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INTELLIGENCE SQUARED DEBATE OFFERS LITTLE IN THE WAY OF ACTUAL INTELLIGENCE2

by Dale Coberly

INTELLIGENCE SQUARED DEBATE OFFERS LITTLE IN THE WAY OF ACTUAL INTELLIGENCE

I am reading a short article on the Intelligence Squared debate I previously referred to in Social Security For the Young. It turns out they were more concerned with “insurance” than with Social Security.

But they don’t seem to understand the idea of insurance. The “for” side of the debate resolution: “Commitments made to seniors decades ago…saddle our children with unmanageable debt…” neglected to mention that Granny paid for those “commitments,” and there is no “debt,” manageable or otherwise. But granny didn’t get much help from the “against” side. Here are excerpts from the article here.

One shocking statistic is that 37 percent of those who came of age in this millennium are unemployed,” Rosenkranz said. “When consumers lack the confidence to spend, when businessmen lack the confidence to invest and to hire, it is the young that suffer most. The health insurance debate focused on the uninsured. But think for a moment about how health insurance is priced. Almost everywhere the young pay the same premium as their more illness prone elders. A massive subsidy for the old paid for by the young. Tens of millions of young people quite reasonably said no thanks to health insurance until the government mandated that they say yes.

The motion was that the young are being asked to sacrifice financially for the entitlement programs of the elderly, and the Conservative panelists argued in favor of that motion.

Arithmetic still matters,” Zuckerman began. “Medicaid now pays for both health and long term care for roughly 55 million Americans. It finances more than one third of all births in the United States, and pays the cost of almost two thirds of the people in nursing homes. The federal government underwrites 50 to 77 percent of the cost, depending on the income level of each state. Even so, Medicaid is the second biggest and fastest growing category of state spending. Costs are up more than 60 percent in the last five years and are expected to exceed $450 billion this year and to keep growing by about eight percent annually for the next decade. In the next — by the mid-2030s, the 65 and over population will nearly double, and health care costs, which have been rising far faster than worker productivity since the end of World War II, may be completely out of control, resulting in a tidal wave of federal spending.

But the Liberal camp did not see America’s entitlement programs as something that needs significant renovation.

The elderly used to be the poorest group in American until in 1926 the farm states where the Depression started began Social Security, which has then spread to a national program by Roosevelt in 1933,” Dean argued. “So this is a core program. We just need to make it work and we just need some mild tweaks. Health care needs a lot of tweaks, but the whole system needs tweaks, not simply Medicare. And we should stop victimizing Medicare for the sake of keeping our taxes absurdly low. The fact is people need to pay their fair share in America, and the Bush tax cuts need to sunset. You know, when the taxes were at Bill Clinton’s rate, the economy was a whole lot better than it is now. And I wouldn’t mind going back to those taxes and paying my fair share at all.

Beginning with the fatuous remark by Zuckerman that “Arithmetic still matters” it seems to me that neither side understands what they are talking about.

Arithmetic only matters if you understand the problem you are “solving” in the first place.

I doubt very much “the young” pay the same for private health insurance as “the old.” But in the case of Medicare, and less directly Medicaid or any government paid health insurance, the whole point is that THE YOUNG WILL BECOME THE OLD. It makes more sense for them to pay a small premium, while they are young and healthy and working, over a long period of time, so that they will have paid in advance for health care needs that will come when they are old and sick and not working. THAT IS THE WHOLE POINT OF “INSURANCE.”

And that is the whole reason that government paid insurance is “better than” private insurance. It just is not possible for a private company to pay for health care forty years after the premium was paid in. Government plans, whether explicitly “pay as you go” plans for which the insured person pays directly, as Medicare is in part, or just a general “we are all in this together” plan where “on average” younger workers are “paying for” older people out of general taxes… but will be paid for in their turn when they become older… can manage this kind of infinite “pay it forward” financing with no problem at all. No problem except for the political liars who pretend that the young are bearing the burden for the old.. as a trick to fool the young into voting for someone who promises to lift the burden… and leave them to the mercies of the free market when they get old and sick and out of work.

The fact that costs are going up is not an argument FOR cutting your insurance. In fact it would be insane to CUT your insurance because you think costs are going to go up. With pay as you go financing the increased costs will be to some extent subsidized by the “next” generation… but that generation will have its own increased costs subsidized by the following generation. Moreover each generation will be richer than the last, making it easier for them to pay the increased costs. This is not a Ponzi scheme, because each generation will get the same good deal as the last…and it can go on forever. In fact, it’s the best deal “the young” can hope for.

Unfortunately Howard Dean’s remarks, as quoted here, don’t seem to address this simple fact. Rather he offers a kind of vague “we need to pay taxes to save the program” which is true, but doesn’t really help anyone understand why. or what. or how.

Go back to what Rosenkranz said at the beginning of the excerpt: “When consumers lack the confidence to spend, when businessmen lack the confidence to invest and hire, it is the young that suffer most.”

And what does Rosenkranz think will happen to consumer confidence, and ultimately to business confidence, when young people finally notice that without Social Security and Medicare they are looking forward to an old age that is desperate,poor, nasty, brutal, and short?

I would add an entirely personal comment: The purpose of arguments like “honoring commitments to granny… impose intolerable debt on the young” is three fold.

