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My Daughter Wants a Trust Fund

July 2nd, 2008 . by economistmom

I mean “trust fund” in a “public accounting” sense rather than “personal estate” sense… My husband and I have no personal wealth to put into a real trust fund…

My 15-year-old daughter was complaining to me last night about how her 16-year-old sister is making “like $150 per week” at Baskin Robbins, how she’s quite jealous of that and wants to find a job, too.  I started to explain to her that besides the fact that she would not be able to drive herself to a job, I really needed her to help around the house (now that we no longer have an aupair), and that that’s why she’s getting a pretty nice allowance lately.   She then correctly pointed out that she has not literally been “receiving” allowance lately because of my casual accounting system, where she typically gets NO cash at all each week, because I have been buying her photographic supplies and clothes each week and keep saying I consider it “a wash.”

She said she knows that it’s pretty much a wash, but that it’s a wishy-washy wash (my translation), so it doesn’t feel like she’s getting paid an allowance.  I think there’s some analogy that I could make to the idea that tax expenditures (the government devoting resources to tax reductions) aren’t viewed the same as other forms of government spending (and in fact aren’t treated at all the same in the budget process), but my daughter then took my analogy-oriented mind in a whole different direction by suggesting:  “why don’t we set up a fund?”…

I said ”do you mean literally set up a fund, or just set up a fund as an accounting device?”–and my 15-year-old knew exactly what I meant and immediately said she just wanted the latter–a way of keeping track of the weekly pluses and minuses to her “fund,” so she could see her credits for her weekly allowance and her debits for the goodies I was buying.  She said she’d then feel as if the allowance system was more tangible and more fair (whether on my end of the transaction or hers), and that she’d also then have more incentive to do the work around the house.  In fact, she suggested that I give her a specific list of chores and special cleaning and organization projects to do each day and each week, so she could check tasks off the list so that I (and she) would know she was deserving, and entitled, to her weekly allowance to be credited to her ”Fund.”  And she could check the balance in her “Fund” each day or week and feel good about her contribution to the household economy and the benefits she was receiving in return.

Does this sound a little like the Social Security Trust Fund to you, too?

I then told my daughter that if we go ahead and set up this more explicit accounting mechanism for her allowance, and the more explicit conditions for her to be “entitled” to that allowance, that I would really need to monitor and enforce how this system was working, because if, for example, she wasn’t really cleaning the bathroom, then our family finances would require that we reduce her allowance so that we could afford to hire a housekeeper to come in every couple weeks or so.  In other words, we’d need to revisit the terms of our allowance agreement (the structure of the flows into and out of her “Trust Fund”) in the context of the entire family budget–our full complement of needs and our full complement of means.

And she seemed totally fine with that idea. 

Such wisdom from my 15-year-old… (and all my kids are very smart–have I mentioned?) 

Now, I trust that readers don’t need me to spell out how this parallels the debate on the need (or not) to reform the Social Security system in the broader context of our longer-term fiscal challenge.  I’ll be more directly explaining my perspective on the issue later, anyway. 

So I think we’re actually going to implement this “Allowance Trust Fund.”  I know, I know, I have the benefit of being able to start this Trust Fund from scratch, and that’s what makes it totally different from dealing with the Social Security Trust Fund.  Not to mention the fact that this Trust Fund will be managed by more a (neat and easy) “benevolent dictatorship” rather than a (messy and complicated) “democracy.”  Still, it’s kind of a groovy little personal experiment, don’t you think?

30 Responses to “My Daughter Wants a Trust Fund”

  1. comment number 1 by: kharris

    You are seeing this as a public finance issue, when it is pretty clearly a labor market event. So yes, there are clear analytical problems in using your conduit for labor compensation as a analogy for the Social Security Trust Fund.

    Your daughter was objecting to the fuzziness of her compensation, and that is exactly right. If this is her first taste of wage labor, it might a really good idea to pay her directly and allow her to choose how to spend the money. To the extent that you are happy to buy photographic materials but not happy about buying clothing or music you can’t stand, you are creating a company store. Perhaps food stamps are a better analogy, given that your system may limit the range of items eligible for purchase with allowance. The utility of the “generous” allowance could, in the extreme, be lower than a meager allowance paid in cash.

  2. comment number 2 by: Jennifer

    I know this wasn’t your point but I’m always curious about how other families think about allowances. When I was growing up, my parents insisted that my allowance was not in payment for specific tasks - I was expected to clean my room, set the table, help Dad with yard work, etc. simply as a member of the household. My allowance was also a result of my being part of the household - that is, it was my ’share’ of the family income that I happened to have discretion over. As a consequence, if I shirked on my family duties, I still got my allowance but I got a whole lot of nagging from my parents. I even remember trying to bargain with my parents - when I couldn’t be bothered to clean my room, I’d offer to take a reduced allowance instead but my mother would simply say, “you don’t help me clean the house because I’m paying you, you do it because you’re a member of this family.” Now that I think about it, I wonder if the subconscious threat was that I’d be disowned!

