the future.

Just to be clear, there is no doubt that young workers face dismal economic prospects at the moment.

This means that young people today can expect many more years of dire labor market conditions, because the remedies that could turn around their job situations have been blocked by nonsense spewing from economists. Incidentally, this situation works out very nicely for those on top, who are enjoying the benefits of record-high profit shares, which have also helped to fuel a soaring stock market.
The failure to see the largest asset bubble in the history of the world, coupled with the failure to prescribe an effective remedy to deal with the damage, should be sufficient to earn the economics profession the contempt of right-thinking people everywhere. But there is nothing too low for this group of professionals.

We are now seeing economists joining the crusade to cut Social Security and Medicare by implicitly or explicitly claiming that these programs are somehow responsible for the dismal economic plight of the young. The argument is that we can only free up money for helping our young if we take money from the old, a group with a median income of $20,000 a year.

By contrast, the upward redistribution of income to the richest 1 percent is equal to 10 percentage points of national income, or more than $1.3 trillion a year. To put this in the ten-year-budget-window context that dominates Washington debate, the amount that has been redistributed upward will be more than $16 trillion over the next decade. And that is based on the heroic assumption that the upward redistribution does not continue.

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Social Security is the healthiest component of the U.S.’s retirement saving system

Bloomberg’s Josh Barro is the lead writer for the Ticker, Bloomberg View’s blog on economics, finance and politics.

Social Security is the healthiest component of the U.S.’s retirement saving system

Last week I wrote that Social Security is the healthiest component of the U.S.’s retirement saving system and should therefore be expanded. This isn’t a popular position; liberals tend to prefer defined-benefit pensions from employers and conservatives defined-contribution accounts, such as 401(k)s and individual retirement accounts. But the reason Social Security works so well is that it lacks a fundamental problem that undermines the effectiveness of these other retirement vehicles.

Both defined-benefit pensions and defined-contribution accounts are based on a shared and problematic premise: It is possible to set aside x percent of today’s gross domestic product for retirement and generate retirement income from those savings that exceeds x percent of future GDP. This is to be achieved by investing retirement savings in assets that typically grow at a faster rate than the economy as a whole.

Such returns are possible. Some asset classes have long-run rates of return that exceed GDP growth: equities, for example. But the high returns are a compensation procyclical risk: These assets will tend to strongly outperform GDP when the economy does well and significantly underperform it during recessions.

It doesn’t make sense to finance retirement in such a risky way. Retirement savings exist disproportionately for the benefit of people with low or moderate means and a relatively low tolerance for risk. If retirement assets were invested safely, they would not be expected to grow faster than the economy as a whole.

So 401(k) and traditional pensions are both just efforts to finance retirement on the cheap by taking on excessive risk. The problem created by risk manifests itself in different ways with the different vehicles.

That is, private pensions no longer rely on the premise that retirement can be made cheaper through investment in assets that grow faster than GDP. But such a free lunch was what made the plans attractive for employers in the first place, and as employers have faced the plans’ real costs, they have increasingly eliminated them.

In the public sector, the free lunch lives on in the financial statements of pension funds. Governments fund their pensions based on an expected rate of return on a risky portfolio of assets, most commonly between 7.5 and 8 percent a year, far above the roughly 5 percent growth path we might expect for nominal GDP.

All of these options (expanding Social Security or downshifting the risk in other investment vehicles) would cause retirement saving to appear to become more expensive. But it wouldn’t actually make saving more expensive: It would just replace hidden costs created by risk with explicit costs.
Americans would then face a stark reality: Retirement, which is basically just another word for spending the final sixth of your life on vacation, is expensive. I am agnostic on the question of whether people ought to respond by saving more or retiring later. Advocates of later retirement tend to be elite people with jobs that are interesting and not physically demanding. But facing up to the true cost of adequate retirement saving would help Americans make more sound choices about how to deal with the fact that retirement is expensive.

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Three definitions of Solvency for Social Security

Bruce Webb brings an interesting perspective to the current situation as pundits and politicians figure out ‘what is acceptable’ and what ‘they can live with’ her at AB and at his new website Social Security Defender: (see link below):

Scheduled vs Payable Benefits: three definitions of Solvency

As usual click to embiggen.

When it comes to Social Security there are three definitions of ‘Solvency’, one used by the ‘Actuary’ another by the ‘Defender’ and the third by the ‘Reformer’. And it is this difference that lays at the heart of the policy disagreements on how to achieve it. Something ostensibly all three seek.

