Entry page
Table of Contents
List of Tables
List of Figures
Economic Assumptions under the Three Alternatives
Trust Fund Ratio under the Three Alternatives
Tuesday, April 24, 2007
Wednesday, January 31, 2007
2006 Year End Balances
From the Bureau of Public Debt Dec 2006 Report
OAS Old Age Survivors:$1,845,338,897,223.25
DI Disability $203,922,695,075.07
Total: $2.0492 trillion
Low Cost projection: $2.0380 trillion
Intermediate Cost: $2.0353 trillion
The first year difference between fully funded Low Cost and an Intermediate Cost that goes to zero in 2041 is $2.7 billion. Not only did we hit Low Cost, we beat it by $11.2 billion.
The Trust Fund just isn't broke. By the numbers.
OAS Old Age Survivors:$1,845,338,897,223.25
DI Disability $203,922,695,075.07
Total: $2.0492 trillion
Low Cost projection: $2.0380 trillion
Intermediate Cost: $2.0353 trillion
The first year difference between fully funded Low Cost and an Intermediate Cost that goes to zero in 2041 is $2.7 billion. Not only did we hit Low Cost, we beat it by $11.2 billion.
The Trust Fund just isn't broke. By the numbers.
Monday, July 10, 2006
Guide to the Bruce Webb
This blog started as a convenient place to put links to the various Reports of the Trustees of Social Security along with some commentary. Well its original main purpose has been obscured so let me restore that a bit:
The Reports
2007 Report
2006 Report
2005 Report
2004 Report
2003 Report
2002 Report
2001 Report
2000 Report
The Fundamentals
Social Security is not Broke: by the Numbers
Social Security: is it about Solvency or about Ayn Rand
Social Security After 'Crisis'
Cost of Inactivity: 'Nothing' as a Plan for Social Security
Goldilocks and the Three Social Security Bears
Interest on Interest: a Threat
Invest or Divert? Lets do Both
Unleash your Inner FDR: Social Security as Political Opportunity
The Reports
2007 Report
2006 Report
2005 Report
2004 Report
2003 Report
2002 Report
2001 Report
2000 Report
The Fundamentals
Social Security is not Broke: by the Numbers
Social Security: is it about Solvency or about Ayn Rand
Social Security After 'Crisis'
Cost of Inactivity: 'Nothing' as a Plan for Social Security
Goldilocks and the Three Social Security Bears
Interest on Interest: a Threat
Invest or Divert? Lets do Both
Unleash your Inner FDR: Social Security as Political Opportunity
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
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.
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 mailto:bruce.webb2@verizon.net 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.
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.
Monday, February 13, 2006
2006 Report: Live
These links now work. I created them in February anticipating the release of the Report by March 31st, instead they delayed the Report until May 1 and then released the key data point with an asterix. Did 2005 productivity grow at 2.0% or somewhere North of that?
Entry page
Table of Contents
List of Tables
List of Figures
Economic Assumptions under the Three Alternatives
Trust Fund Ratio under the Three Alternatives
Entry page
Table of Contents
List of Tables
List of Figures
Economic Assumptions under the Three Alternatives
Trust Fund Ratio under the Three Alternatives
Sunday, January 08, 2006
Invest or Divert
Let's do both.
Social Security financing projected forward is complicated by a confusion of first and second order income streams. Now Cost is pretty fixed, it varies depending on your assumptions about Real Wages, CPI and various demographic figures but is conceptually easy. Each month a certain number of checks in certain amounts have to be mailed out. But income is conceptually more difficult and requires some breakdown.
