Saving the Boomer’s Social Security

Originally Published on TheHill, 8/19/2016

The article was published in 2016, but remains largely the same. Saving Social Security exclusively for Boomers is a stagger cost.  That hasn't changed - it is now higher.

Rep. Reid Ribble (R-Wis.), who is retiring after six years in office, has decided it is time to touch the 3rd rail of politics – Social Security. He introduced the legislation “Save Our Social Security” Act (H.R. 5747), which promises to improve the long-term solvency of the program for future generations to come.

The stated point of the legislation is, of course, to avoid the projected benefit reductions of 21 percent across the entire population of beneficiaries that experts believe will start in the 2030s. The subtle subtext of the legislation, however, is more interesting. It sheds light the cost of getting the Boomers through Social Security under the terms of 1983 reforms because by and large they are exempt from this legislation.

At a high level, the legislation accomplishes this goal in roughly three equal parts; 1/3 in tax increases, 1/3 in changes to the retirement age, and 1/3 in a variety of changes to the benefit formula. The proposal begs the question: Do the changes make any sense?  Are we fixing Social Security or looking for ways to pay for a completely broken system.

These changes primarily fall on those born 1965 and after. This approach presents a challenge because this is same audience that was hit hardest in the 1983 reforms. Tax rates peaked in 1990 so the person born in 1968 is really the first to expect to pay the 12.4 percent rate for more than 45 years. The law phased in the new age retirements so that those born 1960 and later absorbed the largest benefit cuts. In conjunction the changes really fell on people who were 17 and younger at the time.

Raises Retirement Age from 67 to 69 

The policy staple of increasing retirement age by two years equates to a 13.3 percent reduction of benefits because people can continue to retire at 67 with lower benefits based on early retirement.

Policy managers justify this change by saying that we are living longer. Life expectancies have increased, but the question remains whether that change is occurring in retirement. The leading cause of increases in overall life expectancy in Americans has been falling infant mortality, a force that tends to make Social Security more solvent rather than less.

The retirement age for Social Security started to change in 2003.  According to research (Actuarial Study 120) provided by the Social Security Administration (“SSA”), someone retiring in 2003 on average expected to live a little over 18 years. Today, the person born in 1965, retiring in 2032, expects to live less time in retirement, but has a slightly higher probability of living to retirement.

If we raise the normal retirement age to 69, that person would have a lower probability of reaching full retirement age would receive full benefits for 16.62 years, which is consistent with someone who was born in 1900. We are asking this audience to work 4 more years to earn retirement benefits because they expect to collect about 3 more years of benefits.

Lowers Benefits 

Changes to benefits formula would substantially further penalize higher-wage earners, who already lose money on the system. Today, workers pay $103 of tax on $1,000 of earnings. At the margin, the higher wage workers receive an inflation adjusted benefit increase of $4.29 per year. (15 percent weight on 1/35^th of $1,000.)  That means someone must live roughly 25 years in retirement in order to break even.

The new formula would use 38 years of earnings rather than 35. Adding 3 more years to the equation lowers the incremental bump to $3.94 per year, a drop of nearly 8%.  By additionally lowering the bend point weight from 15 percent to 5 percent, the annual compensation drops to $1.31, or roughly 70 percent reductions in benefits on high wage contributions. We are not talking about millionaires.  The 15 percent tier affects people with average wages of $61,885.

The proposal would create a new bend point for the truly high-wage earners where the last $103 provides an incremental benefit of $.066 per year. The break-even for these workers approaches 150 years in retirement.

Higher Taxes 

Lower benefits by themselves do not solve the problem. So the proposal would increase the revenue reach of the system adding another $3.5 trillion over time. By committing this revenue to Social Security, the government will have less ability for other priorities like paying down the debt, free college, or shoring up Medicare. While the tax revenue will come from the higher income earners, the inability to finance other priorities will affect everyone.

No one seriously questions whether the system has financial imbalances. The cause of that gap is however not the life expectancy of people born in 1965. They have contributed more to the system than anyone thus far. Changing the retirement age for the program makes no more sense than cutting the benefits of people whose last name contains an “S”. Yes, the change may bring the system into balance, but no it is not addressing the core problems which caused the imbalance.

The proposal doesn’t fix Social Security.  It shifts the consequences of the gaps to people who had nothing to do with the creation of them.

 

The One Fact About Social Security That Isn't.... Fact

There is probably only one widely accepted fact in the debate about Social Security reform.  The Social Security system will pay full benefits until 2035.  

