Update on the Obama “Donut Hole”
July 11th, 2008 . by economistmomPlaying more catch up… I had this clarified to me (by Obama advisor Jason Furman) earlier this week, and it was also corrected in a Washington Post story: the “donut” in Obama’s proposal to restructure Social Security taxes (lift the taxable maximum) isn’t really a symmetric “donut.” From the corrected version of the Post story:
Under current law, income up to $102,000 a year is taxed for Social Security. Obama would create a “doughnut hole” by not imposing new Social Security taxes on income between $102,000 and $250,000. His aides said income exceeding $250,000 would be taxed at a rate of 2 percent to 4 percent, rather than the 6 percent tax that people pay toward Social Security on income below the $102,000 cutoff, which is matched by their employer’s paying a 6 percent tax. Employers would probably pay an additional tax, but the total tax paid by both employee and employer would not exceed 4 percent of the amount of income earned over $250,000.
On the one hand, this avoids the 50% marginal tax rate problem, but on the other hand, this: (i) makes the new structure less progressive in the $102,000 and up range (and more regressive comparing the above-$250,000 folks with the below-$102,000 folks), and (ii) raises less revenue, which is an important consideration when one is relying on the tax side of the Social Security system in one’s plans to close the long-term gap. Tradeoffs, tradeoffs.
Just picture my original photo of the donut hole with the chocolate frosting scraped off one half!
Did he confirm that the amounts are still based on taxable wages, rather than household income?
For a two-earner couple, it’s a big difference.
Michael: Actually, I don’t think the Obama folks have pinned that one down, and they’re not having to get very specific on Social Security yet, because their core economic plan doesn’t include the Social Security tax plan.
yes, but
Social Security is not supposed to be a “progressive” tax.
it is supposed to be a workers insured savings program. taxing the rich to pay for it turns it into a welfare program. exactly what it was never supposed to be.
the way to close the projected deficit is to wait until the deficit actually emerges… or is projected to emergy under short term solvency projections (ten years) and then close it with probably a one tenth of one percent tax increase each year until the income matches the outgo. probably at a 2% tax… and this is the amount of extra savings that those workers will need to pay for their longer life expenctancies, which is the reason for the projected deficit.
if you think of social security as a “tax” just like any other tax you will always reach the wrong answer. if it is a tax like any other tax, there is no reason for the program.
something, of course, that the bad guys have been saying for 70 years… because they still don’t get it.
Regarding how the tax might be assessed (taxable individual wages versus houeshold income) you would think it would be more transparent to have it show up as additional FICA withholding rather than require greater federal tax withholding (if it were to be implemented as a tax on household income).
Does anyone know what philosophical or moral basis there is to mandate participation in a workers insured savings program — if that is a practical definition of the retirement component of social security?
Historically, I understand what happened to produce social secrity as we know it today but what are the philosophical underpinnings for keeping it in it’s current structure over the long-term?
Is it socialism? Is it progressivism–does it compare to socialism?
Aren’t there other ways to have an insured savings program without mandating a 12% tax collectively on workers and employers?
Gilleland
probably best to forget the labels and look at the facts.
The basic fact is this
work for 40 years save 12% of your income
retire for 12 years on 40% of your (prior) income.
this is not an exact formula because there are some small complications. but it is very close to the real fact.
you’ll be glad to know the employers say their share is “really” the workers’ money.
and you might be dismayed to learn that if you are going to live 20 years in retirement, the equation would need to be
changed to 40yrs X 20% = 20 yrs X 40%
and the reason you need the government is so that the retirement benefit can be paid in non-inflated dollars by the magic of pay as you go with wage indexing.
i guess the “philosophical underpinning” is that people don’t like to spend their old age hunting through dumpsters for food or sleeping under bridges. Social Security provides them with an insured way to save their own money for their own needs in old age. Sadly, it has to be a “tax” because experience has shown that most people are not smart enough to provide for themselves. and it is such a drag for the rest of us to step over their begging bodies, or pay a tax to provide them with welfare.
please note the difference between welfare and workers paying for their own retirement.
The key point here is that Obama proposes adding some tax burden to those making over $250K, without a corresponding increase in benefits. If Social Security is really a retirement insurance program, then premiums paid in should bear some resemblance to benefits paid out. Obama’s proposal turns it into more of a welfare program.
I certainly hope the tax is assessed on a household basis — just because my and my wife’s incomes are disparate doesn’t mean that we should have to pay more than a two-equal income household with the same annual income as us.
Moreover, I tend to think that Social Security tends to cause a lack of personal responsibility. I save for my own retirement — I don’t expect the government to provide. There is a significant moral hazard issue in having the government play this role, in that it incentivizes people to consume now rather than be prudent and save for the future. No one should be hunting for food in dumpsters if they (a) worked hard and did well in school, and (b) managed their finances during their working life well.
j albert
i certainly agree with you about the Obama plan turning Soc Sec into welfare, which is another way of saying destroys it.
as for the household basis etc… the basic idea of soc sec is to tax the income a fixed amount, and base the benefit on the amount taxed over a lifetime. there appear to be other features having to do with spouses and kids and stuff that are not to my way of thinking “basic” but they do address the insurance effect and don’t offend anyone’s sense of fairness.
as for “personal responsibility” and “moral hazard” these are religious concepts and don’t belong in a discussion of insurance.
does fire insurance, or car insurance, create a moral hazard. are you more likely to smoke in bed or drive drunk if you have insurance.
you need to read a lot more about the economic history of the united states before you convince yourself that poverty is a result of moral defect. otherwise you need to explain why all of a sudden 25% of the united states become morally defective in 1930.
your (a) and (b) are some help, no doubt. but no guarantee. and no excuse for moral smugness… wish i cou ldthink of the the right word . economic prig maybe.
not meant exactly as an insult. a warning perhaps.