The simplest component is Payroll Tax. 12.4% of every paycheck up to about $90,000 flows to the Treasury each pay period. No one questions that this is real money really extracted from the real economy. A lesser known component is taxation on benefits. In some cases higher earning beneficiaries pay tax on their benefits. This gets a little murkier. If this tax was applied across the board as a simple reduction in benefits at the top end of recipients this would not show as an economic extraction from the real economy at all. It is only because it is applied to checks actually mailed out that it even appears as an extraction from the real economy. A third component is interest on excess payroll tax invested in Special Treasuries. This money is pretty real as well. To the extent that borrowing from the Trust Fund just replaces other borrowing (a question for another day), these are just dollars the Treasury would have been paying out to some other investor. But then comes the dread Interest on Interest
Now there are Papa Bear scenarios which would have payroll tax and taxation of benefits fully capable of covering costs forever, and then some. See Goldilocks and the Three Social Security Bears. If this happens our conceptual course forward is pretty simple. We invest the interest on the existing bonds and any principal payment in alternative economic vehicles (my choice would be Municipal and School bonds) and then direct the returns from that back into the income stream. But if payroll is more than handling cost what do we do with the overage? One answer is to split it in thirds: one third to be reinvested, one third in payroll tax cuts, and another third diverted to Medicare (others might balance the ratios otherwise). Now given that the General Fund under this scenario is gamefully kicking in its $100,000,000,000 in interest owed, or even making additional payments on the principal, we end up with a portfolio that is not only steadily reducing payroll tax but kicking in substantial amounts to Medicare besides. All while capping the General Funds responsibility to actual interest owed.
There are other Papa Bear scenarios that are not so rosy. But they all have the same end benefit to the General Fund. If we just started paying out interest in full in the form of buying alternative instruments for the Trust Fund and keep economic productivity anywhere above Baby Bear's 2.1% ultimately we just dig ourselves out of the hole. Depending on how close we get to Baby Bear we may end up having to tap some proportion of the Alternative Portfolio. But in each case we evade the Interest on Interest trap.
Sounds like a fairy tale? Put on your green eyeshades and run the numbers.
Social Security financing projected forward is complicated by a confusion of first and second order income streams. Now Cost is pretty fixed, it varies depending on your assumptions about Real Wages, CPI and various demographic figures but is conceptually easy. Each month a certain number of checks in certain amounts have to be mailed out. But income is conceptually more difficult and requires some breakdown.
The simplest component is Payroll Tax. 12.4% of every paycheck up to about $90,000 flows to the Treasury each pay period. No one questions that this is real money really extracted from the real economy. A lesser known component is taxation on benefits. In some cases higher earning beneficiaries pay tax on their benefits. This gets a little murkier. If this tax was applied across the board as a simple reduction in benefits at the top end of recipients this would not show as an economic extraction from the real economy at all. It is only because it is applied to checks actually mailed out that it even appears as an extraction from the real economy. A third component is interest on excess payroll tax invested in Special Treasuries. This money is pretty real as well. To the extent that borrowing from the Trust Fund just replaces other borrowing (a question for another day), these are just dollars the Treasury would have been paying out to some other investor. But then comes the dread Interest on Interest
Now there are Papa Bear scenarios which would have payroll tax and taxation of benefits fully capable of covering costs forever, and then some. See Goldilocks and the Three Social Security Bears. If this happens our conceptual course forward is pretty simple. We invest the interest on the existing bonds and any principal payment in alternative economic vehicles (my choice would be Municipal and School bonds) and then direct the returns from that back into the income stream. But if payroll is more than handling cost what do we do with the overage? One answer is to split it in thirds: one third to be reinvested, one third in payroll tax cuts, and another third diverted to Medicare (others might balance the ratios otherwise). Now given that the General Fund under this scenario is gamefully kicking in its $100,000,000,000 in interest owed, or even making additional payments on the principal, we end up with a portfolio that is not only steadily reducing payroll tax but kicking in substantial amounts to Medicare besides. All while capping the General Funds responsibility to actual interest owed.
There are other Papa Bear scenarios that are not so rosy. But they all have the same end benefit to the General Fund. If we just started paying out interest in full in the form of buying alternative instruments for the Trust Fund and keep economic productivity anywhere above Baby Bear's 2.1% ultimately we just dig ourselves out of the hole. Depending on how close we get to Baby Bear we may end up having to tap some proportion of the Alternative Portfolio. But in each case we evade the Interest on Interest trap.
Sounds like a fairy tale? Put on your green eyeshades and run the numbers.
Goldilocks and the Three Social Security Bears
I just updated a new diary at MyDD with the above title Goldilocks rather than repost it here, I would refer you there where if you wanted you could login (or set up a Scoop account if you are not already a member) and comment.
To summarize: the current model used by the Social Security Trustees, that of presenting Low Cost, Intermediate Cost, and High Cost as a range of economic outcomes has broken down and it has become necessary to reformulate the models. Which process becomes easier by renaming them. I use the Three Bears.