    As teenagers, my sister and I also were given clothing allowances, which I think was basically my mom’s way of teaching us about budget constraints and prioritizing (I will forever think about shoes in terms of the sweaters I could buy instead). So I am a bit curious why you are setting up an accounting system like this instead of literally giving her the money to spend as she chooses?

  3. comment number 3 by: economistmom

    To both kharris and Jennifer: you both note that it sounds like this allowance fund accounting system might not give my daughter complete control over what she spends her money on. I think that’s right, because I’m playing the role of a “benevolent dictator” (i.e., parent!) rather than a “democracy.”

    Also to Jennifer, yes, I often give my kids a limit on how much they spend on certain categories of items or on a certain trip to the store, and I do think it’s a great way for them to learn about prioritizing. So setting up those “sub budget constraints”, even within this “allowance fund,” just gives me a little bit of that parental control/veto power over my daughter’s choices, but with this daughter, I’m convinced that those constraints won’t bind, as she always has very reasonable plans about how to spend/budget her money.

  4. comment number 4 by: dgm

    A little off topic, but this post reminded me of an exchange I had with our five-year-old. I fronted him $10 for something he wanted when he forgot his wallet. When it was time to pay his allowance I told him he actually owed me money, so he got down his “monkey bank” and I started taking coins. He looked horrified, then he broke into tears: “When Daddy pays me allowance, he never does it like THIS!”

    Your daughter sounds like she’s got a good head on her shoulders. I think it’s important to teach them about money, taxes, debt, prices and choices when they’re young.

  5. comment number 5 by: coberly

    mom,

    lots of issues there. most interesting are the ones re your daughter, if real, or the ones raised by dgm. howevre i am not at all clear what you are saying about Social Security (i get dense at times). I have a lot to say on the subject myself, and would be very glad to see an honest discussion.

    it might be worth beginning by saying I don’t think the Trust Fund is very important. Second, Social Security can always pay for itself. Third, the 2% raise in the tax that may become necessary to pay for the longer life expectancies projected, may be psychologically difficult for the great masses subject to hysterical propaganda, howevre necessary the actual money is to that longer life expectancy, but there are ways to address even that without either killing Social Security as a worker funded, federally guaranteed, worker insured savings and retirement non means tested safety net.
    all that is probably incomprehensible, but is meant to suggest there is something to talk about.

  6. comment number 6 by: rdan

    Is the trust fund an accounting idea? If the finances of the family change, can you save on general expenses by reducing the allowance, or do the chores maintain a value as a small part of the budget? Can the fund actually be ’saved’? I am lost here.

    BTW, I have three grown children, so budget and allowances and parental guidance are quite familiar. Who is the parent for the Social Security fund?

  7. comment number 7 by: Patrick R. Sullivan

    To have something like the SS trust fund, you’d first have to define the child’s ‘job’, and what she’d be paid for doing it.

    From which pay you’d then deduct her living expenses that you and your husband pay. From the difference, you pay her allowance in cash–withholding something for when she ‘retires’ from childhood.

    The withheld amount would go into a shoe box in your closet, and you could, when needed dip into that ‘trust fund’ to meet your household’s expenses. Just be sure to replace the money with an IOSBTF–I Owe the Shoe Box Trust Fund–of an equal amount.

    You can even agree to pay the Trust Fund interest!

    When your child becomes an adult, hand her the shoe box. If she asks you to redeem the IOSBTFs, plus interest, tell her she can collect THAT from her children.

  8. comment number 8 by: rdan

    dgm,

    LOL. For a five year old that sounds developmentally quite appropriate. But it does remind me of some of the cries from an older set of entrepreneurs lately.

  9. comment number 9 by: coberly

    Sullivan
    has the usual simple minded take on Social Security, which is why an intelligent discussion would be useful

    but dgm

    provides us with a warning: the five year old mind is probably not ready to take a “pay for my expenses” view
    of their piggybank. i have enormous sympathy for the five year old… so much that i think the parents need to have a sit down talk with someone about children, if not about money.

    but sullivan ought to be old enough to learn the facts of life.

  10. comment number 10 by: coberly

    sullivan obviously knows nothing about Social Security but what he’s been told by the people who want to destroy it. And he has never even thought about that for five seconds.
    In the analogy he gives, for example, he has the govvernment handing the Trust Fund to the new retiree and saying it’s up to the retiree to fill it.

