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Home Publications Blogs Beat the Press MSNBC Finds It's Hard to Get Good Help: Abby Huntsman on Social Security (see correction and second correction)

MSNBC Finds It's Hard to Get Good Help: Abby Huntsman on Social Security (see correction and second correction)

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Friday, 14 March 2014 05:07

It's always entertaining when people who obviously have no clue about the basic facts on Social Security take to educating people on Social Security. Of course it's unfortunate when such people actually get taken seriously. In the hope of reducing this risk, BTP takes this opportunity to address Abby Huntsman's warning to millennials about the risks posed to them by Social Security.

Ms. Huntsman (the daughter of unsuccessful presidential candidate Jon Huntsman) tells her audience that the problem is that people are living much longer so that we are seeing much higher ratios of retirees to workers than when the program was first established in 1937. There are two big problems with the basics of Huntsman's story. First, most of the gain in life expectancy that she points to in the segment is the result of reduced infant mortality, not people living longer. For example, the Social Security trustees report shows life expectancy at birth increased by more than 15 years from 1940 to 2012, however life expectancy at age 65 has increased by just 6.5 years. It's great to see lower infant mortality rates, but this doesn't affect the finances of Social Security, it is the increase in life expectancy at age 65 that matters.

However the  bigger problem with Huntsman's diatribe is that this increase in life expectancy was expected at the time the program was created. As a result, a number of increases in the tax rate were put into place in the next five decades. The initial tax rate was just 2.0 percent of wages on both the worker and the employer. Since 1990 it has been 6.2 percent of wages for both employer and employee. (The taxable wage base was also increased substantially.) These increases were put in place to deal with the costs associated with a rise in the ratio of retirees to workers. The age for receiving full benefits has also been increased from 65 to 66 at present, and will rise to 67 for people reaching age 62 after 2022. It is flat-out wrong to claim either that the increase in life expectancy caught anyone by surprise or that no changes were made to deal with longer life expectancies.

The other part of Huntsman story that is even more misleading is the idea that the finances of the program poses some insoluble problem or that the program will impose an unbearable burden on millenials. In fact, average wages are projected to grow substantially in coming decades. If most millenials get their share of wage growth, then they will enjoy far higher standards of living than do workers today, even if their taxes are increased to cover the cost of a larger number of retirees.

The figure below shows the Social Security trustess projections for wages over the next seven decades. It also shows after Social Security tax wages under the assumption that taxes are increased at the rate 0.05 percentage points on both workers and employers each year from 2020 to 2050. This increase will be enough to leave the program fully funded well into the next century even assuming no other changes are ever made.

social security wages 14144 image001

                         Source: Social Security Trustees Report and author's calculations.

Of course there is a big problem wiith this story. In the last three decades most workers have not shared in the growth of the economy. Most of the gains have gone to profits or highly paid workers like Wall Street traders, CEOs, and some celebrity types like Ms. Huntsman. If this pattern continues then millenials may not see rising living standards in the decades ahead. However, the risk to living standards posed by the continuing upward redistribution swamps any risks posed by a larger population of retirees. It is understandable that those who benefit from the upward redististribution would prefer to have public attention focused on Social Security, but this focus is not based in economic reality.

 

Correction:

Mike Anderson has pointed out that the tax increase specified in this post would not be enough to produce a balance over the trust fund's 75-year planning horizon. In order to get to balance with a tax increase phased in over 30 years, beginning in 2020, it would be necessary to have a tax increase of roughly 0.22 percentage points annually (0.11 percentage points on both the employee and employer). This implies a cumulative tax increase of 6.6 percentage points by 2050, slightly larger than the 6.4 percentage point increase in the payroll tax between 1960 and 1990. This calculation assumes no reduction in scheduled benefits, no increase in the retirement age, and no increase in the cap on taxable income. It also assumes no further tax increases in years after 2050. Under this schedule real after-Social Security tax compensation would be on average almost 50 percent higher in 2050 than it is today. By 2060 it would be more than 60 percent higher.

It is also worth noting that these calculations assume some further upward redistribution of income. If some of the upward redistribution of the last three decades were reversed, the tax increases needed to balance the trust fund would be smaller.

 

Second Correction:

Sorry folks, sometimes you need a little sleep to see your spreadsheet clearly. Anyhow, having checked again, it looks like I was much closer to the mark the first time. An increase in the tax rate of 0.14 percentage points annually (0.07 percent on both the worker and the employer) begginning in 2020 and running for thirty years should be sufficient to make the trust fund balanced for its 75 year planning horizon. This leaves a total increase in the tax rate of 4.25 percentage points (2.23 on both the worker and the employer) by 2050. (The spreadsheet is available on request.)

Comments (79)Add Comment
...
written by dax, March 14, 2014 7:40
"life expectancy at age 65 has increased by just 6.5 years"

That would mean that life expectancy at at age 65 has increased 50-100%, no? That strikes me as a lot. So "just" is doing a lot of unjustified heavy lifting. This doesn't take anything away from Dean's larger point that the increase has been foreseen, or there will be many in the future who will be earning more and so who can then afford to pay in more.
..................
written by DJB, March 14, 2014 8:02


"It is understandable that those who benefit from the upward redististribution would prefer to have public attention focused on Social Security"

yep
just
written by medgeek, March 14, 2014 8:07
dax, Dean was comparing the increase in life expectancy at 65 to the increase in life expectancy at birth (6.5 years to 15 years), so the word "just" seems appropriate to me.

Dean, I watched Abby's polemic yesterday and my head was exploding for all the fallacies and half-truths she spewed out. Thanks for spelling them out in this post. I record that show because the other hosts dispense reasonable judgement about politics and society, but I'm afraid Abby is just a pretty airhead.
The Longevity Solution: Make It Shorter with a Funded Mandate
written by Last Mover, March 14, 2014 9:16

So people are still living longer - too long even - despite the success of American health care to cut their lifespans shorter than comparable countries with better care at less than half the price.

Hmmm, there is an alternative solution to rescue the "unfunded mandate crisis" of Social Security isn't there.

It's cruel and quick but will get the job done at far lower cost. Just crank up health care prices even higher to get those private sector death panels back to acceptable performance levels and the problem will be solved in a jiffy with a mandate that is actually funded.
Wall St Traders, Low-rated comment [Show]
"diversity"
written by Jennifer, March 14, 2014 9:52
What's most offensive is that a white woman without any apparent qualifications-a politician's daughter?-is asked to appear on a news show so she can spout conventional right-wing talking points on major domestic policy. When you consider how many other people they could have got, it's just pathetic.
Dean Is Completely Missing the Point
written by Paul Mathis, March 14, 2014 10:22
Abby is quite beautiful so the fact that what she says is stupid is irrelevant! MSNBC desperately needs ratings and Fox has shown that airheads spouting nonsense works great.
refreshing to hear dean call for an increase in the flat tax...
written by pete, March 14, 2014 10:25
The best part of all this is an increase in the flat tax. An even better alternative, of course, is to have a nice fat carbon tax. Optimal taxation and optimal old age and disability pensions should be separated, not confounded. Most economists recognize this. Indeed, with an efficient carbon tax payroll/income taxes could be reduced substantially. The politics of linking the payroll tax to old age and disability pensions was ugly when Roosevelt started it, and we are unfortunately stuck with this anachronism. Thankfully 401ks etc. were started to break the link. But if Dean wants to increase the flat tax by .10% per year, more power to him.
And Palin is an expert on Putin
written by Dave, March 14, 2014 11:02
Somebody was watching 'The View' the other day, and apparently Sean Duffy's wife and Woopie G. believe Palin was right about Obama's handling of Putin.