Baby Bear replaces Low Cost. Baby Bear is a model that produces a fully funded Trust Fund with a flat Trust Fund Ratio. This is in practice what Low Cost has produced for the last decade What is the Low Cost Alternative. Rather than argue whether it is an optimistic number or not, or likely to come to pass or not, we can take it for the question it answers: "What set of economic and demographic numbers gives us fully funded Social Security with a flat Trust Fund Ratio?". Which is to say which is the perfect porridge, not too hot and not too cold.
Mama Bear replaces both Intermediate and High Cost. Take Baby Bear and assume the economy performs worse. Once again we need not worry too much about whether this is realistic or not. It is just a model that projects the effects of an economy whose porridge is too cold.
Papa Bear is new on the scene. Papa relies on the economy producing a better result than Low Cost. Now where you set Papa could set off endless debate. I suggest a simple mechanism: just replace the previously projected second year numbers with the numbers just in. For example the 2005 Report projected a set of numbers for 2005 and another for 2006 and then more for the out years. Leaving the numbers for the out years alone, simply substitute real world 2005 for originally projected 2006 and then do the math. Now this porridge is not particularly hot, the assumption that the economy will perform for a single year pretty much as it did in the past year and then dive back down to the numbers of Baby Bear is not optimistic at all. But it does produce a computable surplus above and beyond what is needed to fully fund Social Security. At least it does this year.
The diary goes on to propose a complicated and not totally thought out mechanism for diverting this one year surplus to other uses, either as a rebate or to Medicare. The key is that we avoid the debate about whether we can predict the economy three years, ten years or seventy five years out. Baby Bear is a model which produces a specific desired result. Papa Bear is a testable model: by the end of the very next year you can determine whether you were correct or not. And in between is a mechanism that regulates the flow of income excluding interest into the Trust Fund.
There is another component. Baby Bear assumes that the Trust Fund is real, that the interest on the Trust Fund is real, and most importantly that the interest on the interest of the Trust Fund is real. The latter is the problem. See the post below.
To summarize: the current model used by the Social Security Trustees, that of presenting Low Cost, Intermediate Cost, and High Cost as a range of economic outcomes has broken down and it has become necessary to reformulate the models. Which process becomes easier by renaming them. I use the Three Bears.
Baby Bear replaces Low Cost. Baby Bear is a model that produces a fully funded Trust Fund with a flat Trust Fund Ratio. This is in practice what Low Cost has produced for the last decade What is the Low Cost Alternative. Rather than argue whether it is an optimistic number or not, or likely to come to pass or not, we can take it for the question it answers: "What set of economic and demographic numbers gives us fully funded Social Security with a flat Trust Fund Ratio?". Which is to say which is the perfect porridge, not too hot and not too cold.
Mama Bear replaces both Intermediate and High Cost. Take Baby Bear and assume the economy performs worse. Once again we need not worry too much about whether this is realistic or not. It is just a model that projects the effects of an economy whose porridge is too cold.
Papa Bear is new on the scene. Papa relies on the economy producing a better result than Low Cost. Now where you set Papa could set off endless debate. I suggest a simple mechanism: just replace the previously projected second year numbers with the numbers just in. For example the 2005 Report projected a set of numbers for 2005 and another for 2006 and then more for the out years. Leaving the numbers for the out years alone, simply substitute real world 2005 for originally projected 2006 and then do the math. Now this porridge is not particularly hot, the assumption that the economy will perform for a single year pretty much as it did in the past year and then dive back down to the numbers of Baby Bear is not optimistic at all. But it does produce a computable surplus above and beyond what is needed to fully fund Social Security. At least it does this year.
The diary goes on to propose a complicated and not totally thought out mechanism for diverting this one year surplus to other uses, either as a rebate or to Medicare. The key is that we avoid the debate about whether we can predict the economy three years, ten years or seventy five years out. Baby Bear is a model which produces a specific desired result. Papa Bear is a testable model: by the end of the very next year you can determine whether you were correct or not. And in between is a mechanism that regulates the flow of income excluding interest into the Trust Fund.
There is another component. Baby Bear assumes that the Trust Fund is real, that the interest on the Trust Fund is real, and most importantly that the interest on the interest of the Trust Fund is real. The latter is the problem. See the post below.
