Terrorizing The Elderly

by JoeTheEconomist August 31, 2013 10:50 AM
Monday, the government opened the season of its favorite sport: terrorizing the elderly and the infirm. Washington wants more money. So it threatens the most defendless in our society.
This is the same Secretary Jaboc Lew who signed a letter to Congress a few months back that said the Social Security Trust Fund had enough cash by ITSELF to pay benefits for more than three years (page 4). The latest figures show that the trust fund has roughly $2.8 trillion in assets. The only possible way that Social Security will not have cash sufficient to meet its bills for years to come is if the man running it is completely.
For all of its long-term financial problems, Social Security has a very solid network of near-term funding sources. The bonds held by the Social Security Trust Fund can be refinanced without adding to the total level of government debt. If the Secretary feels that the government might not be in a position to refinance the debt, he should build a cash reserve today in preparation for that possibility. On top of the trust fund, the system collects a portion of payroll taxes. If there were any truth to the letter, Secretary Lew would be fired for breach of his fiduciary responsibility.
Here is proof that reality is stranger than fiction. When Social Security has excess cash, it is required to invest it in government securities. Unfortunately, the government will not be able to issue more debt. So any excess cash would sit uninvested, while the rest of the government is unable to borrow it.
It is time to remove politics from Social Security. The system needs an independent managing trustee who does not view the elderly and infirm as cattle to prod. The idea that Social Security might not have cash to pay benefits in October is meant to create fear in the elderly rather than inform the public. It is despicable behavior.

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How Will The Government Repay The Trust Fund?

by JoeTheEconomist August 21, 2013 15:30 PM

The media is not covering the problem looming in Social Security, one which will fall on millennials much sooner than 2033. The $3 trillion question is: Where will the government get the money to repay the Trust Fund?

This is a huge question for millennials. Social Security will add $3 trillion of funding questions to a government which is already plagued by debt. Social Security will create this problem at the exact time that it is reducing its role as the nation's private banker.

When the Social Security Trust Fund redeems a bond for cash, the Treasury Department needs a source of funds with which to pay the bond. The Treasury Department has two options: It can buy the debt or it can refinance the debt through a new lender. Buying the debt means increasing tax revenue. Refinancing the debt means finding a new lender. Between 2021 and 2032, the Social Security Trust Fund is projected to redeem $3 trillion in bonds.

The media and experts tend to view this process as a seamless transaction that will go unnoticed by the markets. The problem is that today Social Security is the best customer of the US Department of Treasury, holding 2.7 trillion dollars of assets in a private pool of capital on which the government can draw at friendly rates. This reserve insulates the government from the cost of borrowing in the public markets. Basically Social Security is the government's best friend.

This friendship has been in modest decline since 2007 when Social Security generated roughly $200 billion in excess cash flow. By 2010, Social Security's operating cash flow turned negative. As Social Security excess cash flow has dropped, the government has increased its dependence on the Federal Reserve for its funding needs.

In 2021, the terms of the friendship change entirely. Social Security will start liquidating bonds in order to pay full benefits. At that time, the projected gap between the income of Social Security and its expenses will require the system to redeem bonds. In short, the best customer of the Treasury is about to become a direct competitor.

If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving so that he can open his own shoe store next door. In terms of Social Security, it isn't even clear that anyone is even paying attention.

The government should be asking who will fill the void created by the decreasing excess cash flow from Social Security if only for its own borrowing needs. The fact that Social Security will add 3 trillion dollars of incremental financing is a question that everyone should be asking.

Facts From The Social Security Administration :

The Social Security Trust Funds hold $2.7 dollars of assets. It is the largest customer of government debt in the world. The terms of 1 3/8% are fairly generous. Social Security is projected to need to start redeeming bonds in 2021. Between 2021 and 2033, Social Security will redeem a projected $3 trillion of debt.


Raising Payroll Taxes To Make Social Security Solvent Will Cost The Average Worker $73,000.

by Guest_Post July 24, 2013 12:41 PM

Over at the Jefferson Policy Journal, James Agresti spells out the consequences of raising the payroll taxes.  The article has a number of strengths.

First, it spells out very well that the employee is the ultimate source of payroll taxes.  This clarity is necesary because proponents of increasing taxes pretend that raising the employers share of payroll taxes will have no impact on the employee.