You would think that a society that errs on the side of personal responsibility would be a healthier and more productive society over the course of time / generations — through incentives for individuals and families to provide for themselves first before having to turn to society / government for assistance.
Certainly there needs to be sufficient government regulation such that all members of society have an equal opportunity to employ their labor and inventiveness but beyond that I agree that there is a risk of excessive moral hazard in individuals abdicating responsibility through government programs. In the long run, I believe these programs weaken society especially if they continue to expand.
For the vast majority of individuals and families in this country opportunities are everywhere for education and work to become a self sustaining member of society and to take on personal accountability for their future well being. There is no doubt that some have huge advantages in wealth, family support, etc. but we’ve all seen what is possible for even the most disadvantaged in this country to rise above their circumstances and succeed.
We are at risk of undermining the wellbeing of the very people that these government programs seek to assist.
The notion of a ‘guarantee’ is interesting—social security, a government promised benefit, is considered safer than privately held assets (which could easily be government treasuries which ironically is essentially what the ‘trust fund’ is right now but in the social security account rather than in our own bank/brokerage accounts.)
It is interesting that younger workers in their 20’s and 30’s generally believe that ‘social security won’t be there for them’ (at least that is my impression and it may just be their sarcasm.) Obviously when their FICA tax rate starts to go up they will demand that it still be there for them and we know that social security as a program considered independent of the entire economic and budget picture is salvageable and sustainable (but there will be growing pressure from the overall economic and budget picture.)
In the long run, couldn’t we evolve social security to strengthen the ‘guarantee’ feature through the accumulation of private assets or private annuities with the government as a backstop similar to FDIC? And if it is a fact of human nature that a meaningful proportion of society lacks the self discipline and/or intelligence to save on their own then there can even be a level of mandatory savings – call it 12% of wages (including the portion your employer today sends to FICA on your behalf.)
I understand the transitional challenges are significant but surely it could be phased in over a long period. Perhaps it isn’t worth it? Why should we be locked into a program structured in the 1930’s–in the 21st century with all of the advances in what we’ve learned about economics and political economy can’t we do better than this?
What is it about a government program guarantee that is better than a government guarantee of the protection of privately held assets (assume if you wish a savings mandate as government regulation for lacking self discipline and/or sufficient intelligence)?
coberly — I would tend to agree that personal responsibility is not an economic concept, but think that we have to look at the real-world impact of our economic decisions. And moral hazard, I believe, is a common issue with insurance. Yes, in theory, I should be more willing to take chances with my car, knowing that I am covered if something goes wrong. In practice I don’t, because of the inconvenience and the higher insurance costs that will result.
More to the point, if Social Security is insurance, why does everyone get it? I only get a payout from my auto insurance if I have a wreck. This is what puzzles me about medical insurance — it covers routine, predictable expenses we can forecast (doctor’s visits) as opposed to unpredictable events (hospitalizations). I realize for employers it is a way of providing a substitute for income that would be used to cover those expenses, but it seems an odd type of insurance.
As for moral defect, I don’t think 25% of the U.S. became unemployed in the 1930s because of a lack of personal responsibility. But I think today’s economy is different. I went to public schools growing up, so my opportunities are available to most. I picked a profession where I can work for an employer, but also hang out my own shingle if I become unemployed. I constantly study my field, to determine trends and to see if my skills will keep me employed in the future. I always consider and plan for what I would do if I were fired tomorrow — what my next best opportunity is. I worry that far too many people don’t do these things, which are necessary for economic survival in the modern economic and global trade system. What I don’t see is why my efforts in these regards should be penalized by higher taxes on my earnings. I didn’t inherit wealth. And I don’t think my success is the result of dumb luck. Perhaps that makes me an economic prig — but I tend to think most people’s economic success is within their control.
Based on household income or wage income — unknown? Tax rate — unknown? Whether a benefit will be earned by the tax — unknown?
Such teeny weeny details to bother about.
Rather than analyse such details of the “plan” as there are to death, Andrew Biggs has proposed the entirely cynical notion that Obama, having attached the word “crisis” to Social Security early in the primaries, now on the one hand is politically compelled to say something about it. But on the other hand he has no plan and doesn’t want to propose one (not being poltically stupid — as everyone who does propose a detailed plan is beaten up for doing so) … so he is having his people release only the smallest and vaguest “clarifications” of the plan possible (clarifying so far that it will tax only very few who are very rich very lightly) only when compelled to do so.
Well, how cynical is that? Sounds about right to me.
Now that I look over there again, Andrew Biggs has estimated the effect of the Obama proposal on on Social Security’s finances. In short: not much.
coberly wrote:
The basic fact is this
work for 40 years save 12% of your income
retire for 12 years on 40% of your (prior) income.
this is not an exact formula because there are some small complications. but it is very close to the real fact.
The following excerpt from this link describes one of those complications:
According to estimates by the actuaries at the Social Security Administration, a worker with lifetime average earnings who retired in 2003 at the normal retirement age receives benefits that replace approximately 42 percent of prior earnings. Benefits are estimated to replace about 35 percent of prior earnings for high-wage earners, and about 56 percent for those with low wages.
B Davis your point being? The SSA reports 42% Coberly says 40% and you think that is something worth bolding? Without any other comment? Particularly when current projections show a somewhat lower level of benefits after 2041 if we don’t adjust tax levels? Look up ‘pedant’ and ‘pedantry’. Because if you think you just had a ‘gotcha’ moment you are sadly mistaken.
______________________
“You would think that a society that errs on the side of personal responsibility would be a healthier and more productive society over the course of time / generations — through incentives for individuals and families to provide for themselves first before having to turn to society / government for assistance.”