Comically enough, that one fact is not true. The very bedrock of the debate about Social Security is a date that is taken out of context, and applied in ways that directly contradict the intent of the information.  2035 is not a guarantee. It is a warning about what might happen in a good economy.

The system’s ability to provide full benefits depends upon available reserves in the Social Security Trust Fund to provide a cushion for periods where the expense of the system exceeds the revenue collected. In the 2020 annual report, the Trustees estimated that the Trust Fund should last until sometime between 2031 and 2042. It says that there is roughly a 50% chance that Social Security Trust Fund will last until 2035.  

The media generally reports a very different story, one in which Social Security will pay full benefits until 2035 with certainty.  National Association of Plan Advisors suggests: “That means that until 2035, the trust funds will be able to pay full benefits scheduled under current law on a timely basis.”

The mistake is not limited to the press.  The US Treasury Department publishes a Facts Sheet, “Social Security, which pays retirement, survivor, and disability benefits, will be able to pay scheduled benefits on a timely basis until 2035, the same as reported last year.”  It is simply not true.

There is nothing certain about the projected date of insolvency for Social Security.  In 1977, Jimmy Carter gave America a guarantee that Social Security would pay full benefits for more than 50 years. “This legislation will guarantee that from 1980 to the year 2030, the Social Security funds will be sound”.  By 1982, the Social Security Trust Fund was within a year of exhaustion. 

The Trustees provide policy makers with three different hypothetical outcomes based on different economic and demographic assumptions.  The results range from an outcome in an economy unfavorable to Social Security to one that will make Social Security last longer.  The most commonly used estimate is the “intermediate”, which represents the Trustees’ best estimate “of likely future demographic, economic, and program-specific conditions”.

It is important to understand that this date has limited practical use. While the theoretical economy is built on reasonable assumptions, the probability that these assumptions will materialize in concert over the entire period is infinitesimally small. 

So the data is better suited to provoke a question than to provide an answer.

The date 2033 provides a general warning: even in a good economy, the imbalances in Social Security should start falling on retirees in roughly 20 years.  A person turning 66 today expects to live long enough to be affected.  The longer we wait, the higher the cost to fix.  The question is: is that general outcome acceptable?

The stated intent of these estimates is to show policy makers and the public at large the degree of uncertainty embedded in the Social Security system. Instead of providing a view of the uncertainty to the voters, the information is used to reassure them that reform is not an immediate priority. 

Chain-CPI Short of Solution Short on Vision

Originally Published On Forbes

While there is generally agreement across a broad range of the political spectrum that Social Security is unsustainable in its current form, there is less consensus about what to do to assure long-term stability.

Most democratic policy makers, including Presidential contender Joe Biden, would increase tax revenue available for benefits by raising the wage base — the amount of earnings subject to Social Security taxes. (For 2020, that amount is $137,700.) Others would like to contain the costs of the program. Various bipartisan proposals would do both.

For those focused on the expense of the system, one of the favored approaches is to change the measure of the cost-of-living adjustment, or COLA. The COLA is an essential component of the program. Under current law, Social Security automatically increases benefits annually based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to offset the impact of inflation. Reformers would change that process to use the Chained CPI for Urban Consumers (C-CPI-U) to offset the rise in the cost of living.

According to the SSA this policy option would address about 20% of the shortfall.

Long Range Solvency Provisions

The appeal of the shift of the COLA to a C-CPI-U to the spend-less-crowd is easy to understand. It saves money. The Congressional Budget Office estimates that this policy option would save the system more than $100 billion over the coming decade. That savings comes disproportionately from those with the highest benefit levels. Moreover, supporters of the change sell it as a more accurate

measure of inflation than the current index used. If you listen long enough, the solution not only makes the system more stable, but actually improves the inflation adjustment process.

The problem is that C-CPI-U is not a better measure of inflation. The index does not even measure true inflation. It actually measures the cost of living, which in part reflects the behavioral response to inflation.

To illustrate the impact of behavioral response, two years ago the rising cost of health insurance forced me to switch to a less expensive alternative. In order to keep my new insurance cost roughly the same as my old cost, I had to double my deductible. In my case, it is possible to say that my cost of living hasn’t changed ---assuming, that is, I don’t have medical costs that force me to pay the full higher deductible. But it is insane to say that there was no inflation in healthcare that year.

