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 Myth Of Spending Social Security On Other Programs

One of the most enduring myths of the Social Security debate suggests that the money collected for the system was spent on other government programs.

Legend holds that Social Security was running well enough on its own until politicians crept in at night to empty the cash register. Congress, those liars and cheats, took the money that we contributed to Social Security and Medicare, and spent it on other things.

The followers of this myth however aren’t just conspiracy theory crack-pots, who routinely accuse every president since Kennedy of stealing money from Social Security for other priorities.  Some of these accusers are people running for the Presidential nomination of major parties. Ironically enough, some of these accusers are the people who served in the Congress that supposedly stole the money.

Today Social Security collects less in payroll taxes than it spends on benefits. The system has not generated a penny of excess cash to spend since 2009.  So there hasn't been anything to spend on other programs in more than five years.

What about the past?  Originally, Social Security was designed to build a reserve of cash. Some members of Congress feared that any such reserve would not be truly “saved”. So the Social Security system was specifically changed over the 1940s to a pay-as-you-go method in which there wouldn’t be a large reserve to spend on other federal initiatives.

The downside of the pay-as-you-go strategy was insolvency.  To deal with this problem, Congress adapted the financing approach to the system such that the system could build-up a reserve.  Since the change, Social Security has built a reserve of $2.8 trillion, most of which was accumulate after the mid-1990s.

So where did the money go?  Not to other programs.

The Social Security Administration provides information on the cashflows of the system dating back to 1937 which shows how the money was collected and spent. Since inception, Social Security has collected about 15.7 trillion dollars. That revenue falls broadly into three categories of revenue: payroll tax revenue ($13.4 trillion), general fund subsidies ($0.6 trillion), and interest on loans ($1.7 trillion).

The vast majority of the resources were spent on benefits for retirees.  Clearly retirees are not “other things”.  In total, benefits have cost $13 trillion or roughly 82% of all revenue ever collected.  It is roughly the same amount as the system collected in payroll taxes.

The next largest use of the Trust Fund resources finances the government’s debt. This is the payment of interest, and interest on the interest. Interest does not pay for one brick in the bridge to no-where.  Interest represents the cost of borrowing money. Interest today accounts for more than 60 percent of the $2.8 trillion dollar trust fund.  All of which has bought nothing but time.
If the money is not repaid, it means that the money was used to pay for the time value of money, not other government programs.  If it is repaid, the money will be used for benefits of retirees.

After benefit expense and the cost of time, there isn’t a lot of money left over to spend on any other programs.  Our payroll tax collections have exceeded benefit expenses by less than half a trillion dollars.  This figure is less than the subsidies from the General Fund. In other words, the government in the net is putting money into Social Security rather than using it out to finance other programs.

We love the storyline because the fabled scheme dovetails into what we want to believe anyway. People like Social Security. People dislike Congress. This story sells like telling a 6 year-old: yes, there is a Santa Claus.

Originally Published On FedSmith.Com ( See more at : http://www.fedsmith.com/2015/12/08/the-myth-of-the-missing-social-security-trust-fund)    

Revisiting GWB's Plan To Save Social Security

Ten years ago, George W. Bush outlined his vision for Social Security reform.  And a lot has been written on the subject since that time. 

My piece looks at issues with his vision that have largely gone uncovered. The foundations of the plan were built on faulty reasoning. Personal accounts do not create investment capital, and they will not earn near the 7% returns that supporters promise.

Whether it is a good idea is a separate question.  The promised results would not have occurred.

Originally published on TheHill.Com, (see the article)

How Did The Social Security Prospects Improve?

This article originally appeared on AmericanThinker.Com.

The 2015 Trustees Report for the Social Security Trust Fund showed a surprising improvement.  The combined Trust Funds are projected to be exhausted in early 2034.  It is surprising in part because CBO's projections showed continued deterioration.

Where did the improvement come from.  In large part the Trustees now forecast substantially lower costs.  This is the number of checks issued, and their size.  That savings, along with the interest on the savings, largely explains the entire improvement, about $500 billion in Trust Fund balances.