Yes, if you were an Ayn Rand fanboy or thought that ‘Road to Serfdom’ or the collected works of von Mise or ‘Capitalism and Freedom’ together contain all knowledge. But those of us who grew out of our ‘Fountainhead’ stage and actually studied economic history and power relations over time understand that democratic government is an imperfect but indispensible instrument to protect the many from the autocrat backed by a gang of thugs. If you need a way to ease into this concept read Heinlein’s 1940 short ‘Coventry’ or pick up any book of political or social history ever printed. Or perhaps some anthropology. Humans are social animals who have always banded together for collective security, whether that security be physical or economic. In most times and places that collective still ended up being dominated by the chief and his men, democracy is nothing that spontaneously arises, but the notion that the only real man is Autonomous John Galt is a fairy tale attractive mostly to adolescent boys who mostly (though not always) grow out of that stage.
Personal responsibility in the absense of enforceable social norms (generally exercised through the police powers of the state) is mostly a fantasy. At least if you examine it over the course of time/generations and not in the light of a libertarian world that never was and never will be.
BTW ‘you would think’ is not in fact a logical argument but instead a simple privileging of your own world view. Yes if I were you and shared your education and social situation I might very well think along the same lines, which would not mean that you and I by that fact alone were right in so thinking, instead it is more likely that we have been shaped around that social norm in a way that ends up making its existence being as invisible as air. The belief that one’s own First Principles are in fact innate to humanity at large historically turns out to be a dangerous perscription.
“More to the point, if Social Security is insurance, why does everyone get it? I only get a payout from my auto insurance if I have a wreck. This is what puzzles me about medical insurance — it covers routine, predictable expenses we can forecast (doctor’s visits) as opposed to unpredictable events (hospitalizations).”
Well not everyone is in fact covered by Social Security. As to medical insurance you are drawing a line between ‘predictable’ and ‘unpredictable’ that does not in fact exist. If you or your child ends up with a chronic condition you will in fact end up using a higher level of ‘predictable’ doctor’s visits then somebody blessed with perfect health that pops in for a routine checkup every two years or so. So risk pooling is one perfectly good answer.
But even in its absense an insurance model makes sense. Historically many, many social societies/fraternal organizations got their start as burial societies. Everyone knew that everyone would die at some point, but forcing everyone to save at the same time for a literally once in a lifetime event made much less sense than a subscription model. If everyone kicked in a few pennies every week not only did you have the comfort of knowing your funeral expenses would be covered, but that your family would have the support of the Lodge behind them, and as often as not a nice wake in your honor.
Nothing is as certain as death and taxes. Which is why most of us use withholding rather than establishing a separate account, nothing about it is particularly mandatory, but it adds a smoothing effect. And medical insurance works in the same way. Even among two individuals with identical lifetime medical needs it is convenient to be buffered away from the inevitable price spikes that would come from Mr. A breaking his leg skiing in December and Mr. B breaking his leg mountain biking in June.
So the combination of risk pooling and temporal smoothing is what makes health insurance almost mandatory for those to whom it is accessible.
Bruce
thanks. i suspect you are talking way over their heads. these people operate on the level of “soundbit therefore i think”.
i am hard pressed for time today, but here are some short answers:
Gilleland
you have been far luckier than you suppose. i guess good enough genetics so that education, and even “effort”, are meaningful concepts to you. most people probably, but certainly a very large number of people, do not have such advantages. they can be led to work. they cannot be “given incentive to work” and left to their own devices.
and, you skip rapidly past the Great Depression and assume things are different today. Well if they are different, it is because of things like Social Security and a few other aids to making the economy work so the rich get richer in spite of being really stupid about taxes.
“moral hazard” and “incentives to work” are just projections by dishonest and lazy people who think that other people are as lazy and dishonest as they are. give an ordinary worker a chance to do a good and honest job and he will break his heart for you. just don’t expect him to solve the problem of the business cycle on his own initiative.
you don’t like “a government promised benefit” then you describe Social Security exactly as a good idea: ” a level of mandatory savings” and despite what i said about many or most people not having the ability to do this on their own, the point about the mandatory savings is that they can be protected from inflation, and other losses, by the insurance principle, not by “taxing the rich” which Social Security does not do. so far.
J Albert
my comments above to Gilleland were also direct to you. you are an economic prig. you could get better, but it will take some knowledge about how the world really works. Bruce’s essay on insurance is good start. Meanwhile what you are insured agains with Social Security is arriving at old age without enough money to eat or live indoors. You suppose that ordinary prudence would take care of that without the mandatory savings-insurance of Social Security. the history of modern industrial societies says that you are wrong. the good news is that Social Security is structured in such a way that you always get your own contributions back. and yes that means the bettre off get a 35% replacement rate, the average get a 40% replacement rate, and the worst off get a 50% replacement rate. the arithmetic is such that the better off still get more than the less well off. … not as a percent, but in absolute real dollars… and you have to multiply that replacement rate by the number of years of life expectancy to see how it compares to a contribution rate of 12% over about 40 years. it’s a good investment. rate of return is not so great, but the safety is the best you can buy. not what you want to do with ALL of your savings. but a damned smart hedge.
Glass
I think Biggs is approximately correct about the Obama plan.
but you are foolish to rely on “authority” in this matter. do analyze those plans to death and you will find out that most of the “non partisand experts” are lying to you.