    The analogy fails on every count, but even someone who has not been paying attention ought to realize that whoever pays for the trust fund it won’t be the retirees.

    But it will take more than five seconds to explain what’s wrong with the rest of the analogy.

  11. comment number 11 by: coberly

    Let me anticipate a little.

    With Social Security the worker pays into Social Security a small amount of his check each pay period (it’s 6.2% right now, but that opens another can of worms we should save for later). When the worker retires he gets his money back — adjusted for inflation — at a rate approximately 40% of his average each month for as long as he lives. And that’s really it. The worker does not need to worry about where the government gets the money, or what the Trust Fund is.

    Those things are all easy enough to explain to anyone with an honest mind and a few minutes. But the basic idea is that as long as there are new workers paying in their 6.2% there will always be enough money to pay the retired workers their 40%. You could call that “the children paying” if you wanted to, or you could call it “the workers paid in advance” it really makes no difference.

    You can work yourself into some stupidities by accepting the wrong frame on this. But once you get the right frame and think it through patiently it all turns out to be quite simple and obvious.

  12. comment number 12 by: Jim Glass

    “Does this sound a little like the Social Security Trust Fund to you, too?”

    No, actually it sounds more like the tax expenditure budget. The difference is that in your example your daughter wants to see some tally showing that her allowance is being applied to current expenditures actually made on her behalf. But in a Social Security analogy she’d want to see a tally showing her allowance being set aside in savings to pay future expenditures you’ve promised to meet on her behalf — a promise to buy her a car, pay her college costs, finance a vacation to Morocco, whatever.

    In the latter case, in her heart she may want to see a statement showing her allowance actually being saved in an investment account. Now, you may say to her that you intend instead to continue to spend all the family income as before, without reducing family consumption to fund any savings in such an account, because there are plenty of household expenditures to cover — but that you will give her your personal promise that the full amount of her allowance plus interest will be paid to her at a later date, as promised, from the family resources at hand then, as they may be. And since your standing in the family doubtless is rock-solid AAA both as to personal integrity and credit-wise, she would be churlish to complain, and would readily go along.

    Nonetheless … if your family is incurring many other obligations coming due around the same date … if family income around that date may decline (perhaps an income earner will retire, or due to an unexpected misfortune) or simply not be higher than today’s level in the face of the promises to be met … then looking back in retrospect at that point it may seem as if you really should have cut family consumption to fund that savings account for her back when the allowance started — to avoid the unpleasant choice then of boosting family income to a new higher level in some unforeseen way (take a night job?), or slashing overall family consumption, or reneging on your promise to your daughter in whole or part, or some unhappy combination thereof, due to the need to bring your family cash flow into balance then.

  13. comment number 13 by: coberly

    jim glass

    a lot closer than sullivan. but let me hold the cigar for now.

    the trust fund is not that big a deal. it can be paid off at the rate of one dollar per week per taxpayer in 2017, raised a dollar a week next year and the year after, all while wages are going up ten dollars per week per year.

    and ending in 2040 when the tax increase raches 20 dollars per week on a wage that is 300 dollars per week more than it is today. at this time the Trust Fund debt is paid.

    and just in time, too. because now you have to start taking care of the fact that retirees are going to lilve longer. turns out the solution is just to keep that 20 dollar raise, only now put it on the payroll tax and take it off the progressive income tax where it was paying for the Trust Fund… not, by the way, the same people who pay the payroll tax.

    of course it would be smarter to phase in the payroll tax raise starting in about 2030… this would bring the payroll tax to where it needs to be just as the Trust Fund runs out… only now that would be in 2050.

    there is no huge burden here. only a Big Lie by people like Peter Peterson who know how to make small numbers look terrifying by multiplying them by 200 million people and 75 years.

    but it is important to note that Social Security is paying for itself. just the workers putting their own money into a safe safe insured savings plan. all the “real” budget’s problems are its own. take those up with the people who like to spend on war toys.

  14. comment number 14 by: Jim Glass

    “…the trust fund is not that big a deal. it can be paid off at the rate of one dollar per week per taxpayer in 2017, raised a dollar a week next year and the year after, all while wages are going up ten dollars per week per year…”

    The CBO projects that the cost of servicing the Trust Fund will rise to 2 points of GDP in income taxes, over today’s tax level, by circa 2027 and every year thereafter. GDP of course includes all wages of workers including their increases, plus all other national income. Taking 2 points out for the Trust Fund of course leaves correspondingly less after-tax in workers’ wages. Taking out another 4 points-and-rising for Medicare leaves that much more less. (more less?)

    CBO actually projects the amount of GDP collected through income tax will have to increase 50% by 2030 for revenue to stay even with these programs, with one-third of the increase needed to service the SS trust fund (and the 50% increase rising to 90% by 2050).