What is not well reported is that the Trustees turned more negative on the next 10 years, particularly on the revenue side.  The 10 year forecast is basically the same as last year.  So the improvement that is forecast are in jobs that don't exist, and pay raises that will not be considered in the coming decade.  Let's hope that the Trustees are right.
 Read : (more)

The Mythology Of Borrowing And Stealing From Social Security

There is a level of crazy in the Social Security debate that is simply not healthy for the nation.  We have reached the point where the sound of the sound bite is more important than the facts underneath it.

Governor Christie in an effort to shutdown Mike Huckabee in the recent GOP debate invoked the crazy card.  He said, "The lying and stealing has already occurred. The Trust Fund is filled with IOUs.” He subsequently followed this statement with a plea for political honesty with the public. Are you kidding me?

Every candidate is entitled to his own opinion, but today candidates simply make up facts that fit their sound bite. Christies’ statement is classified by the Social Security Administration as Urban Legend. He isn't lying. He is wrong.

So we have left the realm of reason and entered Crazytown. And, Crazytown has a large voting block.  Consider that the following quote has drawn 50,000 likes and 500,000 shares.

 “Next time a Republican tells you that ‘Social Security is broke,’ remind them that Pres. Bush ‘borrowed’ $1.37 trillion of Social Security surplus revenue to pay for his tax cuts for the rich and his war in Iraq and never paid it back.” ~ Occupy Democrats

PolitiFact conidered this quote, and rated it as “Mostly False.” That is of course a polite rating. It is “Stir Crazy”, and 500,000 people took time out of their day to share lunacy. Make no mistake, Governor Christie wants to tap into the energy of Crazytown for his campaign.

Every President since Kennedy has been accused of stealing money from Social Security. There isn’t a shred of evidence to suggest that any program money has been misused. I have seen people accuse Ford and Carter of stealing money, and their budgets actually subsidized the system. 

I have written previously on LBJ, who draws the ire of conservatives. Bush draws serves as a lightning rod for liberals. The story is all the same, where the name of the thief varies based on the ideology of the author. The story is noise.

PolitiFact’s article is right on a number of things. It correctly points out that the current surplus stems from changes made in 1983.  Also the process of borrowing the money hasn’t changed since the inception of the system. Between the two, we are borrowing more money under a process that dates back to the 1930s.

By law, the excess cash of Social Security is converted into government securities, and, yes, the cash is used by the Treasury to pay for government expenses.  This is no different from a private pension that buys Treasury obligations.  The only difference is that no one at these private pensions complains about the theft, questions the IOUs, or worries about the repayment of the bonds.  Why? Because these investment professionals aren’t crazy.

The article is specifically incorrect about the repayment of bonds.  It says: “As for not ‘paying back’, the bonds won’t need to be repaid until 2020.” This is nutty. The bonds held by the Social Security Trust Fund have specific maturity dates.  On those dates, the Treasury refinances the maturing bonds with new loans under new terms from the Social Security Trust Fund.

To be clear, it is factually wrong to say that no one pressed Bush for payment on the money borrowed by the government.  It is factually wrong to say that the money borrowed by the Bush administration hasn’t been repaid with interest. Much of the money that was borrowed by the Bush administration has been repaid by loans made from Social Security to the Obama administration.

It is more accurate to say that we will need to find a new source of refinancing in the next few years.  CBO says that it is 2017.  SSA projects it is likely to be 2019. This is a serious problem – one that get no attention in Crazytown.

Governor Christie isn’t lying.  He is simply wrong.  The problems of Social Security have nothing to do with what is in the Trust Fund, and everything to do with the sums that were never put into it.

Today the largest expense in the government’s budget is on auto-pilot, and largely governed by politicians trolling Crazytown for votes. No one really should be surprised if that mix falls into crisis.

Social Security’s (Missing) Guarantee

Social Security benefits are not guaranteed. This isn’t my opinion.  It is the opinion of the Supreme Court, Flemming V Nestor.