While it is true that in any year the savings from switching to C-CPI-U will come disproportionately from those receiving the biggest Social Security checks, there is nothing to suggest that these people are particularly well off. Moreover, data from the Social Security Administration suggests that the large reductions from this policy option may well come from those most in need because the relative importance of Social Security benefits to recipients’ overall living standard rises with age.

As people age, most beneficiaries have fewer work options and have used up some, if not all, of their retirement savings to cover costs that go over the level of benefits. As a result, we tend to depend on Social Security benefits for a greater percentage of our total income as we get older.

The Social Security Administration's statistics support this thesis. Social Security benefits account for 90% or more of income for more than 1/3rd of seniors. That percentage of seniors who fall into that highly Social Security dependent group nearly doubles between the ages of 70 and 80. This trend is a great concern because a typical retiree can expect to live to 85.

Unfortunately, the impact of lower COLAs accumulates over time. So the chained-COLA would apply progressively larger reductions to people as they age. For example, FactCheck.org reports that a reduction of .25% in the annual inflation adjustment will lower the buying power of a retiree’s monthly check by 3 percent after 10 years. By the time that retiree is 95, the lower COLA adjustment will have cut the value of the check by 8 percent, relative to what he would have with a COLA that is 0.25% a year larger.

I am not going to tell you that CPI-W is the correct measure. The fact is that there isn’t a single best measure for inflation. Inflation is a theoretical concept that varies by person and by location. Some argue that an experimental index which takes into account the spending patterns of those 62 and older (CPI-E) is a more accurate benchmark for Social Security. Among other things, it reflects the higher share of their spending which goes to medical care, where costs have been rising faster. Using CPI-E would tend to make Social Security benefits increase faster.

Bottom line: the shift to a chained-CPI would fix our old-age insurance program with a solution that lowers the buying power as one ages. This option is like buying auto insurance that declines in value as the car wreck gets worse. Fixing Social Security's finances in the most responsible manner requires that we look at more than just how much a change will save.

From Gutting To Savings #Social Security, a mirage of debate

“Statements by President Trump and top Democratic presidential candidates in recent days have thrust Social Security into the middle of the 2020 campaign.” ~ Washington Post

Last week I lamented that the issue of Social Security has gone 0 for 7 in the Democratic debates, see article. I felt, and still do, that law makers need to focus more the program’s long-term stability, and the media needs to hold our elected officials to account. Nothing suggests to me that either is happening.

This week, the program is drawing fresh attention from heavyweight news outfits like the New York Times, Washington Post, CNN, plus a range of political outlets because of comments coming from leaders in both parties. Unfortunately, the news reports and opinion pieces tell you more about the breakdown of the debate than the direction of the program. Social Security is being used as a prop for wedge politics.

There are two underlying stories here: President Trump made comments in an interview with CNBC’s Joe Kernen about the size of entitlement spending. Elsewhere, Biden and Sen. Bernie Sanders (I-Vt.) have exchanged barbs over comments about Social Security that date back decades. (The best coverage of the stories seems to be in the Washington Post, read here.)

In the first story, Trump seems to suggest that he might consider revamping entitlement programs after the election. Almost overnight, writers inserted “Social Security” into the story as an example of an entitlement to provide context for the reader. Then articles stated that the President was open to cutting Social Security. Outlets like Forbes ran pieces that said that Trump actually said Social Security cuts were on his agenda. By the time the story reaches outfits like Huffington Post, Trump has committed to gutting the program. Now the media claims that Trump is attempting to “walk-back” comments that he never actually made.

Here is the interview clip. Read; the words Social Security never appear in the interview.

Will Entitlements Be On Your Plate?
At some point they will be. We have tremendous growth. We're going to have tremendous growth. This next year I—it'll be toward the end of the year. The growth is going to be incredible. And at the right time, we will take a look at that. You know, that's actually the easiest of all things, if you look, cause it's such a big percentage.

I have no idea what he is saying. The words Social Security do not appear in the entire interview. There is nothing here about cuts. Instead of reporting the news, the media is conflating news with analysis (guesswork) such that the news can be sold in the eyeball marketplace on the internet - to great effect by the way.

In separate but similar story, Sanders has questioned Biden’s commitment to Social Security. In return, Biden has accused Sanders of distributing ‘doctored’ videos, edited to make it appear that Biden has ‘advocated for Social Security cuts for 40 years’.