First, encourage “the young” to continue to believe they will never get old.

Second, take the young despise the old, and everyone else: “we don’t owe them anything.” We are all proud, heroic, individuals. We don’t need “cooperation”, much less kindness.

And third, enable the young to tell themselves that “commitments” don’t matter. Not just vague promises here, but commitments to give people what they paid for.

Someone more old fashioned than we allow ourselves to be would say this is the way to a society of anxiety, pain, and misery. Pleasures, perhaps, for the “winners,” but no happiness at all, for anyone, win or lose.

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Social Security For The Young

by Dale Coberly

Social Security For The Young

Intelligence Squared U.S. (corrected link: http://intelligencesquaredus.org/) is sponsoring an Oxford-style debate Tuesday evening in Manhattan. The program is entitled “Grandma’s Benefits Imperil Junior’s Future” The resolution:

“Commitments made to seniors decades ago failed to foresee the harsh economic realities of the present. Do entitlements saddle our children with unmanageable debt, asking them to sacrifice their future for the sake of the elderly? Social Security, Medicare, and Medicaid were created to provide a social safety net. But if we cut these programs, are we balancing the budget on the backs of the aged and sick, leaving behind society’s most vulnerable?”

Arguing for the motion will be Fox “News” commentator Margaret Hoover and U.S. News and World Report editor-in-chief Mort Zuckerman.

Arguing against will be former DNC Chair and Vermont Gov. Howard Dean and Roosevelt Institute economist Jeff Madrick.

Does keeping promises to the elderly mean sacrificing our children’s future?

The answer is, “NO! This is nonsense. Social Security has NOTHING to do with balancing the budget.

But while you will hear the lies the enemies of Social Security have been telling for 75 years, it is not certain the defenders of Social Security will explain the simple truth.

The simple truth is that Social Security has nothing to do with “the harsh economic realities of the present” except to provide the insurance payments that people paid for “just in case” of harsh economic realities like the present.

Social Security is NOT in trouble. It is not broke. It is not going to go broke. It can’t ever go broke.

Unless you believe the lies and let them break it.

With NO CHANGES AT ALL Social Security can continue to pay “all” benefits forever at a level that is “enough” by today’s standards.

So why do we keep hearing that is going to go broke and create huge budget deficits… unless we raise huge taxes on the young… or “the rich”?

Well, because there are highly paid liars — they call them “non partisan experts” — who are paid to tell you this.

And you, dear reader, will have to think very hard to free yourself from the lies. They have been telling you lies since you were a child, charitably giving “lesson plans” to the schools, so that well meaning, but not very well informed, teachers would teach the lies to children too young to know they were being lied to. So you would grow up and every time you heard “Social Security.” you would think, “it won’t be there for me. it’s going broke.”

And even those people who partly know better can only say “it’s not going broke… not yet anyway.” or “it’s not going broke, it will be able to pay 80% of benefits… so it’s only 20% broke,” or “it’s not going broke… we can make the rich pay for it.”

Well, it’s not going broke at all. Not even one percent. Not ever. And it doesn’t need to be fixed. And the rich don’t have to pay for it.

In fact the whole point of Social Security is that it is NOT a tax on the rich. It is NOT welfare. It is not even “government spending.” It is the only way that workers have to save their own money for their own retirement protected from inflation and market losses.

Social Security is a very smart way to protect workers savings by a simple idea called “pay as you go with wage indexing.”

The way it works is something like this. [There are some details here that I have simplified to make the point easier to follow. They do not change the basic idea, or the “cost” to workers in any important way.]

When I was young I made a dollar an hour. If the payroll tax then was what it is today [it was a lot less] it would mean I paid about 6 cents an hour to Social Security, and my boss contributed another six cents. My 12 cents, times 2000 hours per year times about 100 million people [if the population was the same… it was a lot less] would add up to enough money to pay the retirement needs of about 50 million old people [there were a lot fewer]. Fifty years later, workers doing the same work I was doing are making about ten dollars an hour. So they contribute about $1.20 to their Social Security. That means that $1.20 times 2000 hours per year times 100 million people would be available to pay the retirement benefits of 50 million retirees. In other words, to pay my current Social Security benefits, there is ten times as much money available as i was paying in… with no change in the tax rate.

Some of this is “just” inflation, but enough of it is a real increase in wages over that time. This real increase in wages translates into a real effective “interest” on the money I paid into Social Security, allowing me to collect more than I paid in. Even the part that was “inflation” would have been hard for me to earn in interest over those fifty years.

Now it happens that over that time, the ratio of the number of beneficiaries to the number of workers has changed, but so has the tax rate. The ratio of workers to beneficiaries has gone from ten to one to about three to one. So the tax rate has gone from 2% to 6%. That is not a “terrible problem.” It merely reflects the gradual phasing in of Social Security. This meant that on a pay as you go basis the early worker-beneficiaries got a bargain. On the other hand, those early workers had supported their own parents and paid for welfare for others, lived through the depression and fought World War 2, and served in the draft, and built the infrastructure that makes it easier for you to make money than it was for them. But it does not mean that later worker-beneficiaries are bearing a cruel burden. They are paying in no more than they will get back. In fact they are paying less, because of that pay as you go effective interest we just talked about.