Second, it puts the cost of solvency into terms of the average worker.  He projects that raising payroll taxes to make Social Security solvent will cost the average worker $73,000.

Finally, he points out that these taxes may not save Social Security because the projections may prove overly optimistic.

About James D. Agresti:
James D. Agresti is the president of Just Facts, a nonprofit institute dedicated to researching and publishing verifiable facts about public policy. He holds a Bachelor of Science in Mechanical Engineering from Brown University and has worked as a designer of jet aircraft engines, a technical sales professional, and chief engineer of a firm that customizes helicopters.


Social Security And The 47%

by JoeTheEconomist June 21, 2013 7:27 AM

According to many pundits, the last election swung on a single quote: “There are 47 percent of the people who will vote for the president no matter what.” These writers focused on the consequences of the statement without discussing the cause.  Why does nearly half of the country have no income tax obligation?  The answer is Social Security.  Not only is Social Security a primary cause today, but more importantly the system will continue to drive this percentage of the population higher.

This isn't an exact science, but the Tax Policy Center conducted research into who the 47% are, and how they have escaped the calculations of the IRS tax code. About half have no tax obligation because they do not make much money.  So we are really looking at the 23% - those people who would pay income taxes if not for favors in the tax code.

There are two big favors in the tax code related to Social Security that reduce the income tax of Americans. Benefits from Social Security are tax-exempt; and the Earned Income Tax Credit which was created to offset the high cost of payroll taxes lowers income taxes.  The research showed that between the two as much as 75% of the “23%” are removed from the tax rolls by tax treatment rooted in Social Security. 

Roughly 44% of those with no income tax obligation are elderly (This group includes more than Social Security benefit exemptions. It also includes the extra standard deduction for the elderly and the credit for the elderly).

Social Security benefits enjoy a tax-exempt status that allows people to collect income on which they do not pay income taxes. All Social Security benefits are tax exempt. While the 1040 does include a portion of Social Security benefits in the tax calculation, any revenue collected is returned to the Social Security system; roughly $24 billion in 2011. This money isn’t a tax. It is really a means-tested claw-back which is collected by the IRS on behalf of the Social Security system.

Nearly 30% of those with no income tax obligation are dropped because of the EITC (and other child credits)

Many low-income workers don’t pay federal income taxes thanks, in part, to the earned income tax credit (EITC). Many in fact get a tax return because the EITC is a refundable credit. The earned income tax credit was created to offset the high cost of payroll taxes for lower-wage workers. The EITC has changed over time, but Congress in the mid-1970s decided that it was not economically viable for lower-wage workers to pay the full cost of Social Security taxes. The cost of the EITC was roughly 60 billion in 2010.

The tax base is a very complicated mix of policy and economics. Using linear research in a complicated world has its problems. It is difficult however to ignore the fact that every day, roughly 10,000 people trade in income-tax producing jobs for a pension which is completely exempt from income tax collection. It is difficult to ignore the fact that the cost of payroll taxes on lower wage Americans leaves very little room for income tax collection. Between the two, the 47% is going to rise.


Immigration And Social Security

by JoeTheEconomist June 17, 2013 10:13 AM

DC and its think tanks are selling the idea that Immigration Reform will help fix Social Security.  For example, "Improving Lives, Strengthening Finances: The Benefits of Immigration Reform to Social Security".  Without making any statement on the merits of Immigration Reform, there seems to be little actual research that supports the idea that Immigration Reform will improve the outlook of Social Security. 

There are not any reforms on the table for the Social Security Administration to score.  But I make the statement based on information that the SSA has already provided.

First, undocumented workers provide a stable source of unattached revenue.  When Americans pay payroll taxes, the revenue creates future costs in the form of promised benefits.  Undocumented workers cannot collect Social Security benefits.  Millions of undocumented workers pay payroll taxes by either using someone else’s Social Security card or by using a false name and Social Security number.  The Social Security Administration estimated that this revenue exceeded 10 billion dollars in 2010.  Losing free revenue cannot help Social Security.