    If such a tax increase equals your “one dollar per week per taxpayer in 2017, raised a dollar a week next year and the year after, all while wages are going up ten dollars per week per year”, then you two agree!

  15. comment number 15 by: economistmom

    Wow– you guys are confusing me now! You all show great brain agility in the various interpretations and have taken my analogy (to the Social Security Trust Fund) to a whole level of depth I never imagined. (And I mean that as praise, not criticism, for your thoughts, by the way.)

    The analogy in my head was much shallower than the more profound ones you all are making. I only saw these similarities between the Social Security Trust Fund and the “Allowance Trust Fund”: (1) it’s not a literal fund that we deposit to and withdraw funds from; it’s only a sort of “subaccount” that’s kept track “in the books”–the main account where real transactions take place is the entire family budget (aka the “unified budget”); (2) there’s some contractual agreement that links a “work history” to the stream of benefits (allowance credits); (3) the terms of this agreement (the structure of the program) can be revisited and “reformed” in the future, taking into account the needs and means of the entire family/unified budget.

    There’s obviously excess demand out there to have deeper conversations about Social Security reform. We’ll get there soon, I promise.

    Happy 4th!

  16. comment number 16 by: coberly

    jim glass

    check carefully your sources. servicing the trust fund should not rise to 2% of gdp, except possibly for an instant under a peculiar way of looking at things.

    social security right now is 4% of GDP (think about that for a minute four per cent of what we produce goes to feed and house all the elderly people in this country… this is not a huge amount. note also that it is something like (the details are a little funny) 12% of what you make… again 12% of what you make in order to pay a retirement equal to 40
    % of what you make for around 20 years… not unreasonable. and do you have another way to pay for it? mutual fund? better look closer.)

    but if we are all going to be living about 50% longer in retirement (18 years then, 12 years now) then, yes, the PAYROLL tax will go up about 50%. But that’s 50% of 6%, or about 3%…. and actually the 2% i gave is closer to what is projectected for 2040. [sorry, i notice my numbers don’t quite add up. that is because there are complications and i am not taking the time (yours mostly) to go through them all… but the size of the problem ought to be getting clear to you: that is “not much.”

    so social security will go from 4% of GDP to 6% (do i have to remind you this is your living expenses for twenty years we are talking about? not some bad old government black hole where the money goes.)

    now it happens that the baby boomers have lent a lot of money to the government (they really are not the same people) over the years, and that money ought to be paid back. and as it is paid back it happens to reach that 2% of payroll just before it is fully paid back, after which the payroll tax can pick up that 2% and social security can go on paying for itself foreever.

    there are a couple of issues here. but scaring yourself about 2% of GDP looks a little silly when you realize you are talking about how you are going to be spending your own money on yourself.

    i don’t know what CBO is saying, but there looks to me like plenty of room in your statement for grammatical as well as financial confusion. get those numbers under control and find out what they really mean and you will be pleasantly surprised there is no boogey man.

  17. comment number 17 by: coberly

    be a little careful. the trust fund is NOT social security. and social security is NOT the budget, or a budget item. and that’s important.

    i don’t know what you mean by a “literal fund.” all “funds” are accounts that are “kept track in the books.”

    social security is NOT a “sub account”. it is a completely independent account with its own revenue source and its own obligations.

    the trust fund is (i am being a little “careless” here, but the distinction is important and too hard to make “carefully” in one minute):

    the trust fund is a record of borrowing … your “main account” has borrowed from social security. a real debt it should pay back. not a phony debt of taking money out of one pocket and putting it in another.

    you could revisit the terms of the agreement… but you shouldn’t reneg on the agreement. and there is no need to “take into account the needs of the entire family/unified budget.”

    the only relation the unified budget has to social security is that “the budget” borrowed some money form social security. it needs to pay that back just the way it needs to pay back any other money it borrowed. the good news is that it can, easily. and that if it doesn’t, social security still has the means to continue paying it’s promises pay as you go forever with no real injustice to anyone.

    these are hard things to understand if you have been carrying another (incorrect) frame around in your head. but I guarantee my frame is correct and that i can explain it clearly, given enough of your time and attention, and it is not because i am so clever. i just happened to look into the issue with no preconceptions and a modest ability to know when to do simple arithmetic, and keep track of ‘oo is paying ‘oo for what.

  18. comment number 18 by: Jim Glass

    “jim glass

    “check carefully your sources. servicing the trust fund should not rise to 2% of gdp, except possibly for an instant under a peculiar way of looking at things….”

    http://www.cbo.gov/doc.cfm?index=9216

    Table 1

    Social Security spending, pct of GDP

    2007: 4.3%
    2030: 6.1% = +1.8% of GDP

    Virtually all of this is due to the swing in the “surplus” and cost of servicing the trust fund, as one can see in the Trustees’ report, data for Chart E. It is all a general revenue cost.