If there were no Social Security you would still have to save at least as much money as you now save via the payroll “tax.” Moreover you would have to earn at least enough interest to pay for inflation, and you would be lucky to earn enough interest to equal the effective interest that “wage adjustment” through Social Security provides you. You might do better than that. Or you might do a lot worse. Social Security is insurance to prevent you from doing worse. The “rate of return” is not bad, but that’s not the important point. The important point with insurance is the difference between “enough” and “not enough.” Social Security provides you with enough to retire if all else fails.

The hardest part of saving enough on your own would be actually saving the money in the first place. Most people can always find something more important today than saving money for tomorrow. And then tomorrow comes sooner than they expect. The second hardest part would be keeping up with inflation. And the third hard part would be not losing it all to a bad investment or just a bad decade on the stock market.

That’s basically how it works. No tricks. No magic. No anxious hopes. No “if only’s”. No greedy geezers. No taxes on the rich. No trips to the welfare office. Just you saving for your own basic retirement. There is no reason this can’t continue forever.

So why does “everybody know it’s going broke and it won’t be there for them”?

Because everybody has been lied to. You have been lied to your whole life, and you will have to work very hard to understand that. All the little lies will pop into your head saying, “No…it’s really a Ponzi scheme.” “no, it’s really greedy geezers,” “no. the return on investment is really lousy.” “no, the return on investment is really too generous.”

It’s not going broke. Ever. But here is why they get away with saying “it” is.

Back in 1983 there was some danger it COULD go broke. There was a lot of inflation and a lot of unemployment at the same time, and the Social Security tax rate had not been raised enough to pay for the benefits the workers would need. [it was 8%]. They fixed that problem then by raising the rate to 11.4%, scheduled to rise to 12.4%. But this rate was actually higher than needed to just pay for Social Security’s needs on a pay as you go basis. The extra was put into a Trust Fund — that means it was saved in a legal way so the money, and the interest it earned could only be used to pay for Social Security benefits. So in effect the Baby Boomers would be paying in advance for their own retirement needs above the normal pay as you go rate. This Trust Fund is exactly like a savings account you might set up to pay for your kid’s college. It grows until the kid goes to college, then it is draw down to pay for his expenses. And it runs out of money about the time he graduates. So the Social Security Trust Fund is expected to run out of money just about the time the Baby Boomers run out…. of a need for benefits.

It is this running out of the Trust Fund that the politicians and journalists point to and shout that “Social Security is going broke.” But the Trust Fund is NOT Social Security. It’s a bridge fund to help pay for the Boomer retirement. It is SUPPOSED to run out of money.

After that, Social Security goes back to “pay as you go with wage indexing.” And it can continue on that basis forever.

But there is one more little wrinkle in the story. While the Trust Fund is paying for the Boomer retirement, the “young” are going to be living longer than their grandparents did. If they are going to be living longer, they will need to save a little more for their retirement.

Or they can wait and not retire as soon as they might have wanted. Or they can retire on time and take a little less each month in order to make their savings last the longer time they will need it.

As a matter of fact, with no change at all, Social Security can pay for them to retire on time, and pay “all” benefits over their life expectancy at a monthly rate that would be considered “enough” by our standards today. But because the people of that time will be making about 60% more (real) money than we are today, they may want to retire at the same higher standard of living… that is keep the same monthly rate of benefits that people get today (which would be worth more than today’s). If they will want to do this… keep the same “replacement rate” and the same retirement age, they would need to raise their savings rate (payroll tax) about 2% for the worker and 2% for the employer. This will not be a hardship for them because they will be making 60% more than you are today. And the really good news is they don’t have to do this all at once. In fact it would be better if they raised it about a tenth of a percent per year over the next twenty years. They would never notice the increase… because their wages are going up. But they sure would notice having to put off their retirement, or having to live on a pension that was “enough” for their grandparents, but won’t buy what the people living in the same time and in the same neighborhood are going to “need.”

So Social Security cannot go broke. It can always pay “all” benefits. But you will have to defend it from the liars, and you will have to decide what tax rate you are willing to pay in order to get the level of benefits you will want at the age you will want to retire.

To put it simply, if you want to keep the same retirement age, and the same relative replacement rate you would need to raise your tax rate at least one half of one tenth of one percent per year… that’s forty cents per week in today’s terms.

Or you could take the chance of having to work for the boss until you are ready for the glue factory. Even if you don’t want to stop working when you are 65, or 62, you may like the idea of having your Social Security to back you up while you try to do something really worthwhile with the rest of your life.

But you are going to have to undo a lot of lies if you are going to save your Social Security for your own needs.

Small note on math:

The average worker is making 1000 dollars a week today; he is paying 60 dollars a week for his Social Security, and his boss is contributing a matching 60 dollars. This leaves him with 940 dollars a week to live on (and pay other taxes). The average SS beneficiary gets about 400 dollars a week.

In 2040 or so the average worker will be making about 1600 dollars a week. With no change in the payroll tax, he would pay 96 dollars a week into SS. his boss would match that. leaving him with 1504 per week to live on… The average beneficiary would get 640 per week…. IF he wasn’t going to live longer. To make the money last a life time that is about one third longer he would have to settle for 480 dollars per week.