Second, the demographic mix of workers affects Social Security.  If the immigration reform brings in a higher percentage of single workers, or high-paid workers, or workers that work longer than 35 years then immigration reform may help improve the picture of Social Security.  None of the media reports suggest that the system will enjoy more profitable demographics.  And to be clear, improve the picture of Social Security and fix Social Security are trillions of dollars apart. 

Third, immigrants tend to be a very poor demographic to add to the mix of Social Security because they do not have parents that depend upon the system.  Social Security is an electorial priority.  Voters elect Congress which sets the payroll taxes, which dictates the level of benefits.  We are adding an audience that has no value to parental support.  This change will overtime work its way into our representative government.  Unless the individual prospects of Social Security are dramatically improved for workers - we should expect immigration reform to negatively affect support for the system.

What supporters of Immigration Reform are saying is that Social Security will enjoy a boost in the number of workers.  More workers equals more revenue - but they ignore the cost of taking that revenue.  It may help Social Security in the short-term, but longer term it will make the system even more unworkable.  This is not a good trade-off for the system or the people who will depend upon the system in the future.

The point here isn't the immigration reform is wrong, but the people who tell you that Immigration Reform will fix Social Security are wrong.



The 2013 OASDI Trustees Report

by JoeTheEconomist May 31, 2013 18:04 PM
The Trustees of the Social Security Trust Funds released their annual report, read summary.  The online report was posted on Friday at  www.socialsecurity.gov/OACT/TR/2013/.

In the 2013 Annual Report to Congress, the Trustees announced:

  • The combined trust fund reserves are still growing and will continue to do so through 2020. Beginning with 2021, the cost of the program is projected to exceed income.
  • The projected point at which the combined trust fund reserves will become depleted, if Congress does not act before then, comes in 2033 – the same as projected last year. At that time, there will be sufficient income coming in to pay 77 percent of scheduled benefits.
  • The projected actuarial deficit over the 75-year long-range period is 2.72 percent of taxable payroll -- 0.05 percentage point larger than in last year’s report..
  • Program costs are projected to exceed non-interest income throughout the remainder of the 75-year period.
The system continues on course for insolvency in 2033 - but what does insolvency in Social Security mean to you?  (Read More)

Pew Research : Retirement Across Generations

by JoeTheEconomist May 30, 2013 7:55 AM

Pew Research has produced a report on the preparedness of generations for retirement. 

"When the Great Recession hit in 2007, the oldest baby boomers faced the real possibility of downward mobility just as they were entering their golden years.The downturn also heightened concerns about retirement planning—or lack of planning—by younger generations. Many younger Americans were already behind in saving for retirement, and suddenly millions of them were out of work or owned homes worth far less than they had been just a few years earlier"  (read more)

The research includes expected revenue from Social Security.  It reports the expected benefit levels to continue forever.  This will significantly overstate the preparedness of early Boomers.  According to the report, various studies have shown that pensions (such as Social Security) contribute as much as 50 percent to the household wealth projections. (See the full study)

House Committe Hearing On Social Security Reform

by JoeTheEconomist May 24, 2013 9:14 AM

The debate about Social Security reform isn’t serious.  It is noise filled with statistics that paint a picture of convenience.  This piece comes from testimony in a hearing about Social Security reform before the Ways And Means Sub-Committee.

Despite Social Security’s great success, its growth in lifetime benefits over time has been decreasingly targeted at its major goals. Even while programs for children and working families are being cut, combined lifetime benefits for couples turning 65 rise by an average of about $20,000 every year, so that couples in their mid-40s today are scheduled to get about $1.4 million in lifetime benefits, of which $700,000 is in Social Security.

What Are The Major Goals Of Social Security?

Social Security is suppose to be old-age insurance, and has virtually nothing to do with other programs for the children and working families.  What is really meant here is that the system does not serve the major goals of the person testifying.

What About The Growth Of Benefits?

In all honesty, this couple does not expect to collect $700,000 or anything close to it.

  1. When he says ‘scheduled’ he ignores the fact that this couple expects to retire after the Trust Fund is exhausted which means that they will be subjected to benefit cuts. 
  2. These people would likely trigger means-testing that would claw back benefits at more than 10% per year  
  3. These people may die before collecting a penny

But the number sounds impressive.  Well, until you consider how much this couple has contributed.  In all honesty, the couple depicted probably deserves more than $700,000.  Someone born in 1970, making 2/3rds of median income (roughly 34K in 2010) will lose about $600,000 in savings to Social Security.  In case of this couple, two people were contributing, and both made more than median income.