Why do we have shows where people with below average knowledge about a subject are heard? I suspect it is because many experts are so corrupted by money that nobody trusts them anymore, and so a person who seems pretty dumb can get credibility because they don't pretend to have anything but common sense. But Palin is as much a corrupt sellout as any of the experts, and she knows nothing on top of it.

Excellent Posting
written by PJR, March 14, 2014 11:53
Scheduled small annual hikes in FICA would be the smart approach, especially if paired with policies to increase wage growth. These could begin anytime. The approach would allow Congress to cease annual hikes earlier than anticipated, or extend them for more years, if either action is warranted by reports from the Trustees in the distant future. The number of years also could be reduced if the earnings cap is increased. Baker also is correct that policies to increase wage growth rates would be a wise (but not necessary) accompaniment to this approach to Social Security funding.
Gains in life expectancy are unequal
written by Mike, March 14, 2014 11:56
Dean is right that most of the gains in life expectancy have come from lower infant mortality rates, but it is also important to remember that the gains have been unequal.

While there have been gains in life expectancy after age 65, most of those gains have accrued to the top half of wage earners.
http://theincidentaleconomist.com/wordpress/subtleties-of-life-expectancy-ctd/

Yes, some people are living longer once they hit the age of 65, but it is not the group of people which Social Security benefits the most.

It is upsetting that some people erroneously use the gains in life expectancy argument to attack a program that overwhelmingly benefits people who have not seen significant gains in life expectancy.
again
written by Joe, March 14, 2014 12:12
Social security doesn't have to be "paid for". Generally the govt needs to have a deficit to allow the private sector to net save in USD. No reason this deficit can't go to seniors. Just depends how we wish to allocate resources.
She also mentioned SS and bankruptcy.
written by Michiganmitch, March 14, 2014 1:41
Apparently Abby is ignorant of the fact that SS by law cannot be bankrupted because it can only dispense funds from current revenues and the trust fund. Borrowing is not permitted so no bankruptcy can occur. Also, Medicare for all would go a long way toward taking care of Medicare forever. Other countries in the OECD can do it. We elect not to.
A cynic might suggest the VSP's are concerned for their pocketbooks, not the citizens
written by John Wright, March 14, 2014 2:12
This campaign rings hollow to me, as the people seemingly most concerned about Social Security are wealthy.

Where is the groundswell of support for reform from the people who are/will be depending on Social Security for the majority of their income?

And what were the VSP's and talking heads doing during the USA's recent blunders, be they financial bubbles, unfunded wars, much national wealth spent on dubious security measures or early climate change actions?

Fixing Social Security is at the top of their list.

Perhaps because they fear future taxes they will pay.
..., Low-rated comment [Show]
Let's try a different approach
written by Dave, March 14, 2014 3:55
I wonder how this public debate would play out if we took the government out of the theoretical discussion as a test. What if we just reframe this and ask people if they think it is possible for a prosperous society to allow everyone to retire with the very minimal income of xxx at age yy, or rather if they believe poor people should work until death?
How to increase revenue to Social Security
written by Chuck, March 14, 2014 8:57
The POTUS can sign an executive order minting an unlimited number of one trillion dollar coins. Turn the SS Trust Fund into a bank and us the IRS or Postal Service as a conduit to issue loans to ordinary folks. Use the trillion dollar coins to capitalize the new SS bank with more money and start making consumer loans at low interest rates. Imagine what mortgages and student loans at 3-4% could do to unleash consumer demand in this country. Also, lower the age at which partial and full benefits are paid out to soak up excess supply in the labor market (we could also introduce mandatory paid time off with the amount indexed to labor productivity gains while we are at it.)
we need to pay for it ourselves
written by coberly, March 14, 2014 9:24
look, if the price of bread went up we wouldn't all run to congress and demand that the rich pay for our bread, or demand that bread stop being sold in stores. the first is the "hard left" solution to SS projected increase in costs. the second is the hard right solution.

we will need to pay more for SS in future... not a lot more, a tiny bit more... because we are going to be living longer and because our wages are not going to be keeping up... so a larger SHARE of our wages will have to go for paying for the things we will need after we can no longer work.
AND if we pay for it ourselves... and make damn sure the Congress understands that we know this... there shouldn't be a damn thing that Peterson or anybody else should be able to say about it.

we... american workers... like the idea that "we paid for it ourselves." we don't need some exotic "fund it by the lottery" solution. and as Dean's graph shows, we are going to have more money AFTER paying the bigger tax than we have today. So can't we get serious and tell the Congress... look, raise the damn tax one half of one tenth of one percent per year and shut up about it already.
Ministry of Truth?
written by coberly, March 14, 2014 9:31
I think what we are seeing here, and have been for some time, is a variation on the "1984" Ministry of Truth that rewrote history on a daily basis to conform with the party line. Now we just make up "truth" and tell it on TV, and that's what everybody believes... except a few people and they don't count.

I wish Dean or somebody forceful could go on MSNBC and explain the facts about SS to Abby in front of an audience of millions.
KTM illustrates the VSP obsession with Social Security "reform" quite well
written by John Wright, March 14, 2014 9:53
KTM wrote earlier:

"Without reform, young workers will see their promised benefits slashed to 70% of what they should be."

And closed with "Don't even get me started on Medicare, which is 1000x worse."

If SS is 0.1% of the problem that Medicare is, why not reform Medicare first and put the savings into Social Security?

For it appears the wealthy Very Serious Persons are modern Emperor Neros, fiddling with Social Security while the USA has a host of more significant problems, which I believe includes tackling climate change, a bloated military, a costly drug war, a high incarceration rate, an overly expensive medical industry, a costly, unproductive and poorly regulated financial sector and a large and costly homeland security apparatus.

And there are other government programs worthy of reform such as government sponsored flood,crop,bank TBTF insurances.

But these never seem to get the VSP "reform" attention that Social Security merits.

I believe it is because VSP Social Security reform always involves increased cost to the working class and no net expense to the upper crust.

The other programs' "profits" flow to the upper class.
I may well be hard to get good help ...
written by John Puma, March 15, 2014 5:13
but self-serving, quasi-genocidal propaganda is a way of life.

(Note: I'd put it this way: " ... from 1940 to 2012, ... life expectancy at age 65 has increased by ... 6.5 years" very likely caused, at least in part, by the very existence of Social Security.
SS!
written by jonny bakho, March 15, 2014 5:53
Dear Millenials:
Social Security is a bargain.
It keeps your mother-in-law in her own home and our of yours.

bakho
...
written by coberly, March 15, 2014 6:28
bakho

in all probability the mother in law is paying the rent on their home.

what liars like Druckenmiller are trying to distract attentioin from is that it is people like Druckenmiller who have stolen the millenials future. not grandma.
...
written by watermelonpunch, March 15, 2014 8:37

So I don't know what this woman is saying...
Because what I'm hearing is that she thinks that baby boomers and GenXers should work til we drop, or be forced to live in penury so that millenials can sit pretty in old age...
???

I mean what's the message here?