Neither story deals Social Security. Both are garden-variety wedge politics playing out on a level not far removed from that of a 3rd grade playground. Each case is a matter of he said (somewhat doctored), she denied. What Biden said in 1983 is irrelevant today. What he said 10 years ago is not meaningful. It is nearly $10 trillion of crisis ago. Paul Krugman summarized this story best; “The Sanders campaign has flat-out lied ..., and it has refused to admit the falsehood. This is almost Trumpian.” (Here are two fact check reviews if you are interested; see PolitiFact, FactCheck.)

The impact of this type of this progression has an unfortunate and serious consequence for the program. The lesson for politicians of any level is to evade the subject like the political plague. This response has less to do the price paid at the ballot box from older voters today, and a lot more to do with fear that any combination of words will morph into attack ads that last over 40 years.

While there isn’t any news here, neither Trump nor Biden deserves a pass on Social Security either. Both want to run the country. In the case of Trump’s comments, the media should be asking questions rather than inserting answers. Mr. President could you tell us specifically what the contraction “that’s” refers to? What are the numerator and denominator that make up your “big percentage”? At that point we can start to ask about “easiest.”

It is entirely fair for Sanders to point out that Biden has no plan for Social Security. His plan stops at empty rhetoric and vague promises. He promises to raise money and he promises to spend money. What an astonishing commitment to arguably the most important program in the federal government. Sanders should further point out that the GOP broadly does not have a plan. Suggesting that the GOP wants to gut Social Security or privatize the system is absurd. The real problem is that politicians on the right want to do nothing, and the current debate structure incentivizes it, and subsidizes it.

Social Security hasn’t been thrust into the news. It is nothing more than a label to attract readers.

GWB's Plan For Social Security Woulnd't Have Worked

Given that it has been 15 years since George W Bush proposed to save Social Security, someone will reflect on what might have been even though none of his ideas on reform created any traction in Congress. But what if they had?

 
High school reunions have taught me one thing: The older we get the faster we were. Someone is going to tell you that it was an opportunity missed, and every year the genius lost will get bigger.

The president laid out his framework for broad based reforms for Social Security in the State Of The Union in 2005. That proposal would:

• Allow workers to invest a small portion of their Social Security taxes in individual accounts.
• Reduce the benefit formulas to factor in Social Security to reflect earnings from individual accounts
• Create a guarantee for those people born before 1950 for the benefits promised by the system
• Provide direct subsidies from the general fund to the system to fulfill the promises made by the system.

The obvious question that someone should have asked was: Mr. President, would it not be easier to leave payroll taxes alone, and simply create additional benefit models within Social Security that track stock portfolios funded with funds borrowed in the public markets?

You get the same economic outcome with half of the paperwork. The only real difference is that the president's plan sounds like he is fixing Social Security whereas my plan sounds like we are opening a hedge fund.

Bush’s plan would have changed how we pay for Social Security. The perceived reduction in the tax on labor would have been replaced by taxes on the broader economy. Payroll taxes would remain at 12.4 percent, and over time additional taxes would have been required to pay for subsidies from the general revenue to replace revenue diverted to private accounts.

This structure changes who pays the taxes rather than the amount. In 2005, the projected cost to make Social Security solvent was an increase in payroll taxes of 1.89 percent. By waiting to back fill the tax base with subsidies from the general fund, the nation would face an effective equivalent of a 20 percent payroll tax in 2030. Essentially, Bush’s grand idea was that our children will pay the taxes that we would not.

From an economic prospective, personal accounts do not create any incremental wealth. Any increase in investment capital created by personal accounts would be offset dollar for dollar by increased government borrowing from the public markets. The only wealth created within a privatized Social Security program would depend upon the success of the "central administrator" as an investor.

These investment returns are the lynchpin to the entire plan because Social Security uses the earnings of the personal account as an offset for benefits of the retiree. Supporters in general expected the central administrator to be a very good investor earning 7 percent real returns, well above the rates earned by the government securities held by the Social Security Trust Fund.

Is 7 percent real a reasonable expectation? No. That expectation is well above the historic average of the 45-year rolling real return of the S&P 500, which has varied between 4.5 percent and 8 percent over the last 80 years. There are going to be working careers in which workers are lucky to get 5 percent.

Unfortunately, these historic averages generally overstate the potential of system wide earnings because the individual captures the winnings, and Social Security absorbs the losses. The people who win, pass their winnings onto their kin. The people who lose are picked-up by Social Security. Losers are the average investors who outlive their personal account.

Proponents of personal accounts also ignore the fact that wages and market are run together. This relationship means that worker’s highest earnings statistically buy the market peaks, while missing the buying opportunity at the market at the bottom. In 2009 when the market bottomed, the U-6 measure of employment registered more than 17 percent. U-6 did not break the 16 percent level until the market had doubled in value. Wages are weakest when workers should be buying the most.