For the ‘Actuary’ ‘Solvency’ is mostly a value free concept. Social Security is solvent when all income from all sources equals all costs leaving Trust Fund assets equalling 100% of the next years projected cost. This is known as having a ‘Trust Fund Ratio’ of 100. If the Trust Funds are projected to be solvent for the upcoming 10 year window Social Security is judged to be in ‘Short Term Actuarial Balance’. If the Trust Funds are projected to maintain that solvency, or at least end up with it without going into the hole over a 75 year period it is judged to be in ‘Long Term Actuarial Balance’. And since 2003 the Trustees added an additional measure of solvency measured over the ‘Infinite Future Horizon’.

Under current law Social Security has a ‘scheduled benefit’ which is the arithmetic result of a formula calculated ultimately on the course of Real Wage increases over the worker’s lifetime. It also has a ‘payable benefit’ based on a formula that is calculated by a combination of Real Wage setting the initial benefit, inflation setting the continuing benefit, and total wages driving the income. The details are not important for the present purpose, suffice it to say that ‘scheduled benefit’ is the measure of Cost while ‘payable benefit’ is the measure of Income minus Cost. And as such ‘involvency’ represents that point here Cost exceeds Income to the extent that Trust Fund assets are driven below a TF Ratio of 100. Or in an alternative formulation when those assets are driven to zero. At which time we have a scenario as depicted in the above figure: a sudden reset of payable benefits from the schedule (where they were topped off by asset redemptions) to the new payable equal to then current income from taxation.

In percentage terms that sudden reset amounts to right on 25% of then current scheduled benefits and it is that discontinuity that defines ‘solvency crisis’. But here is where ‘defenders’ and ‘reformers’ depart.
For Social Security Defenders the crisis is one of a cut in benefits and the solution is putting in place policy that would maintain the scheduled benefit. For Social Security ‘reformers’ the crisis is more political, the risk that a reset in benefits from ‘scheduled’ to ‘payable’ will result in demands that the schedule be maintained via transfers from outside the dedicated income stream of FICA and tax on benefits. As a result the proposed solutions to this same ‘solvency crisis’ via benefit reset are diametrically opposed with defenders advocating measures to maintain current scheduled benefits while reformers see their task as reconciling future retirees to accepting then payable.

The key here, and the stopping point for this post is that either the prescription of the defender in saving scheduled or the reformer in reconciling retirees with payable will, if accomplished by appropriate changes in current law, satisfy the actuary’s test for solvency. As will outcomes in between. From a purely technocratic standpoint any set of policies that has scheduled and payable share the same ultimate projected line with no discontinuity meets the ‘solvency’ test. Meaning that each has ‘fixed’ Social Security by ‘preserving’ benefits in a ‘sustainable’ fashion. Without at any point addressing the question of whether the resulting benefits actually meet any standard of societal inequity.

Are cuts to scheduled actually the ‘Road to Catfood’ or a ‘Concession to Reality’? Well interestingly neither question has anything to do which the metric of ‘Solvency’. The question, while of course of the utmost importance in real terms, is somewhat orthogonal to discussions revolving around ‘actuarial balance’. Because from the latter perspective the ‘crisis’ IS the ‘discontinuity’ and not the real world implications thereof.

And a ‘fix’ is a ‘fix’.

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Social Security and the current fad of being balanced and comprehensive

Salon writer  Natasha Lennard reports that a sticking point around Social Security stalled ‘fiscal cliff’ back and forth rejoinders between the two parties, but also points out that the topic continues to be on the table (and has been offered by President Obama before these talks a couple years ago).   Notice both parties using the same language of “part of a balanced, comprehensive agreement” as the fix is in without looking at other parts of the budget…these back and forth sallies are bi-partisan in appearance, but do not address the current version of ‘fical cliff’ responsibilities.

A free gift to the political players and the cover of the moment, a matter not even related to current fiscal responsibility, nor to the real world impact it has on poverty and seniors, nor the carefully thought out and responsible plans offered to address real issues.

In what Democratic aides told reporters was a “major setback” in fiscal cliff negotiations, Republicans proposed throwing a Social Security cut into the scaled-back deal Congress is attempting to cobble together in advance of the New Year deadline. As things stand at the time of writing, negotiations are close to breakdown.