Presumably most millenials plan to get old themselves right? It's not a pleasant prospect, but certainly they see it as better than the alternative.
Yes, we need to pay for it ourselves
written by Rick Fane, March 16, 2014 9:54
- Coberly - Yes, we need to pay for it ourselves. There are quit a few good reasons why the revenue side of the equation is coming up short. Among those would be the stagnant wages in the low to middle income brackets. The high unemployment rate. The huge and growing amount of income that's not subject to FICA taxes. The fact that the cap on income subject to FICA hasn't kept up with inflation.

Raising the minimum wage will help improve the finances of the SSA. Expanding eligibility for overtime pay will also help. But we need to be talking about raising the cap on FICA wages. It should also be annually adjusted for inflation so it doesn't keep falling behind.

Then we can start talking about all the reasons why lowering the retirement age is a really good idea.
reply to Rick Fane
written by coberly, March 16, 2014 12:00
Actually, the cap HAS kept up with inflation. what it has not kept up with is the difference in growth of wages to "the rich" vs "the poor." But that is not a reason to raise the cap. If you buy insurance, you pay what the insurance is worth to you, not a fee that increases with your wages.

The cap on SS is at a point where the cost of SS to "the rich" represents a reasonable cost of insurance, given than they get all of their money back adjusted for inflation plus about one or two percent real interest. Average and low earners get about five to ten percent real interest depending on circumstances. This is a huge benefit to them... made possible by the contributions of those who end up "rich" after a lifetime of work. It is foolish to jeapardize that because we don't want to pay the extra eighty cents per week to "pay for it ourselves."

Then, if we want bigger benefits we can talk about how much more WE want to pay for them. And we might even ask the rich if they want to pay more in order to lock in a retirement check of better than 30k per year to help them keep the standard of living to which they have become accustomed when they retire.

Meanwhile, of course we want to do everything we can to raise the wages of workers. But we don't want to kill or cut Social Security while we are waiting to win that battle. SS was designed to see us through hard times. Expecting hard times is exactly NOT the time to fool around with what works. Especially when that fooling plays into the hands of the Liars who have been yelling for years that SS is going to "burden"... them.

SS works BECAUSE it is "worker paid." If you want welfare, call for a welfare program. Don't try to saddle SS with it. You'll just kill SS.
Intergenerational fairness
written by Mike Anderson, March 16, 2014 12:51
The Trustees' Report makes it pretty clear that rising life expectancy at age 65 does make it significantly harder to balance the OASI Trust Fund in the long run. An increase of 6.5 years may not sound like much, but that--combined with future increases--actually costs a helluva lot of money.

But without a doubt, the biggest problem for the foreseeable future is the retirement of the Baby Boomers. Nobody can seriously argue that the ratio of retirees to workers isn't going to rise substantially over the next few decades. It most definitely will.

"...taxes are increased at the rate 0.05 percentage points on both workers and employers each year from 2020 to 2050."

So basically, this taxes the Millenials. That may well keep the Trust Fund solvent, but it isn't very fair to the Millenials to shift the entire cost of balancing the system onto them.

From an intergenerational standpoint, there is something of a zero-sum game here. If we don't do something in the near future requiring the Baby Boomers to pay more into the system somehow, then all the costs will be shifted onto the younger generations.

If that happens, the Baby Boomers will make out like highway robbers here, while the rest of us will get the I'm a big supporter of Social Security. I also have a PhD in demography and I've published peer-reviewed articles on forecasting Social Security, so I know what I'm talking about.

As a simple matter of intergenerational fairness, it's not right to shift the entire cost of the fix onto the Millenials.

I have a PhD in demography and I've published peer-reviewed articles on forecasting Social Security, so I know what I'm talking about.

And I'm a big supporter of Social Security, by the way. By I do think something needs to change to make it fairer from an intergenerational standpoint.
Baby Boomers have paid for their own retirement
written by Dean, March 16, 2014 1:53
Mike,

given your expertise you must know that baby boomers have paid for their own retirement. They have faced both large tax increases compared to their parents' and also will have to work later in life to get full benefits. I'm sure you're familiar with the work Gene Steurele showing that most baby boomers will get close to a 2.0 percent real rate of return, with middle income earners getting considerably less.

I fail to see how this shows the boomers making out "like highway robbers." Returns actually increase for post-boomers due to projected increases in life expectancy. Higher taxes will offset this, but I have a hard time seeing the big issue if post-boomers get a worse return than the boomers, just as the boomers got a worse return than their parents. These differences are so trivial relative to the impact of the upward redistribution we are seeing, I can't see why any well-educated person would spend much time on it.


...
written by coberly, March 16, 2014 2:24
Mike

you may have a PhD in demographics but you don't appear to know much about Social Security.

The boomers paid for their own retirement. Look at what they paid in and look at what they will get back. The "extra" is effectively "interest". The interest comes from the rising level of the economy. That's where all interest comes from ultimately.

The millenials are paying for their own retirement. They will also get back more than they paid in. But if they don't pay about an extra 80 cents per week per year for some, not all, years, they will not get back as much as they might like PER MONTH. They will get back over their longer life expectancy a good deal more than the boomers... that growing economy again.

The issue here is that the Petersons have been lying about the economics of Social Security. And they have fooled nearly everyone, including you.

If you have a PhD you are probably smart enough to read the Trustees Report and do some simple arithmetic, and maybe examine a few concepts.

No one DOES argue that the ratio of retirees to workers is not going to rise. But when one understands that that is because the ratio of retirement years to working years for each retiree is going to rise, then one can, we hope, understand why paying a little more is not "unfair."

I think SS is pretty fair from an intergenerational standpoint, but I think you'd have to be a fool to expect some kind of perfect "fairness" from one generation to the next when each generation faces different problems. I don't think the milllenials have faced the draft for example. And if they are facing lower wage growth... the other reason for the SS shortfall... that is not the fault of SS. Indeed SS is their only hope of being able to retire at all in that kind of economy. Meanwhile, it IS within their power to change the economics of that low wage growth. But they are going to have to be smarter about it than thinking that their grandmother is the cause of it.
to Mike Anderson, addendum
written by coberly, March 16, 2014 2:30
the "unfair" extra cost to the millenials is about eighty cents per week per year while their wages are expected to rise about eight dollars per week per year, and their life expectancies to increase by about three years.

it is real hard for me to see this as a burden, much less unfair. but as an old math teacher and i have learned that not everyone has much of a sense of proportion where numbers are concerned.

the baby boomers already paid more into the system. that was the 1983 tax increase. the extra that the millenials will pay is not to pay for the boomers, but to pay for their own longer life expectancy / lower wage growth.

stop worrying about who got the biggest piece of burfday cake.
more to Mike
written by coberly, March 16, 2014 2:36
"pay as you go" seems to be very hard for some people to understand.

my generation was familiar with "lay away" in which the customer pays in advance for something he will get when he has fully paid for it. the new generation appears to not understand this idea, being used, i suppose, to getting it on a credit card and paying for it later. so i guess you are thinking that the boomers need to pay for their retirement after they have taken it home.
Coberly is right
written by Troy, March 16, 2014 3:11
A very small FICA rate increase on the order of $1/week per year for the next 20 years will put the millenials on a very good retirement footing.

The baby boomer retirement burden of 2020-2040 was pre-funded by around $1.5T in excess FICA contributions 1990-2010, plus another $1.2T in accrued ("printed") interest (the numbers might be the other way around but that's the ballpark).

"Intergenerational Fairness" is bogus smokescreen when the top 10% of the economy owes FICA payers almost $3T over the next 30 years but has no intention of paying that debt off (via higher taxation on them to properly re-monetize the SSTF), instead they hire smoke artists to confuse the public.