If Fixing Social Security Were Easy, It Would Already Be Done

by JoeTheEconomist May 7, 2013 5:48 AM

If fixing Social Security were easy, it would already be done.  Politicians are paid to hide problems, not solutions from the electorate. 

Nonetheless, the mainstream media continues to say that Social Security is an easy fix.  Typically the line runs something like “Social Security has become the focal point of entitlement debate because it's so easy to find different ways to address its funding problems.”  Basically, the hardest part of fixing Social Security is choosing from so many different options. 

A lot of the ease comes from changing the meaning of words.  The first word to lose its meaning is the word ‘fixed’.  Normally, the word ‘fixed’ means that there is no problem. In the Social Security debate, the word fixed means solvent, or the cost to make our problem a problem for our children.  Solvent and fixed are about 12 trillion dollars apart.  So, saying that fixing Social Security is easy, essentially is comparable to saying it is easy to run a 4 minute mile without telling anyone that the mile is actually only a 100 yards long.

The debate about fixing Social Security isn’t about fixing the system.  It is about paying for it.  The discussion is entirely about increasing revenue or decreasing expense.  The best example of this false dichotomy is the discussion of the COLA change to Chain-CPI.  Social Security is intended to be old-age insurance.  Yet, we are looking at a ‘fix’ which progressively reduces benefits as one gets older.  In all honesty, this is no different than fixing a broken refrigerator by calling it a doorstop.

If we are going to increase revenue, we have to understand that there are three kinds of revenue in Social Security.  The Social Security Trust Fund is funded money.  Contributions are revenue financed with the promise of future benefits.  Finally there are taxes, or the part of the part of payroll taxes on which there is no economic return.  In terms of a house, the word ‘funded’ means that you own the house.  Financed revenue is the loan from the bank.  Tax revenue means that the bank bought the house for you out of the goodness of its heart.

None of these revenue sources provides a stable solution.  Today, the Trust Fund provides about a nickel or a dime per dollar of benefits, but that contribution will go away as the Trust Fund is depleted.  Increasing the level of contributions - say immigration reform - only creates the promise of larger benefits in the future.  This enables us to postpone our problem, but creates an even larger problem for our children. 

The only other type of money in the system is taxes which is a dangerous game for old-age insurance because taxes are a political priority.  FDR rejected this model.  In 1941, he said that the contributions were vital as a means to ensure workers ‘a legal, moral, and political’ right to benefits.  He understood that taxes are dependent upon shifting political priorities.  FDR saw that contributions were the only way to make sure that ‘no damn politician could ever scrap' his program.[1] 

The other problem with increasing tax revenue for Social Security is that it makes it more difficult to raising taxes to control the debt.  We aren't raising taxes as much as we are shifting the taxbase away from debt control to Social Security.  This strategy preserves the debt load for the future generations on whom Social Security depends.

Decreasing benefits is possible, but it is difficult to sell.  The reality of decreasing benefits is that politicians would have to explain to voters that they never made a contribution on which they can expect to collect benefits.  They actually paid a tax on which they collect nothing.  This alternative is very difficult because these same politicians are the ones who have said for years that there is no problem in Social Security.

Every easy solution has a loser, and trying to convince that person that losing is winning is never easy.  So how does the media get back to easy.  We cut the benefits of future generations, and raise taxes on future generations.  It is easy to say that future generations will pay taxes that we will not.  It is easy to say future generations will accept benefit cuts that we will not.  In that context, it is very easy to say that Social Security is easy to fix. 

1 :  The exact quote is : "(Contributions) are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.” (source)

Social Security: America’s Biggest Economic Problem

by Guest_Post May 6, 2013 7:48 AM

The Social Security Trust Fund annual report to Congress is due out this week. It will be discussed in the Press for a few days. Before then, you can read Bruce Krasting's insight on the upcoming Trustees Report. 

The track record of Krasting's commentary is sound.  The one thing that we would add is that if he is correct, anyone 67 years-old or younger expects to outlive full-benefits in the system.