Aides to Republican Senate Minority Leader Mitch McConnell presented the Social Security proposal, which included a method of calculating benefits with inflation. The plan would lower cost of living increases for Social Security recipients. Democrats were swift to reject the offer.

A Democratic aide told ABC News that the proposal was a “poisoned pill” in the current negotiations. However, it should be noted that President Obama has suggested a similar proposal within the context of negotiations on a broad deficit-reduction deal. Such a measure had been taken off the table in discussions over a scaled-back, short-term agreement.

Senate Majority Leader Harry Reid said on the Senate floor Sunday, “We’re willing to make difficult concessions as part of a balanced, comprehensive agreement but we’ll not agree to cut social security benefits as part of a small or short-term agreement, especially if that agreement gives more handouts to the rich.”

How do I know this? Well, it is worth the time to follow posts at Angry Bear over the next few months, and to compare the analysis to your own understandings. Bruce Webb will be writing with updated numbers, a must to understand the words others are using, and to gain further understanding of the big numbers used to argue political points of view.

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Fareed Zakaria on Social Security, Fareed Hearts Pete Peterson, Disses your mom

by Dale Coberly

Fareed Zakaria on Social Security

Fareed Hearts Pete Peterson

Disses your mom

Fareed Zakaria wrote an essay for Time, The Baby Boom and Financial Doom. Dean Baker responded to Zakaria with Fareed Zakaria is unhappy that the American left chooses arithmetic over Peter Peterson. Baker makes the point that the increase in the number of people over age sixty five has always been accompanied by an increase in productivity that makes everyone richer despite the costs of feeding the old.

Baker is far too kind to Zakaria. Zakaria’s article is a compendium of lies designed to fool people in order to lead them to their harm. The lies are not original with Zakaria but are the same lies we have been hearing from Peter Peterson sponsored think tank “non partisan expert” liars for years.

I hope that by taking a little harder look at those lies people will learn how not to be fooled by them and others like them. [Note: I have been told that I need to find another word for “liars.” I understand that people are put off by it, but they need to understand that is exactly what we are dealing with here: lies and liars: words designed to deceive you by people who mean you harm. It is almost possible to believe that Zakaria doesn’t know he is lying, but has merely been fooled by Peterson. But the selection of “facts” presented by Zakaria suggests he knows exactly what he is doing.]

Here is what Zakaria says:   (under the fold)

The facts are hard to dispute. In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays.

Well, the facts may be hard to dispute, but they don’t have anything to do with Social Security, and Social Security doesn’t have anything to do with the deficit.

The short answer to Zakaria’s Baby Boom and Financial doom scenario could be put something like this:
Social Security is paid for by the people who will get the benefits. It is their own money. It has nothing to do with the federal budget. The population numbers that Zakaria offers sound scary because they are meant to sound scary, but the fact remains that the workers can continue to pay for their own Social Security by simply raising their own payroll tax by what amounts to forty cents per week each year. This is an “undisputable fact” that can be clearly demonstrated. And it takes into account all the baby boomers, and the increasing life expectancy, and the poor growth in wages the Trustees project over the next 75 years. It also takes care of the “infinite horizon” which the Big Liars like to trot out when the numbers for the next seventy five years don’t sound scary enough.

In particular, the Baby Boomers have already paid for their retirement. That is the Trust Fund you hear about. It’s real money, paid by the Boomers. It needs to be paid back to them for their retirement. Paying back money that you owe does not increase your debt; it decreases it. The Trust Fund is not “going broke.” It is paying for the Boomer retirement, as it was created to do. After the Boomers have been paid, the Trust Fund will return to a normal reserve fund and Social Security will go back to “pay as you go” as it was designed.

An average worker today might be making, say 50,000 a year, and paying about 3,000 a year for his Social Security, leaving him 47,000 for other uses, including other taxes. His boss contributes another 3,000. And because there are today about three workers for each retiree, those three workers contribute a total of about 18,000 dollars per year, which is about what the average Social Security benefit is.