To offset the uncertainty of the markets and the transition to a modern program, Bush wanted to create a guarantee of benefits for people born before 1950. Social Security benefits - even today - are not guaranteed. Because of the shift to general revenue subsidies, the cost of this guarantee would be absorbed almost entirely by future taxpayers who couldn’t vote in 2005.

Bush professed his worry that doing nothing would mean that our children and grandchildren would have to borrow $13.9 trillion. Ironically enough, his proposal introduces the guarantee for Social Security benefits that would ensure future generations would have to borrow the $13.9 trillion.

The Bush reform would not fix Social Security. It switched which pockets would pay for the program, resulting in an even larger system. It expanded the revenue reach of the system, and created guarantees for current voters that came directly at the expense of future voters. The entire plan was nothing more than an elaborate way to kick the can from generation to generation.

What would our children have gotten for the $13.9 trillion bail-out? They would get the privilege to save for their own retirement.

Social Security : From Thomas Jefferson to Francis Underwood

While many have tried, few writers have proven in writing as effective as Thomas Jefferson at criticizing Social Security. 

In a 1798 letter, Jefferson, who died more than a century before Social Security reached the public’s conscience, laid out one of the most compelling arguments ever written against the program as it exists today. It was wasn't a rant about the size of government or a philosophical look at fairness and the rights of man. He said that "intergenerational contacts" were not valid, and likely would not be honored.

Specifically, he wrote a letter to Madison that dealt with the consequences of enabling one generation to lay debts upon another. In sum, he predicted that eventually a generation would, “eat up the usufruct [the right to enjoy the use and advantages of another's property short of the destruction of its substance] of the lands for several generations to come.”

That sounds a lot like Social Security, which has a shortfall of more than $40 trillion. That figure means that the program’s remedy would require nearly double the nation's GDP or “the usufruct of the lands.” At this point, our politicians are struggling to explain this breathtaking financial gap and to propose a way to fill it. 

How did we get here? 

We nominally cling to the notion that the money was misused or that unforeseen demographic shifts have somehow complicated the best laid politics of mice and men. In other words, hidden hobgoblins menaced the system far beyond the control of our current politicians, whose main complaint is there is no way to push these costs out to even further generations.

Jefferson said nothing about demographics or financial malfeasance. He said that the public council–Congress–would place the self-interest of re-election over the long-term interests of the general public. In just this fashion, Congress ‘expanded’ Social Security for decades without any consideration for how to pay for it, because voters love benefits, but hate the costs. In other words, Congress was giving dollars to voters for dimes, while leaving the balance left to a future generations through the Social Security system.

The Path to Crisis

The Social Security system sold dollars for dimes for decades, and we wonder how such a concept could possibly fail. Over decades, Congress larded benefits upon an ever-widening number of voters in an ever-increasing balance of checks.  They added benefits for spouses, children, ex-spouses, COLAs, and survivors without providing an incremental source of revenue to pay for the bills. Mind you, Congress now wants to give away more based on the idea that future generations will contribute more to Social Security.

The pathway for the approaching crisis was created in 1983 with short-sighted legislation, which was made necessary by an imminent crisis created by even earlier lapses in legislative judgement. For 80 years, Congress has created deals in which their children will pay the taxes that voters won’t and accept the benefit cuts that no one would even discuss. As a result, it is not possible to kick the can down the road anymore.

The crisis coming in Social Security will manifest Jefferson’s “lands holden in tail.” In 1983, law makers protected those who were 45 and older from the consequence of the dollars for dimes math of the system. By 2005, we nominally talked about protecting those 55 and older. Now someone turning 72 this year expects to out live full benefits defined in current law.

Jefferson’s letter serves as a somber presage for politicians promising to keep Social Security’s promises to seniors. He reasoned that “the earth belongs in usufruct to the living; that the dead have neither powers nor rights over it.” In other words, today’s workers cannot be bound by the promises of a past Congress, much less the promises of past promises.

Clearly, we are not there yet, but Jefferson’s reasoning implies that one day a politician will emerge who will serve the new generation. At some point, younger Americans will elect a Francis Underwood, who in turn will tell seniors, “We owe you nothing.”

And Thomas Jefferson would not only agree, but say, I told you so.

Corporate Darwinism And Financial Crisis

Have we seriously forgotten 2008?