Interest on Interest: a threat
The Treasury Bonds in the Trust Fund are real. At least those purchased by current payroll tax dollars. They are the product of actual payroll dollars extracted from real paychecks. And in turn the interest earned on those Bonds is real. The General Fund would have had to pay those same dollars to a bond investor if they didn't have the Trust Fund to borrow from instead.
But the Interest on the Interest is more troubling. It is second order. The General Fund is simply assuming an obligation for the convenience of not reducing the current payroll tax to make it a real pay-go system. Now the decision to raise payroll taxes in 1983 was perfectly necessary, for the most part it just restored paygo, the amount of excess payroll tax over cost actually collected is vastly overestimated by just about eveyone, the Trust Fund did not break the $100 billion mark until 1988. And investing the suplus in Special Treasuries was equally sensible, why set up any elaborate system when the whole Fund would be depleted by 2023 anyway.
But 2023 has now turned into 2041, and given not very extraordinary numbers may begin to stretch out even farther. Now the effect of reinvesting the interest in the Special Treasuries back into Special Treasures starts to bite. The General Fund starts assuming an unfunded liability, one that compounds over time as interest on interest starts to pile up. Now no one who believes in the Full Faith and Credit of the United States (and I certainly do) doesn't agree that that money is owed, the question is whether this is the best way to do it in the interests of all taxpayers in the future.
And the answer is 'No'. Given that the Trust Fund will likely be in surplus well past 2041 and perhaps forever we need to reexamine how we manage it. And the answer is pretty clear: stop reinvesting interest into Treasuries. It doesn't produce real cash flow into the Treasury, it just masks the cost of borrowing. The solution is obvious, interest on existing Treasuries and any excess of income excluding interest over current cost needs to be invested in an alternative economic vehicle. In the short term this means some borrowing pain, in the long term it shifts the reponsibility for redeeming those assets off of the General Fund. Moreover it offers the opportunity for the General Fund to eliminate any responsibility long term. If in addition to taking all interest on the current Trust Fund into other vehicles, it actually start to pay down the current principal it gradually reduces its interest burdens overall.
But given the actual financing of Social Security this means reducing the flow of other income into the system. Which means cutting the tax on Social Security benefits that applies to more affluent recipients (a relatively small amount of income) or cutting or diverting a portion of the payroll tax.
But the Interest on the Interest is more troubling. It is second order. The General Fund is simply assuming an obligation for the convenience of not reducing the current payroll tax to make it a real pay-go system. Now the decision to raise payroll taxes in 1983 was perfectly necessary, for the most part it just restored paygo, the amount of excess payroll tax over cost actually collected is vastly overestimated by just about eveyone, the Trust Fund did not break the $100 billion mark until 1988. And investing the suplus in Special Treasuries was equally sensible, why set up any elaborate system when the whole Fund would be depleted by 2023 anyway.
But 2023 has now turned into 2041, and given not very extraordinary numbers may begin to stretch out even farther. Now the effect of reinvesting the interest in the Special Treasuries back into Special Treasures starts to bite. The General Fund starts assuming an unfunded liability, one that compounds over time as interest on interest starts to pile up. Now no one who believes in the Full Faith and Credit of the United States (and I certainly do) doesn't agree that that money is owed, the question is whether this is the best way to do it in the interests of all taxpayers in the future.
And the answer is 'No'. Given that the Trust Fund will likely be in surplus well past 2041 and perhaps forever we need to reexamine how we manage it. And the answer is pretty clear: stop reinvesting interest into Treasuries. It doesn't produce real cash flow into the Treasury, it just masks the cost of borrowing. The solution is obvious, interest on existing Treasuries and any excess of income excluding interest over current cost needs to be invested in an alternative economic vehicle. In the short term this means some borrowing pain, in the long term it shifts the reponsibility for redeeming those assets off of the General Fund. Moreover it offers the opportunity for the General Fund to eliminate any responsibility long term. If in addition to taking all interest on the current Trust Fund into other vehicles, it actually start to pay down the current principal it gradually reduces its interest burdens overall.