Or he could have raised his payroll tax by 2%. then he would pay a tax of 128 dollars per week, and his boss would match that. leaving him 1472 per week to live on … And the average beneficiary would get that 640 per week without having to delay his retirement for years. Note the trade off. He gives up 32 dollars a week out of 1500 while he is working in order to gain 160 dollars a week out of about 500 while he is retired. And this doesn’t even count the gain that worker will get from the “effective interest” we talked about.

Look at those numbers. It’s hard for young people to really understand that they are going to get old, and they are not going to want to work until they are ready to die, or may not even be able to work. You are going to have 530 dollars more per week after tax than you have today even if you raise your own tax the 2% that would be enough to allow you to retire young enough to enjoy it, with enough money to live about the way your neighbors live… the way you lived before you retired.

This is not a crushing burden. It’s called being richer, and using some of your extra money to pay for a longer, happier retirement.

And it has NOTHING to do with the Federal budget. It’s you paying for your own retirement. IF you are smart enough to keep them from stealing it.

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Long term fiscal problems 2007…PGL

Angry Bear PGL wrote this post in 2007 reflecting the shape of politics and media soundbites of this current and constant election campaigning over the current two years to 2012 elections:

In case Mr. Romney hasn’t seen my question. let me restate it. How will you address the long-run fiscal problem, that is, will you raise income taxes or will you impose that backdoor employment tax increase known as “entitlement reform”, which really means cutting Social Security benefits? Until Mr. Romney answer this question clearly let’s not pretend he has a serious position paper on taxes.

The whole post is below the fold. (hat tip Daniel B)

Stephen Dubner says Mr. Romney does and points to a NYTimes oped written by Greg Mankiw as that position paper:

But perhaps the very most interesting thing about the Mankiw piece is the lead: “Do the rich pay their fair share in taxes? This is likely to become a defining question during the presidential campaign.” This is a classic in winking understatement, for Mankiw was not only an advisor to Bush, but is also (as duly noted in the bio on his piece) an advisor to Mitt Romney on Romney’s current campaign. I applaud Mankiw, the Times, and Romney for having the courage to produce what is essentially a position paper on taxation in the pages of the Times. As long as everyone’s cards are on the table, which they are here, I see no harm. But I sure would have liked to see the e-mails back and forth between the Mankiw and the Romney camp as the Times piece was being edited; and it sure will be interesting to see how this trenchant piece of tax commentary plays out in Romney’s campaign. I can just imagine one of his opponents whipping out the Mankiw article a few weeks or months from now and waving it in his face – “So the rich pay too much tax, huh?”

Doesn’t the suggestion that the rich pay too much in taxes imply that the middle class and the working poor pay too little? It does unless one thinks we ought to slash the budgets of things like the Defense Department – which is not going to happen if Mitt Romney has his way. The claim that Mr. Romney was courageous in producing a position paper on taxation is absurd on so many levels. Greg noted one:

No emails. No phone calls. No smoke signals. I am not an employee of the campaign. I am a Harvard professor, expressing my own views, sometimes publicly, sometimes privately to a candidate for President. After listening to a variety of advisers with various perspectives, Romney decides on his own what positions to take.

The other levels on which this statement about Romney’s courage is absurd goes to a couple of critiques of Greg’s “super-compelling” oped both noted by Brad DeLong. While I think Mark Thoma had a more compelling discussion of the fairness issue, my contribution, which Brad was so kind to highlight, goes to the simple arithmetic of the long-run budget constraint that Mr. Romney has yet to address:

And by looking at 2004, he is forgetting that the budget is not exactly in balance. Yes, the General Fund deficit was rather large so current tax obligations do not capture the cost of government as in all those deferred tax bills thanks to the Bush tax “cuts”. But one might try Greg did that the unified deficit is not that large … Greg leaves out the fact that we have a large Social Security surplus, which is the reason why he can argue that the “deficit” is not that large. Implicit in the use of this figure is the proposition that those payroll “contributions” we are making are NOT to become our retirement benefits down the road. As long as we are posing questions for political candidates, let’s pose this one for Mitt Romney (as Greg is one of his advisors): do you intend to slash Social Security benefits in the future as you continue to impose these employment taxes? After all, you want to maintain the Bush tax “cuts” and still have a large defense department.

In case Mr. Romney hasn’t seen my question – let me restate it. How will you address the long-run fiscal problem, that is, will you raise income taxes or will you impose that backdoor employment tax increase known as “entitlement reform”, which really means cutting Social Security benefits? Until Mr. Romney answer this question clearly – let’s not pretend he has a serious position paper on taxes.

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Guest post: Why Means Testing Social Security Benefits Is More Trouble Than It’s Worth

Guest post by Nancy Ortiz

(Rdan here…Nancy is a long time reader of Angry Bear and has worked within the Social Security system professionally)