Wow. When you guys get into these long, philosophical debates (and with what seems to be more anger/resentment than I understand), I have to admit I’m lost. Could be my shallow understanding of the issue, I know…
On Bruce’s puzzling over B Davis’ comment on the benefits formula, my naive interpretation of the numbers B Davis highlighted was that he was just pointing out that one complication in the benefit formula is that there’s a progressive structure (the relationship between the taxable wage base and benefits differs according to income level). That’s actually why I don’t think we need to think of the tax side and the benefit side separately when it comes to evaluating or modifying the distributional effects of the Social Security system–so that there’s nothing malicious intended if one considers raising revenue for Social Security by making the Social Security tax more progressive (by raising the cap). It doesn’t mean I want to turn Social Security into a welfare program so that it will lose public support; it means I think it would be good to come up with ways to strengthen the sustainability of the program without doing so in a regressive way. One could do that by either reducing benefits in a progressive way or by raising taxes in a progressive way… and the taxes raised, by the way (in my mind at least), don’t necessarily have to be labeled Social Security taxes.
as for predictable/unpredicatble insurance “event”
the even soc sec insures against is poverty in old age. but rather than “means test” poverty, it is simpler, cheaper, and much saner to simply make the “event” “reaching 65″ and not paying according to “poverty” but paying according to “contributions” in other words you get back what you paid in.. not much more, because the event of reaching 65 is “very likely” so the premium/payout is very high. perfectly sound insurance principle.
where the insurance effect become visible is that people whose wage based contributions are not enough to pay for a minimally decent retirement, get a boost from the contributions of those whose wages put them in the “more than i need” class.
what is important to understand is that because these are based on paid premiums (taxes), and the payout IS rather low, it does not pay to game the system. you never know if you are going to be one of the very poor or relatively rich, and the return on working is higher than the return on hiding your income.
but i think i am getting into areas that require real thinking here, and that is not what the audience demands.
coberly sez:
‘…otherwise you need to explain why all of a sudden 25% of the united states become morally defective in 1930.’
The answer is well known. The newly created Federal Reserve System–supposedlyset up to do a better job of responding to banking panics than JP Morgan’s ad hoc arrangements–failed miserably in its first serious test.
Instead of rescuing the banking system–i.e. the nation’s money supply–the FED allowed it to collapse. It is a supreme irony that Ben Bernanke ended up turning the the FIRM JP Morgan to absorb Bear Stearns recently.
EconomistMom thinks:
‘I think it would be good to come up with ways to strengthen the sustainability of the program without doing so in a regressive way.’
You could simply replace SS with a negative income tax.
For what it’s worth, a 4% surtax above $250k (similar to the Diamond-Orszag plan, in that no extra benefits would be paid) would fix around 15% of the 75 year deficit and give you a few extra years on the trust fund, but compared to the gains from raising the retirement age or similar fixes it’s pretty small potatoes. As long as a President Obama is open to other changes like the NRA to build a package then this isn’t a killer, but by itself the surtax doesn’t get you very far.
M Gilleland asks:
‘In the long run, couldn’t we evolve social security to strengthen the ‘guarantee’ feature through the accumulation of private assets or private annuities with the government as a backstop similar to FDIC?’
Yup, and our neighbor to the North could show us how:
http://www.hrsdc.gc.ca/en/isp/cpp/cppchanges.shtml#highlights
They changed in 1998 to a three tier system. The first provides a bare minimum for the poorest Canadians (essentially a negative income tax).
The second tier is the Canadian Pension Plan which is a mandatory investment program, with the investments in stocks, bonds, and real estate, chosen by the Canadian govt.
Finally, the government encourages all Canadians to establish their own IRA-like plans, in their own names with the investments directed by individuals.
That’s right, the land of socialistic medicine has a capitalistic retirement system.
Mom
the problem with raising the cap right now is that right now a worker who earns at the cap his whole life and pays the maximum tax can still expect to get all of his money back with enough “interest” to beat inflation and match the growth in the economy.
raise the cap and that is no longer true. the “rich” are then paying for something they won’t get a benefit from.
i would only add that Biggs, whose heart bleeds for the future generations who will pay half a percent more for their Social Security benefits (present value, per benefit. this is not the 2% tax increase i have described)… is perfectly happy to see five years added to the sentence of future workers, who, if they were allowed to pay for their own retirement, woudl choose to retire sooner, not later.
mom,
sorry about the anger. if you had listened to as many lies, and clever liars, as i have, you’d be out of patience, too.
but Biggs is right about the Obama plan.
According to estimates by the actuaries at the Social Security Administration, a worker with lifetime average earnings who retired in 2003 at the normal retirement age receives benefits that replace approximately 42 percent of prior earnings. Benefits are estimated to replace about 35 percent of prior earnings for high-wage earners, and about 56 percent for those with low wages.
B Davis your point being? The SSA reports 42% Coberly says 40% and you think that is something worth bolding? Without any other comment? Particularly when current projections show a somewhat lower level of benefits after 2041 if we don’t adjust tax levels? Look up ‘pedant’ and ‘pedantry’. Because if you think you just had a ‘gotcha’ moment you are sadly mistaken.
And you might want to look up the phrase “jumping to conclusions”. Of course, I was not nit-picking the SSA’s 42% figure versus Coberly’s 40% figure. As economistmom properly concluded, my point was that the 40 or 42 percent figure applies just to those with lifetime average earnings. High-wage earner benefits replace a lower percentage of prior earnings and low-wage earner benefits replace a higher percentage.
In fact, I made a point of NOT jumping to conclusions and implying that Coberly was purposely being misleading on this point. He mentioned that this was not an exact formula. Hence, I simply clarified the point that this just applies to average-wage earners. As far as why I bolded the excerpt, if you look at my prior postings you’ll notice that I always put the excerpts to which I’m replying in italics and usually put excerpts from someone other than that person (including my own prior posts) in bold.