In another forty years or so, the average worker will be making twice what the average worker today is making… so, say 100,000 dollars (inflation adjusted). If nothing else changed, he would pay about 6000 a year in payroll tax, leaving him 94 thousand dollars for other uses, and his boss would contribute another six thousand, making 12000. By then there might be only two workers per retiree, so there would be 24000 available for that retiree’s Social Security benefit. But 24 thousand a year might feel like poverty in a world where the average wage is 100k. So those workers… who know they will soon become retirees themselves … might agree to pay 8000 each per year, leaving them 92,000 per year for other uses. Their bosses would contribute another 8000 (don’t worry about the poor boss: “most economists agree” that this is “really” the workers money). So 16 thousand, times the two workers per retiree, results in a SS benefit of 32000 per year. Enough to live on in reasonable comfort. (Please note that with a real income of 92 thousand a year, those workers would have plenty of money to “invest in the market” to try to raise their standard of living in retirement. But the SS would be there “in case all else fails.”)

And that’s it. Please note that the poor worker staggering under his load of one retiree for every two workers has 45000 dollars more in his pocket after paying his payroll tax than he has today, and he can look forward to a retirement with 14,000 more dollars per year than today’s retiree. That is, in spite of the staggering load of only two workers per retiree, the future worker will be about twice as rich after paying his payroll tax, and will be able to look forward to being twice as rich in retirement.

It is hard for me to see the gloom in this picture, much less the doom. You may note that the workers could have decided to not raise their payroll tax, keeping the extra two thousand a year for “now,” at the cost of 8000 a year when they are retired. I think this would be a foolish choice, but if it were made honestly, with everyone knowing what they were doing, I would not have an objection.

But Zakaria and Peterson try to keep the people from knowing what their honest choices are.
“The facts are hard hard to dispute…”

but the facts Zakaria chooses are meant to deceive. Please note “the facts are hard to dispute” adds nothing to the argument but does tend to set up in the unwary reader’s mind… “no point arguing with this… these are the facts.” And it is pretty much the standard of excellence among “non partisan expert” liars to use “facts” which are “strictly true” but nevertheless designed to mislead.

“ In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65.”

Does this sound like it means something? It’s meant to. Something like, “Gosh, the population of old people is soaring. It’s going to cost me five times as much to pay for “the old” if we don’t do something.”
Well, maybe not. In 1900 people had large families because a lot of their kids died. This by itself would tend to make the ratio of under sixty five to over sixty five larger than it is today. Add to that the fact that people over 65 also tended to die “young” because they couldn’t work and ran out of money for food and shelter. But perhaps Zakaria doesn’t really want to return us to the dear old days of high infant mortality and a short but miserable old age. Maybe he’s only pointing at the problem… “how are we going to support all these old people.” But in fact he is not. He is pointing away from how we are going to support these old people: We could continue to support them the way we have since 1936 when Social Security was invented: Allow them to save enough of their own money in a way that is safe from inflation and bad days on the market.
And the fact is that unless we decide to kill off the old, we are STILL going to have to “support” them, even if there is no Social Security at all. When they cash in their stocks and bonds, it will be “the young” who are providing the cash.

“Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications.”

Well, maybe not. Workers pay for their own Social Security “off budget.” So Social Security has no budgetary implications whatsoever. Medicare has some “budgetary implications” because it was made partially “on budget” in what I think was a misguided attempt to make the rich pay for more of it. Ordinary workers could pay for all of their own expected medical care in retirement through Medicare, but eventually a serious effort would need to be made to bring down the cost of medical care or no one but the very rich will be able to afford it. This is a problem Zakaria… and Peterson… carefully do not address. Because Peterson’s agenda is ENTIRELY the destruction of Social Security, despite what he says.
Medicaid is entirely on budget; it is welfare. But again, unless you want to go back to high infant mortality and people dying in the streets, this is a problem we are going to have to address. And the way to address it is not to begin by cutting the programs and throwing sick people into the streets. It would help if you knew that the budget deficit has not been caused by medicare and medicaid, but by unreasonably high defense spending, wars of dubious value to America, and the massive fraud of “bankers and private equity billionaires” that brought down the economy in 2008. America can still afford to take care of “the least of these.” And for those who think money is the measure of all things, a case can be made that taking care of the sick now ultimately makes the country richer.

“ In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. “

This does not mean what it seems to mean. You might ask, if you knew to ask, why Zakaria leaves out “the fact” that today the ratio is three working Americans for every retiree. Perhaps that makes the jump to “two working Americans” seem less scary. Perhaps that might make you ask “how can only three of us support each retiree? The answer turn out to be that “we” are not supporting those retirees. They paid for their Social Security themselves. But this ratio of retirees to workers scare “fact” is a perennial, and I want to take some time with it. It will be a little bit (not much) mathematical, made harder by the fact that I don’t know how to draw pictures on line: you will have to use your imagination and draw them for yourself.