One of the many fixes now being considered as a remedy for Social Security and Medicare’s projected shortfalls is means testing benefits. The rationale is that rich people shouldn’t get SS because “they don’t need it.” Many people who ought to know better believe this would save a great deal of money and help fix the 2037 benefit gap. Sorry, people. This idea isn’t worth the paper it’s rotten on (as Dorothy Parker once said about someone else’s screen play). The short and long of it is that it costs more to means test benefits than to pay SS benefits without regard to the beneficiary’s income and assets.
How do I know this is true? The Social Security Administration (SSA) administers two programs: the basic SS program and Supplemental Security Income (SSI), a means-tested federal public assistance program for poor aged, blind and disabled people. You have to have worked 40 quarters to receive SS, but no work is required for SSI. It is a “welfare” program, not a social insurance program. SSI began on Jan. 1, 1974. In the intervening years, SSA has had plenty of experience trying to run this complex and challenging program. It has learned that SSI costs at least 7 times more dollar for dollar to administer than its regular SS program. 
There are many reasons. The federal government establishes overall SSI eligibility and payment levels, but each state can pay optional amounts over and above those required by federal law. In effect, there are 50 different SSI programs across the country. Earlier this week, CBS ran an article online with an account of a House Ways and Means Committee hearing about SSA’s improper benefit payments. Here’s the link. http://www.cbsnews.com/stories/2011/06/14/in_depth_us/main20071107.shtml
SSA was third in the list of federal agencies making improper payments to its beneficiaries and recipients. The first two in order were DHHS (Medicare, Medicaid, and TANF with $71.4 billion ) and DOL (Unemployment benefits $17.5 billion). DOD is not mentioned in this article presumably because the amount of DOD’s improper payments cannot be determined. SSA’s total was $8 billion, including $4 billion in improper SSI  payments, out of a total of $650 billion in benefits paid for all programs.
Congress has underfunded SSA since the 1980’s, sometimes more– sometimes less, but consistently for at least 30 years. The agency is  understaffed as a result. This has produced a 10% error rate in SSI payments as compared to a .05% error rate in SS benefits. This is because SSI is very labor intensive. The recipients are poor, often functionally or completely illiterate, and don’t speak English well or at all. Interviews are longer, the topics covered more complex, the documentation requirements much more extensive than in the SS program. Furthermore, you have to reinterview recipients frequently to be sure they’re still eligible. So, not only is it harder to process the claims to begin with but also you have to do the work all over again every year. If you don’t have the staff, you can’t do the work fast enough or accurately enough to produce a low error rate.
SSA’s Inspector General summed up the state of SSA’s efforts to improve payment accuracy in his statement for the record at Ways and Means’ hearing. See http://waysandmeans.house.gov/UploadedFiles/ocarrol222.pdf  SSA plans to spend $796M on quality control in 2011 and at least as much in 2012, budget permitting. This includes local office and end-of-line quality reviews, studies to determine causes of error, costs for computer matches in-house and out-of-house, Continuing Disability Reviews, redeterminations of eligibility, and the like. There are many more ways to reduce payment errors. But they cost more money than the ones listed above.
In SSI or any other means-tested program today, all income and any assets, no matter how small in dollar or market value, have to be reported. Any change in stated income and assets must be reported, recorded and verified. If the parents of a disabled child work, for example, they have to report all changes in their income whenever they occur. People who enter or leave the household cause a change in the payment level. Gifts of money or determinable value can reduce payments. Ownership of real estate other than a principle residence also count against the asset limit of $2000.00 for an individual ($3000.00 for a couple). So, if the recipient is a tenant in common in real estate having a value over the limit, s/he is ineligible. This is common in intestate estates in which numerous relatives may have a share in unmarketable rural property. I could go on, but your eyes are already glazing over.  
The obvious response is to say that means testing SS could be designed in such a way as to get around these problems.  But, the fact is that the limits set on income and assets are absolute dollar limits not subject to waiver or tolerances. So, means testing means one thing and one thing only. You have to check and recheck everything that affects eligibility every year for every eligible person. And, that takes staff which costs money. About 50 million people receive SS and SSI benefits. I cannot even guess what it would cost to handle that many new eligibility determinations. We must look elsewhere to find a fix for the coming SS benefit gap.

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House Republicans propose Social Security opt-out

It was bound to happen…

House Republicans propose Social Security opt-out by Pete Kasperowicz –

House Republicans on Friday introduced legislation that would allow workers to partially opt out of Social Security immediately, and fully opt out after 15 years.

Rep. Pete Sessions (R-NY), who chairs the National Republican Congressional Committee, and several other Republicans introduced the Savings Account for Every American (SAFE) Act. Under the bill, workers would immediately have 6.2 percent of their wages sent to a “SAFE” account each year.

That would take the place of the 6.2 percent the workers now contributed to Social Security.

Another 6.2% is sent to Social Security by employers. Under the Sessions bill, employers would continue to make this matching contribution to Social Security, but after 15 years, employers could also send that amount to the employee’s SAFE account.

[snip]

Under the bill, employees would be able to make tax free contributions to their SAFE account, and take tax-free distributions at retirement age. The bill would also allow employees to stay with the Social Security program if they wish.

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Sixteen Men on a Dead Man’s Chest…Social Security and the Facts of Life

Guest post by Dale Coberly

Sixteen Men on a Dead Man’s Chest Yo Ho Ho
Social Security and the Facts of Life

Sen. Mark Warner (D-Va.) said on Sunday the “Gang of Six” senators is “very close” to a deal on deficit reduction, suggesting the plan would impact Social Security that most Democrats have said is off limits.
Asked by host Bob Schieffer to clarify that the group will take on Social Security, Warner said, “Part of this is just math: 16 workers for every one retiree 50 years ago, three workers for every retiree now.”

