Uncertainty And Social Security

by JoeTheEconomist September 11, 2014 2:16 AM

There is probably only one widely accepted fact in the debate about Social Security reform.  The Social Security system will pay full benefits until 2033. 

Comically enough, that one fact is not true. The very bedrock of the debate about Social Security is a date that is taken out of context, and applied in ways that directly contradict the intent of the information.  The date 2033 should drive Americans to ask hard questions.  Instead this information is used as a means to quell any discussion.

The system’s ability to provide full benefits depends upon available reserves in the Social Security Trust Fund to provide a cushion for periods where the expense of the system exceeds the revenue collected. In the 2014 annual report, the Trustees estimated that the Trust Fund should last until sometime between 2028 and 2041. It says that there is roughly a 50% chance that Social Security Trust Fund will last until 2033. 

The media generally reports a very different story, one in which Social Security will pay full benefits until 2033 with certainty.  CNBC’s headline suggests: “Social Security Solvent Until 2033.”  Forbes’ contributor John Wasik reports that Social Security “is fully solvent until 2033.”  Typically the coverage says that it’s worth noting that even with no additional financing provided, Social Security will pay full benefits for almost 20 years.

The mistake is not limited to the press.  The US Treasury Department publishes a Facts Sheet, “Social Security’s retirement and disability programs have dedicated resources sufficient to cover benefits for the next 19 years, until 2033.”  It is simply not true.

These reports appear to use a completely different date far removed from its actual context.  “The dollar level of the theoretical combined trust fund reserves declines beginning in 2020 until reserves become depleted in 2033” (emphasis added.) 2033 in this context is a hypothetical outcome, not a prediction much less a guarantee.

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

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

It is important to understand that this date has limited practical use. While the theoretical economy is built on reasonable assumptions, the probability that these assumptions will materialize in concert over the entire period is infinitesimally small.  So the data is better suited to provoke a question than to provide an answer.

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

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

2014 Trustees Report

by JoeTheEconomist August 4, 2014 3:50 AM

The 2014 Trustees Report for Social Security was released on July 28th.  The coverage of that report demonstrates once again that the media is focused on the length of the fuse rather than the size of the bomb.

The report tells us that the Social Security system lost 1 year of projected solvency over the course of 2013.  Instead of providing 19 years of full benefits, the system now should provide benefits for 18.  That according to the media is the good news. Michael Hilzik of the LA Times, for example, said "The release of the annual trustees reports for Social Security and Medicare customarily give rise to an outburst of disinformation from the enemies of these social insurance programs -- that comes with the territory when you're putting out documents of hundreds of pages densely packed with graphs, charts and statistics."  It is an ironic statement coming from someone who could not possibly have read the hundreds of pages by his press deadline.  He quoted someone Kathy Ruffing who spent even less time with the matierail who apparently pronounced that there was no news in the report.

Here is the bad news : 

The actual shortfall (the cost to fix the system) increased by 1.8 trillion.  That is roughly $2 of broken promises for every $1 that the system collected from ALL sources of revenue. 

The solvency shortfall (the cost to make the problem of Boomers a problem for their children) grew by 1 trillion to more than 10 trillion dollars.  This is the cost to kick the can.

Social Security reached two dubious milestones.  2013 was the first time in history in which the average person turning 66 - that's normal retirement age - expected to live long enough to feel the impact of the shortfall.  The time frame of solvency in the Trustees Report means that more than 50% of voting age Americans expect to retire after the Trust Fund is gone.

There is a troubling side to this report.  The projections in this report vary substantially from the projections of CBO.  CBO projects that the system will pay depleted benefits in 2030 rather 2033.  That type of difference can be attributable to things like the long term jobs picture or life expectancy tables.  More troubling is the differences in the short-term picture.  CBO projects that the Social Security Trust Fund will peak in 2017 where as the Trustees put the figure at 2019.  In the short run, these projections should not be that far apart.

What is lost in all of the popular coverage is that the bomb size is growing.

 

What Are Benefit Cuts To Social Security?

by JoeTheEconomist July 18, 2014 4:12 AM

Virtually all plans to fix Social Security involve benefit cuts, and generally we caution against when the benefit cuts disportionally affect future workers. 