But given the actual financing of Social Security this means reducing the flow of other income into the system. Which means cutting the tax on Social Security benefits that applies to more affluent recipients (a relatively small amount of income) or cutting or diverting a portion of the payroll tax.
Saturday, October 22, 2005
Unleash your Inner FDR: Social Security as Opportunity
Time for Politics.
Social Security offers the opportunity to reverse a whole generation of political defensivism on the part of Democrats. We have the unique chance of changing the entire narrative.
Because Social Security "crisis" is not a matter of numbers, not really, it is a story in support of an ideology which can be boiled down to "Markets Good, Government Bad". This story has been carefully crafted for seventy years and finally got its opportunity to be put in play in 1980 with the election of Ronald "Government is not the solution, government is the problem" Reagan.
As it turns out Reagan was forced to compromise on Social Security in 1983 and accept an increase in payroll tax. The response of the Social Security haters was then laid out in the Fall 1983 issue of the Cato Journal Social Security: Continuing Crisis or Real Reform? Particularly illuminating is the article by Butler and Germanis "Achieving Social Security Reform: A “Leninist” Strategy". They laid out a careful, long term strategy that would allow them to kill Social Security at the next crisis point, which point was projected to coincide with the retirement of the first Boomers, which would start as early as 2008. According to the story the impact of Boomer Retirement would send the whole edifice crashing leaving Private Accounts standing triumphant.
But history and the economy did not play nice. They conspired to return economic numbers that started to push shortfall and depletion back. This trend accelerated in the nineties and can be inspected here Economics Policy Institute: Changes in Trustees Projections over time. A Trust Fund that was projected to run dry in 2023 was over a period of years adjusted to a Trust Fund projected to run out in 2041, and that date was being pushed back more than 1.3 years per year.
Privatizers panicked. Their carefully generated narrative began to lose its punch. In 2041 the youngest Boomer (born in 1964) will be seventy four, the oldest (born in 1946) ninety-six. It would be pretty hard to argue that they in fact had not fully paid for their Social Security themselves. So privatizers began to tweak the numbers and move the goalposts. In doing so they had to cast doubt on the very existence of the Trust Fund. Hence the talk of "worthless IOUs". But even this new story is losing its impact.
Because amazingly enough we may not even need to tap the Trust Fund principal, we may need at worst to tap a fraction of the interest due. Because we are soundly beating the productivity numbers required by Low Cost.What is the Low Cost Alternative: What does it mean and Low Cost predicts just that: a minor shortfall in income less interest against cost in 2023 which is more than offset by interest earned. Absent some future government proving themselves to be Crooks and Liars in abrograting Trust Fund bonds issued with the Full Trust and Credit of the United States beating Low Cost means we are home free.
But it might well be better than that. The economy is returning productivity numbers close to double what Low Cost requires, and minor changes in productivity in the early years have outsized impacts on the Trust Fund in the outyears. As it sits we may have a Trust Fund that is actually overfunded going forward. And that is our opportunity.
Imagine a March 2006 Report that announces that not only will Social Security not be going broke, it will be a net lender forever. That shows that privatizers pushing "Crisis" were not just alarmists but outright liars trying to sabotage the legacy of Roosevelt. Do you think we could run with that? Do you think we could run ON that? Well I do.
Social Security offers the opportunity to reverse a whole generation of political defensivism on the part of Democrats. We have the unique chance of changing the entire narrative.
Because Social Security "crisis" is not a matter of numbers, not really, it is a story in support of an ideology which can be boiled down to "Markets Good, Government Bad". This story has been carefully crafted for seventy years and finally got its opportunity to be put in play in 1980 with the election of Ronald "Government is not the solution, government is the problem" Reagan.
As it turns out Reagan was forced to compromise on Social Security in 1983 and accept an increase in payroll tax. The response of the Social Security haters was then laid out in the Fall 1983 issue of the Cato Journal Social Security: Continuing Crisis or Real Reform? Particularly illuminating is the article by Butler and Germanis "Achieving Social Security Reform: A “Leninist” Strategy". They laid out a careful, long term strategy that would allow them to kill Social Security at the next crisis point, which point was projected to coincide with the retirement of the first Boomers, which would start as early as 2008. According to the story the impact of Boomer Retirement would send the whole edifice crashing leaving Private Accounts standing triumphant.