I didn’t include any other comment because I thought it was obvious that my main point was that high- and low-wage earners replace about 35 and 56 percent of their earning, significantly different from the average-wage figure of 40 to 42 percent. The main reason for this difference, of course, is the PIA formula described at this link. So, as economistmom said, one complication in the benefit formula is this progressive structure.
One might counter that this is offset by the tendency of high-wage earners to live longer. For this reason, it’s helpful to look at the OASDI Internal Real Rates of Return shown at this link. I actually find that the numbers are somewhat liberating in that they dispel some of the more negative myths that one hears about Social Security. As can be seen, early retirees (those born between 1920 and 1940) got a somewhat better return but not horribly so. Likewise, nearly all retirees born through 2004 are projected to receive a positive real return from Social Security. The only ones who aren’t are some maximum-wage earners if benefits are cut to bring them into line with income projected by the intermediate scenario. Even those will receive a nominal (not adjusted for inflation) return. In any event, the progressivity of benefits is not so extreme as to cause people to view it as a welfare program. But the fact that there already is progressivity would make it possible to simply increase that progressivity a little if necessary. In any event, the projected returns show that they are not about to fall off the edge of cliff and that all retirees can continue to receive benefits.
B. Davis there is nothing “of course” about it. You cited a range of returns and left the implication that you had responded to Dale’s argument. When challenged you expanded on your point. Which is all I asked. Thanks. I think.
Davis
thanks for clarifying. my reading of the Trustees Report is that even someone who earned at the cap his whole life will get back all of his money adjusted for inflation plus growth in average wages if he (or his wife) live twenty years after retirement.
of course he could probably have done better by investing the money (12 thousand a year) in riskier investments. but he couldn’t have known that in advance, so the “opportunity cost” amounts to an insurance premium.
i knew about the progressivity built into the benefit structure, but i can’t talk about evreything at once. that progressivity is the source of the “insurance effect.”
probably a slightly different use of “insurance” from the “opportunity cost” discussed above.
Diane a good part of my anger is that advocates of crisis won’t come clean on the economic assumptions that predict it but who assume better numbers to support their solutions, while Coberly is angered by assumptions that we have solutions cheaper than assuming the current official payroll gap.
I am dying to have you bring real numbers and real assumptions to the table. I am little older than you but still feel I can call ‘Mom!’ here.
PRS only a lunatic escapee from Angry Bear could translate ‘mandatory investment program’ to ‘capatilistic retirement system’.
If the govenment controls the contribution amount, the general allocation, and the rules for withdrawel it is not in any real sense ‘private’ at all.
my reading of the Trustees Report is that even someone who earned at the cap his whole life will get back all of his money adjusted for inflation plus growth in average wages if he (or his wife) live twenty years after retirement.
Good news, Coberly, you don’t have to figure this out for yourself!
The SSA actuaries publish “moneysworth” data that project the present value of all benefits as a % of the present value of all taxes paid to get them on average for persons in all kinds of different situations, in all different time periods.
E.g. let’s take who you said, “maximum earner”, entering the work force around today, so born 1985. And the future funding shortfall is made up by increasing the payroll tax — that’s what you favor, right? That’s one scenario they provide.
Here’s this guy’s projected benefit as % of tax paid as per the actuaries, if he’s…
Single: 48%
Married to a mid-level wage working spouse: 79% (both their benefits relative to both their taxes).
The married head of a one-earner family: 87%
That includes all benefits, disability, etc.
So go over to SSA.gov, look the stuff up, have fun, and avoid making so many mistakes by trying to figure these numbers for yourself.
After all, you know full well that SS being a paygo system, and past participants having received $14 trillion from it more than they put in from it relative to the bond rate, as a matter of arithmetic future participants must get back $14 trillion less than they put in.
As the Treasury has explained in detail in a very simple, dumbed down, but comprehensive way:
http://www.treas.gov/offices/economic-policy/briefs/SSIssueBrief1.pdf
That being the case, that young participants must take a $14T loss … and SS being “progressive” so the highest earners get the least return from it … how could maximum earners possibly get back “all their money” that they paid in?
Glasscan you spend a “present value”?
how much of that X Trillion dollars will you pay this month?
If you like phony numbers you can get all you can eat from your favorite liars.
But I am not the one who has trouble figuring things out for myself… or knowing that “a matter of arithmetic” is not always as simple as it seems, or as simple minded as you seem.
“After all, you know full well that SS being a paygo system, and past participants having received $14 trillion from it more than they put in from it relative to the bond rate, as a matter of arithmetic future participants must get back $14 trillion less than they put in.”
Jim for a guy so familiar with ssa.gov you seem to be unable to read a data table. Your number is not only outdated it misstates its case. Per Table IV.B6.—Unfunded OASDI Obligations for 1935 (Program Inception) Through the Infinite Horizon[Present values as of January 1, 2008; dollar amounts in trillions] of the 2008 Report unfunded liability from program inception to 2082 is $4.3 trillion, you have to go to Infinite Horizon to get to $13.6 trillion (up from your outdated $14 trilion). So it is not at all the case that past participants received $14 trillion more, you have confused past and future here. It would not be hard to compute how much more past participants put in than past beneficiaries took out, you simply would have to take the actual cash surpluses minus cash deficits while setting interest aside from Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2007 [Amounts in billions] in which case you would see a net cash extraction of about $1 trillion putting you off by a factor of 14 even discounting the fact that many past participants are not yet current beneficiaries and can expect to get that money back, with interest. Instead you have confused “young” with “all future” participants.
Why are Coberly and I angry sometimes? Because dolts like Jim Glass presume to sneer at us while not actually showing they have done the ’simple arithmetic’.
Jim you started with stale data, misstated its nature, and then drew a counterfactual conclusion from something you claim is “very simple” and “dumbed down”. Apparently not dumbed down enough that you grasped the difference between actual past contributions and theoretical funding gaps going forward.