Why do so many plans include benefit cuts? The answer is simple.  Future benefit cuts are popular with policy makers because the people who are affected have no vote today.  In 1983, Congress changed Social Security in such a way that the maximum tax increases and benefit cuts fell on people who were 11 and younger at the time.  The problem with this approach is that these people have no vote in the discussion.  Changes like the ones we made in 1983 are largely us agreeing with ourselves that our kids will get less from Social Security than we take from it ourselves.

Why is this approach a bad idea? The answer is equally simple. The people who are affected by such policies will have a vote at some point.  Assuming that our children will vote to get less than we took is not a reasonable assumption for a system on which millions depend.  The person who was 11 in 1983, is now 42.  This audience is slightly less than 50% of voting aged Americans.  Everyone of them, is expected to retire after the Trust Fund is gone.  So our assumption is that these people will continue to vote for people who support using 12.4% of wages for a system that deliivers a negative return on average.  We are counting on a majority of Americans to vote against their own self-interest.

The question that policy makers never consider is what will happen if the majority of people start voting for politicians who are aligned with their self-interest.  Basically we haven't considered the possibility that the history of the last 100 years will repeat itself. 

Retirement and Income Security Enhancements (RAISE) Act

by JoeTheEconomist June 12, 2014 8:20 AM

Over the past six months, there has been a noticeable political push in DC for the expansion of Social Security benefits. Here is what Charles Blahous, a public trustee, wrote in response on E21 last December:

"The left’s latest proposals embody a conscious effort to recast the Social Security debate by adopting a policy position well outside of longstanding mainstream opinion."

At first glance the idea of raising benefits seems implausible given the system cannot pay the promises that it made last year.  At second glance, it seems that my former fraternity brothers hae taken over Congress, and Social Security is little more than a Friday night kegger, where the Budwiser that we can't afford is no longer sufficient.

The party-on crowd apparently has been elected to Congress, and produced legislation in the form of the Retirement and Income Security Enhancements (RAISE) Act.  The problem at my fraternity is not terribly different from the problems faced by Social Security. The entire fraternity did not like the fact that our predecessors had left us a huge bill to pay. The divide in the house was how to pay for it or whether to party on leaving a larger hole for the next round of brothers.  It isn't difficult to guess who won that discussion.

Like kegs on Friday night, everyone like more benefits from Social Security.  The problem is that no one wants to pay for them personally.  This proposal is the perfect mix of voter gratuity and minimizes the voter push-back by increasing the taxes on only those people making more than $400,000.

This proposal has nothing to do with Social Security.  It is a tax and redistribute plan from people who earn money to voters who want it.  It is a terrible idea.

Senator Rubio's Social Security Proposal

by JoeTheEconomist May 19, 2014 4:44 AM

On Tuesday, Sen. Marco Rubio (R-Fla.) outlined a number of reforms for Social Security at the National Press Club in Washington.  The press fawned, but I am not sure over what.

His speech dealt with public policy on retirement in the 21st century, including a 4-point change to Social Security

1.     Eliminate the payroll tax for anyone over age 65 who continues to work.

2.     Remove the retirement earnings test for seniors 62 and over

 3.     Raise the Social Security retirement age for those under the age of 55.

 4.     Increase benefits for low-income seniors and reduce scheduled initial benefit levels for wealthy retirees.

His words were strong. Rubio warned the audience, "(By 2038), Social Security will have been bankrupt for years. This is not a scare tactic. It is a mathematical certainty. The longer we wait to address this the harder it will be to fix, and the more disruptive those fixes will be.” These words contrasts sharply with the 2012 election in which we heard "Social Security is - you know - structurally sound."

It is refreshing to see a politician speak candidly about Social Security for all Americans. At the same time, his comments paint a clear picture that the even the most courageous politicians remain distrait from a system on which they do not depend.

Oddly enough, a considerable portion of his proposal will make Social Security less solvent. Reducing payroll taxes will not help Social Security, particularly for seniors who, as Rubio notes, may get very little in return for their contribution. Removing the retirement earnings test will only encourage more people to start drawing benefits at 62, which creates near term pressure on the system. Likewise, increasing Social Security benefits for anyone makes Social Security less solvent.