    All income taxes in 2007 were 11.2% of GDP.

    Collecting an additional 1.8% of GDP in income taxes is a 16% income tax increase from today’s levels, across-the-board on everyone, both corporations and individuals, including on retirees’ IRAs, pensions and Social Security benefits. Not for an instant, permanently.

    If you can reconcile this with a tax increase of $1 per week on wages, while wages are increasing $10 a week, with no tax falling on retirees, then fine, you agree with CBO and the SSA’s Trustees and Actuaries.

    If your numbers don’t reconcile you should take up your disagreement over the peculiar way that CBO and the SSA’s Trustees and Actuaries look at things with them, not me.

    Me, I’m the kind of person who mindlessly defers to authority, in this case.

  19. comment number 19 by: coberly

    jim glass

    if that is the best you can think, you are probably best off deferring to authority. but you should probably get an anuthority to explain their numbers to you.

    “servicing” the trust fund debt… means repaying it. when it is repaid, it is done. no longer a factor for the general budget. that is predicted to occur in about 2040.

    with income subject to the payroll tax at about 35% of GDP, your 4.3% of GDP cost for Social Security works out to 4.3/35 or about 12.3% of taxable income.

    your future cost 6.1% works out to 6.1/35 or about 17.4% of income. looks like an increase of 5% of income. or, since the boss is paying half, a tax increase of about 2.5% for the worker (as well as for the boss).

    close enough for my guess, and the Trustees guess, fifty years in the future.

    i am glad income taxes were only 11% of income, but calculating cost of social security as a percent of income tax is a pretty serious mistake. you see, social security is paid for out of payroll taxes… a system for workers to set aside enough of their own money to pay for their own retirement.

    the income tax is what pays for submarines and such. and, of course, if the income tax borrowed money from the payroll tax, then it really should pay it back. and that will cost somethng until it is paid back. but that something is along the lines of 2% of income,… which 2/11, is about an 18% increase in the tax… close enough to your 16%. but do try to remember its not a 16% tax increase. it’s a 2% tax increase, which is, yes, 16% of the tax. these are not hard, but you need to think a little slower so you can understand them.

    the one dollar per week per year is the cost of the first year of repaying the trust fund. it does rise to about 20 dollars per week over twenty years, or about 2% of income in the last year. after which it stops. it turns out the same 2% of income will be needed by the payroll tax after the Trust Fund is paid back, to pay for the longer life expectancies after 2040. but meanwhile wages will have been going up ten dollars per week, or a total of about 40% by 2040. so the larger tax will be taken out of a much larger income.

    i realize you will not be able to follow this explanation, but i have hope that the rest of America will catch on before the fast talking Big Liars get them to trade their Social Security for a sure thing on Wall Street.

  20. comment number 20 by: coberly

    in case it’’s not clear, that 2% increase in the income tax needed to pay for the last year of the Trust Fund debt…money the “income tax” borrowed from the “payroll tax”… is an increase on Jim Glass’s 11% income tax to a 13% income tax.

    I am sure jim did not mean to fool anyone but himself into thinkiing that your income tax would go up to 16%, or another sixteen percent.

    and it’s worth remembering that the income tax is mostly not paid by the same workers who pay the payroll tax.

    repaying the trust fund is simply repaying money the higher income folks have borrowed from the lower income folks.

    and, you may have to trust me on this, taxes on pensions, and even on social security benefits themselves, will not be a significant part of the tax burden on low income people. actually it will not be a significant part of the tax burden on high income people.

    but as we know the rich don’t like to pay their bills. they keep telling us that if they have to repay the money they owe, or even pay for the things they buy from government, they will fall into a funk and become unable to create jobs.

    and we keep buying it.

  21. comment number 21 by: Jim Glass

    jim glass:
    if that is the best you can think, you are probably best off deferring to authority … “servicing” the trust fund debt… means repaying it. when it is repaid, it is done. no longer a factor for the general budget. that is predicted to occur in about 2040…. with income subject to the payroll tax at about 35% of GDP, your 4.3% of GDP cost for Social Security works out to 4.3/35 or …

    i realize you will not be able to follow this explanation, but i have hope that the rest of America will catch on before the fast talking Big Liars….

    You are so right, I really cannot follow your “fifty year” mathematical analysis.

    Please help me by agreeing to dumb things down for me, by looking at just one single year, using just simple arithmetic, and numbers provided by authority I defer to.

    As per the aforementioned data for Chart E provided by the Trustees, we see the effect of OASDI on “General Revenue” shifting from a 0.55% of GDP contribution in 2008 to a 1.19% of GDP cost in 2030.