First there is the original version: “there were 40 workers per retiree in 1940” or “16 workers per retiree in 1950”… or some such.

This is a meaningless artifact of how the Social Security system was phased in. Imagine if you will a country which has recently experience hard times which have wiped out the life savings of everyone.

The people get together and decide to create an insurance pool to keep this from happening again. Imagine there are forty million people in the pool, one million aged 25, one million aged 26, one million aged 27, and so forth to one million aged 63 and one million aged 64. So far no one has retired so the ratio of workers to retirees is 40 million to zero. The next year the one million aged 64 turn 65 and retire. The one million aged 25 turn 26 and “move up a year” as does everyone else, with one million new workers who turn 25 and enter the insurance pool. So the number of workers remains the same while the number of retired people increases by one million. Now the ratio of workers to retirees is 40 million to one million… or 40 to 1.
Next year another million people retire and another million young workers enter the pool, and the ratio becomes 40 to 2, or 20 to 1. And the next year another million… etc, and the ratio becomes 40 to 3 or about 13 to 1. And so on.

First note in passing that those first cohorts who retire “only” paid their insurance premium for a year or two… far less than they will collect in benefits. But the people knew this when they designed the insurance pool. They reasoned that the first retirees were people who had lost the most savings in the depression; the first retirees had worked their whole lives paying taxes, supporting their own elders, and supporting the children who would be directly paying their benefits, as well as building the infrastructure that made it easier for those children to make money than it had been for their elders. They also noted that none of the later retirees.. people who paid the premium “tax” for a full forty years … would lose anything by the deal. They would collect the benefits they paid for in their turn… benefits that would equal what they paid in, plus an interest that takes care of inflation and about two percent real interest on top of that. Plus any “insurance” benefit they would collect if they died with dependents, got disabled, or just never made enough money to have saved enough for retirement.

But note that people don’t live forever, so by, say, year ten, the number of retired people increases by another million but decreases by say half a million who die that year. This means that the ratio of workers to retirees will not continue to decline forever. It will stabilize at some level that reflects the death rate of retirees, or what is the same thing, the average life expectancy of retirees.

If, say, the average death rate was 10% of each cohort of retirees each year, then after 10 years (in our model… real life is a little more complicated) the number of people who die each year is the same as the number of new retirees. This would also mean that the life expectancy… you have a 50-50 chance of living to this age… of new retirees would be five years.

Draw a picture. Make a bar graph: write ages on the bottom axis, and population on the vertical axis. For every age from 25 to 64 the bar is “one million” high. For every age after 65 the bar is shorter by 10% or 100 thousand. So you have 40 million workers, and 900 thousand plus 800 thousand plus 700 thousand… and so on … retirees. The sum of those retirees is four and a half million (9 plus one, 8 plus 2, 7 plus 3, 6 plus 4, and 5). So the ratio of workers to retirees is about 40 to 4 1/2) or about 9 to one. And this is a ratio that will not change over time unless there are changes in death rates, or birth rates, or immigration. Note that the life expectancy is about four and a half years. This means that each worker works for forty years and can expect to collect 4 and a half years of benefits. So, oddly, the ratio of workers to retirees is the same as the ratio of working years to retirement years for EACH retiree.

If the death rate was 5% per year for each cohort of retirees, the bar graphs would decline at a slower rate.. taking 20 years to reach zero at age 85, with the life expectancy now ten years. One million retirees still die each year, but now there are ten million of them alive at any one time . This makes the ratio of workers to retirees 40 to ten or 4 to one. It also makes the ratio of working years to retirement years 4 to one.
Now, finally, let us give those retirees a life expectancy of twenty years… half of them will die by age 85, and (most of) the rest of them by age 105. This would result in a population of retirees of twenty million… or a ratio of workers to retirees of 2 to 1. It also means that workers will work two years for every year they expect to be retired.

But wait, if they are going to be retired, they are going to have to buy groceries for those twenty years. Where are they going to get the money?

Well, they could save it from their earnings if we could solve the inflation problem for them in a way that didn’t expose them to the risk of ending up with nothing at all from investing in stocks that fail. And this is what Social Security does.

Note that they don’t need to save enough in protected savings to have the same income in retirement as they have while working. They could decide, say, that since the kids are grown and the mortgage paid, if they had to they could get by on, say, one third of their working wage. Since they will be working 40 years and expect to live 20 years, they would need to set aside about 16% of their wages to have enough. (16% times 40 equals 32% times 20.)