Today the Federal Reserve has an economic policy that not only fosters crisis, but introduces a Darwinian process that selects leaders who are uniquely unfit to deal with it.

Let’s step back to 2008, when the investment bank Bear Stearns failed with leverage of 35 to 1, the danger of which should be obvious to anyone who's taken fifth-grade math. Wall Street embraced these dangers to the point where it nearly went extinct. Not only did our government miss the risk, but the head of the Federal Reserve described derivatives, the centerpiece of the crisis, as  "a useful risk management tool" held in the hands of the well-capitalized hands of sophisticated investors. Six months later, virtually every government employee would describe the financial crisis as a fast-moving event.

How does this happen? Economic Darwinism. Whether it is getting elected or getting promoted, Economic Darwinism selects people by success. The Federal Reserve's 20-year policy of easy money created an environment virtually assured to select bankers, bureaucrats, educators, and elected officials who least understood the consequences of a credit crisis.

The process of Economic Darwinism works within a corporation surprisingly similar to how Darwinism operates in nature. The only difference between evolution in nature and evolution in a corporation is the speed of the transformations. Economic Darwinism moves much faster because humans can learn traits, whereas a bird in the Galapagos requires generations to grow a longer beak.
Natural selection in organizations feeds on its reward system. If the system rewards long hours, you will find people at the company who are willing to sacrifice personal lifestyle for the good of the company. It isn’t that they are more selfless, but anyone unwilling to work within the system of rewards normally leaves or is pushed out.

When the Federal Reserve forced interest rates lower, it altered the balance and outcome of risk in favor of risk-takers. That step led to greater earnings streams, or sales, or some measure of profitability. Stupid transactions seemed wise, and foolish risks were rewarded. The most important thing to understand about booms and Economic Darwinism is that when it happens, the statistical likelihood of any system promoting someone with a sensible risk perspective becomes lower and lower. Capitalism acts as a steroid, drawing cash into a successful companies. This process encourages other companies to emulate the practices that made certain companies successful.

Thinking back to 2007, it should surprise no one that Darwinism had selected companies like Bears Stearns for survival. The economy had made its corporate culture wildly successful. It made billions packaging and selling loans. When one bet was rewarded, the firm took on more risk in the next one. This is how you expand from prime loans to alt-A to sub-prime. Bankers call this universe expansion. The bankers didn't make the era. The era made the bankers.

The boom times enabled animals called bankers grow to massive size. Nature selected those who were the fittest for that environment. When the environment changed, these animals were like dinosaurs staring at the glaciers. The interest rate policy of the Federal Reserve today is designed to keep those dinosaurs warm and well fed.

The people who run our country were largely selected by Economic Darwinism from a pool of people who owe their success to cheap interest. It is no surprise that these people see cheap interest as the only solution to our economic woes. This policy is about rebuilding their past rather than improving your future.

Confessions of a Social Security Mooch

There are many articles which say that Social Security is a bad deal.  I have written some of them myself.  For younger workers, Social Security is not terribly different from spending a quarter to buy a dime. It is difficult to tell people with a straight face that is a sensible transaction.

Yet, Social Security is a financial system which basically takes a dollar in and ships a dollar out. Contrary to popular mythology, it isn’t as though the money was siphoned away to pay-off wars and to provide comfortable housing for idle drug addicts.  Someone has to make money if someone else is losing it.

In looking at what Social Security provides and what it costs, I confess I am a bit of a moocher.  Statistically I am likely to make money on the system. I had a shorter working career, and married later in life.  Understanding what makes the system work for me is likely a sound starting point for understanding why it does not work for the vast majority of Americans.

In terms of cost, my contributions measured in actual investments shows that Social Security will have cost me by the time I am 67 roughly $1 million (in 2014 dollars) in savings.  My projected Social Security benefit is $1,250.  That sounds like a losing proposition. Here is a specific example.  In 1990, my contribution to Social Security was the maximum $5, 437.80.  Invested in the Vanguard 500 Index fund, that sum would be worth more than $57,000 going into 2015.  Given 13 more years of investment, that investment would grow to nearly $100,000 by 2028.

So what happened to the cash?  The cash that I paid to Social Security went to existing beneficiaries, in part to my father.  My father in turn gave me annual stipends which in some years offset the entire cost of FICA.  He even called it my FICA rebate check. So the cash simply went in a circle from me to Social Security to my father and back to me.