There's three trillion of the 1%'s money on the line here, and BSing the American public is usually pretty simple if you have enough money to get your message out.

(I fully expect that in the end the nation will end up printing the money to monetize the SSTF; that sucks to some extent but our politics are that dysfunctional and corrupt).
"Solvency"
written by Troy, March 16, 2014 3:23
The SSTF isn't supposed to be "solvent", it's supposed to be spent down to its statutory minimum once the demographic bulge is through the snake.



shows 2037 is the when the demographic stress starts to subside, where the population of retirees levels off and the population of working-age takes off.

'course, we're going to actually need jobs for all these new people, and that's the actual tricky bit.
...
written by Mike Anderson, March 16, 2014 7:59
"I'm sure you're familiar with the work Gene Steurele showing that most baby boomers will get close to a 2.0 percent real rate of return, with middle income earners getting considerably less. I fail to see how this shows the boomers making out 'like highway robbers.'"

Compare it to the RoR that the Millenials will get if they have to shoulder the entire tax increase necessary to balance the Trust Fund.

"The boomers paid for their own retirement."

No, they didn't. They need the taxes of younger generations--without those, the Trust Fund would go to $0 very quickly.

Technically, the Baby Boomers paid for the generations who retired before them. Remember, the Depression-era retirees never paid anything into the system. It has always been PAYGO, never fully funded.

Look at the RoR paid by generations under the various scenarios required to balance the Fund. (Somewhere out there, I actually have a paper published with these numbers.)

"2037 is the when the demographic stress starts to subside, where the population of retirees levels off and the population of working-age takes off."

No, the Old-Age Dependency Ratio will stay high well beyond 2037, and well past the death of the last Baby Boomer. Look at the Trustees' own forecasts.
...
written by Mike Anderson, March 16, 2014 8:06
"you may have a PhD in demographics but you don't appear to know much about Social Security."

Here's one of the papers I published with my forecasts:

http://deepblue.lib.umich.edu/handle/2027.42/50612

Where's yours?

"A very small FICA rate increase on the order of $1/week per year for the next 20 years will put the millenials on a very good retirement footing."

There's no way this is remotely true. Where in the world did you get this estimate?
The Trustees' Report
written by Mike Anderson, March 16, 2014 8:12
First two sentences of the TR's conclusion:

"Under current law, the projected cost of Social Security increases faster than projected income through about 2035 primarily because of the aging of the baby-boom generation and relatively low fertility since the baby-boom period. Cost will continue to grow faster than income, but to a lesser degree, after 2035 due to increasing life expectancy."

http://www.ssa.gov/oact/tr/2013/II_E_conclu.html#86802

Here's what the report says about how much taxes would need to be raised to keep the Trust Fund solvent for 75 years:

"For the combined OASI and DI Trust Funds to remain solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.66 percentage points (from its current level of 12.40 percent to 15.06 percent)"

If it would take an immediate and permanent increase of 2.66% in the payroll tax to balance the system, how in the world could you balance it with an increase of $1/wk per year???
Rates of Return
written by Mike Anderson, March 16, 2014 8:22
Dean, here's my paper on intergenerational rates of return under various policy scenarios:

http://deepblue.lib.umich.edu/handle/2027.42/50610

Mike Anderson
written by coberly, March 16, 2014 8:41
Mike

you simply don't understand what you are talking about.

here is a hint.. that 2.66% immediate and permanent is NOT "necessary." you can reach the 2.66% 0,2% at a time (that's combined. i prefer to talk about he 0.1% each for the worker and for the employer, but it's the same thing in the end.

and when you reach the combined 2.66% after about 13 years, you keep going for another about seven years and reach a combined about 4%... which is enough to "fund" SS into the "infinite horizon".

I used to be an academic and read many papers written by people who didn't know what they are talking about.

oh, one dollar per week is about one tenth of one percent of a thousand dollars per week, which is a little more than the average pay today. if it helps you to think of the dollar as "present value" be my guest. the point is that no worker will ever feel more than a dollar a week raise in any year. and that is not enough to cry about.

also if it helps you, you can find a reference to my work in National Academy of Social Insurance, 2010, "Fixing Social Security" by Reno and Lavery. I only get a footnote on p 14 because I several "real" people got the same answer first.. and had theirs scored by the chief actuary.

but after i got an honest job i stopped worrying about credentials. all i had to worry about was getting the right answer.
...
written by Mike Anderson, March 16, 2014 9:00
"you can reach the 2.66% 0,2% at a time"

No, that will not have the same effect as an immediate increase. Money that goes into the Trust Fund today earns interest. If you wait any number of years before putting money into the fund, that's interest the money isn't earning.

In other words, the present value of $1 put into the fund 13 years from now is less than $1. The longer you wait to put money in, the more you'll have to put in when you do.

Second, you can't just ignore the employer's contribution. The truth is that for many workers--probably most workers--an increase in the employer's contribution will come out of the employee's pocket in the former of lowered wages, at least partly.

Even if the employer pays the full increase, that doesn't mean the money is free.

And by the way, just to put my cards on the table here, if I were king, I'd fix the system with tax increases on the wealthy. I'm a liberal, and I support social security. Nobody is paying me to argue that it should be dismantled or something.

I just don't want to see younger generations get screwed. The longer we wait to do something, the more the cost gets shifted onto them. I would've thought that to be obvious.
Your calculations
written by Mike Anderson, March 16, 2014 9:11
"...taxes are increased at the rate 0.05 percentage points on both workers and employers each year from 2020 to 2050. This increase will be enough to leave the program fully funded well into the next century..."

Can you show us the calculations that demonstrate this? Because, frankly, I don't see how it can be true.
Consider this------
written by Kumquat Surfeit, March 16, 2014 10:03
I think you're mistaken.
- Suppose life expectancy at 65 were unchanged from what it was decades ago. Let's say it's 8 years.
- Also suppose that the percent of people reaching age 65 has risen from 10% to 100% of the population.
- If Social Security doesn't take that into consideration, there's going to be a big problem in the long run.
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written by Procopius, March 16, 2014 10:10
I guess this proves my point that MSNBC is NOT a left-of-center network. I couldn't watch beyond the point where she says, "President Obama did not include any reform to entitlements..."
Do Highway Bandits Get a 2.34 Percent Rate of Return?
written by Dean, March 17, 2014 7:45
Mike,

I'm afraid that your paper doesn't do much to change my mind on the generational equity issue. Baby boomers will likely get a better rate of return on Social Security than their kids, just as baby boom parents got a much better rate of return than baby boomers. You pick this up in part by showing the higher rate of return for the 1941 birth cohort. The difference would be even more pronounced if you had the 1931 cohort, a group that paid much lower taxes during most of their working lives and could collect full benefits at age 65 (as opposed to 67 for younger baby boomers.) It also doesn't look like you factored in the changes in the CPI that make SS much less generous today than for people who retired 30 years ago. (Also, it looks like you applied the average life expectancy to the median worker. This almost certainly too high http://www.ssa.gov/policy/docs...p108.html.)Since the median benefit has risen relative to average over the last three decades because of the upward redistribution of income, it seems especially important to adjust for differences in life expectancies by income if you want to focus on the median.