And if they put that money into an insurance pool, they can expect to keep collecting that 32% even if they live longer than 20 years. This is made possible by the money paid in by the people who don’t live as long as the twenty years.

But Zakaria doesn’t know that and Peterson doesn’t want you to know that.
You are making well over twice as much money as your grandparents made… and they struggled to save 10% of what they made to eke out a retirement that would only last about ten years. But you, twice as rich as they were, are being told you can’t be expected to save 16% of your wages to pay for a retirement that will last twice as long or maybe a lot longer?

Or maybe you can. But the only way to do this is through Social Security, and Peterson doesn’t want you to, because even though its YOUR money, its a “government” program. And that drives Peterson crazy. Literally insane.

But wait, it’s better than that. While you are paying your 16% every year, wages will be going up so that by the time you retire real wages will have about doubled. That means that the 16% workers are paying in each year will be worth twice as much as the 16% you paid in (this is a simplification). That means that instead of living on about 33% of what you were making while working, you will have about 50% or more. Because Social Security is insurance, the effective interest on your premium (payroll tax) is a lot higher if you were a low wage earner than if you were a high wage earner. The high wage earner is not hurt by this. He still gets a reasonable “return on investment” plus the insurance value of Social Security “in case” things had not turned out so well for him. The interest on your Social Security “investment” is not high. It depends on the growth in the economy, but it is always higher than inflation. And whatever happens, you will get “enough.” And that’s priceless.

The “facts are not in dispute.” And the facts are that all the scary language about the looming booming number of old folks “we” have to support… turns out to mean that we can easily afford to support OURSELVES out of our own savings, protected by Social Security, but not “paid for” by the government.”
And if you are going to live longer.. become one of those looming booming old people… you are going to have to find a way to pay for those extra years. Social Security provides a very secure way to pay for at least “enough.”

That is if you don’t let the Big Liars scare you into letting them “save” it.

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Steady State Social Security: What Would it Look LIke?

What would Social Security look like if it met all current law requirements for ‘solvency’? Well unfortunately we have to start with the most eye-glazing opening ever deployed: ‘first lets define our terms’. To which I would add ‘within an artificial economic model’. Because real life is messy, particularly right now, and that introduces unnecessary conceptual confusion. So lets begin.

First assume a solid state economy. For my purposes I will define that as 5.5% unemployment, 5% nominal yield on 10 year Treasuries, 2.5% Real GDP, 2% inflation, 1% annual growth in SS beneficiaries. (Yes in the real world these interact, and maybe this precise combination is unlikely, though each number in isolation is in intermediate ranges, but that will not effect the basic argument).

Second assume that Social Security is currently ‘solvent’, meaning that income from all sources is sufficient to pay all costs, leaving a reserve numerically equal to next year cost. What would it take to keep it ‘solvent’?

Well in our simplified model Social Security cost increases year over year as a sum of inflation growth and beneficiary population. Which ignoring interactions means an increase of 3% per year. Which in turn means that maintaining ‘solvency’ requires bringing in enough income from all sources to pay 103% of Year One cost AND add 3% to Trust Fund principal and so leaving the Trust Fund ratio (reserves as a percentage of NEXT year cost) at the end of Year Two at 100 or one year’s worth of Year Three cost.

Now in our model the 5% nominal yield on Trust Fund assets (mostly invested in a mirror of 5 year bonds) would boost the TF ratio to 105% by interest effects alone, assuming that is that no portion of current interest was needed to pay current cost. Turning that around this means that 2 points of interest are available to reduce the need for ‘income excluding interest’ to match cost. Meaning that such income has to total 98% of the new 103% of previous year cost.

Now in year over year terms this has two effects on the overall economy. First ‘income excluding interest’ has to increase year over year to pick up its 98% share of the new year’s new increased cost. And second some part of the 5% interest on Trust Fund assets has to be transferred in cash to pick up its 2% share.

What does this leave us? Well a Social Security system that is cash flow negative each and every year. But with a wrinkle. Since that portion of the 5% nominal interest retained simply to meet the 3% growth in TF balance to maintain a TF ratio of 100 is credited in the form of NEW Special Treasuries, which are NOT financed directly by borrowing, that nominal interest is discounted in cash terms by some 60% from the perspective of the General Fund and the taxpayers who pay into it. AND the system is picking up basic income support for the 1% of the population being added on net to the beneficiary pool.