BTW Coberly and I generally don’t have to resort to secondary sources like the Treasury Departments issue briefs. We read them and discuss them but generally get our actual data points right from the actual tables of the Trustees’ Annual Reports. If you did less talking down and more homework studying the actual dollar numbers as they show up in Tables VI.F7 and VI.F8 perhaps we could advance this discussion somewhat.
You seem to have confused pre-digested talking points with data mining. I suggest you stop slurping and start digging.
well, anyone
who can think with numbers needs to start by asking what does 14Trillion in “present value” mean to ME.
and then ask whether all of the assumptions used to arrive at that number make any sense in the real world.
or amount to a hill of beans.
i have already tried to help glass think this through, but he panics at the sight of real numbers, and i doubt he was ever very good at ‘word prblems,” much less algebra.
but the two issues that strike me are not especially numerical:
the first is what can anyone meaningfully say about the next 75 years, much less the “infinite horizon.” you can make prudent choices based on reasonable guesses, especially if they are near term. but no one is asking you to make a prudent choice here. they are trying to panic you into making a very very bad choice based on misleading numbers.
the second non numerical issue is what does “fair” mean when you are talking about money across genertions? those people in the future are likely to be making twice what you are making today in real dollars, and more than four times what your grandparents made in real dollars. and they will be making that much because of the work the previous generations did in preparing a way for them to make more money more easily than their grandparents. but we are being asked to throw away our own social SECURITY because some economist with made up numbers is telling us that the people in the infinite future will get half a percent less return on their investment in social security than their great grandparents got.
in an unfair….or at least changing…world the one thing we HAVE to make “fair” to the last decimal place, they tell us, is the return on Social Security. never mind that the future generations will be richeer, live longer, and have much easier jobs. and never mind that their parents and grandparents were giving them money, real money, at every step of the way.
never mind the arithmetic, this is an invitation to mental illness.
but if you do look at their arithmetic, you will find that it melts in the sun.
‘who can think with numbers needs to start by asking what does 14Trillion in “present value” mean to ME.’
That’s about as good a summary of your attitude as possible. As long as YOU can stay in denial, that’s fine for YOU.
Now, for almost everyone else….
But, what do you care about them
Patrick.
You are an open backer of a Republican Party that supports cutting heating oil assistance for seniors today and blocks funding for SCHIPS for kids who will be the new retirees of 2060. To pretend that any of this is being driven by compassion for the plight of retirees yet unborn is just to cry crocodile tears.
This rather pathetic attempt to exploit liberal guilt is pretty laughable in light of your known past record as a down the line supporter of everything Republican. The Economic Right hates Social Security and always has and it is not because of fears that it will be inadequate at some time in the future, you can see this in the fact that everyone of their plans for reforms starts with benefit cuts and so guarantees the outcome they ostensibly are worried about.
In any event the notion that the introduction of PV was done because big hearted Republicans worry about retirement security in year 76 doesn’t pass the historical test. For that matter it doesn’t really pass the laugh test.
“But what do you care about them” from PRS of all people. Wait until I tell this one to PGL, he’ll probably fall out of his chair.
If you hadn’t completely gone off your rocker before, you sure have now, Bruce. I’m not, nor ever have been, a Republican.
Both you and coberly are making fools out of yourselves as Jim Glass runs circles around you. SS has been running a checking account. Taking in deposits from workers and paying out funds to retirees.
The reality that SS paid out more to people like Ida Mae Fuller (http://www.ssa.gov/history/idapayroll.html) who paid $25 in taxes to collect almost $23,000 in benefits and millions more like her, means that someone has to pay for the Free Breakfast they enjoyed.
There are sound reasons to take into consideration the years after the 75th; to fail to do so ignores the promised benefits of year 76, 77,…. Which seriously understates the problem.
PRS you have been an open shill for the RNC for years. Which is why you have been laughed off Angry Bear for the last fuple years.
Jim Glass and now you have decided that we understand no difference between Past Participation and Present Value of future contributions. I think Diane ie honest enough to understand the difference.
Few or couple? PRS on AB fully justified the neologism ‘fuple’.
Patrick have you ever heard of something called ‘inflation’. Ida lived to be a hundred. She contributed based on an income of $150 a month and over 35 years took an average of $653/year or $54 a month in benefits. To suggest that Ida got a Free Breakfast is to reveal what a cold-hearted guy you really are.
In a civilized society we take care of our children and our elders. Somehow I think that on balance this society weathered paying Ida $1.80 a day on average over her extended lifetime.
While I guess you would have just put her on the ice floe and gave it a shove. ‘Bye, bye Ida!’
Patrick have you ever heard of something called ‘inflation’.
Ida’s $22,889 on $25 came from inflation? Did she move to Argentina?
Ida lived to be a hundred. She contributed based on an income of $150 a month and over 35 years took an average of $653/year or $54 a month in benefits. To suggest that Ida got a Free Breakfast is to reveal what a cold-hearted guy you really are.
She also got a 36.5% annual return on her contribution. Real, above-inflation return. According to SSA.
I mentioned that the SSA publishes “moneysworth” tables, well they also publish “real internal rate of return” tables, for the value of benefits relative to contributions by cohort. Ida and her cohortees received real 36.5%.
So I guess it depends on whether you consider a real 36.5% guaranteed for life (a long T-bond is only 30 years) for all of a given age a “Free Breakfast” for them.
(Give me a 36.5% real annual return for life and I’ll be buying breakfast for the whole room.)
In a civilized society we take care of our children and our elders.
And let’s look at how we do that. As per the SSA, real rates of return by birth year cohort:
1876: 36.5%
1900: 11.9%
1925: 4.8%
1950: 2.2%
1975: 1.9%
2000: 1.7%
Well, it looks like you are half right. Our elders surely were taken care of, all getting well above the market rate — for risk-free investment the T-bond rate.
