Friday, November 14, 2014
Social Security Crash Explained In 4 Simple Steps
How to destroy the future in four easy steps:
1. Give To Voters
The original law included automatic tax increases which would have increased the cost of Social Security to 6% of wages from its 2% base. Over the 1940s, Congress waived every increase, one of which required a Congressional override of FDR's veto. Funding for Social Security did not reach the originally envisioned 6% until the 1960s. Self-employed workers would not pay 6% until the 1970s.
These tax cuts transformed Social Security from a system paid by workers to a system financed by children.
2. Take From Non-Voters
Once voters did not have to pay for benefits, Congress raised benefits — every election year in the 1950s. Social Security Act Amendments of 1950, 1952, 1954, 1956, 1958 all increased benefits. These increased the value of existing benefits, created new benefits, or expanded coverage to more Americans. The 1950 Amendment raised benefits by 77%, 1952 (12.5%), 1954 (13%), 1956(added disability), 1958 (7%).
A couple retiring in 1960 expected to collect $8 of benefits for every $1 of contribution. Basically, Congress in the 1950s was selling dollars of benefits to voters for little more than a dime. The difference between the cost and the benefit was largely passed on to future generations who had no vote in 1950.
3. Allow The Federal Reserve to Lower Interest Rates At A Cost Of $1.2 trillion of Projected Interest Income (in 2012 alone)
In 2011, projected interest income over the life of the Trust Fund was 3.6 trillion. In 2012, projected interest income over the life of the Trust Fund was 2.4 trillion.
Thanks, Ben Bernanke.
4. Ignore The Problem
Social Security almost reached insolvency in 1983. At that time, Social Security had more than 40 years of promises embedded in a system that did not have a penny to pay them. The solution to these problems in 1983? Repeat step 1. Repeat step 2. Prepare for step 3. The solution to these problems in 2013? Repeat step 1. Repeat step 2.
Today, Social Security is not much different than spending quarters to buy dimes. Congress' solution is for us to get our kids to spend quarters to buy nickels.
Wednesday, September 24, 2014
Does Social Security Contribute To The Deficit
"Social Security has never contributed one cent to the deficit. Not one cent!"
~Senate Candidate Jeff Merkley
Tim
Geithner’s dog whistle is back in the news. Over the past
two weeks, the discussion about Social Security and the deficit degenerated into a full blown ‘does so’ – ‘does
not’ school yard shouting match.
The exchange
started when Jeff Merkley, a candidate for Senate in Oregon, blew the whistle,
and PolitiFact challenged his statement. Michael Hiltzik challenged its assessment. And the dogs were off to the races.
To fully
understand the dispute, you have to know that the word deficit has one meaning
to Markley and a very different meaning to PolitiFact. Both sides ignore the most basic facts of the
subject, and use words almost assured to mislead just about everyone. It is the
circus of extremes, which allows the voter to learn only what he wanted to hear
in the first place.
These
participants are more interested in circus than answering the basic question: does
Social Security contribute to the overall financial imbalances of the federal
government? Here is the answer. While Social Security does not count toward
the government’s red-ink, it contributes to it significantly.
Merkley’s
statement is completely false. Social
Security is not self-supporting as he claims.
It receives by law (Public Law 98-21) annual general fund transfers, mainly the revenue from the taxation of Social Security benefits. This revenue appears on-budget, and is
dollar for dollar deficit spending. Over the past three years, Social Security
has by law created more than $75 billion of “On Budget” deficit – according to
the Trustees.
Yes, Center for Economic and Policy
Research is wrong. Michael
Hiltzik is wrong.
Paul Norr, the financial expert who has written extensively about Social
Security, is simply uninformed. These
transfers are clearly detailed in the Trustee
Reports.
They are outlined in the budget. But,
sound bites are better than facts.Merkley has also used the wrong word. It is possible to say is that Social Security does not “count” toward the deficit. This is very different from saying it does not “contribute”. Count is a very narrow word dealing with what revenue and expense is included in a calculation. Contribute weighs the changes in the deficit caused by the system as a whole.
Merkley’s statement assumes that Social Security operates in a vacuum, where it has no impact on the economy around it. This assumption reflects more ideology than reasoned deliberation. It isn’t possible to redistribute nearly a trillion dollars of income without affecting the broader economy. For example, the National Bureau of Economic Research has shown that Social Security encourages people to retire earlier in life which means that older workers are trading an income tax producing job for a tax-free pension. Lower income tax collection will foster a deficit.
On the other side of the discussion, PolitiFact’s assessment may be even worse. While its rating is essentially correct, the accuracy has more to do with random luck than actual reason. The piece has a number of fact problems, only one of which is that Markley did not say what PolitiFact has judged.
PolitiFact has substituted its own definition of the word “deficit” in its ruling. There is more than one equation to calculate the deficit. Merkley is talking about the on-budget deficit. PolitiFact has validated his statement against a different measure, the unified budget deficit. Mind you, PolitiFact has made this mistake repeatedly. (PolitiFact New Hampshire, Politifact Georgia, PolitiFact Wisconsin)
Fact: Since 1984, Social Security Trust Fund has accumulated $2.8
trillion dollars more revenue than it paid out in benefits.
PolitiFact’s reasoning changes the
relationship between Social Security and the government. In the unified budget
approach, Social Security is a profit center to fund other spending. There is
no $2.8 trillion dollar reserve of payroll taxes, nor interest earned. The money is spent on other priorities with
nothing left over. So PolitiFact is
testing Markley’s statement against a measure which specifically excludes
revenue dedicated to Social Security.
In PolitiFact’s world, Social Security
adds to the budget deficit as soon as the cost of benefits exceeds the revenue
collected from payroll taxes and on-budget subsidizes. This line of thinking is
the exact
reason that Social Security was moved off-budget
in the 1983. The National Commission for Social Security Reform argued that “changes
in the Social Security program should be made only for programmatic reasons,
and not for purposes of balancing the budget.”
This approach to government is
non-sense. Social Security does not
belong in the budget. The government
does not make a profit or loss on Social Security. The revenue dedicated to Social Security
should not be used by bureaucrats to hide spending problems elsewhere in the
budget.
Neither argument is particularly helpful
for someone who wants to understand the relationship between Social Security
and the overall financial imbalances of our government. That question is never
even really discussed.
Sunday, August 17, 2014
2014 Social Security Trustees Report
The Trustees of the Social Security Trust Funds released their
report on July 28th.
The details of the report clearly show that the crisis in Social Security is
not only deepening but widening as well.
The conventional measure of the report is the exhaustion point of
the Trust Fund, which continues to be 2033. That is the point at which financial consequences start falling
on retirees. That date didn't change, but every other measure of the
crisis has changed for the worse.
The reasonable solvency of the system was reduced over the course
of 2013 from 19 years to 18 years. This reduction means that for the
first time in history on average someone retiring today at normal retirement
age expects to outlive full benefits. Anyone who is 48 years old or
younger roughly expects to retire after the system pays depleted
benefits. This, believe it or not, is the good news.
The bad news is that the size of the crisis arriving in 2033 is
growing rapidly. The report reveals that the unfunded
liabilities now exceed the Gross Domestic Product
of the entire county. The financing shortfall grew by $1.8 trillion.
The growth means that Social Security created more than $2 of broken promises
for every dollar that it collected ($855
Billion in 2013). The grand total of unfunded liabilities
exceeds all revenue ever collected by the system since its inception.
The other measure of the shortfall, the
75 year financing gap, tells us how much it will cost to
kick the can. This cost rose $1 trillion dollars, again more than the
system collected in all forms of revenue. To solve this part of the problem we
would have to raise payroll taxes from 15.3% to 18.18% (an increase of 2.88%).
In other words, the nation would need to divert roughly $10.6 trillion away
from deficit reduction in order to make the Boomer’s problem an even
larger problem for their children.
The report tells us that these broken promises will start falling
on people in roughly 19 years. The Trustees project that there is a 50%
chance that the system will pay full benefits
through 2032. It is reasonable today to expect that more than 50% of voting
aged Americans will retire after 2032. Five years ago, a near majority of
voting aged Americans expected to be completely unaffected by the
shortfall. Today, it is less than 20%.