    Now, being that 0.55 + 1.19 = 1.74, we have OASDI increasing as a cost against General Revenue by 1.74% of GDP in 2030, compared to today.

    (That “1.19″ of course is the general revenue cost of redeeming bonds in the SS trust fund to pay SS benefits)

    Thus, CBO, the Trustees, etc, conclude that for General Revenue receipts to cover this cost they must increase by 1.74% of GDP by 2030. (Alternatively, the budget deficit must increase by 1.74% of GDP, or there must be some combination thereof. Arithmetic.)

    Obtaining this needed additional 1.74% of GDP of General Revenue through income taxes self-evidently requires that income taxes be increased by 1.74% of GDP from today’s level. Calculating this income tax increase in percentage terms (as CBO did in the paper linked to previously) since income taxes currently (2007) equal 11.2% of GDP, we get … 1.74 / 11.2 … a 15.5% required increase in income taxes as a percentage of GDP by 2030 to fund OASDI. (I can do division with a calculator.)

    This 15.5% increase of course is across-the-board and lands on everyone who pays income taxes today, both corporations and individuals, including retirees who pay income taxes on their IRAs, pensions and Social Security benefits.

    Now considering the year 2030 only, can you tell me whether you agree with the above — and if you do not, exactly what above you disagree with?

    Are the numbers in Chart E wrong? Is the arithmetic wrong? Will a needed 1.74% of GDP increase in general revenue by 2030 (equivalent to a 15.5% across-the-board increase of income taxes on everyone) really be covered by increasing tax on workers’ wages by $1 a week as those wages increase $10 a week?

  22. comment number 22 by: coberly

    jim

    actually, i covered this ground in the preceding letter.

  23. comment number 23 by: coberly

    jim

    the summary appears to be written with the intent to deceive. you should read the Trustees Report itself. Same numbers. Different gloss.

    But let us try again:

    Taxabke payroll is about 38% of GDP.
    your 1.74% of GDP = 4.6% of payroll
    you pay half of that
    boss pays half of that…

    so a 2.3% increase in the payroll tax will cover the increase.

    as it happens Social Security lent a lot of money to the Income Tax, that money needs to be paid back. the first year it will need to be paid back is about 2017. in that year an amount equal to one tenth of one percent of payroll will close the gap. next year, it will take two tenths of one percent… and so on for about 20 years, finishing at about 2% of payroll that the income tax will be paying to the payroll tax.

    after that, the debt will be paid, and income tax will no longer have to pay anything to payroll tax.

    but payroll tax will then need to be increased by that same 2% in order to keep on paying what would otherwise be the difference between income and outgo due to the fact that there are now more retired people per taxpayer, and that is because those retired people are living longer.

    apparently self-evidently is a word you like. it does not seem to mean anything.

    now you are perfectly free to calculate that the increase in the tax is 16% of the tax. but you should not forget that this is still a 2% tax increase. don’t confuse percent of tax with percent of GDP.

    i hope this answers your questions.

    and don’t be too confused by the 1.74% of GDP … which i would guess would be roughly the same increase in the income tax, if all of GDP is taxed, turns out to be about a 4% increase in the payroll tax, which turns out to be a 2% increase in the workers share of the payroll tax. it is, as you say, arithmetic.

  24. comment number 24 by: coberly

    Mom

    from an undisclosed source:

    “Parents who create trusts for their children are not simply engaged in a sleight of hand. The children have claims enforceable in a court of law on the funds set aside in the trusts. They would not have such legal claims if the funds are not in trust but remain in the parents’ bank accounts, even though the funds origninate with the same two parents.”

  25. comment number 25 by: coberly

    jim glass

    seems to think a 2% increase in share of GDP going to feed the elderly is an unreasonable expense.

    since the elderly are going to be eating anyway, i wonder how he proposes to eliminate this expense.

    personally i don’t find the idea of setting aside an extra 2% of my budget to make sure i have enough to eat when i am too old to work is an unreasonable use of my money.

  26. comment number 26 by: Jim Glass

    jim, the summary appears to be written with the intent to deceive….”

    The SS Trustees write with intent to deceive? Oh, my. What authority should I defer to?

    But let us try again:

    Taxabke payroll is about 38% of GDP.
    your 1.74% of GDP = 4.6% of payroll
    you pay half of that
    boss pays half of that…
    so a 2.3% increase in the payroll tax will cover the increase.

    You are suggesting that the current law should be changed so the 1.74% of GDP will be covered by a 30% payroll tax increase, by 4.6 points, to 19.9% from 15.3%, instead of by a 15.5% income tax increase?

