Wednesday, May 24, 2006

Cost of Inactivity 3: Response to Karlsfini (and apologies)

(Karlsfini did not authorize me to repost his question from MaxSpeak.)

Bruce, what version of spell check are you using that tags "Regan" and not "Reagan"?

Also, why not just say what's on your mind here where the comments are turned on, rather than try to move the party somewhere else?

A free an open discussion -- that's what we like.
Karlsfini | 05.24.06 - 9:53 am | #

Well I usually start with the only Spell Checker they had when I was a kid, the one inside my head. And "Spell Check is your Friend" is snark for "You are not going to be taken seriously if you repeatedly misspell the name of a recent President" particularly one who is practically a God to the economic Right.

As to your underlying question I would respond forever to this thread if engaged by serious thinkers addressing the issue. It just looked like between Pinky, Bob and Bill a certain amount of "je ne sais quoi" had left this thread.

But I am playing with a mental gambling game I call "Social Security: the Cost of Inaction". It starts with this formula:

A=Social Security payroll gap from year one report times year one payroll income:

Y1Gap x I. Using 2005 as year one and me as example this works out to 1.89% x $50,000.

B=Difference in payroll gap from year two report time year two payroll income times years to retirement.

Y2Gap-Y1Gap x I x Y. Using 2006 as year two (1.92% gap) and me as example this works out to .03% x $51,000 x 17.

The Price of Inaction is B - A.

Now when Bruce is playing this game we get $50,000 x 1.89% = $945. And then $51,000 x .03% = $15.30 x 17 years to retirement = $260.10

Cost of inaction to Bruce in 2005 $260.10 - $945 = -$684.9. That is $685 2005 dollars left in my pocket. Given that both interest and inflation work in my favor here that is the rock bottom cost to me of doing nothing.

Now take somebody we will call "Andy". Andy just graduated from Wharton at 24 in 2004 with an MBA that enables him to take a job on the Street which pays close to the maximum for 2005. How does Andy fare. Well $90,000 x 1.89% = $1701. And $1701 x .03 = $27.30 x 42 = $1146.60. Cost of inaction to Andy in 2005. $1146.60 - $1701 = -$554.40. Now given that interest and inflation are working a lot better for Andy than they are for Bruce, not taking action in 2005 on Social Security put real 2005 dollars in everybody's pocket.

Those who claim that the cost of inaction is $600 billion or $160 billion would be well served to play this game. If you believe that the economic numbers will produce better results than 2006 Intermediate Cost and so lower payroll gap next year than doing nothing is a dead pipe cinch. The 2006 dollars left in your pocket clearly were not needed after all and can be invested or spent. If the payroll gap ticks up than you need to play the game. Are your immediate savings in not taking the tax hit outweighed by your increased tax burden between now and retirement?

Crisismongers insist that if Intermediate Cost holds true payroll gap goes to 12% at depletion. Well fine. I won't be paying payroll tax at currently projected depletion. Some of you will. Well play the game. If there is no increase in payroll gap, i.e. if it stays at 1.92% inaction costs you literally less than nothing. Only if the increase in payroll gap times your income going forward times your years to retirement exceed the dollars left in your pocket (even ignoring the postive effects of interest and inflation on those pocketed dollars) is action even needed.

It would take some pretty sharp spikes in payroll gap year to year to make Inaction a bad bet. .0003 x your 2006 income (.03%) is not much of a bite compared to keeping .0192 x your 2006 income (1.92%) in your pocket.

Take it year by year. Ignore the 75 year or Infinite Future projections. Are you going to have more or less dollars in your pocket this year by doing nothing? Understanding that doing nothing is going to cost you no more, and probably less, going forward than doing something?

Privatizers don't want you to do the math. I'll be glad to respond here, there and everywhere, but Karlsfini just between you and me I think this is likely a dead thread.

But thanks for letting me organize my thoughts. And thank you Max

Tuesday, May 23, 2006

Cost of Inactivity 2: Lets get Historical

Revert to the last post:
Cost of Inactivity I and look at the numbers from the past Reports.

Let's say someone actually started paying attention to the numbers back in 1997, downloading the Reports and looking at the numbers. Well in that Report the price of inactivity was 2.23% of payroll. People paying attention would have to admit that keeping 2.23% of payroll in pocket that year would have to be offset by increased payouts in years forward. Well lets say I was making $32,000 back then compared to $50,000 now. My cost for a permanent fix? $713 dollars a year plus whatever increases in income I gained between then and now. Which at $50,000 would be $1150 a year.

Well I could do the arithmetic and maybe will but I am looking at roughly $8000 plus accumulated interest as the cost of doing nothing and what is the cost of my not accepting a 2.23% boost in payroll back in 1997? 1.92% going forward.

Crisis mongers who insisted that we would pay and pay for doing nothing back then need to return to their abacuses. Thousands left in my pocket since then and a smaller bite going forward.

The math continues in Part 3 of Cost of Inactivity.

The Cost of Inactivity: Nothing as a Plan for Soc Sec

This will be a work in progress for a while, but I will publish it anyway. e-mail criticism and commentary to are welcome.

Can we quantify the price of inaction on Social Security? My starting point is this table from EPI Changes in Trustees Projections Over Time.
Note these are not EPI numbers, these are official numbers from the Annual Reports: "Source: Annual Reports of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, 1996-2004."

Trustee report date
1996 1997 1998 1999 2000 2004
Year when tax revenue falls short of benefits
2012 2012 2013 2014 2015 2018
Year when trust fund income falls below expenditures
2019 2019 2021 2022 2024 2028
Trust fund depletion date
2029 2029 2032 2034 2037 2042
Shortfall as a share of taxable payroll
2.19% 2.23% 2.19% 2.07% 1.89% 1.89%

Now let the fun begin. My oh my plenty of numeric fun to be added.

What is the cost of doing nothing? I mean real cost in terms of dollars and cents to a particular worker in postponing Social Security reform by a year? Now there has been some learned talk at MaxSpeak and DeLong on May 22 and 23 about what are the costs of inaction, but they all assume that the current economic and demographic model of Social Security is valid and the proper focus point is the outcomes five, ten, seventy-five and God Help Us, Infinite Future out. Well no I propose to put this whole discussion on the Short Term. What is the cost of postponing action this year given what we know about the year just past and the year now ongoing?

Lets start with a real example. The 2004 Report declared that an immediate increase of 1.89% of payroll would be enough to fully fund Social Security with no changes in benefits or retirement age. This under the Intermediate Cost assumptions. Now the 2005 Report declared that the gap is now 1.92%. Worrisome? Well lets whip out the calculator.

Per the Trustees NOT taking action in 2004 in the face of a 1.89% payroll gap left the $50,000 earner with $945 in his pocket. What were the negative consequences? Well the 2005 Report gives us 1.92% payroll gap. Well translate this into dollars. I have $945 left with every opportunity to invest or spend with whatever utility I would get from that spending and what is my downside? Well it is an additional .03% of payroll taxes going forward. Which for our $50,000 earner is $15 a year going forward. Well I have 17 years to retirement which means my total actual cost going forward for pocketing that $945 is 17 x $15 which equals $255. Not doing anything, and discounting for inflation and interest I could earn on that $945 over the next 17 years and I am still $690 ahead in current dollars.

If the payroll gap stays steady, as it did from 2000 to 2005, then you are ahead by exactly the amount of the payroll gap multiplied by your income plus whatever current and future interest you would earn on that amount.