In its ruling, the Court held that entitlement to Social Security benefits is not a contractual right.  Benefit levels are what Congress says that they are. The Social Security Administration recognizes the case.  PolitiFact delivers research on it. Notch Babies provide evidence of it.  There is no guarantee.

See more at: http://www.fedsmith.com/2015/07/06/social-securitys-missing-guarantee

The piece looks at the specifics of the case, and how they affect you, your parents, and beneficiaries in general.  Nestor sets an unusual precedent.  Nestor was retired at the time that his benefits were reduced, and no longer participating in the Communist Party. 

What Happened to the $2.6 Trillion Social Security Trust Fund?”

This is part of a series of articles in which I look at other articles on the internet that are forwarded as reasoned thought.  Just because you read it on the internet, does not make it true.

Many want to believe that Social Security Trust Fund is a scam.  No matter how reasoned the counter-argument, they eventually cite a piece from Forbes blog, “What Happened to the $2.6 Trillion Social Security Trust Fund?”

Readers tend to think that the article says that the Social Security Trust Fund is a scam.  That isn’t what the article actually says though.

The article contains some fact problems. The author states that the Social Security Trust Fund is the source of benefit checks.  This is factually wrong.  The primary resource of revenue for the system is payroll taxes.  So it is factually wrong to suggest that the only way for Social Security to get cash is from the general fund or incremental borrowing. The Trust Fund is little more than a parking lot for excess cash.

The article has reasoning problems. This statement is a false dichotomy. 

·        “Well, either Obama and Geithner are lying to us now, or they and all defenders of the Social Security status quo have been lying to us for decades.  It must be one or the other.”

It is unlikely to be either. 

Anytime you deal with politics you are dealing with words that have many meanings.  Here is the quote, "I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it."

The writer has chosen to read that sentence as social security checks might not go out because there may not be money in the Social Security Trust Fund."  If that is what the President meant, then the answer is simple: the President doesn't understand how Social Security works. The benefits of Social Security are funded by the payroll tax.  If checks didn't go out, it would mean that payroll tax collection had entirely ceased.  The Trust Fund serves as a buffer for Social Security rather than a primary source of cash.

Moreover, the Social Security Trust Fund is exempt from the discussion of the debt ceiling.  The government has the power to refinance any bond held by the Trust Fund because refinancing debt does not increase overall debt levels.  The government issues a bond and uses the proceeds to retire a bond.  The impact is a wash on the level of Federal debt.

One fact that Matthews fails to mention is that Secretary Geithner is the managing trustee of the Social Security Trust Fund.  It is his responsibility to build cash reserves necessary to pay bills in the face of foreseeable events.  If Geithner is telling the truth, he is effectively pleading guilty to the largest breach of fiduciary responsibility in the history of mankind. 

It is highly unlikely that the asset structure of the Social Security Trust Fund would be the cause the government's inability to deliver checks – nearly zero.  The primary source of revenue is payroll taxes.  It is virtually impossible to believe that the Trustee would have failed to build the necessary cash reserves if the Trust Fund was going to be needed.

The problem here is that no one in Congress or the media took the statement seriously enough to drive out the meaning of the President's words. The writer attributes meanings to the words that the President cannot mean. I have seen a number of other interpretations about the statement. 

There are two things that we know for sure: Coffers clearly can't mean the Social Security Trust Fund. If checks didn’t go out on that August 3rd, it would have been a matter of priority rather than financial resources.

At best for Matthews’ argument, the President is woefully uninformed about the mechanics of the system.  The idea that ‘real assets’ would have changed the President’s statement is simply false.

Why Writers Say That Social Security Can't Go Bankrupt

In writing about Social Security, I get a lot of impassioned missives to tell me how wrong I am, with links that purport to show how wrong I am.  I welcome feedback, but understand that just because you read it on the internet does not make it true.

Some of these emails are better than others. The worst of these include links to the blog pages of traditional media.  The readers tend to confuse the credibility of the media brand with the accuracy of the article.  Just because a blogger writes for Forbes blog page, does not mean that a Forbes' editor has read the piece much less fact checked it.