Politicians assure us that we have time to fix the crisis.
It is ironic that Time is the one variable that we know with certainty is
destructive to Social Security. The 2014 report tells us that changing
the valuation date from 2012 to 2013 meant that the system created
$900 billion broken promises. Another way to
look at this problem is if we had diverted every penny spent on the military in
2013 to Social Security, the system would still have been worse off at the end
of the year than it was at the beginning.
What should trouble people is that the Congressional Budget Office
(“CBO”) provides similar projections on the Social Security system. Every angle of CBO’s
projections provides a more pessimistic forecast for Social Security. CBO
believes the crisis emerging in Social Security will be larger and arrive
sooner than the Trustees. They show that it will affect more people and
require greater resources to ameliorate. So it is possible that the
Trustees are too optimistic.
The problem with this coverage today is that it focuses on the
length of the fuse rather than the size of the bomb.
Monday, July 21, 2014
The 3rd-Rail Is Running Out Of Track
Social Security has long been known as the 3rd-Rail of Politics in large part because the program serves an audience with a high rate of voter participation. Politicians have historically avoided the discussion of reform for fear of the consequences at the voting booth.
This political calculus is however changing. The finances of Social Security are such that most Americans now expect to see benefits cut in their lifetime. Separately, there are few options which insulate voters from the impact from the changes necessary to preserve the system. In short, the 3rd Rail is running out of track.
Earlier this month the Congressional Budget Office ("CBO") released a new projection for the Social Security Trust Funds which suggests that the combined funds will be depleted in 2030. If the Trustees confirm this finding in their 2014 Report on the Social Security Trust Funds, the system will have reached new milestones: a vast majority of voting aged Americans expect to retire after the system is unable to fulfill its promises.
2030 means that someone turning 70 today expects to outlive Social Security's ability to pay scheduled benefits. Likewise, women who are 72 generally expect to live into the year 2030. (SSA Life Expectancy Calculator) This projection means that people who are 52 and younger expect to retire after the Trust Fund is exhausted - more than 60% of voting aged Americans.
The demographics of the 3rd Rail were radically different just 5 years ago. In 2009, the Trustees projected that the system's solvency would extend for 28 years. People who were 52 and older had a reasonable expectation that they would die before the consequences of Social Security would reach the public. Even the average 40 year-old expected to collect some level of scheduled benefits.
Five years ago a near majority of Americans expected to be completely unaffected by Social Security's unfunded liabilities. The consequences of ignoring these problems fell on a small group of voters who were largely detached from the electoral process. Five years ago, it paid political benefits to ignore the problem.
The changing financial picture of Social Security has yet to materialize in polls. Public confidence in Social Security is about the same as it was 25 years ago. In 1988, public confidence in Social Security was roughly 49%. Current polls shows that the figure is roughly 54%. Even younger Americans have a surprisingly high level of confidence at 45% given that every one of those polled will be less than 45 when the Trust Fund plans to liquidate its last asset.
While the public's confidence in the system hasn't changed much, financials have changed substantially. In 1988, Social Security was projected to be solvent for more than 60 years. Today projected solvency is less than 16 years. The cost to keep the system solvent has nearly doubled over the last 5 years. It is a matter of time before the deterioration of the systems financials begins to alter the how the 3rd Rail influences the nation's politics.
What should trouble everyone who believes in Social Security is the correlation between personal benefits from the system and confidence in the system. The National Association of Social Insurance concluded from a poll a year ago, "Large majorities of Americans, both Republicans and Democrats, agree on ways to strengthen Social Security — without cutting benefits." In that poll, 80% of the respondents said : I don’t mind paying Social Security taxes because I know that I will be receiving benefits when I retire - and 48% strongly agreed.
This poll contrasts sharply with a Reason-Rupe poll of younger Americans who are more skeptical that they will receive benefits from Social Security. That poll found that 73% of this audience supports a new system with private accounts. The poll further found that nearly half of younger people would replace the existing system even if current seniors had to have their benefits reduced.
According to multiple polls (here is one), people prefer increasing taxes to decreasing benefits. This preference is completely understandable because benefit reductions affect all future benefits where as tax increases cannot be applied to past earnings. The closer one is to benefits, the cheaper a tax solution is to the voter. CBO for example projected that increasing the payroll taxes to 14.4% would increase lifetime contributions of those born in the 1960s by 6% and those born in the 2000s by 15%. In other words, the greatest impact would fall on those people who are 14 and younger. Essentially this proposal is based on the idea that our children will pay the taxes that we won't.
Unfortunately, the tax-other-people alternatives are quickly losing the pretense of effectiveness. Advocates of Social Security frequently argue to increase the amount of wages subject to the Social Security payroll tax. In the apex tax solution, proponents suggest completely eliminating the payroll cap. In 2010, Congressional Research Service projected that completely removing the taxable wage cap would solve 95% of the financing shortfall. Earlier this month, CBO lowered its projection to 45% of the solution. The point here is that solving Social Security's financial gaps will involve more and more personal sacrifice.
The dynamics of the 3rd Rail will change as more people start to look at how the exhaustion of the Trust Fund will affect them personally. Current law would subject nearly all Americans to forced benefits cuts at some point in their life. The options to preserve the existing system will have larger and larger impacts on the individual, rather than a nameless individual far in the future.
Social Security will always be a political lighting rod because of the amount of money that it controls. The nature of that force will change as the financial imbalances start to fall on current voters. That change is occurring much faster than most realize.
This political calculus is however changing. The finances of Social Security are such that most Americans now expect to see benefits cut in their lifetime. Separately, there are few options which insulate voters from the impact from the changes necessary to preserve the system. In short, the 3rd Rail is running out of track.
Earlier this month the Congressional Budget Office ("CBO") released a new projection for the Social Security Trust Funds which suggests that the combined funds will be depleted in 2030. If the Trustees confirm this finding in their 2014 Report on the Social Security Trust Funds, the system will have reached new milestones: a vast majority of voting aged Americans expect to retire after the system is unable to fulfill its promises.
2030 means that someone turning 70 today expects to outlive Social Security's ability to pay scheduled benefits. Likewise, women who are 72 generally expect to live into the year 2030. (SSA Life Expectancy Calculator) This projection means that people who are 52 and younger expect to retire after the Trust Fund is exhausted - more than 60% of voting aged Americans.
The demographics of the 3rd Rail were radically different just 5 years ago. In 2009, the Trustees projected that the system's solvency would extend for 28 years. People who were 52 and older had a reasonable expectation that they would die before the consequences of Social Security would reach the public. Even the average 40 year-old expected to collect some level of scheduled benefits.
Five years ago a near majority of Americans expected to be completely unaffected by Social Security's unfunded liabilities. The consequences of ignoring these problems fell on a small group of voters who were largely detached from the electoral process. Five years ago, it paid political benefits to ignore the problem.
The changing financial picture of Social Security has yet to materialize in polls. Public confidence in Social Security is about the same as it was 25 years ago. In 1988, public confidence in Social Security was roughly 49%. Current polls shows that the figure is roughly 54%. Even younger Americans have a surprisingly high level of confidence at 45% given that every one of those polled will be less than 45 when the Trust Fund plans to liquidate its last asset.
While the public's confidence in the system hasn't changed much, financials have changed substantially. In 1988, Social Security was projected to be solvent for more than 60 years. Today projected solvency is less than 16 years. The cost to keep the system solvent has nearly doubled over the last 5 years. It is a matter of time before the deterioration of the systems financials begins to alter the how the 3rd Rail influences the nation's politics.
What should trouble everyone who believes in Social Security is the correlation between personal benefits from the system and confidence in the system. The National Association of Social Insurance concluded from a poll a year ago, "Large majorities of Americans, both Republicans and Democrats, agree on ways to strengthen Social Security — without cutting benefits." In that poll, 80% of the respondents said : I don’t mind paying Social Security taxes because I know that I will be receiving benefits when I retire - and 48% strongly agreed.