There are two parts of his policy that will improve Social Security's finances. One will increasing the age of retirement for those who are 54 and younger.  The other targets wealthy retirees for lower benefit levels. So would these adjustments rescue Social Security for those under the age of 54?

The Social Security Administration has scored similar concepts, and the results generate little confidence that Rubio's changes will add "years" as he claims. The research from the Social Security Administration suggests that it is closer to months. It isn't even possible to say that these adjustments will offset the negative impacts of his other proposals.

These are scores of comparable ideas. None of these ideas increase the exhaustion point of the Trust Fund past 2033. The Social Security Administration :

  • scored a proposal to increase the retirement age for people 54 and younger. This change addresses about 12% of the financing gap.

  •  projected that slowing the initial benefits of senior retiring in 2026 addresses 2% of the shortfall financing.

  • scored the changed to Chain-CPI would address 14% of the projected shortfall.

That assumes of course that we change the system in 2016 rather than 2026, and apply the cost controls on all seniors rather than just those who reach normal retirement age after 2026.

There are some problems with Senator Rubio's proposals. Specifically, Social Security does not have insight into a retiree's wealth. His proposals use past income which may be connected to wealth, but it isn't possible to say that his changes will even target wealthy retirees.

It is difficult to criticize someone who has the courage to step forward when no one else will. It is however a tiny step, one that does almost nothing. In the words of Senator Rubio, "anyone who is in favor of doing nothing about Social Security is in favor of bankrupting Social Security." He is effectively doing nothing.

Did Lyndon Johnson Steal From the Social Security Trust Fund?

by JoeTheEconomist May 9, 2014 2:34 AM

The debate about Social Security reform contains a certain amount of myth which has been accepted mostly through volume rather than fact. One of the most pervasive legends in the Social Security debate suggests that President Lyndon Johnson (LBJ) stole the trust fund in order to pay for Vietnam.

The Social Security Administration responds directly to this claim. The Social Security Trust Fund has never been “put into the general fund of the government.” For this myth to be fact, it would require a 50 year conspiracy that crosses administrations, political parties, and ideologies. The only word in the English language to describe this suspicion is crazy.

Yet, this belief about LBJ is so widespread that the Social Security Administration has included it on its internet myths page. And the audience isn’t an isolated conspiracy cult. For example, former Senator Jim DeMint wrote in one of his books Now Or Never, “Raiding the Social Security Trust Fund was a precedent set in 1968 by another progressive president, Lyndon B. Johnson, to help pay for the Vietnam War.”

The myth seems connected to LBJ’s proposal to move Social Security into the Federal budget. In short, yes LBJ recommended that the budget process should include the revenue and expense of Social Security. No, his recommendation did not actually move any money from Social Security. You might consider this distinction like filing a 1040 jointly with a spouse. While the 1040 form reports income and expense of both spouses, it does not move any money between accounts.

“A Presidential commission composed of distinguished congressional fiscal leaders and other prominent Americans recommended this year that we adopt a new budget approach. I am carrying out their recommendations in this year’s budget. This budget, therefore, for the first time accurately covers all Federal expenditures and all Federal receipts, including for the first time in one budget $47 billion from the social security, Medicare, highway, and other trust funds.” 

~ State Of The Union 1968

This mythos unravels over multiple layers. LBJ’s term as president expired before Social Security was moved into the Unified Budget process. There is no historical record of any money moving improperly out of the Social Security Trust Fund. And even there were a paper trail of money moving, the sums in the Trust Fund during the time of LBJ were relatively very small.

At the time, Social Security was a pay-as-you-go system, leaving almost nothing for LBJ to steal. Prior to 1983, the excess cash collected by the system in any year peaked at 5.5 billion in 1969 which is roughly $37.5 billion in today’s money. At the time, the entire balance of the Trust Fund was less than $29 billion, roughly 190 billion in 2014 dollars. In contrast, the Trust Fund today is worth roughly $2.8 trillion and throws off more than $100 billion in interest alone each year.