As I said, the SS tax rates paid by an age cohort are a tiny factor in generational equity. If average compensation is 60 percent higher thirty years from now, why are we being unfair to our kids if their SS taxes are 4 percentage points higher? (You're right, I probably need to get an extra pp in there, I based this calculation on old trustees reports.)We paid taxes that are more than 4 pp higher than what our parents paid, what exactly is the problem?

Distribution within generations will swamp the impact of any plausible increase in SS taxes. In fact, if you want to be concerned about distribution between generations, asset values (stock and housing prices) are likely to have far more impact than anything we do with SS taxes. If our kids have to pay twice as much (in inflation adjusted dollars) for a home or for a dollar of earnings on the stock market, it will have much more effect on their standard of living than even a 4 pp rise in the SS tax.
to Anderson
written by coberly, March 17, 2014 10:23
I am sorry this conversation... between you and me... degenerated into a "I have a PhD so I'm smarter than you.."

I think the real question is "will the millenials need Social Security?" answer is yes. "will they have to pay too much for it?" answer is no.

trying to make a case for "intergenerational fairness" is absurd. each generation faces different problems. for example... the first people who collected benefits got a "better deal" if one looks ONLY at SS as if it were an investment plan. but the fact is that the first generation of SS beneficiaries was grandfathered (partly) in to solve a national problem, and to help make up for the "generational unfairness" of what those first recipients got from the great depression, meanwhile, my generation had the draft and the vietnam war..

the extra cost of SS to the millenials is tiny in comparison... if there is any extra cost at all.

i KNOW my math is right. and I am pretty damn sure I am right on the question of sanity. fighting over who got the biggest piece of burfday cake is something we should have gotten over by the age of six.

the millenials will have to pay up to an extra 4% of their income, depending on how you count it, to have a retirement that lasts longer, and only "costs" more if they are unable to "grow the economy" the way their parents' generation did.

i can't make you understand the philosophical point here. but someone ought to be able to make you understand that eighty cents per week, per year, is not enough to cry about... if it's the difference between having "enough" to retire and not having enough.
...
written by Mike Anderson, March 17, 2014 10:59
"If average compensation is 60 percent higher thirty years from now, why are we being unfair to our kids if their SS taxes are 4 percentage points higher? (You're right, I probably need to get an extra pp in there, I based this calculation on old trustees reports.)"

Dean, you're still way off. Show us your calculations if you don't think so.

I've put together enough of these forecasts to tell you off the top of my head that if we wait until 2020 and phase it in over 30 years, you will need something in the neighborhood of a 10% increase by 2050.

That absolutely affects intergenerational equity negatively. The Millenials will end up with a negative RoR under that scenario.

Do the math -- or at least show us the math you are doing. You are completely underestimating the size of the problem.

As far as the increase in wages, that's already baked into the forecasts. Future generations will require a massive tax increase (or benefits cut) in spite of it.
...
written by Troy, March 17, 2014 11:02
"The difference would be even more pronounced if you had the 1931 cohort"

The 1931 cohort -- new buyers in the 1960s and early 70s -- also benefitted immensely from the 1974-83 inflation that significantly inflated away their mortgage debt.

http://research.stlouisfed.org...R0000SEHA

shows that people who were able to buy pre-1980 did very, very well.
...
written by Mike Anderson, March 17, 2014 11:06
"eighty cents per week, per year,"

Sorry, your math is way, way off. Even the tax increase Dean is talking about--which is still not nearly enough--is much bigger than 80 cents per week.

If you don't think your math is off, go ahead and show us your calculations. I'd really like to see how you arrived at that figure.

"...fighting over who got the biggest piece of burfday cake is something we should have gotten over by the age of six."

This sounds like something wealthy people say when the rest of us talk about income inequality. Class warfare!
SS trustees projections are the basis of my numbers
written by Dean, March 17, 2014 11:20
Mike,

I'm not sure what part you're disputing, that average real compensation will be 60 percent higher in 30 years? You can find the projections here http://www.ssa.gov/oact/tr/201...tml#282052 . If you multiply through (adding the change in the compensation wage gap), you get average real compensation will be 60.9 percent higher in 2044 than in 2013. Please check the numbers.

As far as the tax increase needed to cover millennials, if you just did straight paygo, you would only need to raise taxes by 3.61 pp as of 2050, the last year when any substantial number of millennials should still be paying into the system http://www.ssa.gov/oact/tr/201...tml#170627
I can't imagine where you would get the need for a 10 pp increase.
...
written by Troy, March 17, 2014 11:29
Mike is conflating intergenerational transfer with "fairness".

SS is intergenerational transfer. All savings works this way since we can't eat money.

The $2.7T currently in the SSTF covers the intergenerational fairness part. That's FICA money taken from boomers (and Gen X), 1990-2010 and put in USG bonds.

Gen Y will get their SS checks paid by FICA from Gens Z and the children of the 21st century yet to be born. That's the beauty of SS, and coberly's math checks out fine.

4% of the $50,000 wage is $40/week. We don't have to make that raise immediately, just a smooth $2/week raise over the next 20 years will work fine.

Note that rents have been rising 10X this, so it's not like the wage-earning public doesn't have this income. In fact, as a Georgist I'd argue all FICA raises will come out of (forestalled) future rent increases.

https://research.stlouisfed.org/fred2/series/CUUR0000SEHA

"all taxes come out of rents" -- nobody gets this
...
written by Mike Anderson, March 17, 2014 11:41
"that average real compensation will be 60 percent higher in 30 years?"

Not disputing that; I have no problem with that assumption.

"if you just did straight paygo, you would only need to raise taxes by 3.61 pp as of 2050"

No, this does not bring the system into balance. You are ignoring the cumulative impact on the balance over time. If you wait until 2050 to do anything, by that time the Fund is hundreds of billions of dollars (if not trillions) into debt.

Let me say this again: Under the Trustees' forecasts, you would need a 2.66% increase TODAY to balance the system for the next 75 years. (Compare that to the difference between the Income Rate and Cost Rate TODAY: -1.26% as of 2013)

If you wait any number of years to do anything, more and more money gets sucked out of the Fund in the meantime, which drives the actuarial balance more and more into negative territory.

By the time you get to 2035 or so, the balance is dropping like a rock. Look at some of those plots in the first paper I posted above.
...
written by Mike Anderson, March 17, 2014 11:51
"4% of the $50,000 wage is $40/week. We don't have to make that raise immediately, just a smooth $2/week raise over the next 20 years will work fine."

You guy don't get it. The longer you wait, the harder the problem gets.

Not only do the annual deficits cumulate over time, but you are losing out on the interest you would be earning if you implemented the tax increases today.

Somewhere out there is a paper (not one of mine) that calculates the sizes of the tax increases you'd need if you waited 10 years, 20 years, etc. If you wait 20 years, the size of the tax increase you need is pretty massive.

"Mike is conflating intergenerational transfer with 'fairness'."

No, I'm not. I'm fine with intergenerational transfers and PAYGO pensions per se.

It only becomes unfair when one generation (like the Baby Boomer generation) earns a positive return on their taxes, while the younger generations end up losing money in order to fund the Baby Boomers' benefits.
...
written by Mike Anderson, March 17, 2014 11:56
"The $2.7T currently in the SSTF covers the intergenerational fairness part. That's FICA money taken from boomers (and Gen X), 1990-2010 and put in USG bonds."

And that's not nearly enough money.

The actuarial balance takes into account the current Fund balance. The Trustees' estimate is that we have to raise taxes by 2.66% TODAY, even with the $2.7T in the Fund balance today.