This poll contrasts sharply with a Reason-Rupe poll of younger Americans who are more skeptical that they will receive benefits from Social Security. That poll found that 73% of this audience supports a new system with private accounts. The poll further found that nearly half of younger people would replace the existing system even if current seniors had to have their benefits reduced.
According to multiple polls (here is one), people prefer increasing taxes to decreasing benefits. This preference is completely understandable because benefit reductions affect all future benefits where as tax increases cannot be applied to past earnings. The closer one is to benefits, the cheaper a tax solution is to the voter. CBO for example projected that increasing the payroll taxes to 14.4% would increase lifetime contributions of those born in the 1960s by 6% and those born in the 2000s by 15%. In other words, the greatest impact would fall on those people who are 14 and younger. Essentially this proposal is based on the idea that our children will pay the taxes that we won't.
Unfortunately, the tax-other-people alternatives are quickly losing the pretense of effectiveness. Advocates of Social Security frequently argue to increase the amount of wages subject to the Social Security payroll tax. In the apex tax solution, proponents suggest completely eliminating the payroll cap. In 2010, Congressional Research Service projected that completely removing the taxable wage cap would solve 95% of the financing shortfall. Earlier this month, CBO lowered its projection to 45% of the solution. The point here is that solving Social Security's financial gaps will involve more and more personal sacrifice.
The dynamics of the 3rd Rail will change as more people start to look at how the exhaustion of the Trust Fund will affect them personally. Current law would subject nearly all Americans to forced benefits cuts at some point in their life. The options to preserve the existing system will have larger and larger impacts on the individual, rather than a nameless individual far in the future.
Social Security will always be a political lighting rod because of the amount of money that it controls. The nature of that force will change as the financial imbalances start to fall on current voters. That change is occurring much faster than most realize.
Saturday, July 12, 2014
Privatizing Social Security
“Politics is the art of postponing decisions until they are no longer relevant.”
After three years of researching Social Security, I have finally reached the conclusion that privatizing any or all parts of Social Security will not improve the financial prospects of the system as promised by its many proponents. Privatization has fallen victim to the art of politics. It is no longer relevant.
I am completely unpersuaded by the traditional objections to the privatization of Social Security. On the contrary, my concerns deal with whether the change is sound policy. Moreover, I simply don’t believe that it is affordable anymore because of the structural changes to the system which have occurred over the last 10 years.
Privatization does not reform Social Security. Privatization changes the role that Social Security plays in our lives. Privatization would transform Social Security from conceptually old-age insurance to a system of forced savings. These are very different things.
In terms of policy, I do not see the point of changing Social Security from insurance which I can’t buy in the private market to a personal savings account which I already have in abundance. The only proxy in the private market for Social Security is an annuity which is generally expensive to buy. On the other hand, I have an IRA, ROTH/IRA, 401K, and a SEP. I do not understand the reasoning behind making Social Security into another flavor of the alphabet soup of retirement planning.
The sell-side of this idea will tell you that not everyone has prepared for retirement. Ironically enough, this reasoning is an argument for insurance rather than savings. Savings must cover how long you might live, where as insurance only needs to cover how long you actually do live. (A longer discussion of insurance vs savings is found here.)
The sell-side of this idea will tell you that it is possible to make more money in the stock market than in Social Security. While it is true, the comparison is not honest. Social Security carries legacy costs which cause the poor return. The market does not reflect this financing burden. So the comparison is only valid if the costs of the past go away – they don’t.
What are legacy costs? They are the benefits of existing retirees which are fulfilled with current payroll taxes. If we redirect the payroll taxes of workers from Social Security to private accounts, how will you pay the existing benefits? Privatization in general replaces the money with subsidies from the General Fund. In other words, privatization changes the pocket which pays for Social Security.
The consequence of this strategy is clear: higher income taxes or cuts to other government services. Your income taxes must increase directly proportionally with whatever payroll taxes that go to private accounts because most of the plans that offer an element of personal ownership come with a clause to protect the existing retirees. Since existing payroll taxes will not fully cover the cost of these benefits, the increase in Social Security income taxes will be higher than the Social Security payroll taxes put into your personal account. Basically your private account is great, but it is likely that the entire balance will be lost to higher Social Security income taxes.
When the sell-side of this idea tells you that the SSA has said that privatization will make Social Security solvent, it is not completely honest. Generally they point to studies from 2005. In a different example, JustFacts.Org says, “As evidenced by analyses conducted by the chief actuary of the Social Security Administration and a bipartisan presidential commission, proposals to give Social Security an element of personal ownership are generally structured to strengthen the program’s finances.” The evidence is a proposal scoring completed by the chief actuary in 2008. The proposal contained a 4.1 trillion dollar subsidy from the General Fund. If I hand you 4.1 trillion dollars, yes it will strengthen your financial position.
There are two major structural shifts in Social Security that are generally ignored by the sell-side. First, the imbalances of the system are growing rapidly. The 2008 study was based on data from year-end 2006. The short-term financing gap has doubled since that time. Second, the system stopped generating excess cash in 2010. So there is no excess cash in the system to invest.
Research from 2005 is at best irrelevant. According to the Academy of Actuaries, the cost to privatize Social Security is reasonably considered to be roughly $10 trillion, more than double the cost projected in the research from 2008. The phrase in football is throw where the receiver will be. The sell-side on this policy is crafting the play around where the receiver was 5 plays ago.
The second shift in the dynamics of Social Security is a little more serious. In 2005, Social Security created excess cash which was subsequently invested in government securities. At the time, it was possible to create economic value by investing the excess cash in more productive ventures. It wasn’t a lot of money, but at least it was real. Today, the system collects less in payroll taxes than it expends in benefits. Any money that is pulled away from Social Security for more productive ventures, will be offset dollar for dollar with increases in government borrowing from the public markets. It is a complete wash.
Finally there is the problem that no one discusses: adverse selection. In terms of Social Security and privatization it means that the first people to leave Social Security for a personal account will be the system’s most profitable participants. In the case of Social Security, the most likely candidate to leave is the single high-wage worker. If this selection process occurs, a transition from Social Security to private accounts will not make Social Security more financially sound. It will set the stage for an implosion.
This idea may have had some merit 20 years ago, but today it seems to be a questionable policy decision that we can’t afford. What does the younger American, for example our kids who have no vote in this matter, get for $10 trillion dollars. They get the privilege to save for their own retirement.
Originally published on FedSmith.Com.
Thursday, June 19, 2014
Embrace Your Mistakes
Over three years of researching Social Security, I have come to two conclusions. One, Social Security is a vital program. Two, there is no single force driving that program to crisis faster than the media and the experts that it quotes.
Today, polls show that roughly 80% of the public believe that Social Security is heading for crisis without reform. Social Security reform has number. That support is however diluted across dozens of ideas by the media which has abdicated any responsibility for educating the voters.
In 2012, there was very little coverage of Social Security in the Presidential campaigns. During the debates, President Obama stated that Social Security was 'structurally sound'. The Trustees project that in the 14 seconds that Obama took to say it, Social Security issued roughly $220,000 of additional broken promises. Both candidates talked about the necessary changes in terms of tweaks. The Trustees put the cost of these 'tweaks' at nearly 10 trillion in 2013 dollars. The media treated these euphemisms as facts.
Ideology is largely what passes for information in the media. Recently, on Bloomberg, Barry Ritholtz wrote that small changes to the wages subject to payroll taxes would make Social Security solvent well into the next century. It isn't close to true, and quickly discounted with research from Social Security Administration.
To his credit, Mr. Ritholtz wrote a correction. Unfortunately his correction was even less accurate. It introduced a web page from the American Academy of Actuaries that was based on data from 2009. He doesn't disclose that this data is trillions of dollar out of date. By profession, Mr. Ritholtz is a money manager. Do you think he buys and sells companies based on earnings from 5 years ago when the companies which have shown deteriorating financials for nearly 10 consecutive years?