OTOH, our children, guaranteed less than the risk-free rate forever, may feel that somebody’s ‘taken care of them’ in another sense of the term.
Who’d push our kids out on an ice floe like that — especially in their old age?
Bruce, thanks for sharing with me the deeper sociological purpose for collective action through a program like social security (comment 15)—I honestly want to understand your perspective. Although I don’t consider myself an Ayn Rand fanboy and have never read ‘Atlas’, I am certainly predisposed to the notions of rugged individualism and self-sufficiency in the context of a society governed by laws with individual liberty held most sacred (e.g., the constitution / bill of rights.)
Depressingly, I’m willing to concede to the notion that a significant portion of our society can’t adequately prepare for old age on their own and thus require some form of assistance from the more well off and mandatory government / collective action implemented across all of American society (and everyone can benefit even if it progressive.) What I’m still curious about of your and coberly’s perspective(s) is why a government-controlled account is preferable to a privately-controlled account in the long-run—a private account required by the government but not controlled by the government. (I think I understand that based on how social security first originated as a pay-as-you-go system that it would take a long time to transition to a private account structure.)
In other words, today social security is in the hands of 536 individuals (congress and the president) and they have the power to change social security at their discretion (granted some accountability come the following election.) Under the right circumstances, such as a scenario where there is significant overall government financing pressure, there is a good chance they will restructure social security to reduce benefits and reduce needed taxes (or avoid tax increases) and you would have no control over that. All the prior dollars you paid in have already been paid out to then current beneficiaries. They made a call (wise or unwise) that it was more important to not increase taxes rather than deliver the promised benefits.
As an alternative, wouldn’t it be preferable to know that the taxes you paid into this program were secure in an account with your name on it and protected as your own private property—where it would be an obvious violation of law for that property to be seized with out due process?
Fundamentally, you mentioned ‘the autocrat backed by a gang of thugs’ – I agree, they, in all of their forms, are threats to individual liberty. I’m concerned about all large institutions where there is concentration of power (without sufficient transparency and checks and balances) – big business, big government, big religion, etc. Through the diffusion of power as much as possible to individuals and smaller institutions I think society is better off through better protection of individuals.
I’d like us to have a long-term vision for social security that addresses the regrettable fact that some non-negligible segment of society needs assistance and can’t be relied upon to plan for themselves but shifts the locus of power from the federal government to individuals.
who can think with numbers needs to start by asking what does 14Trillion in “present value” mean to ME.
Coberly, here’s one of the few things I agree with you upon. A big part of the political problem is a whole lot of people out there think “that $40 trillion present value isn’t going to fall on ME, so what do I care?”
Of course they may not be right about that. A lot of them seem to make the rather naive mistake of believing that liabilities measured over 75 years and reduced to present value aren’t going to be felt until something like 75 years have passed. They could be in for a surprise on that one.
i have already tried to help glass think this through, but he panics at the sight of real numbers
Panic? Nah. Though $40,848 billion at present value and rising $2,100 billion annually makes me a tad nervous. Strictly selfishly, as a “ME” person — because I figure I’m going to be around long enough to be stuck paying a good bit of it. The 2020s, 2030 … they aren’t so far away
.
what can anyone meaningfully say about the next 75 years, much less the “infinite horizon.”
Couldn’t agree more about the long stuff. That’s why I refer only to CBO’s projection for 2030 of a 50% income tax increase needed, and for 2050 of a >90% one, as things are going. Alternatively, with no tax increase, GDP falling in the 2040s etc. You know, via CBO here
Those dates aren’t anywhere near 75-years out. And while you may think you helped “think through” them, all I’ve really seen is your unfortunate allergic reaction — no analytical challenge to their credibility at all.
what does “fair” mean when you are talking about money across genertions? those people in the future are likely to be making twice what you are making today in real dollars
Coberly thinks that “taxation without representation” grabbing gobs of points of GDP for oneself is “fair” as long as it is intertemporal — taxing those in the future who aren’t consulted.
But as I’ve pointed out to him before, this logic can be applied to any point in modern history — yet when the future becomes the present, it never seems to work out happily with the voters.
In 1993 Bill Clinton squeezed through a tax increase less than half the size needed by 2030 for SS alone (forget Medicare) if you believe CBO, by one vote in the House and on a tie-breaker in the Senate.
Perhaps it would have been much easier for him if he’d just told the American people “You’re all so much richer now than you were 40 years ago, why don’t y’all just pay up and be happy about it.” Gee … why didn’t he do that?
but we are being asked to throw away our own social SECURITY because some economist with made up numbers is telling us that the people in the infinite future will get half a percent less return on their investment in social security than their great grandparents got.
Your allergy is making you make up stuff again.
Nobody’s asking anybody to give up social security (though maybe Warren and Bill could take a cut without losing so much security, eh?) … lots of economists have numbers for the 2020s, ’30s, 40s, hardly an “infinite” period away … and not “half a percent less”, 34 points less than in Ida’s day.
Oh, but give Ida a break. Let’s just say around 10 points less from the days when Paul Samuelson was praising SS and Medicare with …
never mind the arithmetic, this is an invitation to mental illness.
If you don’t see the difference between “half a percent” and 10 you sure aren’t minding the arithmetic, and as to the rest…
JG wrote:
“After all, you know full well that SS being a paygo system, and past participants having received $14 trillion from it more than they put in from it relative to the bond rate, as a matter of arithmetic future participants must get back $14 trillion less than they put in.”
Bruce Webb replied:
dolts like Jim Glass presume…
The allergy is spreading. ;-(
Then….