But history and the economy did not play nice. They conspired to return economic numbers that started to push shortfall and depletion back. This trend accelerated in the nineties and can be inspected here Economics Policy Institute: Changes in Trustees Projections over time. A Trust Fund that was projected to run dry in 2023 was over a period of years adjusted to a Trust Fund projected to run out in 2041, and that date was being pushed back more than 1.3 years per year.
Privatizers panicked. Their carefully generated narrative began to lose its punch. In 2041 the youngest Boomer (born in 1964) will be seventy four, the oldest (born in 1946) ninety-six. It would be pretty hard to argue that they in fact had not fully paid for their Social Security themselves. So privatizers began to tweak the numbers and move the goalposts. In doing so they had to cast doubt on the very existence of the Trust Fund. Hence the talk of "worthless IOUs". But even this new story is losing its impact.
Because amazingly enough we may not even need to tap the Trust Fund principal, we may need at worst to tap a fraction of the interest due. Because we are soundly beating the productivity numbers required by Low Cost.What is the Low Cost Alternative: What does it mean and Low Cost predicts just that: a minor shortfall in income less interest against cost in 2023 which is more than offset by interest earned. Absent some future government proving themselves to be Crooks and Liars in abrograting Trust Fund bonds issued with the Full Trust and Credit of the United States beating Low Cost means we are home free.
But it might well be better than that. The economy is returning productivity numbers close to double what Low Cost requires, and minor changes in productivity in the early years have outsized impacts on the Trust Fund in the outyears. As it sits we may have a Trust Fund that is actually overfunded going forward. And that is our opportunity.
Imagine a March 2006 Report that announces that not only will Social Security not be going broke, it will be a net lender forever. That shows that privatizers pushing "Crisis" were not just alarmists but outright liars trying to sabotage the legacy of Roosevelt. Do you think we could run with that? Do you think we could run ON that? Well I do.
Friday, August 05, 2005
Principal Economic Assumptions: What are they?
I constantly talk about "Productivity", but of course it is not the only number series involved. If we take Tables V.B1 Principal Economic Assumptions and V.B2 Additional Economic Factors we see a total of 11 columns:
Productivity
Earnings as a percent of Compensation
Average Hours Worked
GDP Price Index
Average annual wage in covered employment
Consumer price index
Real wage differential
Average annual unemployment rate
Average increase in Labor Force
Average increase in Total Employment
Average increase in Real GDP
Average annual interest rate
I focus on Productivity for a few reasons. One the Trustee's front it in their discussion, they talk about it in section B.1, they put it in the left hand column of the table. And they characterize it so "The rate of change in total productivity is a major determinant in the growth of average earnings." No they don't say "the major", but "a major" suggests that we should place close attention.
Two, the effects of Productivity on Trust Fund exhaustion are direct: a bigger future economy will have an easier time financing a fixed pool of boomers. This is true however we structure the financing and the payout.
Three, the effects of the other number series are harder to understand. The problem we have is that wage increases and inflation work on the Trust Fund in different ways. Wage increases boost contributions. Inflation increases boost cost. And the interaction is pretty complex. It works this way. Your ultimate initial retirement check depends on a combination of your income history and the overall rate of real wage increases. If workers as a whole do better you do better. But there the linkage stops, adjustments to your retirement check after that are determined by CPI: consumer price inflation. Okay lets unravel this a bit.
Higher inflation means higher payouts both short and long term. So all things being equal a jump in projected inflation is an immediate drag on the Trust Fund via increased payouts. Bad for Solvency (but oddly due to the disconnect from CPI and medical inflation not necessarily bad for current retirees. Topic for another time).
Increases in hours worked and average wage will increase contributions and so inject money into the Trust Fund. On the other hand they will increase your retirement check when the time comes and so increase costs. I have had posters elsewhere claim that this offsets itself, but I don't think so. The time shift between contribution and retirement check should make this a net gain for Solvency in a paygo system and the effect should roll forward. Like I said the effect some of these other number series are harder to understand. But people are free to bring numbers.
From the standpoint of solvency is seems clear that inflation is bad and real wage differential is good. But without a lot of study and more numeric skills than I have it is difficult to determine the significance of any particular number. But what I do know is that if productivity year in and year out comes in above both the Intermediate Cost and Low Cost projection Solvency is increasingly likely. And if we convince ourselves it will permanently come in above those points we are justified in asking skeptics to identify the particular number series that will offset that, and how they specifically work on Trust Fund balances.