Bloomberg will tell you that it is not responsible for Mr. Ritholtz's opinion or his research. Mr. Ritholtz in all likelihood will tell you that it is not his responsibility to correct information on the website of the American Academy of Actuaries. The American Academy of Actuaries will likely tell you that people should use the more current webpage on its site. Ironically enough, Mr. Ritholtz original article condemned the lack of accountability in pundits.
And thus the rumor spreads faster than the fact. News outlets and bloggers pick-up stories from Bloomberg because of its reputation. Bloomberg trusts Mr. Ritholtz, who seems to have assumed that the American Academy of Actuaries was a reliable source. There is virtually no accountability in the entire process.
None of the characters here are particularly unusual. Mr. Ritholtz isn't the lone writer using dubious sources. The American Academy of Actuaries aren't the sole source of noise. The Social Security debate has evolved into a cottage industry of agenda-driven think-tanks pushing a flavor of social policy through Social Security. Cato Institute pushes privatization. The Heritage Foundation sells its American Dream. These groups plus NASI, and CEPR, all make a living selling the noise that has turned the Social Security debate into a shouting match.
Today, polls show that roughly 80% of the public believe that Social Security is heading for crisis without reform. Social Security reform has number. That support is however diluted across dozens of ideas by the media which has abdicated any responsibility for educating the voters.
In 2012, there was very little coverage of Social Security in the Presidential campaigns. During the debates, President Obama stated that Social Security was 'structurally sound'. The Trustees project that in the 14 seconds that Obama took to say it, Social Security issued roughly $220,000 of additional broken promises. Both candidates talked about the necessary changes in terms of tweaks. The Trustees put the cost of these 'tweaks' at nearly 10 trillion in 2013 dollars. The media treated these euphemisms as facts.
Ideology is largely what passes for information in the media. Recently, on Bloomberg, Barry Ritholtz wrote that small changes to the wages subject to payroll taxes would make Social Security solvent well into the next century. It isn't close to true, and quickly discounted with research from Social Security Administration.
To his credit, Mr. Ritholtz wrote a correction. Unfortunately his correction was even less accurate. It introduced a web page from the American Academy of Actuaries that was based on data from 2009. He doesn't disclose that this data is trillions of dollar out of date. By profession, Mr. Ritholtz is a money manager. Do you think he buys and sells companies based on earnings from 5 years ago when the companies which have shown deteriorating financials for nearly 10 consecutive years?
Bloomberg will tell you that it is not responsible for Mr. Ritholtz's opinion or his research. Mr. Ritholtz in all likelihood will tell you that it is not his responsibility to correct information on the website of the American Academy of Actuaries. The American Academy of Actuaries will likely tell you that people should use the more current webpage on its site. Ironically enough, Mr. Ritholtz original article condemned the lack of accountability in pundits.
And thus the rumor spreads faster than the fact. News outlets and bloggers pick-up stories from Bloomberg because of its reputation. Bloomberg trusts Mr. Ritholtz, who seems to have assumed that the American Academy of Actuaries was a reliable source. There is virtually no accountability in the entire process.
None of the characters here are particularly unusual. Mr. Ritholtz isn't the lone writer using dubious sources. The American Academy of Actuaries aren't the sole source of noise. The Social Security debate has evolved into a cottage industry of agenda-driven think-tanks pushing a flavor of social policy through Social Security. Cato Institute pushes privatization. The Heritage Foundation sells its American Dream. These groups plus NASI, and CEPR, all make a living selling the noise that has turned the Social Security debate into a shouting match.
Friday, June 6, 2014
Social Security And The Safety-Net
One of the more dangerous arguments in the debate about the Social Security system is the growing belief that Social Security is part of a social safety-net that protects the elderly or the poor. The argument is dangerous because it expands the charter of Social Security at a time when the system lacks the resources to serve its primary goal.
Social Security is supposed to be old-age insurance which provides some financial certainty to people who no longer have a viable option to work. Old age is an uncertainty, one which can create great expense. Insurance spreads the risk of old age across a large population, and concentrates resources on those who incur the cost. Unfortunately, the trustees of Social Security project that even in a good economy the program cannot fulfill that role for people who are 64 and younger.
The argument to broaden the scope of the system has bled into the lexicon of both parties, and become a standard for media analysis of any proposal to reform the system. The problem here is that there is no basis in the argument. The history of the program does not support the argument. The cashflows do not support the argument. Comically enough, the design of the system makes it uniquely unfit to serve as a social safety net.
Social Security Was Not Originally a Safety Net
The Social Security Act Of 1935 includes many things, some of which deal with needs of the elderly, unemployed, and children. Separately, it created the Social Security Old-Age Insurance. If Title 2, "TITLE II- FEDERAL OLD-AGE BENEFITS," was intended to provide a safety net for the poor, there would have been no need for Title 1, "TITLE I- GRANTS TO STATES FOR OLD-AGE ASSISTANCE". Title 2 is what created the Social Security Old-Age Insurance program.
FDR structured the law in this way because he did not want his program to be subject to political priorities. Originally, Social Security was supposed to be a self-funded contributory benefits system. FDR referred to these contributions as "politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits." A social safety net has no rights. It is a political priority.
AJ Altmeyer, who was the chairman of the Social Security Board said in 1944, rejected the idea that Social Security was a public dole in congressional testimony.
Social Security Cannot Serve As a Safety Net
Social Security is uniquely unfit even to play a role in a social safety net. Millions of Americans are not covered by Social Security. Many of them do not qualify because of a spotty job history that created need in the later years of life. So the system excludes those who would need financial support most. Even if everyone were covered, Social Security does not even have visibility into the poverty that it is supposed to alleviate. As a social safety net, the system blindly throws money at people who may or may not be in need at all.
The Social Security system is highly progressive, in which high-wage earners subsidize those who are lower-wage earners. This makes old-age insurance more affordable for a wider audience. Yes, the formula rewards people progressively less as they earn more. Yes, the formulas reduce benefits for people who saved for their own retirement. At the same time, the Social Security system does not pay a penny based on need.
Social Security's Benefit Formulas Reward Everyone But the Poor
The benefits formula for Social Security has more than 2,000 rules which change the benefits based on whether you have kids or how many times you marry. The benefit formula rewards people for living longer or working longer. The formula allocates the largest amount of resources to people who contributed the most in the past, live the longest, have the most qualifying ex-wives, and have the most children after the age of 65. Nowhere do the formulas base benefits on need.
Social Security pays the most money to someone like Pete Stark. Who is Pete Stark? An ex-Congressman who is wealthy by congressional standards. He is apt to collect the maximum payment allowed by Social Security. He is apt to live longer than most Americans. He married three times, giving the system three potential wives to collect survivor benefits from Social Security. The last wife produced three children all of whom have been eligible for Social Security almost since birth. It is not possible to call a system that lards benefits on someone like Pete Stark a safety net.
In contrast to the haul of Pete Stark, Social Security will allocate zero resources to people who worked for Central Falls, a small town in Rhode Island which faces bankruptcy. Like many towns and municipalities, Central Falls did not put its employees into Social Security. With their pensions gone in bankruptcy, the people who retired from the city will have significant needs and no way to collect from Social Security.
Social Security is supposed to be old-age insurance which provides some financial certainty to people who no longer have a viable option to work. Old age is an uncertainty, one which can create great expense. Insurance spreads the risk of old age across a large population, and concentrates resources on those who incur the cost. Unfortunately, the trustees of Social Security project that even in a good economy the program cannot fulfill that role for people who are 64 and younger.
The argument to broaden the scope of the system has bled into the lexicon of both parties, and become a standard for media analysis of any proposal to reform the system. The problem here is that there is no basis in the argument. The history of the program does not support the argument. The cashflows do not support the argument. Comically enough, the design of the system makes it uniquely unfit to serve as a social safety net.
Social Security Was Not Originally a Safety Net
The Social Security Act Of 1935 includes many things, some of which deal with needs of the elderly, unemployed, and children. Separately, it created the Social Security Old-Age Insurance. If Title 2, "TITLE II- FEDERAL OLD-AGE BENEFITS," was intended to provide a safety net for the poor, there would have been no need for Title 1, "TITLE I- GRANTS TO STATES FOR OLD-AGE ASSISTANCE". Title 2 is what created the Social Security Old-Age Insurance program.