The most spammed piece in my mind is from Forbes blog writer, John T. Harvey, who has published “Social Security CannotGo Bankrupt.”  Understand that before you send it, the article does not say what you think it says.

Readers who have sent the piece to me believe that the article says that Social Security is financially stable, and that the concerns that I express are meritless. The writer hasn't said that Social Security is financially stable.  He is playing semantics in which that Social Security cannot run out of money.  It can run out of political support..

His analysis presents politics and money as completely separate and unrelated.  The difference is theoretical.  The writer sees Social Security as a political system, whereas the laws of the system make it a financial system of dedicated inputs and outputs.  Political systems can run short of political support.  Financial systems can run out of money.  In practice, the system fails regardless of wording. 

The problem with the theory in the article is that the author completely misrepresents how Social Security works.  If laws mean anything, Social Security is self-financed.  That means the system collects revenue from workers in exchange for the promise of future benefits.  This is why Social Security Administration says that the system is self-financed.

The writer chooses to ignore the impact of future benefits.  He writes, “It’s an immediate transfer from workers today to retirees today.”  If future benefits did not exist, then he would be correct.  The problem is that if you eliminate future benefits you pretty much eliminate the political support for the system. 

Beyond mischaracterizing the system’s operations, he leverages the standard straw-man of the debate.  No one says that the Social Security Trust Fund will dry up making it impossible for anyone to receive their Social Security payment.  Everyone says that if the Trust Fund dries up, that people will get checks of a lesser amount.

It is important for the reader to understand. If Social Security operated as the writer suggests, he would be correct.  The Trust Fund would be unnecessary if the revenue was tax money which did not generate future obligations.  We would match tax revenues and pay outs.  The problem is that the revenue collected today defines what we owe in the future.

“The lesson from this is that if we want Social Security to “be there” when we retire, our efforts must be focused on increasing productivity and making sure in particular that these increases get passed on to workers in the form of higher wages”

The writer seems unaware that Social Security indexes past contributions to average wages.  There is nothing about higher wages that makes Social Security more stable.  As wages rise, the primary insurance amount of new retirees is pushed higher.  The definition of their own future benefits is pushed higher.

The writer would be right if Social Security worked as he presents.  Unfortunately it doesn’t.

 

Jeb Bush Projections On Social Security Off By 30 Years

This statement is off by roughly 30 years.  Can we expect candidates to know the finances of the government's largest expense?

“We need to look over the horizon and begin to phase in, over an extended period of time, going from 65 to 68 or 70,” he added. “And that, by itself, will help sustain the retirement system for anybody under the age of 40.”

Jeb Bush’s statements from CBS’s “Face the Nation” about Social Security expose a distance from the issue that is unhealthy for Americans who depend upon the system. In his interview, he states the wrong retirement age, and delivers promises which are off by decades.

A number of his critics have already pointed out that Bush misstated the normal retirement age (“NRA”).  The NRA of Social Security is 66, not 65.  It hasn’t been 65 in more than a decade. Yes, some enjoy poking a wealthy politician unacquainted with his own retirement age about the suggestion to increase the NRA of others.

For me, it is a forgivable slip given that Bush was speaking on a Sunday morning news program, rather than in a more formal setting.  He has spoken in the past of increasing the retirement age.  In this interview, he was only providing additional clarity to a past position. 

Originally published on TheHill.Com, (see the article)

This chart shows the life prospects of a retiree.  The change to gradually increase the retirement age that started in 2000, basically accounts for all of the increase in a retiree's life expectancy until 2050.

Life Expectations At Retirement By Year For Social Security
Year	Survivor	Male	Females
2000 (Life Expectancy At 65)	87%	20.42	22.97
2050 (Life Expectancy At 67)	89%	21.06	23.41
Source: Social Security Administration Actuarial Study 120 (A survivor is the likelihood of a 21 year-old reaching retirement)

 

Politicians See Social Security Fix As 'Easy'

Over and over again, the media and experts tell us that financing shortfall in Social Security is relatively easy to address.  Conventional wisdom presents options for Social Security as though the problem with system is one of political will rather than one of economic resources. Basically if politicians could just get along, all of Social Security’s troubles would evaporate.

