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