What we have learned in ten years of watching the Social Security “debate” is that when someone says “it’s just math,” he is lying. Unless, of course, a United States Senator simply doesn’t know what he is talking about.

The “16 workers for every one retiree” is one of those true facts that doesn’t mean anything… and is therefore used by liars to mean what they want it to mean.
The Senator does not read Angry Bear, but in the hope that one of his friends will try to explain it to him, I offer the following simplified model.

Update: The Atlanta Fed Macroblog from 2006 includes Dean Baker, pgl, Ken Houghton on this issue.


Imagine that the voters of America look around themselves and see a crisis where millions of people approaching retirement age have lost their savings by no fault of their own. Perhaps a Great Depression or something like that. There is no time for all these older workers to again save enough to retire on. Workers who have already reached retirement age are receiving “welfare.” But the voters don’t like the idea of a permanent “welfare establishment” as the “normal” way for workers to get through their retirement years.
So they decide to try a simple plan.. a retirement insurance system based on the idea of pay as you go. And here is how it works.. worked. Remember I said this is simplified.

Imagine that in the first year of the plan there are 40 million workers, one million in each age cohort… that is, one million aged 25, one million aged 26, … etc. up to one million aged 64. So far there are NO retirees in the system. If each worker pays a “tax” of one percent of his income, there will be enough money so that..

In the next year one million people become 65 and retire. And one million who were 24 last year become 25 and get jobs and start paying the tax. And of course each cohort moves up to the next year.

Now there are forty million workers and one million retirees, a ratio of forty workers for every one retiree . And if each worker is paying 1% of his income into the system, there will be enough money to pay-as-you-go each retiree 40% of the average income of all the workers. The 40% is called “the replacement rate.” it will be roughly enough to replace 40% of the average lifetime monthly income of each of the retirees.. adjusted for the average increase in wages over 40 years. )
The next year, another million will retire, bringing the ratio of workers to retirees to 40 to 2, or 20 to 1 (remember that every cohort moves up a year, and one million new workers enter at age 25 replacing those who retire at age 65. Now it will be necessary to raise the “tax” to 2%.

At this point the Senator Warners of the world get hysterical.. “A doubling of the tax. We’re all going to die!” And the “non partisan experts” project that if this keeps up, in only 30 years the tax will be ONE MILLION PERCENT!.
But the workers say, two percent isn’t so bad and it goes for a good cause. So they keep paying as they go.

The next year the ratio of workers to retirees becomes 40 to 3 (13 to 1). and the tax goes up to 3%. Note that we have already passed the 16 to1 ratio without even noticing it.

The next year the ratio becomes 40 to 4, or 10 to 1, and the tax goes to 4%
And the next year the ratio becomes 40 to 5, or 8 to 1. Or does it? Well, sadly, no. By this time some of the retired workers have begun to die off… so the number of retirees does not increase by the full million new retirees, but by some number like one million new retirees minus some hundred thousand older retirees who have died And while the ratio of workers to retirees will continue to decline, it won’t continue to decline at the rate it did for the first few years.
In fact, if the life expectancy of retirees is about 12 years… half of them will die by the age of 77… the ratio of workers to retirees will stabilize at around 3 to 1. ( The ratio of workers to retirees depends very much on the ratio of working years to retirement years for each worker. )

This will require a tax rate of about 12% in order to pay that replacement rate of 40% of a workers average lifetime adjusted income… or, which is the same thing, 40% of the current average income. Note that sneaky “adjusted” income. That is the secret of pay as you go. By adjusting the income of retirees to reflect the inflation and rise in real standard of living that shows up in the wages of those paying the tax, the retirees get an automatic effective “interest” on their tax… which now looks exactly like “savings.”

Meanwhile the workers are putting away 12% of their income (or 6% depending on who you think would get the boss’s share if there were no SS tax), and this is exactly what they would have had to save out of their income for a basic “if all else fails” retirement. This seemed like a good idea at the time… the people who were living then had seen what happens to “sure things on the stock market,” and they wanted a little insurance “just in case,” and they were smart enough to know they had to pay for it.

Now, what Senator Warner is so sure is going to cause the sky to fall on our heads is the prediction that we are all going to live a little longer… as much as twenty years in retirement, bringing the ratio of workers to retirees down to 2:1. Other things being equal, this would require that we save about 20% of our working income, if we are going to need about 40% of that income every month to see us through a long retirement.

Since we are making more than twice as much as our grandparents, you’d think we could afford this. But let me make it a little clearer. Suppose grandpa was making a thousand dollars a week real money and paying 120 dollars into his retirement fund, and expecting to live about 12 years after he retired. Now suppose that great great grandson will expect to live about 20 years after he retires. He will need to pay 20% to cover the expense of a longer life. But he is making twice what grandpa made. So out of his 2000 dollars per week, he needs to save 400 dollars in his retirement fund. But that leaves him “only” 1600 dollars to live on.
Compared to the 880 dollars grandpa had to live on. You can see the tragedy of this situation. Great grandchild has to get along on less than twice what his grandpa did, and all so that he can afford to live almost twice as long in retirement.

Oh the unfairness! Oh the financial ruin!