If we don't raises taxes until 2035 or so, the $2.7T will be long gone by then.
...
written by Mike Anderson, March 17, 2014 12:01
By the way, the $2.7T in the Fund consists of T-Bills -- i.e. debt that will have to be paid by younger generations.
...
written by Troy, March 17, 2014 12:12
"If we don't raises taxes until 2035 or so, the $2.7T will be long gone by then."

it's SUPPOSED to be gone by 2035, actually.

$2.7T at 3% is earning $80B/yr in printed interest, which is keeping the fund growing. If we spend it down at an average of $100B/yr it will last 20+ years, what we need to bridge us to 2037, when the worker/retiree ratio stabilizes at ~3.

I'd hope the top 10% of the economy is willing to part with that $100B/yr in extra taxation -- it would raise their tax burden from 19% to 21%. Tough sacrifice for millionaires to face, I know.

What's key for SS is a middle-class wage recovery, and getting the 12M people NOT employed now on payrolls.

http://research.stlouisfed.org/fred2/graph/?g=tbR


I'm not opposed to higher FICAs now to give us higher payouts in the future, but the SSTF needs to be liquidated by 2040, preferably honestly, by taxing non-FICA income marginally more.
...
written by Troy, March 17, 2014 12:27
"while the younger generations end up losing money in order to fund the Baby Boomers' benefits"

Gen Y inherits all the wealth of the boomers in the end. The boomers aren't taking it with them.

Intergenerational stuff is just smoke for inter-class politics, and that the 1% don't want to pay on the back-end of the 1983 Greenspan Deal, that $2.7T in the SSTF they're morally on the hook for now.

http://i.imgur.com/3pE3R5e.png

is age 18-64 / age 65+, working-age per retiree

The SSTF needs to be spend down by the 203x flattening, and FICA needs to be raised to cover the full program outgo by then.

We can also look at raising FICA rates on higher-income contributors, since they live longer than lower-income taxpayers.

As for losing accrued interest, that's just socking future generations with more debt they've gotta pay interest on. The beauty of SS is avoiding all this "interest" jazz, and once we get through the current demographic transition we won't need the SSTF any more.
...
written by Mike Anderson, March 17, 2014 12:52
"The SSTF needs to be spend down by the 203x flattening..."

But it's not "flattening"; at 2035, the Fund balance is dropping like a rock.

That's in large part because this:

"2037, when the worker/retiree ratio stabilizes at ~3."

is not true. First of all, the Old Age Dependency Ratio will be closer to 0.4 by 2035 (which is a 2.5 worker-to-retiree ratio). Second, it will continue to increase to something like 0.5 over the following 50 years (a ratio of 2-to-1).

This is a long-run problem, not just a matter of waiting until the Baby Boomers die off. And it is a long run problem precisely because we forecast life expectancy at age 65 to increase into future over the long run.
I didn't say wait until 2050 to raise taxes
written by Dean, March 17, 2014 1:10
Mike,

again, look at the Trustees Report. I originally said we needed to increase taxes at a rate of 0.05 pp a year on both sides as of 2020. Eyeballing it, it is probably more like 0.065 pp, given the deterioration in the projections the last two years. This gets you a tax increase of 1.3 pp by 2030 and 2.6 pp by 2040, so I'm not saying to wait until 2050. That should be pretty clear.

In this case, we are looking at a tax increase of 3.9 pp over 30 years. That's a hike that is considerably smaller than the 6.4 pp increase we saw over the years 1960-1990, which was coupled with a 2-year increase in the retirement age for young boomers. I fail to see the big problem here.

And the devastation done to the economy from the recent downturn will do far more to hurt millennials life prospects than anything that could happen with SS. Unfortunately there was much money available to promote concerns about SS than warnings about the risks posed by the housing bubble.

If I think of the problems faced by the young, I would start with the high rate of unemployment that they have faced and are likely to face for the rest of the decade. Then I would turn to all the policies that have redistributed income upward. I would also worry about the state of the planet because of global warming. The issue of prospective tax increases in SS is pretty low on my list.
...
written by Troy, March 17, 2014 2:48
"The issue of prospective tax increases in SS is pretty low on my list."

Housing is #1 on mine. We need to build new supply to house the boomers, Gens X & Y, until the (lucky among the Y) inherit the boomers' places.

We also need to get specuvestors out of single-family rental housing:

http://www.corpwatch.org/article.php?id=15903

was and is obscene. To put things in perspective again, CPI rent has risen 10% since 2010, and the FICA giveaway of 2011-12 went right into higher rents.

Nobody gets this.
...
written by Troy, March 17, 2014 3:00
"But it's not "flattening"; at 2035, the Fund balance is dropping like a rock."

by "flattening" I meant the dependency ration stabilizing around 3 in that graph.

The fund balance dropping like a rock is a GOOD thing, that's what the Greenspan Deal was all about.

As for longer retirements, maybe corporations should contribute more to retirement, to make up for this:

http://research.stlouisfed.org/fred2/series/CP/

solving collectively what we can't solve individually.
math for Anderson
written by coberly, March 17, 2014 3:51
Mike

I'm sorry, but you simply don't understand the math.

The easiest way for you to check my result is to begin with the Trustees Report. Turn it into a spread sheet and recalculate their results as a way to check your spread sheet. Then introduce the one tenth of one percent each (two tenths combined.) do it for 30 years, or better just do it whenever the Trustees Report would otherwise (based on current projections) project short term actuarial insolvency. You will see that the combined tax never rises over 4% above today's level, that once it reaches that level there are no reasons it should rise beyond that level on the horizon, and that while it is reaching that level there is never any reason to draw down the current balance in the Trust Fund... in fact only part of the interest will be needed as time goes on to help keep the required Trust Fund reserve.

I don't know how competent you are, or have been. But it takes some serious concentration to get this right, and my experience with all but a few people suggests to me that not many are really capable. I can send you my spread sheet if you send me an email address... since that may not be wise to do in public, maybe there is a back channel you could find. also, i work with an old apple, and it is not clear to me how to send my spreadsheet, but i'll figure out a way. though it's better you work it out yourself or it's not likely you would understand my work.
more for Mike
written by coberly, March 17, 2014 3:56
it is worth noting that the gradual increase in the tax places the costs on those who will enjoy the increase in benefits as well as have the increased income to pay for them.

the bottom line is that even paying the extra 4%, those people will have twice as much money in their pockets AFTER paying the tax as they have today, plus they will have paid for a longer, richer retirement.
...
written by Mike Anderson, March 17, 2014 4:52
"I don't know how competent you are, or have been."

I already linked to some of my papers on this topic; did you even bother to glance at them?

I programmed a stochastic simulation of the OASDI Trust Fund in Matlab. It required several thousand lines of code, and was flexible enough to simulate a wide array of policy scenarios, as set forth in the papers I linked to.

I'm pretty sure I can comprehend your spreadsheet, assuming it's comprehensible that is.

Go ahead and email it to lawyerphd (at) gmail.com

LOL
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written by Mike Anderson, March 17, 2014 5:01
"This gets you a tax increase of 1.3 pp by 2030 and 2.6 pp by 2040"

How is it possible to balance the Trust Fund with such a meager tax increase that doesn't kick in for 15-30 years, when a 2.66% increase would be required TODAY?

You are vastly underestimating the problem that occurs when you wait many years to do anything.