The latest to make this claim is Lindsey Graham, who reportedly said “you could [design a plan to fix Social Security] on the back of a napkin.” There is no way to be polite about this statement.  If you believe that Social Security can be solved in 15 minutes or on the back of a napkin, it is because you have an inner struggle with the meaning of commas and zeros in very large numbers.

The problem isn’t politics.  It is economics..... (See More At FedSmith.Com)

The Media And The Collapse Of Social Security

The media is a major player in the decline of the prospects of Social Security.  It has consistently proven unable to express the challenges of the program in terms that the public understands.

Writers in general focus on headlines, rather than content. For example, over the past two weeks, the media has jumped on a recent study published in the Journal of Economic Perspectives that accuses the actuaries of the Social Security Administration (“OCACT”) of systemically overstating the projections for the solvency of the trust funds.

While any question about the integrity of these forecasts deserves coverage, even the best coverage of this story failed to explain the basics of how this study fits into the questions about the stability of Social Security.  Most of the stories inflated the breadth of the research, and applied the findings far removed the scope of the study.

The study isn’t about the future.  It is about the past.  It deals with the inputs to the forecast, not the output of the forecast. It deals with three inputs, not all inputs.  It tells you almost nothing about the long-term decline of the projected solvency of the Trust Funds. In total, study suggests that OCACT is getting worse at fortune telling, and we don’t know why.

Oddly enough, the answer is actually pretty simple: OCACT did not foresee the Great Recession five years out. The irony here is that most of the reporters covering this story didn’t see the financial crisis coming when it was months away.

The study expresses the revelation in language that is highly inflammatory. It said, “In recent years, especially after about 2000, the Social Security Administration began issuing systematically biased forecasts with overconfident assessments of uncertainty.” It is the language rather than the content that has created the coverage.

It really can’t surprise anyone that forecasts during a steady economic expansion, 1982 to 2000, were more accurate than ones from a period of economic uncertainty which started with the end of Internet Bubble and finished in the Great Recession. The lesson of the study is that even the best forecasts are subject to the mercy of future events.

News coverage went in a different direction:

“[Since 2000], the forecasters proved overly optimistic, overestimating revenue and underestimating costs, with the total error reached nearly $1 trillion.” ~ Barron’s

A great deal of coverage prominently cited a figure of $1 trillion dollars. This figure does not come from the study, or its authors.  According to Gary King an author of the study, the figures were a calculation of the media writer.

The figure deals with issues that are well outside the realm of the study. The $1 trillion dollars of total forecasting error is the sum of ALL variance in forecasting inputs and modeling errors. The study on the other hand examines only three of the ingredients that go into baking the pie that we call the forecast.  Moreover, the study provided the cost assessment of only a sliver of one of the variables.

That sliver happens to be the sliver that makes the forecast appear worse. The study estimated of the cost of people 65 and older outliving statistics. This is the number of people who lived longer than the actuaries expected. The calculated cost to the program was equal to the number of unexpected beneficiaries multiplied average benefits.

If you are going to calculate the impact of under-estimating mortality, the estimate needs to include all ages, not just the ones where people are collecting benefits.  The estimate in the study is only meaningful if the only age group to outlive expectation is those people 65 and older. You have to know at what point in our lives that we are living longer.

The answer to that question may surprise you.  OCACT recognizes that we are living longer.  In 1940, somewhere between 50% and 60% of the population could expect to survive from 21 to 65.  In 1990, that figure had risen to 72% to 83%.  Big increase, yes.  That increase in life expectancy is however occurring at a point in our lives where we are generally contributing to Social Security rather than drawing benefits.