While I am not 67, I already enjoy one of the lesser discussed retirement benefits – free life insurance.  I qualified for Social Security many years ago, but only recently married and had children.  The Survivor benefits from Social Security spare me the need to buy life insurance.  That benefit saves me roughly $1,000 a year unless I take up cave-diving and drag racing in which case the savings are even more.

While your parents and in-laws may not send you a rebate check, the liquidity provided by Social Security protects their asset base.  If you inherit assets from someone who has been retired for any length of time, it is likely largely in part to Social Security which provided the predictable liquidity to protect their asset base.

Many on the internet believe (and spam) the idea that they would be millionaires if they had been allowed to save their future without the interference of government.  It is possible. Of course, they fail to factor in the incremental support that they would need to provide for their parents, in-laws, and step in-laws.  This is what Ronald Reagan meant when he said, ‘the nine most terrifying words in the English language are: I’m your mother-in-law, I need a place to stay.’

By the time I am 67, Social Security will certainly have returned all of the contributions that I made over my lifetime.  If the system is still around at that time, I will draw the equivalent of roughly $1,250 a month.  When I die, my wife who is younger than I am may well draw benefits until 2060 based on her life expectancy.  I haven’t had a job in 15 years, and well may not again unless the issue of Social Security creates sufficient interest to support a writing position for me.

I am not the largest mooch by any means.  There are workers, like Pete Stark, a man wealthy by Congressional standards, who more clearly demonstrate the real earning power of Social Security.  He has 2 ex-wives, either of whom may be able to collect under his contributions. His current wife is eligible to collect as the mother of his 4 minor children, who are already collecting.  She also may well collect benefits under his contributions past 2050.

The structure of Social Security is simple: dollar in and dollar out.  It creates almost no economic wealth with which to pay positive returns.  The only way to give me a bonus, and someone like Pete Stark, more than we contribute, is to pay others less.  The others traditionally have been future workers.

The system desperately needs reform, unless you feel that the government should impoverish future workers for the benefit of me and the Pete Starks of the world.  Americans are living longer.  It makes sense to increase the retirement age – which we have already done.  It makes sense to increase the number of quarters to qualify and the number of years to weight in the formula. And we need to revisit the idea of early retirement.

We need to look at reforming the freebies that Congress has embedded in the system over the years. In a world, where fewer couples are supported by a single income, spousal benefits do not make a lot of sense. The structure makes sense if the goal of the system to subsidize the trophy wives of the wealthy. We should separate survivor benefits into its own system, and require people pay for these benefits if they want them.

Yet, any reform is met with a scorch-earth resistance from the left, which pretends that Social Security is a safety-net for the poor.  We are subjected to lectures about grandmothers being run-over by a bus, when the outcome of the resistance is that a future grandmother will be hit by a larger bus. It is hypocrisy at its worst.

Today the system is broken.  Instead of talking about how to fix the brokenness, Congress is looking for a way to pay for it.

How Would You Change Social Security?

Generally, I believe that labeling Social Security as a "Ponzi Scheme" is a little more than name calling. It is an emotional trigger, that people use to vent frustration with the system.  I am curious about the thoughts of these people.  How would you change the system from what we have today?

Social Security and the Myth About the 3rd-Rail

Every year, the Trustees of the Social Security Trust Funds urge Congress to take action on the gaps developing in the beloved program’s finances. Just as frequently, our law makers do nothing.

Typically, pundits explain the gap between reason and action as the rational response of a political class to the career-killing consequences of talking about Social Security or Medicare. At this point, the narrative is so pervasive that everyone pretty much blindly accepts that the fabled “third rail” is as electrified as ever. 

A Clichéd And Broken Story

The metaphor implies that issue of Social Security is electrified – touch it and you faced certain death politically. It dates back to the 1980s when the finances of Social Security were very different. The problem was small, and options were plentiful.

Specifically, the program faced a short and shallow period of insolvency. The remedy for those gaps was little more than gradual changes that mainly affected those 17 and younger. In that situation, major reform is impossible, and politicians would have died politically for suggesting it.

Times have changed

Today, on the other hand, the current numbers point to a deep insolvency that grows forever, affecting people who are now in their 70s. Specifically, the Social Security Administration believes that about half of those turning 71 today will be turning 87 as the system reduces benefits. In this case, the strategy of stagnation exposes these Americans to the worst of the crisis.

In this scenario, it is much more difficult to understand why older voters would stymie any reform effort. Maybe they do not fully comprehend the size of the approaching crisis. Maybe they believe that they will be exempted from change if they can prolong it. The one thing that makes no sense is the idea that older voters would intentionally insure that trillions of dollar of misery falls on themselves as individuals. 