I keep asking you for your calculations, but you have yet to present any. "Eyeballing" it doesn't work; the problem is more complicated than that.

Why don't you do some back-of-the-envelope calculations and estimate the present value of your proposed tax increase? Then compare it to the present value of the current actuarial imbalance -- that's 2.66% of all future taxable payroll income for the next 75 years... That's a massive number, and you'll see that it dwarfs the size of your proposed tax increase.

As for the other problems you mention -- the economic downturn, global warming, etc -- yes, these are all big problems, perhaps even bigger problems.

But we are talking about Social Security.

By the way, are you going to correct your original post at some point, now that you agree that your estimate was wrong?
...
written by coberly, March 17, 2014 5:01
Mike

while waiting for me to figure out how to email it, you might glance at the Trustees Report table that shows income and expenses as a percent of payroll. note that the difference is a good first approximation to the tax increase that would be needed. the tax increase would actually be a little smaller because the interest on the Trust Fund would amount to about 1% of payroll.

i went around and around with Kotlikoff about this who, like you, didn't think such a small gradual increase could hope to equal the 12 Trillion Dollar Deficit. I think he finally figured it out because his last letter assured me that no one would be willing to pay 16% of their income for Social Security.

I am not so sure about this. If it was going to cost me 16% of my income to eat and live under a roof, I think I'd pay it.

I don't mean to belittle you, but I have watched too many professional experts get things wrong to have much patience with "i am an expert so trust me.."

related: i think you overlooked the contribution from trust fund interest to the 2.66% "immediate and permanent" that would fix SS for 75 years. and who do you think would be paying that interest?
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written by Mike Anderson, March 17, 2014 5:20
"while waiting for me to figure out how to email it, you might glance at the Trustees Report table that shows income and expenses as a percent of payroll. note that the difference is a good first approximation to the tax increase that would be needed."

No, it isn't. All that tells you is how big the deficit is in any given year, at a given point in time. It doesn't tell you anything about the cumulative balance of the Fund--except that it is going up or down in that given year.

It also doesn't tell you anything about the present value of those deficits (or conversely, the amount of money you'd need TODAY to make up for them.)

"who do you think would be paying that interest?"

The Trust Fund actually uses a mixture of bonds with varying maturities, so the cost of the interest gets spread out over multiple generations, including some payments made very soon. But by and large, it will be future generations who pay for it.

But I'm not even talking about that yet -- I pointed out above that the Trust Fund consists of debt, and the fact that younger generations will shoulder the bulk of that debt (as compared to the Baby Boomers, who will mostly be in retirement as the Trust Fund gets spent down and the bonds needed to pay for it are maturing.)

Are you trying to argue for my position, or against it? :)

"I don't mean to belittle you..."

Perhaps when you can figure out how to email a spreadsheet then.
Corrected numbers posted
written by Dean, March 17, 2014 8:08
Mike,

you were correct, we need a tax increase of roughly 0.22 pp annually beginning in 2020 and running through 2049 for a total of 6.6 pp. I have posted that as a correction.

As far as the line "we are talking about Social Security" the whole point of the original post is that we have far more important things to talk about right now. Because we had lots of people talking about Social Security had considerable access to the media back in 2002-2007, those of us warning about the housing bubble could not be heard. As a result we experienced a downturn that is likely to end up costing more than $10 trillion in lost output and ruin millions of lives.

My argument is that Social Security is a distraction from far more immediate concerns. That was certainly true when we were still in a position to do something to stop the growth of the bubble. It is true now when young people stand to lose far more if the pattern of upward redistribution continues than from any plausible increase in SS taxes. (If we see the same pattern of upward redistribution in the next 30 years as the last 30 years, it will be equivalent to a 30 pp increase in the Social Security tax for most workers.)

And we have much more at risk by not addressing global warming. We will feel pretty stupid if we pass off a wrecked planet in 30 years but boast to our children and grandchildren that we didn't raise their Social Security taxes.
...
written by Mike Anderson, March 17, 2014 8:17
Well thanks for posting the correction, but without some more in-depth explanation/calculations, I still am not convinced that it's enough.
how it ends
written by coberly, March 17, 2014 10:45
I sent Mike Anderson my spread sheet and a pdf of the spread sheet. He said he couldn't read them. I expected that so i started to walk him through the calculations, and he said he doesn't have time.

I don't know where Dean came up with 6.6% of payroll, The new CBO estimate might support that, but as of the 2013 Trustees Report the answer was very close to 4%. Nothing fundamental has changed since then, though the CBO now feels that we will see a lot more unemployment even though the original reason for the shortfall was supposed to be too few workers. So fewer workers but more of them out of work, I guess.

My method, for anyone who wants to replicate... or fail to replicate... it, is simply to recreate the Trustees calculations first with their numbers, then with the two tenths of one percent increase in each year the Trustees would... by 2013 projections... report "short term actuarial insolvency." When I recalculated based on CBO numbers... not broken down by year, I found I could equal their "3.6% immediate and permanent" with a 2 tenths percent increase for each of 23 years... which would total to an increase of 4.6%.

And frankly, I saw NOTHING from Dr Anderson that shows a glimmer of understanding of SS financing. A lot of arm waving does not equal "analysis."

by the way.. if Dean's answer turns out to be right... and whatever the math, it is always possible the cost of SS COULD come to that... it's still a cheap price to pay for twenty years or more of basic retirement needs. and THAT is the only important issue: how are you going to pay for your retirement? the magic of the stock market?

I'd be glad to see how Dean got his answer... though it might be too sophisticated for me. And I'd be glad to hear his criticism of my answer.
...
written by Mike Anderson, March 18, 2014 12:23
"I sent Mike Anderson my spread sheet and a pdf of the spread sheet. He said he couldn't read them."

That much is certainly true.
The Boomers Paid For Their Benefits ....
written by Joe The Economist, March 18, 2014 8:38
Dean,

"given your expertise you must know that baby boomers have paid for their own retirement"

Your comment is a half-truth. The Boomers paid statistically more (according to Urban Institute's data) than they will collect. That is true only to the extent that they pass-along (ie escape) the entire legacy cost of the system. That cost comes from the first 50 years of retirees capturing enormous returns.

If you feel that the Boomers have no responsibility to that cost, then you can say that they have paid fully for their benefits. Otherwise it is not a completely true statement.

Mike is likely looking backward at facts. Your assessment is based on projections of the future, and heaven only knows what happens then. So you are likely to disagree but that doesn't make him wrong.



Joe the self professed economist
written by coberly, March 18, 2014 10:09
Joe, you are another "economist" who doesn't know what he is talking about. It's really hard to refute nonsense in detail on a blog, so I have to hope that you don't fool too many people who don't recognize when they don't understand something.