Because I just don't think the long-range trends in this table are reversible EPI: Changes in Trustees Projections over time
The differences between projected 2004 and real 2004 (that is from the 2005 Report Table V.B1)
Productivity 2.7% 3.3% Earnings -.3 -.5 Hours worked (increase) .0 .0 GDP Price 1.6% 2.2%
Average wage 3.6% 3.8% CPI 1.2% 2.6% Real Wage Differential 2.4% 1.2%
Productivity
Earnings as a percent of Compensation
Average Hours Worked
GDP Price Index
Average annual wage in covered employment
Consumer price index
Real wage differential
Average annual unemployment rate
Average increase in Labor Force
Average increase in Total Employment
Average increase in Real GDP
Average annual interest rate
I focus on Productivity for a few reasons. One the Trustee's front it in their discussion, they talk about it in section B.1, they put it in the left hand column of the table. And they characterize it so "The rate of change in total productivity is a major determinant in the growth of average earnings." No they don't say "the major", but "a major" suggests that we should place close attention.
Two, the effects of Productivity on Trust Fund exhaustion are direct: a bigger future economy will have an easier time financing a fixed pool of boomers. This is true however we structure the financing and the payout.
Three, the effects of the other number series are harder to understand. The problem we have is that wage increases and inflation work on the Trust Fund in different ways. Wage increases boost contributions. Inflation increases boost cost. And the interaction is pretty complex. It works this way. Your ultimate initial retirement check depends on a combination of your income history and the overall rate of real wage increases. If workers as a whole do better you do better. But there the linkage stops, adjustments to your retirement check after that are determined by CPI: consumer price inflation. Okay lets unravel this a bit.
Higher inflation means higher payouts both short and long term. So all things being equal a jump in projected inflation is an immediate drag on the Trust Fund via increased payouts. Bad for Solvency (but oddly due to the disconnect from CPI and medical inflation not necessarily bad for current retirees. Topic for another time).
Increases in hours worked and average wage will increase contributions and so inject money into the Trust Fund. On the other hand they will increase your retirement check when the time comes and so increase costs. I have had posters elsewhere claim that this offsets itself, but I don't think so. The time shift between contribution and retirement check should make this a net gain for Solvency in a paygo system and the effect should roll forward. Like I said the effect some of these other number series are harder to understand. But people are free to bring numbers.
From the standpoint of solvency is seems clear that inflation is bad and real wage differential is good. But without a lot of study and more numeric skills than I have it is difficult to determine the significance of any particular number. But what I do know is that if productivity year in and year out comes in above both the Intermediate Cost and Low Cost projection Solvency is increasingly likely. And if we convince ourselves it will permanently come in above those points we are justified in asking skeptics to identify the particular number series that will offset that, and how they specifically work on Trust Fund balances.
Because I just don't think the long-range trends in this table are reversible EPI: Changes in Trustees Projections over time
The differences between projected 2004 and real 2004 (that is from the 2005 Report Table V.B1)
Productivity 2.7% 3.3% Earnings -.3 -.5 Hours worked (increase) .0 .0 GDP Price 1.6% 2.2%
Average wage 3.6% 3.8% CPI 1.2% 2.6% Real Wage Differential 2.4% 1.2%
Productivity is the Loneliest Number but still no. 1
I had an interesting e-mail from an economist who wanted to remain anonymous. He/she pointed out that Productivity is only one variable and that the Trustees had a stochastic analysis that validated the current exhaustion date. Let me make a couple of points here.
One, Productivity is shorthand for the whole range of economic numbers. It is true that the other numbers can vary, but many of them, like real-wage growth, have been tied to Productivity. True there are rumblings that this linkage is breaking down but it is incumbant on others to show how that offsets the huge gap between projected and actual Productivity. If Productivity was coming in at 2.2%, barely above the 2.1% used by Low Cost, I would still have a good case that we were on the road to solvency under the "if this goes on" theory, but I wouldn't be so cocky. My advice would still be to do nothing, if we are beating the model we are beating the model. But in the real world Productivity is coming in above 3.0% and now we are entering "what if" territory. "What if" 2005 ends up with a number over 3.0%? My answer is Solvency. Others can knock me off that mountain, but just pointing out that the other numbers of Low Cost are similarly optimistic compared to Intermediate Cost doesn't buy anything. Show me that they are being undershot by enough to offset the dominant variable. I am open to argument.