Overall, the report doesn’t change my view.  I use the information from OCACT almost exclusively.  Over the years of writing about Social Security reform, I have come to trust the forecasts from the Social Security Administration as the best-effort available.  They may not always be right, but I am confident that no one is paying them to be wrong.

The study largely represents a missed opportunity to ask more serious questions.  As much as I use the data from OCACT, I recommend that you follow the trend.  Since 1987, the system has lost about 1.5 years of solvency for year one calendar passed.  At that rate, the system reaches insolvency in 2027.  This study tells you nothing about the longer-term decline, and in fact seems to ignore it.

The projections of the Congressional Budget Office are even more troubling.  It projects that Social Security will turn cash flow negative in 2017, rather than the more optimistic figure of 2020 provided by the SSA.  The gap in forecasts is longer than it might take to arrive.  No one is asking about that gap.

The coverage of the study drives home a larger issue.  How can we expect to have an informed debate about Social Security when the media puts headlines over content?

- See more at: http://www.fedsmith.com/2015/05/26/the-medias-role-in-social-securitys-collapse/#sthash.P4vQeMWN.dpuf

Gaming Social Security

Few, if any, articles on Social Security discuss “Adverse Selection”, and the associated havoc that it can play on projections for the system’s future.  Another name for “Adverse Selection” is gaming the system.  Whatever you call it, the concept is basically the economic equivalent of gravity.

The concept refers to the economic force in which freedom and choice combine to create the least profitable response to a business’s offerings.  In terms of Social Security, the least profitable mix of customer means that some taxpayers are trying to contribute the least while at the same time some beneficiaries are trying to maximize what they collect.  While we may like the system as a whole, our individual interests are doing everything that they can to drive the system to insolvency.

Adverse selection has been around since the inception of Social Security.  What is not getting enough coverage is that these forces are getting stronger over time as beneficiaries have more resources with which to make claiming strategies more effective.

The Trustees Reports are based on historic norms that cannot reflect this evolution.  Historically, there was little way for someone to completely maximize their benefit levels from Social Security.  There are more than 2,000 rules which can determine benefit levels.  That is a lot of rules to maximize.

Retirees are not on our own anymore. The internet is greatly improving the odds in favor of retirees. Today retirees have a cottage industry of financial advisors that do nothing other than help retirees maximize their benefits.  These people know how to twist the thousands of rules in the system in favor of their clients.

Retirees are using these resources.  “Get What’s Yours”, a how-to book on maximizing your Social Security payout, reached #3 on Amazon’s best seller list last month. This isn’t “50 Shades of Grey”, but it is an example of people learning to game the system.

One example of this trend is the “File and Suspend” tactic enjoyed by married couples.  The Center for Retirement Research at Boston College says, “This strategy is equivalent to a “no interest” loan from Social Security and could potentially cost the program as much as $11 billion a year.”  This isn’t what people paid for.  It is a loophole that was created in 2000.

This is a trend that Social Security Administration should follow.  When the Trustees project the solvency of the Trust Fund, they use assumptions that are based on historic standards.  These historic measures will be progressively out-of-sync with actual benefit draws as retirees get better at gaming the system.

Here are the facts.  In 1984, Social Security was projected to be solvent for roughly 80 years, more than 2060.  Since that time, roughly 30 years of solvency have simply evaporated.  The projected exhaustion point of the Trust Fund is now to 2033.  The Congressional Budget Office even predicts 2030.

There are a couple of things that are clear. Retirees are trying to improve their return on their past Social Security contributions.  Any success that they have will come at the expense of the system’s solvency.

Originally published at :  http://www.fedsmith.com/2015/03/25/gaming-social-security/#sthash.fEL9Vzlr.dpuf

Social Security Number Watch

Be very careful when you are looking at numbers about Social Security.

Numbers about Social Security do not lie, but they can mislead not only the public but policy makers as well. The numbers watched by the experts in Washington suggest that Social Security is slowly moving to crisis. The numbers have lulled even the harshest critics of the system into believing that the system is many years from crisis. The problem is in the numbers : we are looking at the wrong numbers.