FDR structured the law in this way because he did not want his program to be subject to political priorities. Originally, Social Security was supposed to be a self-funded contributory benefits system. FDR referred to these contributions as "politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits." A social safety net has no rights. It is a political priority.
AJ Altmeyer, who was the chairman of the Social Security Board said in 1944, rejected the idea that Social Security was a public dole in congressional testimony.
"I believe that I am safe in saying that the people of this country, that the Congress of the United States, and that the members of this Committee favor a system of contributory social insurance for providing protection against the inevitable economic hazards that beset the workers of this country, rather than a Government dole."
Social Security Cannot Serve As a Safety Net
Social Security is uniquely unfit even to play a role in a social safety net. Millions of Americans are not covered by Social Security. Many of them do not qualify because of a spotty job history that created need in the later years of life. So the system excludes those who would need financial support most. Even if everyone were covered, Social Security does not even have visibility into the poverty that it is supposed to alleviate. As a social safety net, the system blindly throws money at people who may or may not be in need at all.
The Social Security system is highly progressive, in which high-wage earners subsidize those who are lower-wage earners. This makes old-age insurance more affordable for a wider audience. Yes, the formula rewards people progressively less as they earn more. Yes, the formulas reduce benefits for people who saved for their own retirement. At the same time, the Social Security system does not pay a penny based on need.
Social Security's Benefit Formulas Reward Everyone But the Poor
The benefits formula for Social Security has more than 2,000 rules which change the benefits based on whether you have kids or how many times you marry. The benefit formula rewards people for living longer or working longer. The formula allocates the largest amount of resources to people who contributed the most in the past, live the longest, have the most qualifying ex-wives, and have the most children after the age of 65. Nowhere do the formulas base benefits on need.
Social Security pays the most money to someone like Pete Stark. Who is Pete Stark? An ex-Congressman who is wealthy by congressional standards. He is apt to collect the maximum payment allowed by Social Security. He is apt to live longer than most Americans. He married three times, giving the system three potential wives to collect survivor benefits from Social Security. The last wife produced three children all of whom have been eligible for Social Security almost since birth. It is not possible to call a system that lards benefits on someone like Pete Stark a safety net.
In contrast to the haul of Pete Stark, Social Security will allocate zero resources to people who worked for Central Falls, a small town in Rhode Island which faces bankruptcy. Like many towns and municipalities, Central Falls did not put its employees into Social Security. With their pensions gone in bankruptcy, the people who retired from the city will have significant needs and no way to collect from Social Security.
Why Social Security is Falling Apart, Explained in Language You Can Understand
The Social Security debate has its own private lexicon wherein words take on new meanings, which at times even contradict the meaning those words have in the English language. The consequence of the Social Security pseudo-code is a stalemate, because it is virtually impossible to build any consensus in a world where up means down and right means left.
For example, the standard rebuttal to any call for reform is, "Social Security has funds in a worst-case scenario to pay full benefits for more than 20 years, and minor changes could easily fix the long-term funding problem." While you hear this often, you need a decoder ring to understand what is really being said.
The most abused word in the debate about Social Security is "fixed." Writers use the word "fixed" and "solvent" interchangeably, even though the concepts are 14 trillion dollars apart according to the Social Security Administration. "Fixed" means that we have no problem. "Solvent" means that we have made our problem a problem for our kids. These are not the same thing.
For millennials, "solvent" means that the nation will divert roughly $10 trillion away from deficit control so that in 35 years millennials can be in the exact same situation Boomers are today. As millennials approach retirement, the system would have massive solvency shortfalls. The working generation would be complaining about the cost of the system, doubting that they will collect anything. The nation will be right back where it was in 2013 and 1983 with millennials trying to convince their children that Social Security will provide them a safe retirement provided that they pay more and get less.
This problem comes in part because the word "funds," in a Social Security context, does not mean funds in the traditional sense of the word. Social Security is financed, not funded. Social Security collects payroll revenue in exchange for the promise of future benefits. This is no different from going to a bank to borrow money in exchange for the promise of future interest and principal payments. Social Security pays every dollar of benefits with borrowed money, where the next generation serves as a new bank.
Yes, the system holds $2.7 trillion in borrowed money in the trust funds. In building that reserve, the system issued more than $25 trillion of promises for which there are no funds in any true sense of the word.
Words of certainty in the Social Security debate also have no meaning. "Will" means "might," or at best "should." The Trustees of Social Security say that in a good economy Social Security might be able to pay full benefits until 2033. 2033 is not a prediction. It is a likely outcome. The projection is provided as a warning, not as a guarantee.
Even so, what would the word "guarantee" mean? On Dec. 20, 1977, President Carter said, "This legislation will guarantee that from 1980 to the year 2030, the social security funds will be sound." "Guarantee" meant that six years later the system was completely insolvent, requiring massive tax increases, benefit cuts, and the inclusion of millions of more workers.
Not only is 2033 not a guarantee, it is not even a "worst-case" scenario. The Trustees provide projections based on three different scenarios, ranging from low-cost to high-cost. On page 58 of the Trustees Report, the Trustees provide outcomes based on less favorable economic assumptions where the system pays degraded benefits in 2027. And while these assumptions are called "high-cost," they are far from a worst-case scenario.
Words of magnitude in the Social Security debate have no meaning. The opponents in the debate change the wording of $10 trillion so that it has no meaning. Ten trillion is expressed as a percentage of GPD. It is expressed as a percentage of wages. For example, Gail Buckner on Fox Business referred to the $10 trillion as "small" increase in the payroll tax rate of 1.3%. Another way to express her ideas is, "Raising Payroll Taxes to Save Social Security will Cost the Average Worker $73,000." Expressing the problem in fewer digits does not make the problem smaller —$10 trillion is still $10 trillion.
In a debate where words have no meaning, it is possible to say that Social Security's financing gap is easy to fix — whatever "easy" means.
For example, the standard rebuttal to any call for reform is, "Social Security has funds in a worst-case scenario to pay full benefits for more than 20 years, and minor changes could easily fix the long-term funding problem." While you hear this often, you need a decoder ring to understand what is really being said.
The most abused word in the debate about Social Security is "fixed." Writers use the word "fixed" and "solvent" interchangeably, even though the concepts are 14 trillion dollars apart according to the Social Security Administration. "Fixed" means that we have no problem. "Solvent" means that we have made our problem a problem for our kids. These are not the same thing.
For millennials, "solvent" means that the nation will divert roughly $10 trillion away from deficit control so that in 35 years millennials can be in the exact same situation Boomers are today. As millennials approach retirement, the system would have massive solvency shortfalls. The working generation would be complaining about the cost of the system, doubting that they will collect anything. The nation will be right back where it was in 2013 and 1983 with millennials trying to convince their children that Social Security will provide them a safe retirement provided that they pay more and get less.
This problem comes in part because the word "funds," in a Social Security context, does not mean funds in the traditional sense of the word. Social Security is financed, not funded. Social Security collects payroll revenue in exchange for the promise of future benefits. This is no different from going to a bank to borrow money in exchange for the promise of future interest and principal payments. Social Security pays every dollar of benefits with borrowed money, where the next generation serves as a new bank.
Yes, the system holds $2.7 trillion in borrowed money in the trust funds. In building that reserve, the system issued more than $25 trillion of promises for which there are no funds in any true sense of the word.
Words of certainty in the Social Security debate also have no meaning. "Will" means "might," or at best "should." The Trustees of Social Security say that in a good economy Social Security might be able to pay full benefits until 2033. 2033 is not a prediction. It is a likely outcome. The projection is provided as a warning, not as a guarantee.
Even so, what would the word "guarantee" mean? On Dec. 20, 1977, President Carter said, "This legislation will guarantee that from 1980 to the year 2030, the social security funds will be sound." "Guarantee" meant that six years later the system was completely insolvent, requiring massive tax increases, benefit cuts, and the inclusion of millions of more workers.