    That seems odd, and unlikely to be enacted. How will the SS trust fund bonds be paid down then?

    as it happens Social Security lent a lot of money to the Income Tax, that money needs to be paid back.

    Yes, that’s why the 15.5% income tax increase. So what’s the purpose of your 4.6 point payroll tax increase? The money lent from payroll tax “to the Income Tax” can’t very well be repaid with payroll tax.

    This doesn’t seem to be getting us anywhere…

    jim glass seems to think a 2% increase in share of GDP going to feed the elderly is an unreasonable expense.

    Not at all. When I’m over age 65 I want society to pony up as much as it takes for me to eat well.

    I was just wondering how a 2% increase in the share of GDP going to Social Security would be covered by a tax increase of $1 per week on workers wages as their wages increased $10 per week.

    I didn’t even realize that the entire elderly population was dependent on Social Security to eat. Warren Buffett would be hungry today? Who knew?

    Here’s a picture of the first baby boomer to collect Social Security benefits using them to avoid hunger by sailing away from it on her yacht the First Boomer.

    personally i don’t find the idea of setting aside an extra 2% of my budget to make sure i have enough to eat when i am too old to work is an unreasonable use of my money.

    I entirely agree! And if you are taking that reasonable step now, you too will be able to afford to use your Social Security retirement benefits to buy a boat.

    Well, this is enough from me on this topic here.

  27. comment number 27 by: coberly

    glass

    i can see your problem. you’ll just have to take my word that the arithmetic works. and while Buffet will not be collecting social security (unless he paid for it) the money that goes to pay for social security will indeed be paying for the elderly to eat. and it won’t buy any yachts.

    look, jim, i don’t mean to be snarky here, but the great problem with explaining social security to people is that so many of them, like you, do not have the physical capacity to follow the numbers. that is, sadly, the reason that social security has to be a “tax” instead of a voluntary, or even commercial, program.

  28. comment number 28 by: coberly

    specifically

    yes, jim, the Trustees are political appointees. and the program to deceive from the Trustees office started in early 2001, if that suggests anything to you. the “Trustees Report” is prepared by honest people, and the numbers are reliable, even the gloss about the numbers is carefully not dishonest, but only slightly misleading. the summary that glass is reading reads almost like a peter peterson publicaton. numbers are selected for their emotional impact and likelihood of deceiving or confusing people like jim who cannot be expected to cross compare numbers and keep track of exactly what they mean. as we see here:

    “You are suggesting that the current law should be changed so the 1.74% of GDP will be covered by a 30% payroll tax increase, by 4.6 points, to 19.9% from 15.3%, instead of by a 15.5% income tax increase?”

    we have a 1.74% of GDP increase in the cost of providing basic needs for elderly people, because there will be an increasing number of elderly people, because elderly people will be living longer.

    jim seems to get confused going from a 1.74% pf GDP to a 30% increase in payroll taxes. well the base is different. 1.74% of GDP IS 30% of payroll taxes. you see the payroll tax (combined) is 12.4% of taxable wages, and taxable wages are about 38% of GDP. 30% looks scarier than 1.74% but its the same number. and since you only pay half the payroll tax, that’s 30% of 6.2% or about 2% of your pay that you would see going (extra) to the payroll tax. Moreover, when the 2% will become needed… in about 30 years, your pay will have increased by about 40%. So to get rid of the %’s that are confusing to some people (jim?), it’s like this current average pay is about 700 dollars per week. average pay in 2040 will be about 1000 (real) dollars per week. out of that the payroll tax will need (maybe) to be increased about 2% or 20 dollars per week. so you will have gained 300 dolars a week, but need to pay an extra 20 out of that to make sure you will have enough to cover your longer retirement because you are going to live longer than i will.

    back to jim: he’s worried about that 15.5% income tax increase. well here again, the base matters. he told us that the income tax was 11%, so he is talking about a 15% of 11% increase.. .155 times .11 equals .o171… or about the 1.74% of GDP we started with… or, what is more to the point, about a 2% (of payroll) increase in the income tax.

    the reason the income tax is in the picture at all is because the general fund (income tax) has been borrowing from Social Security (payroll tax). and that money needs to be paid back. the schedule for paying it back is about one tenth of one percent of payroll the first year, and going up one tenth of one percent each year for twenty years… when it reaches 2%. but at this point the debt will be paid, so the income tax can go back to what it was before. the payroll tax, on the other hand, will now need to make up that 2% in order to pay for the longer life expectancies of retired people. it turns out that the income tax base is about twice as large as the payroll tax base, so the 2% income tax is the same as a 4% raise in the payroll tax, but since the worker only pays half the payroll tax, his payroll tax raise is 2%… or about 20 dollars per week, out of a pay that is by then 300 dollars per week more than it is today. see how that works? btw, the income tax base is about twice the payroll tax base because the rich do not pay payroll tax… and this is why borrowing from the payroll tax for general governement (income tax) and then repaying the money from income tax to social security (payroll tax) is NOT a matter of uncle sam lending money to himself. that is only a misleading cartoon the Big Liars came up with to fool people like Jim.