This article isn’t for policy wonks. It is intended for average Americans who get pounded with useless statistics about the system. This is a typical quote that a reader will see when researching Social Security : “When Social Security started, there were 16 or 17 workers for every retiree. When the baby boom finally finishes retiring, there will be 2 workers for every retiree.”

It sounds scary, but it is completely uninformative. The statistic in this case is the Support Ratio[1]. It doesn’t accurately track what it is suppose to track, and authors subsequently quote bad data out of context. In the process, the statistic goes from simply bad economic theory to dangerous public policy.

First, the number of workers includes government workers who have been purchased with debt, or future tax revenues. This debt inflates the number of workers today by pulling future jobs into the today's numbers. If as CBO has warned, the government is unable to place debt at reasonable prices, these jobs will disappear. Worse, if the productivity of the public-sector jobs doesn't create sufficient wealth to pay off this debt, the debt becomes a drag on future jobs.

Second, the number does not factor in the impact of the Trust Fund[2]. The Trust was designed to hold excess cash in the system, so that the Trust Fund could serve as an addition worker as the Baby Boomers started to retire. Hence some of the workers from the 1990s were really working to support 2010 beneficiaries – the first year that outgo of the system exceeded payroll tax contributions. In 2009, the Trust Fund generated about 110 billion dollars of interest income. That is about 16% of the total income of the system. So the workers per retiree should have been roughly .5 workers higher.

Even if one had an accurate Support Ratio, the number isn't very informative because it does not factor in productivity. As productivity increases, it takes fewer workers to support a retiree. When Social Security started, we had something like 25% of our workforce in argricultural production. Today it is something like 3%. Telling someone that there are too few workers without knowing what their productivity is, is just like telling someone that they are over-eating without considering their exercise regime. That is where the data goes from wrong to pointless.

Experts use this statistic far out of context, as you can see in the example above. In the context above, the author assumes that workers are the same today as in 1955. The assumption is horribly wrong. Today’s worker contributes at a higher rate and against a larger cap. In 1955, the maximum contribution was an inflation adjusted $168. Today it is more than $13,000. In other words there are workers in 2011 who effectively are the same as 77 workers from 1955.

Like the workers who are counted like beans, the beneficiaries are not the same today as they were in 1955. According to JustFacts.Com, “Benefits have not remained constant. If they had, SS would now be collecting roughly three times more in taxes than it is paying in benefits.” I haven’t seen their data, but it is not unreasonable. Beneficiaries are living longer and may well be retiring earlier. Comparing the number of beneficiaries over time when pay-outs are changing is simply pointless.

A reader might arrive at this point in the article feeling relieved that the Support Ratio suggests that the problem is smaller than the raw data suggests. And that belief would be correct if workers did nothing but support retirees. The fact is that they do substantially more than support retirees. Workers through wage taxes also support the budget deficit. The budget deficit is growing and so is the interest cost to support it. Today’s worker carries about $75,000 in look through debt from the government. Assuming that workers today are in the same position to provide financial support for retirees as they were 40 years ago, or even 5 years ago, is where authors cross the line from bad economics into dangerous public policy.

In summary, there very well may be a shortage of workers to provide benefits for all of the Baby Boomers. My guess is that there is a dramatic shortage but I don't have any data to support that belief. The actual data that you need to see is compensation slack - which would measure the ability of workers to support a retiree. If you had that data, I suspect that the slack has dropped radically and you would see that the crisis is now, not some stardate in the distant future.

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[1] The SUPPORT RATIO, which measures the number of beneficiaries to number of retirees. Data Source Social Security Administration

http://www.ssa.gov/OACT/TR/2010/lr4b2.html

[2] There are some who question the existence of the Trust Fund. Here is why I discount their view. The government holds a number of hard assets such as oil, land, and gold. Beyond that, the government has future revenue streams based on 16.6 trillion dollars in retirement assets which are tax deferred. Beyond that, the government has the ultimate power of taxation, printing money. As long as the citizens grant the power to print money to the government, US Treasury debt will represent the safest investment in the country.