"legacy cost" as far as I know was invented by Orszag to sound clever and completely confuse Social Security with some kind of investment club. Everyone who ever got a SS benefit got "more" than they paid in. Partly as a result of being grandfathered, partially, in as a "reward" for their contributions to earlier retirement systems, and mostly because of the effective interest that comes from pay as you go in a growing economy. As time goes on that effective interest may or may not decrease, and the effect of grandfathering certainly decreases, but this is NOTHING like a "debt." Moreover, while everyone gets back more than he pays in, NO ONE pays in, or will pay in, more than a fair cost of the insurance and "time value" of his money. NO millenials will pay for any boomers: they are paying, in advance, for their own retirement. If you can't understand how "paying ahead" works, you should avoid banks and the stock market because they work on the same principle.
more Mike nonsense
written by coberly, March 18, 2014 10:17
Mike

your comment above about the Trustees income and costs as a percent of payroll Table is deeply ignorant. You need to study the matter more carefully. for Each year the Trustees project in that table the difference between money in and money out. if a higher tax brings enough money in to balance the money out, there is NO accumulated debt. There are a few details that make the reported balance between tax income and benefit outgo not exactly the same as the difference between "all" income (and all outgo) but it is certainly close enough to show that my answer is right within any reasonable margin of error, and yours is completely, completely wrong. Even Deans 6.6% is "ballpark", and he uses a method that departs somewhat from the Trustees projections, while my only purpose is to show that the Trustees projections... the one all the serious people use... amounts to a need for a one tenth of one percent increase in the tax, for each the employer and the employee, any year the Trustees project short term actuarial insolvency, and based on the current TRustees Report that should occur in about one year out of four over the next seventy five years, with heavy front loading and tapering to nothing by 2070 or so.
"paid more than they will collect"
written by coberly, March 18, 2014 10:26
this is a lie that works by sneaking in "present value" and then failing to mention that what you mean by "more" is that they will get back less than you say they would get back from a magic present value bank that ALWAYS pays an interest rate higher than you can deliver with certainty, and ignores the insurance value of SS... which in the case of lower income workers amounts to an "interest" rate that they couldn't even earn on the stock market on a good day, much less from an imaginary present value bank.

EVERYONE who pays into Social SEcurity will get back about twice as much, or more, than they paid in. some of this is "inflation' (which you would have to make even in private investment just to keep us) and some of it is due to "growth in the economy" and a lot of it is due to the insurance "transfer" which holds down the "average return" in order to pay the extra that low income earners will need.

the difference between insurance and welfare is that those low earners will have paid for at least the largest part of what they get, and the general taxpayer will not. those who end their careers as high earners will have paid the difference as an insurance payment they paid "just in case" they had something bad happen to them and they ended up among the "low earners."

but we can expect the liars to keep comparing apples to apple pie in the sky until they destroy SS and folks go back to the good old days when "virtue" was rewarded by starving in the street when you got old.
typo
written by coberly, March 18, 2014 10:31
"keep up" not "keep us"

but none of this works if you won't think about it hard.
Mike gets snotty
written by coberly, March 18, 2014 10:57
I am a rather poor person working with an old Apple computer. Neither Apple nor Microsoft seems interested in finding an easy way to send spreadsheets from one brand of computer to the other. This doesn't make me stupid... at least about anything besides computers. Meanwhile I started to show Anderson how he could recreate my spread sheet on his own computer. He said he didn't have time. But he still wants, really wants, to see a "more in depth explanation/calculations" of the figures... as long as he doesn't have to spend any time understanding it.

Meanwhile "present value" is not going to change the values reported as percents of payroll for each year. Anderson does not understand that.

if you make up "the deficit" every year with an increase in the tax, there is no accumulated balance to have to worry about, much less apply "present value" to confuse yourself with. knowing how much you'd have to have today...well, unless you are going to put the money in the bank today, knowing how much you'd have to have won't help you. but here is a hint. if the tax had to be increased "four percent of payroll" to cover the deficit for year X. then "four percent of payroll" today is a pretty good estimate of the present value (today) of what you'd have to pay then. but Anderson doesn't understand this.

as for paying the interest on the future Trust Fund, Anderson seems to understand that it will be future tax payers. he does not seem to understand that they will be paying back the money the boomers lent to "the united states." this may not seem fair to him, but it's the way borrowed money works, even if the United States borrowed it in your name and you have to pay it back. you can be sure most of the money was spent keeping you safe from the Russians. Meanwhile my point about "who will pay" was that the "2.66% immediate and permanent tax increase" contains a hidden extra tax on incomes to pay for the interest that will be needed in the out years of that "immediate and permanent." better to just pay the one tenth of one percent (each) each year "as needed." That way the people who pay the larger tax as time goes on will have more money to pay it with, and they will be the ones with the longer life expectancies collecting the benefits... more than they paid in, but not more than they "paid for," thanks to that good old time value of money thing.
the unfairness of it all
written by coberly, March 18, 2014 11:03
i need to make clear that Anderson seems all worked up that the millenials will have to pay for the boomers, but can't seem to understand that the boomers already paid for themselves. the millenials would have to pay BACK the boomers.

but even that is not quite true. paying back the national debt will come mostly out of the taxes of higher earners.... not the future payroll tax of workers.

but its even better than that: by paying for SS "as we go" with a gradually increasing (small, tiny, increases) the money borrowed from the boomers never has to be paid back. it is absorbed into the "reserve" that SS needs to keep on hand for the next great recession.

but Anderson doesn't understand that paying money BACK to the people who lent it to you, is not the same as paying FOR those people. he wants the boomers to pay twice. once by themoney they lent the government. and once more so the kids don't have to pay for their own future retirement ... because he doesn't understand pay as you go and thinks the kids are paying "for" their grandmother's retirement, and that's so unfair, you know.
...
written by Troy, March 18, 2014 3:55
And as Romney so infamously pointed out, 47% of the country isn't involved in this "pay back" stuff at all.

I think the $2.7T in the trust fund needs to be liquidated down to its statutory minimum ($1.5T?) by 2035, so that's 20 years and maybe $100B/yr of bond cashing.

Furthermore, if taxes on current FICA payers are raised to cash the bonds in the SSTF, this will have largely been an exercise in taking money out of one of my pockets to pay the other, as they like saying SSTF is "in toto".

For the Greenspan Deal of 1983 to be not a total fraud perpetrated on me, a Gen Xer, this future ongoing SSTF liquidation has to come from non-FICA income.

Corporate income tax levy, billionaire tax, tariffs, don't really care.

A secondary issue is ensuring Gen Y -- age 12 to 30 now -- pays in a sufficient amount to get a fair pay out.

You know, ideally, we should adjust FICA tax rates based on age, too. This would clarify who is paying what, and when, for what.
Coberley The Guy With No Sense Of Humor
written by Joe The Economist, March 19, 2014 7:43
Joe The Economist is a monikur that basically says economists take themselves too seriously. I happen to be one, and the industry is a step up from Scientology.

You talk down to a lot of people here. My data comes from Urban Institute, and is backed by data from the Social Security Administration. All told, they possess more credibility than you have demonstrated here - which is little more than a breath-taking combination of arrogance and ignorance.


First, Social Security isn't an investment it is insurance. It is not measured in a nominal sense. It is measured in an expected return - which is what UI does. The economic returns on now on average negative - again this isn't my data and it puts SS's return in its best possible light. You should argue with them - they are very nice.

Second, Social Security is financed. It is not funded. We pay for benefits today by promising benefits tomorrow. It is only not a debt if you have no intention of repaying the loan.

Third, no private business operates on the principles of Social Security. The bookkeeping method is against the law. Comparing any private business is like Social Security is absurd.

Urban Institute has baby boomers getting back less than they paid on
written by Dean, March 19, 2014 10:21
Joe,

if you look at most of the permutation in this study www.urban.org/UploadedPDF/4126...WM&cad=rja
those hitting age 65 in 2020 and 2030 get somewhat less back in benefits than they paid in taxes. The big exceptions are one earner couples and a couple with an average earner and low earner. Singles and other couples get back less than they paid in by these calculations.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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