It seems to me that once having established steady state solvency that people paying taxes on non-wage income are getting a pretty good deal out of Social Security. To the degree that basic income support for seniors, widows/widowers/orphans, the disabled is some societal wide responsibility then 98% is being paid by current wage workers in FICA and by retired workers in tax on benefits and an additional percentage by income tax on wage workers leaving a pretty damn small levy on gains from capital. Forgive the language.

All this of course stems from a condition of ‘solvency’, which translates to keeping the income excluding interest/cost ratio approximating 98%. Which in theory can be done on either the benefit or cost side. But either way the resultant post-solvency is not remotely ‘unsustainable’. Or if so leave some numbers in comments. The only real policy question it seems to me is determining the actual costs and trade-offs getting from where we are now to solvency as defined. And not as is too common now trying to calculate the costs of paying off all the principal going forward. Because as noted in a previous post in a Steady State Social Security system principal NEVER needs to be paid down, instead all of it has to be retained to meet reserve requirements.

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SOCIAL SECURITY…Sweet Reasonableness and Fact Checkers

by Dale Coberly

Sweet Reasonableness
and Fact Checkers

Apparently the Big Liars are getting worried about the fact that “Social Security has nothing to do with the deficit.” There have been a flurry of little Big Liars “proving” that in fact SS is a contributor to the Deficit. I am going to try to point out the hidden lie in a couple of these articles, beginning with the most dangerous.
Glenn Kessler ( Washington Post ) sets himself up to be The Fact Checker for the Washington Post. The trouble is, of course, that in this world every liar begins by claiming himself to be the Fountain of Truth and offers to explain things to the little people who wouldn’t be expected to know without his kind guidance and protection. The Devil, they say, can appear in the guise of a Franciscan monk when it suits his purposes.
And Kessler adopts Sweet Reasonableness for his schtick today. Why not? It works for Lyndsay Graham.
“Senator Durbin,” he tells us, says “Social Security has added not one penny to the deficit.”

Kessler explains how he previously “evaluated” similar statements and “rated” them, “true but false.” Can’t get any more fair and balanced than that. But Kessler is worried that this “true but false” statement will lead readers to forget that “Social Security’s a long term issue that can’t be deferred.” I hope you notice how we are gently being led into the swamp. Most Washington Post readers will not notice. These are, after all, the people who took on mortgages they couldn’t afford because “house prices can only go up.” And of course were blamed for their foolishness later by the very people who sold them the mortgages.

Update: Also see Jamie Galbraith
explains why the WaPo’s so called fact checkers is wrong as well, in addition criticizing “sensible liberal” takes on middle class and what works.

But Kessler doesn’t “mean to pick on Durbin since plenty of Democrats in recent days have made similar comments.”

Ah, see how fair we are being. Can’t blame Durbin, because all the Democrats are doing it.

But Kessler “remains troubled.. given the further decline in Social Security’s finances in the past year.” Note we get this “further decline” as an established fact that we don’t have to question. We will not even be given time to ask whether this “fact” bears on the question of SS contribution to the deficit. Remember, that’s where we started.

And of course, more sweet reasonableness: “we do not think this is a slamdunk falsehood as some people believe, but it is certainly worth revisiting”… in order to convince you dear reader that while it is not false, this “talking point” is not true. See, we are just saving you from being misled by that fast talker over there.
Then Kessler gives us a list of “facts,” which are true enough to establish his credibility as a fair truth checker. While he leads us ever so gently by the hand to his disturbing conclusion: You see, all that money coming into Social Security from interest on the Trust Funds “is simply paid with new Treasury Bonds.”
Leading to the inevitable conclusion that SS does indeed increase the deficit. You see, if you borrow money and you have to pay it back, that “increases your deficit.”

I hope… without hope… that what is wrong with this is obvious to the (my) reader. But just in case: paying back money you owe does not increase your debt. It decreases it. Even if you borrow money to pay back the money you owe someone else, you do NOT increase your deficit… you just exchange one debt for another. And in any case… the person you borrowed from did NOT increase your deficit. YOU did. And if you try telling him you are not going to pay him back because that would increase your debt… he may send the boys around to break your knees. And you would deserve it.

But Kessler regards this as “a matter of Theology.” I guess it is, some people regard paying their debts as something like Thou Shalt Not Steal. Others, like Kessler, regard not paying your debts… especially if they are owed to old ladies who can’t break your knees… as simply “good business practice.”
And of course, my debt is her fault because she lent me the money.