Not only is 2033 not a guarantee, it is not even a "worst-case" scenario. The Trustees provide projections based on three different scenarios, ranging from low-cost to high-cost. On page 58 of the Trustees Report, the Trustees provide outcomes based on less favorable economic assumptions where the system pays degraded benefits in 2027. And while these assumptions are called "high-cost," they are far from a worst-case scenario.
Words of magnitude in the Social Security debate have no meaning. The opponents in the debate change the wording of $10 trillion so that it has no meaning. Ten trillion is expressed as a percentage of GPD. It is expressed as a percentage of wages. For example, Gail Buckner on Fox Business referred to the $10 trillion as "small" increase in the payroll tax rate of 1.3%. Another way to express her ideas is, "Raising Payroll Taxes to Save Social Security will Cost the Average Worker $73,000." Expressing the problem in fewer digits does not make the problem smaller —$10 trillion is still $10 trillion.
In a debate where words have no meaning, it is possible to say that Social Security's financing gap is easy to fix — whatever "easy" means.
Think Social Security is Unaffordable Now? Just You Wait
Millennials who have an interest in the debt and the burden the government can place on the economy should pay attention to a trend among older Americans. Today, an estimated 10,000 people leave the workforce for a pension from Social Security — every day.
People tend to see this trend as a problem for Social Security, and it is. The trend presents, however, a larger problem for the people who are expected to pay for the general debt of the government. The problem is that retirees in general are leaving income-tax-producing jobs for a pension that is exempt from taxation.
Many people mistakenly believe that Social Security benefits are subject to income taxes. While the income is reported to the IRS and revenue is collected, the monies paid to the IRS on Social Security benefits are returned to Social Security. Not one penny of the revenue collected on Social Security benefits goes to the general fund to help control the deficit. The penalty collected by the IRS is really a means-tested clawback of benefits.
Not only are people leaving the work force, but as Andrew Biggs reports, the trend is for Americans to retire early over time. In the 1950s, the typical American claimed Social Security benefits at age 68 and lived to around age 76. Today, the typical American retires at age 63 and can expect to survive until age 83. Today only about 30% of first-time checks go to retirees who have reached full retirement age.
It is difficult not to reach the conclusion that Social Security induces people to retire earlier than they normally would. In fact, Social Security penalizes those who work part-time during early retirement. It is impossible the reach the conclusion that Social Security will not foster lower income tax revenues in the long run.
Let's look at a simple example of consequences. If I were to retire next year, my wife would continue to work, making around $15,000. My accountant tells me that we can manage our income to avoid Social Security's penalties on outside income. Our income tax will drop from $6,700 to zero. Our payroll taxes will drop from roughly $10,500 to $2,250. Our total tax bill will drop from more than $17,000 to about $2,000.
The situation is worse because of the way that the penalty on Social Security benefits is imposed. My wife's wages might make getting below the penalty threshold more difficult. If we miss the threshold, even by a penny, 50% of my Social Security benefit will be subject to penalty at our marginal rate. As it works out, my wife may quit her job late in the year because the tax and penalty liability would exceed her paycheck.
This picture becomes more troubling once my wife actually retires because we will not fully replace her wages with outside income. We will compensate for lower disposable income by spending less. That lower spending will feed into the economy as a whole. I am not a problem by myself, but 10,000 people retiring every day does present a problem in terms of tax revenue and domestic spending.
There is no doubt that we will spend less. Even with less spending, we will transition from a net buyer of investments to a net seller in order to provide the lower standard of living. As the focus of Americans shifts from equity investments to fixed income, it will affect the capital gains created for all Americans. There are no winners in my spending less money.
Americans need to pay attention to a tax system that is grounded on income when many people are transitioning from an income-based lifestyle to one based on wealth. In my case, we'll get less income and lower spending. More broadly, my decisions are apt to hurt capital-gains taxes paid by others. If it were just me, the change wouldn't be a problem, but there are 10,000 people who are joining me every day.
People tend to see this trend as a problem for Social Security, and it is. The trend presents, however, a larger problem for the people who are expected to pay for the general debt of the government. The problem is that retirees in general are leaving income-tax-producing jobs for a pension that is exempt from taxation.
Many people mistakenly believe that Social Security benefits are subject to income taxes. While the income is reported to the IRS and revenue is collected, the monies paid to the IRS on Social Security benefits are returned to Social Security. Not one penny of the revenue collected on Social Security benefits goes to the general fund to help control the deficit. The penalty collected by the IRS is really a means-tested clawback of benefits.
Not only are people leaving the work force, but as Andrew Biggs reports, the trend is for Americans to retire early over time. In the 1950s, the typical American claimed Social Security benefits at age 68 and lived to around age 76. Today, the typical American retires at age 63 and can expect to survive until age 83. Today only about 30% of first-time checks go to retirees who have reached full retirement age.
It is difficult not to reach the conclusion that Social Security induces people to retire earlier than they normally would. In fact, Social Security penalizes those who work part-time during early retirement. It is impossible the reach the conclusion that Social Security will not foster lower income tax revenues in the long run.
Let's look at a simple example of consequences. If I were to retire next year, my wife would continue to work, making around $15,000. My accountant tells me that we can manage our income to avoid Social Security's penalties on outside income. Our income tax will drop from $6,700 to zero. Our payroll taxes will drop from roughly $10,500 to $2,250. Our total tax bill will drop from more than $17,000 to about $2,000.
The situation is worse because of the way that the penalty on Social Security benefits is imposed. My wife's wages might make getting below the penalty threshold more difficult. If we miss the threshold, even by a penny, 50% of my Social Security benefit will be subject to penalty at our marginal rate. As it works out, my wife may quit her job late in the year because the tax and penalty liability would exceed her paycheck.
This picture becomes more troubling once my wife actually retires because we will not fully replace her wages with outside income. We will compensate for lower disposable income by spending less. That lower spending will feed into the economy as a whole. I am not a problem by myself, but 10,000 people retiring every day does present a problem in terms of tax revenue and domestic spending.
There is no doubt that we will spend less. Even with less spending, we will transition from a net buyer of investments to a net seller in order to provide the lower standard of living. As the focus of Americans shifts from equity investments to fixed income, it will affect the capital gains created for all Americans. There are no winners in my spending less money.
Americans need to pay attention to a tax system that is grounded on income when many people are transitioning from an income-based lifestyle to one based on wealth. In my case, we'll get less income and lower spending. More broadly, my decisions are apt to hurt capital-gains taxes paid by others. If it were just me, the change wouldn't be a problem, but there are 10,000 people who are joining me every day.
The $3 Trillion Dollar Question No One Is Asking....
The media is not covering the problem looming in Social Security, one which will fall on millennials much sooner than 2033. The $3 trillion question is: Where will the government get the money to repay the Trust Fund?
This is a huge question for millennials. Social Security will add $3 trillion of funding questions to a government which is already plagued by debt. Social Security will create this problem at the exact time that it is reducing its role as the nation's private banker.
When the Social Security Trust Fund redeems a bond for cash, the Treasury Department needs a source of funds with which to pay the bond. The Treasury Department has two options: It can buy the debt or it can refinance the debt through a new lender. Buying the debt means increasing tax revenue. Refinancing the debt means finding a new lender. Between 2021 and 2032, the Social Security Trust Fund is projected to redeem $3 trillion in bonds.
The media and experts tend to view this process as a seamless transaction that will go unnoticed by the markets. The problem is that today Social Security is the best customer of the US Department of Treasury, holding 2.7 trillion dollars of assets in a private pool of capital on which the government can draw at friendly rates. This reserve insulates the government from the cost of borrowing in the public markets. Basically Social Security is the government's best friend.
This friendship has been in modest decline since 2007 when Social Security generated roughly $200 billion in excess cash flow. By 2010, Social Security's operating cash flow turned negative. As Social Security excess cash flow has dropped, the government has increased its dependence on the Federal Reserve for its funding needs.
In 2021, the terms of the friendship change entirely. Social Security will start liquidating bonds in order to pay full benefits. At that time, the projected gap between the income of Social Security and its expenses will require the system to redeem bonds. In short, the best customer of the Treasury is about to become a direct competitor.