… for a guy so familiar with ssa.gov you seem to be unable to read a data table. Your number is not only outdated it misstates its case. Per Table IV.B6.—Unfunded OASDI Obligations for 1935 (Program Inception) Through the Infinite Horizon[Present values as of January 1, 2008; dollar amounts in trillions] of the 2008 Report unfunded liability from program inception to 2082 is $4.3 trillion, you have to go to Infinite Horizon to get to $13.6 trillion (up from your outdated $14 trilion)…
And Bruce, for a fellow also so astute on Trustees reports, you know that they say that taking any truncated time period to measure balance distorts the deficit downwards for workers within that period by counting taxes they pay while not counting the cost of many of the benefits they receive — not costs for later generations of workers stretching out to “infinity”, for them.
I hate to keep quoting afore-linked dumbed-down Treasury white papers to get such simple ideas across, but as that seems to be what it takes….
Did you miss that in your reading of the Trustees Report? That the shorfall for just past and current workers is greater than for “infinity”.
BTW, among the fiscally astute like us, referring to 13.6 or 14.4 in a blog comment as “14″ isn’t an error, it’s called “rounding”.
So it is not at all the case that past participants received $14 trillion more, you have confused past and future here.
Oh, geesh…
Well, it seems that somebody who reads the Trustees Reports doesn’t understand them, not even the basic principles discussed above.
Is it the people at the Treasury writing their white papers or you?
BTW Coberly and I generally don’t have to resort to secondary sources like the Treasury Departments issue briefs…
Of course you don’t have to… But if you did, and you found them making plain statements that flat contradict the conclusions you’ve figured out for yourselves, it might help your error-checking process.
To suggest that Ida got a Free Breakfast is to reveal what a cold-hearted guy you really are.
In a civilized society we take care of our children and our elders. Somehow I think that on balance this society weathered paying Ida $1.80 a day on average over her extended lifetime.
While I guess you would have just put her on the ice floe and gave it a shove. ‘Bye, bye Ida!’
Trying to ‘box the compass” on the logical fallacies? It’s a pretty telling admission you know you’re losing the argument when you resort to this sort of emotion.
Would Ida have had to be put on an ice floe if it wasn’t for SS? How do you know?
At any rate you’ve tacitly admitted that the ECONOMICS is just what I and Jim are telling you: The free breakfast was consumed and SOMEONE is going to get to pay for it. To the tune of about $14 trillion.
it is very wearying to have to answer Gilleland, Sullivan, Glass et al. They understand nothing. But they repeat the misleading sound bites of the Big Liars. And those are “convincing enough” to fool the people who don’t have time to think these things through.
It does not matter to you or me what the first cohort of Social Security recipients got as a return on their investment. They were the beneficiaries of the fact that the program had to start somewhere. And in fact in their turn they had paid for their own parents retirements on their own… before Social Security existed… and they paid for the advantages their children got… i might have paid a little more for my granny’s benefits… but actually I was merely pre-paying for my own benefits. What the government did with “my” money while it was waiting for me to get old enough to collect my money back in benefits… really does not affect me at all. And even if it did, I know that my granny worked a lot harder for less money than I did, and she used almost all of her money to support my mother and to pay the taxes that won the war and built the economy and sent me to school and made my life so much easier and my generation so much richer than hers, that it is beyond stupidity to look at what Ida Mae Fuller got and feel cheated. It is a kind of stupidity that they used to call sin… it creates a condition of mind that anyone on the outside can look at and recognize as a disgusting disease.
may be worth saying it again. whatever the soundbites say… about Ida Fuller, or the missing 14 Trillion, or oo pays oo… these are not from the Trustees Report, but apparently from a summary prepared by the politicval appointees in full spin mode..
the basic facts are these:
everyone who pays into Social Security will get their money back in benefits adjusted (up) at least enough to make up for inflation. you’ll get that money when you need it most. and it will come from a tax you won’t even notice you are paying, unless you have gone insane.
the current tax rate is 6.2% for you and 6.2% for your employer. that adds up to 12.4%. if you adjust for inflation you can see that 40 years times 12.4% will pay for 12.4 years times 40%. actually you get a better deal than this as long as the economy is growing. if the economy is not growing, you won’t get a better deal anywhere else either.
the “projected shortfall” may come in about 30 or 40 years IF we start living much longer than we are now. If that happens it could be necessary to raise the payroll tax about 2% for the employee and 2% for the boss.
This would make the above formula look more like
40 years times 16.2% equals 16.2 years times 40%.
and this tax raise can easily be done by one tenth of one percent increases each year… about a dollar a week each year while incomes are going up by ten dollars per week each year.
i hope this is plain enough to form a framework for thought, in case anyone would rather think through what the actual money issues are instead of scaring themselves with ghost stories about ghost money paid to ghost people in the far future or the dead past.
At any rate you’ve tacitly admitted that the ECONOMICS is just what I and Jim are telling you: The free breakfast was consumed and SOMEONE is going to get to pay for it. To the tune of about $14 trillion. from Patrick Sullivan
this is complete nonsense. not only is it not “the” economics, it is not even “the accounting.”
you will pay more or less exactly what you will get back. there is NO money going to pay back bills. earlier recipients may have gotten 14 Trillion more than they paid in… i doubt it, but i really don’t know, and i don’t care… because there is NO bill that i or you or anyone will have to pay. the people who paid the money that were used to pay the benefits of the first recipients were in fact paying in advance for their own benefits. just as you and i are now paying in advance for our own beneftits. the fact that our money is currently paying the benefits of the now retired is of no more significance than the fact that the money you put into the bank is taken out by some borrower who uses it to pay for his current expenses.
PRS is too dumb to understand this, and the Big Liars are hoping you are too.