But, he says, some say “this is just paper shuffling among different parts of the U.S. government.” Those people who paid into the Trust Fund to pay in advance for their own retirement “benefits” don’t exist. The government is some kind of Monolithic “person” that only owes money to itself. The “government” has no relationship of trust whatsoever to the people it calls “citizens” or “taxpayers.” It’s theology: “the government giveth and the government taketh away.” or in this case, the “government borrows and the government stiffs the people it borrowed from.” We are not expected to notice that the government borrowed from workers to give tax breaks to the rich, and that not paying back the workers will save the poor hard working job creators from the indignity of paying back what they borrowed (through the government they paid for). Or, heaven forbid, that the money the United States of America borrowed had nothing to do with creating, or protecting, “our” ability to make more money in the (now present) future so we could afford to pay back what “we” borrowed. Nah, that would sound too much like the “government behaving like a business.”
Kessler says, oh so reasonably, “What matters is whether Social Security is generating enough money to pay for its bills on its own. The plain fact [we are, after all, fact checkers] is that it is not.”

This is a lie. It is in fact a damned lie. Social Security “generated” the money to pay for its bills on its own. It lent a temporary excess of that money, those taxes, to The United States of America. Kessler says that Social Security cannot cash its bonds to pay for its bills… because that would, you see, force the United States of America to find some money to pay its full faith and credit obligations with. And we all know the United States of America is broke, flat busted. Where would The United States of America find that kind of money?

See, “White House budget documents… show that … Social Security outlays exceed Social Security payroll taxes, thus boosting the bottom line federal deficit.” Well I would not want to accuse the White House of keeping two sets of books, but if you refuse to count the money Social Security already collected in payroll taxes and saved for just such a recession as we have today… and can say with a straight face that “outlays exceed taxes” while pretending the interest on previous taxes does not exist… you are a goddamn liar.
You want to watch out for damned liars who call themselves Fact Checkers and lead you with sweet reasonableness to your own destruction.

[Kessler hints at, but sweetly does not go into, the “fact” that the payroll tax holiday causes Social Security to contribute to the deficit. This is also a lie, but more subtle. It is not Social Security contributing to the deficit. It is the tax “holiday.” The tax holiday is NOT Social Security. It is the opposite of Social Security. In fact it might best be understood as what would happen if the Liars succeed in cutting Social Security. At some point people will not have enough SS benefits to live. At that point the Congress may have to pay “welfare” to those people out of the general fund (the deficit). Will they then blame Social Security for causing the deficit? Of course they will. Because the “fact checkers” will have taught them they can say any damn thing they please, and the people won’t be able to do anything about it.]

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After selling the election

In a previous post Fiscal cliff and the frenzy  I pointed to the rush of reporting the day after the election. Some of these articles should be in the op-ed section instead of reporting.

Lori Montgomery

“Avoiding hard decisions could have grave consequences, analysts say…”


Few expect Washington to replicate the scope of the Bowles-Simpson plan. Though it is widely praised, its $4 trillion in 10-year savings includes major changes to Social Security opposed by liberals and an aggressive new tax code that would generate far more revenue than most conservatives could stomach.


About half the new savings would come from reversing part of the massive tax cuts that, along with the collapse of tax collections during the recent recession, are a major cause of current budget problems. The rest would come from lower spending, including on Social Security and Medicare, forecast to be the biggest drivers of future borrowing.

Zachary Goldfarb

Much of the public dispute over the fiscal cliff has centered on the president’s demand that taxes rise for the wealthy. But entitlements are an essential element of the discussion because they are the main drivers of the nation’s borrowing problem over the years to come.

from The Root

After four years of sheer obstructionism — behavior that was called out during the presidential campaign season — most Americans are pointedly aware of who is willing to further wreck the nation’s economy and who would like to rescue it.

Fifty-three percent of the nation believes that if a fiscal agreement isn’t reached by New Year’s Eve, Republicans in Congress are the ones to blame, reports a new Washington Post-Pew Research Center poll. It also reports that only 38 percent believe that the president and the Republican Congress will reach a deal.

If those pessimists are right, then in an effort to assure a long-term deficit reduction, a series of mandatory and draconian spending cuts will jump off in less than seven weeks, coupled with the expiration of a slew of tax cuts.

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