    That seems odd, and unlikely to be enacted. How will the SS trust fund bonds be paid down then?”

    well, jim, by the income tax. that’s what we have been talking about here. but to you words don’t seem to have any meaning. the income tax will pay downd the trust fund bonds. and when they are paid off, the payroll tax will be increased by 2% to pay for the larger number of old people in the future. it’s really very simple. maybe you can find a second grade teacher to draw you a picture. it will, i admit, be harder to “get it enacted” since the congressmen seem to have the same trouble with arithmetic that you have.

    “Yes, that’s why the 15.5% income tax increase. So what’s the purpose of your 4.6 point payroll tax increase? The money lent from payroll tax “to the Income Tax” can’t very well be repaid with payroll tax.”

    we are repeating ourselves here for Jim’s benefit. the 2% income tax increase… which Jim calls a 15.5% increase…is to pay off the Trust Fund (they borrowed it, remember?). the 4.6% payroll tax increase is to pay for the old people after, (AFTER) the Trust Fund is paid back. That 4.6% is 2.3% paid by the worker and 2.3% paid by the employer. Is it getting any clearer? Jim seems to think his inability to keep track of who is paying whom for what is proof that there is something wrong with Social Security. he is not alone.

    “Not at all. When I’m over age 65 I want society to pony up as much as it takes for me to eat well.”

    you will be disappointed. society will pony up what you have paid into social security, adjusted for inflation and average wage growth. no more. this is called paying your own way. an old american tradition. all Social Security does is INSURE that your money won’t get lost, inflated away, or gambled away in some can’t lose investment plan.

    “I was just wondering how a 2% increase in the share of GDP going to Social Security would be covered by a tax increase of $1 per week on workers wages as their wages increased $10 per week.”

    it’s easy when you think about it. one tenth of one percent of 700 dollars a week is 70 cents a week. as your income goes up at the rate of ten dollars per week per year, that one tenth of one percent grows to. and it adds up. so, if i can call 70 cents a dollar close enough. the first year you pay a dollar a week more, the second year, two dollars a week more… and so on so that by the end of the twentieth year, it is twenty dollars a week more. but meanwhile your income has been growing by ten dollars a week, so that by the end of the twentieth year you are making 200 dollars a week more than when the tax increases started. but since the tax increases won’t start for another ten years, but your pay increases have already started you will be making 300 dollars a week more in 2040 than you are today, but only paying 20 dollars a week more in payroll tax. If your wages have gone from 700 dollars a week to an additional 300, they will be 1000 dollars per week. the additional 20 dollar per week tax is 2% of that. Now do you understand?

    “I didn’t even realize that the entire elderly population was dependent on Social Security to eat. Warren Buffett would be hungry today? Who knew?”

    I am afraid this shows the degree of idiocy we have to deal with here. Subtract Warren Buffet from the elderly population, and you won’t change the arithmetic one part in a hundred million. We have been talking about workers pensions here, not the rich. If you, dear reader, have a yacht, you will not need your Social Security. But like most people who have yachts who paid into Social Security you will be happy to cash your check. And no one else is paying for it but you. In fact, because of the insurance effect, that rich boomer is probably contributing a little bit to your check. But Jim wants to have it both ways. Or just mangled in what he calls his brain: we are all going to be so rich we won’t need social security but we are all too poor to pay the 2% of our pay it will cost to pay for living longer.

    “I entirely agree! And if you are taking that reasonable step now, you too will be able to afford to use your Social Security retirement benefits to buy a boat.”

    well, i am saving. through Social Security. I also have enough left over after paying Social Security, that i will be able to afford a boat…if all goes well. I am willing to gamble about the boat. I am not willing to gamble about eating.

  29. comment number 29 by: coberly

    well, it looks like jim went away.
    and i am sorry about that.

    it is hard to explain this stuff in a few minutes over email.
    especially to people who want to believe what they want to believe.

    i am sure i could explain it very clearly in about an hour in a classroom. but, sadly, i am quite sure the bad guys could convince you just as easily, or even more easily since they know how to appeal to wishful thinking and scary numbers.

    and they are not at all displeased when you skip steps, or lose track of the denominators…

    anyone know the answer?

  30. comment number 30 by: Rob in CT

    Perhaps if you weren’t such a total jerk in your posts, you might accomplish something. Maybe.

    It is possible to tell someone they are wrong tactfully, and then demonstrate it, you know.