If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving so that he can open his own shoe store next door. In terms of Social Security, it isn't even clear that anyone is even paying attention.
The government should be asking who will fill the void created by the decreasing excess cash flow from Social Security if only for its own borrowing needs. The fact that Social Security will add 3 trillion dollars of incremental financing is a question that everyone should be asking.
The Social Security Trust Funds hold $2.7 dollars of assets. It is the largest customer of government debt in the world. The terms of 1 3/8% are fairly generous. Social Security is projected to need to start redeeming bonds in 2021. Between 2021 and 2033, Social Security will redeem a projected $3 trillion of debt.
This is a huge question for millennials. Social Security will add $3 trillion of funding questions to a government which is already plagued by debt. Social Security will create this problem at the exact time that it is reducing its role as the nation's private banker.
When the Social Security Trust Fund redeems a bond for cash, the Treasury Department needs a source of funds with which to pay the bond. The Treasury Department has two options: It can buy the debt or it can refinance the debt through a new lender. Buying the debt means increasing tax revenue. Refinancing the debt means finding a new lender. Between 2021 and 2032, the Social Security Trust Fund is projected to redeem $3 trillion in bonds.
The media and experts tend to view this process as a seamless transaction that will go unnoticed by the markets. The problem is that today Social Security is the best customer of the US Department of Treasury, holding 2.7 trillion dollars of assets in a private pool of capital on which the government can draw at friendly rates. This reserve insulates the government from the cost of borrowing in the public markets. Basically Social Security is the government's best friend.
This friendship has been in modest decline since 2007 when Social Security generated roughly $200 billion in excess cash flow. By 2010, Social Security's operating cash flow turned negative. As Social Security excess cash flow has dropped, the government has increased its dependence on the Federal Reserve for its funding needs.
In 2021, the terms of the friendship change entirely. Social Security will start liquidating bonds in order to pay full benefits. At that time, the projected gap between the income of Social Security and its expenses will require the system to redeem bonds. In short, the best customer of the Treasury is about to become a direct competitor.
If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving so that he can open his own shoe store next door. In terms of Social Security, it isn't even clear that anyone is even paying attention.
The government should be asking who will fill the void created by the decreasing excess cash flow from Social Security if only for its own borrowing needs. The fact that Social Security will add 3 trillion dollars of incremental financing is a question that everyone should be asking.
The Social Security Trust Funds hold $2.7 dollars of assets. It is the largest customer of government debt in the world. The terms of 1 3/8% are fairly generous. Social Security is projected to need to start redeeming bonds in 2021. Between 2021 and 2033, Social Security will redeem a projected $3 trillion of debt.
Social Security Crisis Explained In Four Simple Steps
When Social Security was created in 1935, the system was designed to be funded by workers not financed by their children. It wasn't a generational-transfer or a Ponzi scheme. Since that time, the system's finances have deteriorated virtually every year to the point where the financing gap is nearly the size of our entire GDP. So what the hell happened?
How to destroy the future in four easy steps:
1. Give To Voters
During the 1950s, Social Security became a way to buy votes. Congress raised benefits — every election year in the 1950s. Social Security Act Amendments of 1950, 1952, 1954, 1956, 1958 all increased benefits. These increased the value of existing benefits, created new benefits, or expanded coverage to more Americans. The 1950 Amendment raised benefits by 77%, 1952 (12.5%), 1954 (13%), 1956(added disability), 1958 (7%).
A couple retiring in 1960 expected to collect $8 of benefits for every $1 of contribution. Basically, Congress in the 1950s was selling dollars of benefits to voters for little more than a dime. The difference between the cost and the benefit was largely passed on to future generations who had no vote in 1950.
2. Take From Non-Voters
The original law included automatic tax increases which would have increased the cost of Social Security to 6% of wages from its 2% base. Over the 1940s, Congress waived every increase, one of which required a Congressional override of FDR's veto. Funding for Social Security did not reach the originally envisioned 6% until the 1960s. Self-employed workers would not pay 6% until the 1970s.
These tax cuts transformed Social Security from a system paid by workers to a system financed by children who had no vote at the time.
3. Allow The Federal Reserve to Lower Interest Rates At A Cost Of $1.2 trillion of Projected Interest Income (in 2012 alone)
In 2011, projected interest income over the life of the Trust Fund was 3.6 trillion. In 2012, projected interest income over the life of the Trust Fund was 2.4 trillion.
Thanks, Ben Bernanke.
4. Ignore The Problem
Social Security almost reached insolvency in 1983. At that time, Social Security had more than 40 years of promises embedded in a system that did not have a penny to pay them. The solution to these problems in 1983? Repeat step 1. Repeat step 2. Prepare for step 3. The solution to these problems in 2013? Repeat step 1. Repeat step 2.
Today, Social Security is not much different than spending quarters to buy dimes. Congress' solution is for us to get our kids to spend quarters to buy nickels.
How to destroy the future in four easy steps:
1. Give To Voters
During the 1950s, Social Security became a way to buy votes. Congress raised benefits — every election year in the 1950s. Social Security Act Amendments of 1950, 1952, 1954, 1956, 1958 all increased benefits. These increased the value of existing benefits, created new benefits, or expanded coverage to more Americans. The 1950 Amendment raised benefits by 77%, 1952 (12.5%), 1954 (13%), 1956(added disability), 1958 (7%).
A couple retiring in 1960 expected to collect $8 of benefits for every $1 of contribution. Basically, Congress in the 1950s was selling dollars of benefits to voters for little more than a dime. The difference between the cost and the benefit was largely passed on to future generations who had no vote in 1950.
2. Take From Non-Voters
The original law included automatic tax increases which would have increased the cost of Social Security to 6% of wages from its 2% base. Over the 1940s, Congress waived every increase, one of which required a Congressional override of FDR's veto. Funding for Social Security did not reach the originally envisioned 6% until the 1960s. Self-employed workers would not pay 6% until the 1970s.
These tax cuts transformed Social Security from a system paid by workers to a system financed by children who had no vote at the time.
3. Allow The Federal Reserve to Lower Interest Rates At A Cost Of $1.2 trillion of Projected Interest Income (in 2012 alone)
In 2011, projected interest income over the life of the Trust Fund was 3.6 trillion. In 2012, projected interest income over the life of the Trust Fund was 2.4 trillion.
Thanks, Ben Bernanke.
4. Ignore The Problem
Social Security almost reached insolvency in 1983. At that time, Social Security had more than 40 years of promises embedded in a system that did not have a penny to pay them. The solution to these problems in 1983? Repeat step 1. Repeat step 2. Prepare for step 3. The solution to these problems in 2013? Repeat step 1. Repeat step 2.
Today, Social Security is not much different than spending quarters to buy dimes. Congress' solution is for us to get our kids to spend quarters to buy nickels.
A Frightening Phrase: "I'm Your Mother-in-Law. I Need a Place to Stay.
If Social Security is important to you at all, you should be paying attention to the cost of doing nothing.
During 2012, we did nothing, the cost of which was roughly $1 trillion. According to the trustees, the cost to maintain Social Security rose from $8.6 trillion in 2012 to $9.6 trillion in 2013. Basically, the system lost more money than it collected, in its entirety.
Another way to look at this dynamic is we lost more money not fixing Social Security than we spent on the entire military. If we diverted every penny that we spent on the military and education in 2012 to Social Security, the system would be slightly worse off financially at the end of 2012 than it was at the start.
The problem for millennials isn't whether they will get Social Security benefits. The more immediate problem is whether their parents will get benefits. The Congressional Budget Office ("CBO") projects Social Security will pay depleted benefits in 2031. If so, every future retiree from now until eternity expects to outlive scheduled benefits.
CBO's projected imbalances are based on many economic uncertainties which may or may not come to pass. The one ingredient in this mess that we can measure with certainty is time. The Trustees Report says, "The unfunded obligation would have increased from $8.6 trillion to $9.1 trillion solely due to the change in the valuation period."
This is not economic uncertainty. It is the mathematical cost of time.