Beyond the denial of the Social Security Administration, Snopes dismisses the possibility. FactCheck rejects the possibility. All of these sources reach basically the same conclusion: the process which governs the movement of money hasn’t changed since 1939. When payroll taxes exceed the cost of benefits, the excess cash is invested in government securities. This is no different from a private pension buying government securities, only the government gives Social Security slightly better terms.

Millions of people depend upon Social Security.  The system has massive financial imbalances.  Yet the nation conducts the debate in cliché and hyperbole such that the more you type the righter you are.

 

Originally published on FedSmith.Com : http://www.fedsmith.com/2014/05/08/did-lyndon-johnson-steal-from-the-social-security-trust-fund/

Myths About Life Expectancy And Social Security

by JoeTheEconomist March 3, 2014 8:11 AM

H.L. Mencken once observed "For every complex problem there is an answer that is clear, simple, and wrong." If he were alive today, he could point to Social Security reform as an example.  This issue is very complex, yields a clear and simple answer: Americans are living too long. It is likely wrong.

The answer is based on data which shows life expectancy increasing from 63 in 1940 to more than 77 today. The logical conclusion is that Americans are living longer and thus receiving benefits for more years. The problem with this answer is that it combines faulty reasoning and bad data.

Increasing life expectancies does in fact create two financial burdens for Social Security.  First, it can mean that people are living longer in retirement so that they will collect benefits for a longer period of time.  Second, it also can mean that people become more likely to reach the age where they can collect benefits at all.  Yes, as Americans live longer, Social Security will pay more in benefits.

Those consequences are however only half of the story.  What the argument fails to consider is that Americans who live longer, work longer and contribute more to Social Security.  So it is very possible that rising life expectancies can improve the financial imbalances in Social Security.  It really depends upon at what age Americans are living longer.

The primary cause of this increase in life expectancy is a reduction of infant mortality.  Believe or not, fewer babies dying is a financial plus for Social Security.  Infants born after 1963 statistically will on average collect less than they contribute to Social Security.  The data from the Urban Institute a non-partisan think-tank says that an average wage worker (single or married, male or female) contributes more than he expects to collect – and that assumes every worker lives to the age of full-retirement.

Many do not.  Advances in medical science saved my brother at the age of 21.  Better doctors and better medicine allowed him to work until he died at the age of 44.  Over the 23 years of additional life, my brother contributed close to $60,000 without ever collecting a penny.  Life expectancies of Americans rose because of people like my brother, and yet Social Security made a lot of money on the increase.

This argument also ignores the way Social Security works.  The benefits formula uses the 35 highest years of earnings to compute benefits. Thus when a worker works 36 or more years, the benefits formula removes a year of earnings.   As a consequence of math, Social Security in many cases collects free money by Americans living longer.   Americans whose life expectancy extends from 55 to 67 are at times a cash-cow for Social Security.

Projecting life expectancy is not an exact science.  In fact, the Social Security Administration has faced public scrutiny over its estimation model.  I provide some research here to create some a framework for prospective. According to research from SSA,

 

·         The life expectancy of the average 30 year-old male (someone who typically has attained eligibility for benefits) increased by almost 9 years since 1940.

 

·         The average 65 year-old male in 1940 expected to live about 12 years, whereas in 2010 he expected to live 16.4 years.  Today Social Security requires people to wait an additional two years, the increase in retirement benefits based on this research would be less than 2.4 years.

 

·         Statistically, Americans are more likely to reach the age of full retirement.  In 1990, the SSA projected that someone who was 21 had a 72% of reaching full retirement-age.  The Social Security Administration reports that figure had risen to slightly less than 79% by 2009.

I wish that I could tell you that the original conclusion was completely wrong.  I can’t.  I can tell you that life expectancy of an infant is not relevant to a discussion about a pension system.  I can tell you that the conclusion is based on half the story.  If the answer is right, it has more to do with luck than research.

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Is Social Security A Good Deal?

by JoeTheEconomist February 11, 2014 6:00 AM

The question of whether Social Security is a good deal is getting more visibility.  And it is a question that deserves even more attention.
 