1983 Was Easy

In 1983, the solution was as simple as Congress agreeing with itself that people who were 17 and younger at the time would pay vastly higher taxes, and absorb the benefit cuts that voters would not even consider. Lawmakers didn’t have to face any angry voters. 

2018 Is Hard

Unfortunately, the strategy of the past complicates our situation today. The 17 year old is now 52. The 1983 reform reduced benefits of this worker by nearly 25 percent. He has paid record payroll taxes for his working career, and now expects to retire in 2033, which is the year before the program augurs another 20 percent plus reduction of benefits.

This scenario makes benefit cuts today nearly impossible because any reduction on someone in this group is layered on top of the 1983 reductions that are only now being phased in. On the other hand, if we do not revisit this same audience for savings, reform by reduction will be completely ineffective.

The agreement in 1983 took most of the low hanging fruit. It expanded the coverage of Social Security to government workers, increasing the coverage to 94% of the workforce. Also it added the taxation of benefits, which now recovers as much as 33 percent of the benefits paid to the wealthy. There is no low hanging fruit – there isn’t even a tree left.

Explaining the Narrative

From the politician’s point of view, the 3^rd rail narrative is a blessing. It provides a reasonable shelter from criticism for the lack of progress on stabilizing the nation’s largest and arguably most important program. They reason that stagnation isn’t their fault. The problem is the nameless voter who will punish any lawmaker responsible enough talk about change.

Less understandable is the public’s tolerance of a cliché 30 years out of date holding reform of the nation’s largest program hostage.

Social Security : Delayed Claiming Needs Reform

This piece originally ran on TheHill.Com

The debate about Social Security focuses too much on fix and too little on better. At some level, the debate about Social Security should consider how we can make the system run safer or serve the country better.

The government must run Social Security.  Social insurance is by its nature antitheoretical with capitalism because pricing is dictated by the buyer’s earnings rather than production costs. 

The program has however overtime assumed tasks that go beyond social insurance. One example of that expansion is the rule which enables a retiree to increase monthly benefits by delaying retirement claiming (DRC). This function essentially translates current benefits into an inflation adjusted annuity.  It serves an individual’s want, not a societal need, in which the retiree transforms his benefit into the way that he wants to collect his benefit.  There is nothing social about it.

When DRC was created in 1972, the annuity market may have forced the government to assume a monopoly role. The past is the past. Today, the government’s role is completely unnecessary. There is a robust annuity market today that could support retirees with an expanded range of choices.

The problem for Americans with this rule is risk. Annuities in the private sector are priced daily – every day.  The government does not re-price the annuity daily, weekly, monthly, or even yearly.  The last time that the government changed the pricing for the annuities issued by Social Security was in 1983.  Pricing is a tri-decennial event.

A lot has happened over the last 32 years.  Interest rates have dropped from 13.75 percent to slightly more than 2.125 percent.  Our life expectancies have risen nearly two years since that time. Pricing seems unconnected to the cost and benefit of what the government is selling.

It isn’t a problem that the government provides incentives or disincentives for work behavior.  Social Security in 1990 paid people to collect benefits early, and today it pays them to defer their retirement. 

The problem is that we do not seem to follow what incentives are hidden in the system.

Pricing is a legislative process which is neither perfect nor responsive. In 1972, for example, Congress introduced a flawed benefit adjustment method which triggered benefit increases large enough to push the system into crisis by 1983.  It took Congress five years to address that flaw.

DRC introduces open-ended risk to the system because we don’t know how long these annuities will last. For prospective, the VA is still paying today on pensions from the Civil War.  So any mistake may be around for a very long time.

All of the risk for the system benefits the few. Who are the few?  Today about 10 percent of claims occur after normal retirement age.  The one thing that we know about these retirees is that they can afford to defer their benefits. 

It would be wonderful if Social Security could help retirees structure their income protection.  It can’t.  DRC are expensive to run, complex to understand, and assigns accountability to no one. I buy and sell risk for a living.  I never buy open-ended risk.  I never leave open-risk unattended for more than 10 minutes, and am never more than 3 clicks away from cancelling it.  The government has left open-ended risk unattended for more than 30 years, and we have rewarded it with a monopoly on annuitizing the benefits from Social Security for our seniors.

At some point, the debate about Social Security reform must grow beyond simply cutting benefits and raising taxes.  These solutions do not fix Social Security. They are the way that we pay for its brokenness.