Doing nothing means that we didn't change the revenue intake, benefit formula, age requirements, or the number of quarters to qualify. We let the system run while politicians talked. In the 14 seconds that it took candidate Obama to say, "Social Security is structurally sound," the system lost over $220,000 (even more if you count the time it took candidate Romney to agree).
Politicians will tell you that we have time to fix Social Security. But time is the one thing that we know for certain will make Social Security worse.
During 2012, we did nothing, the cost of which was roughly $1 trillion. According to the trustees, the cost to maintain Social Security rose from $8.6 trillion in 2012 to $9.6 trillion in 2013. Basically, the system lost more money than it collected, in its entirety.
Another way to look at this dynamic is we lost more money not fixing Social Security than we spent on the entire military. If we diverted every penny that we spent on the military and education in 2012 to Social Security, the system would be slightly worse off financially at the end of 2012 than it was at the start.
The problem for millennials isn't whether they will get Social Security benefits. The more immediate problem is whether their parents will get benefits. The Congressional Budget Office ("CBO") projects Social Security will pay depleted benefits in 2031. If so, every future retiree from now until eternity expects to outlive scheduled benefits.
CBO's projected imbalances are based on many economic uncertainties which may or may not come to pass. The one ingredient in this mess that we can measure with certainty is time. The Trustees Report says, "The unfunded obligation would have increased from $8.6 trillion to $9.1 trillion solely due to the change in the valuation period."
This is not economic uncertainty. It is the mathematical cost of time.
Doing nothing means that we didn't change the revenue intake, benefit formula, age requirements, or the number of quarters to qualify. We let the system run while politicians talked. In the 14 seconds that it took candidate Obama to say, "Social Security is structurally sound," the system lost over $220,000 (even more if you count the time it took candidate Romney to agree).
Because the equation "discounts fewer years" and replaces the cost of 2012 with the cost of 2088, I know with mathematical certainty that time has added more than $500 billion to the cost of Social Security in 2013 because of nothing being done.
Politicians will tell you that we have time to fix Social Security. But time is the one thing that we know for certain will make Social Security worse.
Thursday, May 15, 2014
Senator Rubio's Social Security Proposal
On Tuesday, Sen. Marco Rubio (R-Fla.)
outlined a number of reforms for Social Security at the National
Press Club in Washington.
His speech dealt with public
policy on retirement in the 21st century, including a 4-point change to Social
Security:
1. Eliminate the payroll tax for
anyone over age 65 who continues to work.
2. Remove the retirement earnings
test for seniors 62 and over
3. Raise the Social Security retirement
age for those under the age of 55.
4. Increase benefits for low-income
seniors and reduce scheduled
initial benefit levels for wealthy retirees.
His words were strong. Rubio warned
the audience, "(By 2038), Social Security will have been bankrupt for
years. This is not a scare tactic. It is a mathematical certainty. The longer
we wait to address this the harder it will be to fix, and the more disruptive
those fixes will be.” These words contrasts sharply with the 2012 election in
which we heard "Social Security is - you know - structurally sound."
It is refreshing to see a politician speak
candidly about Social Security for all Americans. At the same time, his
comments paint a clear picture that the even the most courageous politicians
remain distrait from a system on which they do not depend.
Oddly enough, a considerable portion of his
proposal will make
Social Security less solvent. Reducing payroll taxes will not help Social
Security, particularly for seniors who, as Rubio notes, may get very little in
return for their contribution. Removing the retirement earnings test will only encourage
more people to start drawing benefits at 62, which creates near term pressure
on the system. Likewise, increasing Social Security benefits for anyone makes
Social Security less solvent.
There are two parts of
his policy that will improve Social Security's finances. One will increasing the age of
retirement for those who are 54 and younger.
The other targets wealthy retirees for lower benefit levels. So would these
adjustments rescue Social Security for those under the age of 54?
The Social Security
Administration has scored similar concepts, and the results generate little
confidence that Rubio's changes will add "years" as he claims. The research from the Social Security
Administration suggests that it is closer to months. It isn't even possible to
say that these adjustments will offset the negative impacts of his other
proposals.
These are scores of comparable
ideas. None of these ideas increase the exhaustion point of the Trust Fund past
2033. The Social Security Administration :
·
scored
a proposal to increase the retirement age for people 54 and younger. This
change addresses about 12% of the financing gap.
·
projected
that slowing the initial benefits of senior retiring in 2026 addresses 2% of
the shortfall financing.
·
scored
the changed to Chain-CPI would address 14% of the projected shortfall. That
assumes of course that we change the system in 2016 rather than 2026, and apply
the cost controls on all seniors rather than just those who reach normal
retirement age after 2026.
There are some problems
with Senator Rubio's proposals. Specifically, Social Security does not have
insight into a retiree's wealth. His proposals use past income which may be
connected to wealth, but it isn't possible to say that his changes will even
target wealthy retirees.
It is
difficult to criticize someone who has the courage to step forward when no one
else will. It is however a tiny step, one that does almost nothing. In the
words of Senator Rubio, "anyone
who is in favor of doing nothing about Social Security is in favor of
bankrupting Social Security." He is effectively doing nothing.
Thursday, May 8, 2014
What Is Social Security?
Much
of the contention in the debate about Social Security derives from one basic
source: few agree on what Social Security is. Many see it as a safety-net
program and most of the rest want to the system to be a retirement plan. Oddly enough it is neither.
Social Security is basically insurance. Insurance protects you from large costs that you may or may not have to pay. The likelihood of living to 100 is about 1%. The cost of living for more than 30 years without a job is staggering. Like fire or health insurance, Social Security protects you against the cost of an unknown event.
Social Security is basically insurance. Insurance protects you from large costs that you may or may not have to pay. The likelihood of living to 100 is about 1%. The cost of living for more than 30 years without a job is staggering. Like fire or health insurance, Social Security protects you against the cost of an unknown event.
The
terms of insurance vary by type. For
instance, auto insurance insures a momentary event. Health insurance insures costs occur within a
whole year. Social Security measures
longer old-age in two week intervals with a small check, one that may payout
over a very long period of time. The
length of the event does not change the nature of insurance.
No
insurance pays the full cost of the event, likely or not. Social Security does not pay the full cost of
living without working. Social Security
does not prevent poverty. It provides
supplemental income to provide the retiree some measure of certainty against
falling into poverty ridden old-age. FDR's words not mine.
Insurance
is an expense, not an investment. Without
Social Security, how could anyone retire?
Without insurance, the worker would need to create sufficient savings to live
30 years or more. That is a lot of
savings to require of someone who expects to live about 17 years, and may live less than
1 in actual retirement. Insurance allows the worker to buy protection against the possibility that he might have an extended life, enabling him to retire
at a reasonable age.
Insurance
fits into a retirement plan with other tools.
When it was designed, Social Security was suppose to be only one part of
a three legged stool. The rest of the
stool was private savings and private pensions. An investment is something that
accumulates the wealth on which you retire.
Insurance protects that wealth so that you do not have to draw it down
too early in retirement.
Some people argue that the force of law exerted by the government makes Social Security a welfare program. Yes, Social Security is legally required for most workers. This requirement is no different than the one by which most states have for auto insurance. Yet your auto insurer is not an arm of the government to provide welfare. The legal requirement to participate does not change the nature of the program.
The reason that many struggle with the nature of Social Security comes from the way we pay for it. The pay-as-you-go system doesn't work. Instead of old-age insurance, this approach structures Social Security as i-dont-want-to-live-with-my-parents insurance. Invariably we look at the cost as too high, the benefits too low, and give politicians the power to sort-out the difference. This is the unavoidable outcome of using the money of one to buy the insurance of another.
Until we agree upon what Social Security is, there will be no way to fix it.
The reason that many struggle with the nature of Social Security comes from the way we pay for it. The pay-as-you-go system doesn't work. Instead of old-age insurance, this approach structures Social Security as i-dont-want-to-live-with-my-parents insurance. Invariably we look at the cost as too high, the benefits too low, and give politicians the power to sort-out the difference. This is the unavoidable outcome of using the money of one to buy the insurance of another.
Until we agree upon what Social Security is, there will be no way to fix it.
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