As I said, the above was a simplified explanation. The true fact is that in order to pay for their longer life expectancy, the workers would need to raise their own Social Security contribution by about forty cents per week per year… in today’s money. Eventually, two generations from now, this would amount to a 2% increase on the tax for the worker, and 2% for the employer. Out of an income that will be more than double what it is today. Leaving the worker with twice as much money “after taxes” as he has today. Plus he will get the money back, with interest, over a retirement that lasts almost twice as long as his grandparents’.

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On budget, off budget

op-ed by Dale Coberly
Is It or Isn’t It
(And what is a “budget” anyway)

There have been a number of comments and counter-comments on the subject of the definition of “on budget.”

I may have contributed to this “debate” by referring to Social Security as “off budget.” I knew what I meant, and I thought I was using the words the way I had seen them used by “experts.” Then CoRev and MG found “definitions” that seemed to contradict my usage. It has seemed to me that these commenters didn’t really understand the definitions they were citing, but I think we both have been guilty of a kind of laziness and stubbornness that make it impossible to resolve the dispute.

I do not offer the following out of any claim to authority, but as an appeal to common sense.

(Dan here…Spirited debate warning…feint of heart need not enter. OTOH, stay on topic and try not to be repetitious.)

Words don’t “mean” anything. They point the way to shared ideas. Just as a picture of a horse is not a horse, nevertheless the picture can remind anyone who sees it of their own experiences with real horses, or movie horses, or story horses. Words are the same way, they point us to experiences we might, or might not, share with the person we are trying to communicate with. But sometimes the experiences are not so well shared as we thought.

There are two concepts here that need clarifying. “Social Security” and “budget.”

The first is the legal, historical, practical, and moral status of Social Security.
Even before looking at that, it needs to be understood that Congress can change the legal status of anything at any time. [Subject only to the Constitution. But the Supreme Court can change the Constitutional Status of anything at any time subject only to what it thinks the people will put up with before they lose faith that the law means anything at all — other than the whim of the current resident.]

We know that. We do not argue that Social Security IS, and always will be, X. We argue that it was created as X, has always operated as X, and we think it should continue to operate as X. X in this case is that Social Security is funded by a special tax dedicated to pay for the retirement and insurance benefits of the taxpayer himself according to a formula based on his own direct contributions.

“Tax” is another word we need to be careful about: The SS tax is actually an insurance contribution. It is also a tax in that it is a non voluntary payment collected by a government, but it doesn’t act like a tax. It acts like an enforced savings “deposit,” which is dedicated to a fund which will be used to provide the taxpayer with essentially his own money (plus interest) back under certain well defined and all but certain conditions. Social Security taxes are legally separate from those taxes which are collected for the usual purposes of government, and they are accounted for separately. They may be LENT to the government, quite formally, with an obligation of the government to repay the loan with interest. But they are not “fungible” or so mixed with government funds that they lose their identity. They always carry a “tag” telling everyone where they came from and where they must return to.

“Budget” is the other term we need to clarify. We ought to have learned from ENRON and Arthur Anderson that accounting can be used to conceal facts as well as to provide an honest record of where money comes from, and how it is owed, and to whom. A budget is created by an entity for its own purposes and does not necessarily reflect a larger reality. Thus, if you are operating an agency of the government, and you have always been able to count on money borrowed from Social Security to pay for part of your activities, you might just enter that money on your books as revenue. And if you have no expectation, or responsibility, to repay it, you might leave it at that.

But if you do have a responsibility to repay it, and you don’t properly account for that, a time will come when you are ‘surprised’ to learn that there is a call on the money you have spent and you are unprepared to repay. There may be an honest reason to keep books this way, or prepare a “budget” this way, but unless your purpose is dishonest… you wish to deceive or confuse your creditors, or auditors, you really need to enter the borrowed money on your books as borrowed money. that is, as a debt that you owe.

This is the case with Social Security. The government knows and legally acts as if it owes TO Social Security the money it has borrowed FROM Social Security. Whether or not it always notes that on any given “budget” does not change the legal… and moral… obligation.

My own feeling is that the decision to keep Social Security debt “off the books,” and to write the various “briefs” that we have seen quoted by CoRev and MG was a decision made more for the purpose of confusing the public… and the press… than for any good or honest reason… even that of convenience.

Sometimes they give themselves away, as when the author of a certain CBO “brief” attempted to convince us that Social Security was no different from any other tax because the money went into the Treasury just like other taxes. This would be like a bank telling you that your money was no different from Joe Smith’s because the same Teller took it in… and therefore the Bank can give it to Joe Smith if it wants, instead of to you.

Honest people can resolve these semantic confusions in a few minutes. When it’s harder than that you can suspect that at least one of the parties is not being honest. Try to look behind the word at the reality it is pointing at.

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Means testing for social Security

In order to make this timely I am cut and pasting a note from CEPR pointing to the efficacy of cutting spending in the Social Security through means testing. The MSM and politicians have proposed this and raising the retirement age as answers to ‘the deficit’ crisis, some commenters indicating a ‘tipping point’ of disaster soon to come and saying Social Security needs to be a focus of this move to prevent disaster.

Such answers can be examined one by one in this particular forum since luckily the format can offer respite from the political power plays of the moment and posturing from ‘friend and foe’ alike. Since means testing is in the media, let’s look at the numbers. Please read the 14 page document first, and then come back with comments. I apologize for not commenting in particular on the topic but cannot today.