There is no short answer, but that doesn’t mean that people will not try to give you one.  Some say that Social Security is a good deal, and some say that it is a bad deal.  When you get a short answer, you have to understand that the answer likely does not apply to you as an individual, and it is likely scripted.

The data is real. It comes from the Social Security Administration (Moneys Worth Studies) and the Urban Institute (2013 Update). The results compare what you would have had if you had invested your contributions (including the employer's portion) to the amount of money it would take to buy the benefits that you expect to collect over time. The point here is to allow you to compare what you give to what you get on an apple to apple basis.

Through the magic of mathematics, the research computes what you would have today if you had invested the past contributions in an investment account.  The research uses the same process to calculate the value today of your expected future benefits. If you expect more in future benefits than you pay, then Social Security is a better investment than the one applied in the math.

Better should not be confused with good.  For example, almost all cars are faster than mopeds, but that does not mean that all cars are fast.  The math compares Social Security to an alternative investment.  In the case of most research about Social Security, the benchmark investment is an extremely poor one that few people would match on their own.
 
The “discount rate” determines the lifetime value of your contributions as if those contributions were invested into an account that earned interest. The Urban Institute uses 2% above inflation.  Even with the financial crisis, the lowest 45 year rolling return of the S&P is between 3 and 4%.  The rolling 45 year return of the S&P500 is normally 5% or more.  So the "lifetime-value-of-contributions" is likely to be greatly understated.
 
People can argue about what the correct rate should be.  There a number of things that you can’t argue:
 
2% above inflation is an express way to poverty.  It is insane that the government created a leg of a retirement stool that delivers a hopeless level of poverty on its citizens.
 
 
A low discount rate will make the what-you-have-contributed lower.  It will make poor returns look great. 
 
A low discount rate will make the what-you-get higher, much higher.  
 
Is Social Security a good deal?  Maybe, but it is much less of a good deal than the research suggests.

The Cost Of Doing Nothing

by JoeTheEconomist November 21, 2013 5:44 AM

The Congressional Budget Office ("CBO") projected last year that Social Security will pay depleted benefits in 2031. If so, every future retiree from now until eternity expects to outlive scheduled benefits.

CBO's projections depend upon many variables which include economic uncertainty. They are a best guess. There is only one variable that we that we can measure with certainty: Time. The cost of time is detailed on page 66 of the 2013 Trustees Report which it says, "the unfunded obligation would have increased <from 8.6 trillion> to $9.1 trillion solely due to the change in the valuation period."

During 2012, we did nothing, the cost of which was roughly $1 trillion. According to the trustees, the cost to maintain Social Security rose from 8.6 trillion in 2012 to 9.6 trillion in 2013. Basically, the system lost more money than it collected - in its entirety.

Another way to look at this dynamic is we lost more money not fixing Social Security than we spent on the entire military. If we diverted every penny that we spent on the military and education in 2012 to Social Security, the system would be slightly worse off financially at the end of 2012 than it was at the start.

Doing nothing means that we didn't change the revenue intake, benefit formula, age requirements, COLAs, nor the number of quarters to qualify. We let the system run while politicians talked. In the 14 seconds that it took Obama to say, "Social Security is structurally sound", the system lost more than $220,000.00. (more if you count the time it took Romney to agree) Watch here on YouTube

Time is not uncertain. It is a mathematical cost in equations. Every year that goes by means that the equation "discounts fewer years" and replaces a low cost year with a high cost "outer" year. Because of the equations we know that Time will cost more in 2013 than it did in 2012.  So we know with mathematical certainty that Time will add more than $500 billion to the cost of Social Security in 2013 because of nothing being done.

Politicians will tell you that we have time to fix Social Security. Comically enough, time is the one thing that we know for certain will make Social Security worse.

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Media Failure

by JoeTheEconomist October 25, 2013 10:37 AM

The Social Security debate is at a stand-still because the media is unwilling to do its job.  CNBC recently ran an interview in which the interviewee went on a rant.  It is fine for the man to believe this non-sense, but it is irresponsible of CNBC to provide information to the public that it knows to be untrue.

 

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