Means testing, or reducing Social Security payments to affluent beneficiaries, has been touted as an effective way to reduce the cost of the program. A new report from the Center for Economic and Policy Research (CEPR) examines the feasibility of several different means testing scenarios and finds the potential savings to be rather limited.

“The majority of Social Security beneficiaries are lower- to middle- income people,” said Dean Baker, an author of the paper and a co-director at CEPR. “The number of beneficiaries who are by most standards considered affluent is too small to raise a significant amount of money via means testing.”

The report, “The Potential Savings to Social Security from Means Testing,” first describes the distribution of Social Security benefits by income level. The authors then look at the effects of phasing out benefits at rates of 10 and 20 percent of every dollar of non-Social Security income above $40,000 or $100,000 and find little in the way of potential savings to Social Security. The savings are even less when behavioral responses in the form of tax avoidance or tax evasion are factored in, since a means test would effectively be an increase in the marginal tax rate for wealthier seniors.

The data show that over 75 percent of social security benefits go to individuals with non-Social Security income of less than $20,000 and 90 percent goes to those with non-Social Security income of less than $40,000 a year as of 2009. If means testing that phased out benefits at 10 percent were applied to those who make $100,000 a year and assuming no change in behavior, it would only save Social Security 0.74 percent of its outlays. At a 20 percent rate, this would only yield savings equal to1.33 percent of costs. If the phase out were dropped down to $40,000, hardly wealthy by any standard, the overall savings would just be 2.77 percent of costs at the 10 percent rate and only 4.65 percent of costs at the 20 percent rate. Accounting for behavioral responses would lead to even smaller savings, could cut these potential savings by half or more.

Mean testing would also raise the cost of the program. The retirement program currently has very low costs. If the administrative expenses rose to the level of the disability portion of the Social Security program, the higher costs would likely exceed any savings from a means test.

On net, a means test would appear to be a dubious way to reduce the cost of Social Security.

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Eyes on the Prize: A Social Security summary

by Dale Coberly

Eyes on the Prize
A Social Security summary.

We have had twenty years and a billion dollars spent by Pete Peterson and friends telling the people that Social Security is going broke and will create huge deficits that will kill the economy and be a crushing burden to the young. Peterson has funded an army of “non partisan experts” who tell the media what to say and what not to say about Social Security.

On the other side we have had Bruce Webb… who does all the hard work… showing that the reports of Social Security going broke are based on assumptions that seem unlikely. Moreover he has shown that each year since we have been treated to the “we must fix (cut) Social Security NOW” , “doing nothing now” has actually reduced the cost of any ultimate fix.

We have had professer Rosser show that even under the pessimistic assumptions Social Security with no changes at all will still be able to pay a benefit that is larger in real value than what retirees get today.

And we have had Coberly show that even under the Trustees projections… the ones that produce the “Five Trillion Dollar Unfunded Deficit!” (or Fifteen Trillion if you want to add up the cost out to “the infinite horizon”), the actual cost to each worker would be a raise of less than a dollar per week from time to time over the next seventy five years, and then no further increases after that.

And we should not forget that CBO has published an “option number three” that shows the cost of one way of fixing Social Security would be a payroll tax increase of one half of one tenth of one percent per year. One half of one tenth of one percent of an average worker’s pay today is forty cents per week, and the boss pays half of that.

Then, we have the good people who want to “fix Social Security” by taxing the rich… either by raising the cap, or by dedicating the estate tax to pay for Social Security. These people do not know, or do not understand that this is exactly what FDR was careful NOT to do. He did not want Social Security to be “the dole” “so that no damn politician can take it away from them.”

And we have the really bad people who want to fix Social Security by raising the retirement age. “It’s the obvious solution,” they say. ” After all, we are going to be living longer.” It never troubles them that if people can pay for their own retirement (with an extra forty cents per week per year) they may not want to work longer, or they may have other age related conditions that will not reduce their life expectancy but may make working painful. But people with jobs they like can’t imagine why working people might want to stop working for the boss and have a few years of freedom before they die.

And we have the strange people who tell us that paying BACK the money that Congress borrowed FROM Social Security… that is from the workers’ savings… will cause the country to collapse: we need to stiff the workers so the bankers can keep their million dollar bonuses for the excellent way they have been managing the economy.

And we have recently had the President and Congress, who decided that since we are facing a “looming deficit” the smart thing to do was to cut taxes. This way they have given you your retirement money to spend now, because they know an extra ten dollars a week spent at Wal Mart will mean more to you than an extra year of retirement.

And we have the eternal obfuscators who will come into any discussion and do everything they can to distract your attention from the basic fact:

Social Security is YOUR money. It doesn’t cost “the government” a dime. Social Security is the ONLY way most workers have to save their own money, safe from inflation and market losses, so they can retire at a reasonable age. And the cost of keeping this insurance is so small no one would even notice it, if it wasn’t for the Big Liars finding ways to make it seem like it was a huge number, or an “unfair” windfall to old people at the expense of the “young” who will never, of course, ever get old themselves.

I have done the math. So has CBO. The cost of keeping your Social Security insurance, just in case you do get old without getting rich, looks like about a forty cents per week increase in the payroll tax each year, while incomes are expected to go up about ten dollars per week each year.

Try to keep that in mind when the man in the suit is selling you snake oil.

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