Two, I have never claimed to be an economist. But embedded in that stochastic analysis (which is studded by so many qualifiers and warnings about methods and reliability of projections to start with) is this sentence: "Each time-series equation is designed such that, in the absence of random variation, the value of the variable would equal the value assumed under the intermediate set of assumptions" (2005 Report p. 159). Near as I can tell all this analysis is doing is allowing variation around the assumed ultimate numbers under Intermediate Cost for the out years and seeing what happens. Given that in past years the Trustees have asserted that variations in the out years have little influence of ultimate results, it is not surprising that the results of this admittedly experimental model validate that. This is a relatively new part of the Report, introduced in 2003, and in this humble bloggers opinion is more intended to confuse and give some greater validity to Intermediate Cost than is warranted. You assume Intermediate Cost numbers as your point of departure and you would expect the outcome to vary around the projected result.
But it is near term numbers that are the big drivers, small changes at the beginning of a curve have outsize effects on its ultimate values. I have been begging professionals to weigh in from day one. Show me reasons why I should not just take Low Cost at face value. This was a nice, if private first step. Not entirely persuasive, but welcome.
One, Productivity is shorthand for the whole range of economic numbers. It is true that the other numbers can vary, but many of them, like real-wage growth, have been tied to Productivity. True there are rumblings that this linkage is breaking down but it is incumbant on others to show how that offsets the huge gap between projected and actual Productivity. If Productivity was coming in at 2.2%, barely above the 2.1% used by Low Cost, I would still have a good case that we were on the road to solvency under the "if this goes on" theory, but I wouldn't be so cocky. My advice would still be to do nothing, if we are beating the model we are beating the model. But in the real world Productivity is coming in above 3.0% and now we are entering "what if" territory. "What if" 2005 ends up with a number over 3.0%? My answer is Solvency. Others can knock me off that mountain, but just pointing out that the other numbers of Low Cost are similarly optimistic compared to Intermediate Cost doesn't buy anything. Show me that they are being undershot by enough to offset the dominant variable. I am open to argument.
Two, I have never claimed to be an economist. But embedded in that stochastic analysis (which is studded by so many qualifiers and warnings about methods and reliability of projections to start with) is this sentence: "Each time-series equation is designed such that, in the absence of random variation, the value of the variable would equal the value assumed under the intermediate set of assumptions" (2005 Report p. 159). Near as I can tell all this analysis is doing is allowing variation around the assumed ultimate numbers under Intermediate Cost for the out years and seeing what happens. Given that in past years the Trustees have asserted that variations in the out years have little influence of ultimate results, it is not surprising that the results of this admittedly experimental model validate that. This is a relatively new part of the Report, introduced in 2003, and in this humble bloggers opinion is more intended to confuse and give some greater validity to Intermediate Cost than is warranted. You assume Intermediate Cost numbers as your point of departure and you would expect the outcome to vary around the projected result.
But it is near term numbers that are the big drivers, small changes at the beginning of a curve have outsize effects on its ultimate values. I have been begging professionals to weigh in from day one. Show me reasons why I should not just take Low Cost at face value. This was a nice, if private first step. Not entirely persuasive, but welcome.
Thursday, August 04, 2005
Scoop just ate my homework: MyDD diary
I have been taking up too much space at Economist's View (but Mark Thoma should be a daily stop for anyone discussing Social Security.) So I want to return to the topic of my previous diaries: Life After Solvency.
Social Security Solvency with no changes in benefits, retirement age or payroll tax is not an impossible dream. Each year the Trustees lay out a set of economic numbers that would would produce that result. This dataset, called Low Cost never gets a bit of attention. But that doesn't make it go away. You can get a little (okay a lot) of background at my website starting with What does Low Cost mean? More below the fold.
Welcome back, if you left at all. Over the last ten years Low Cost consistently returned the same result: flat trust fund ratio. What does that mean? For a fuller explanation you can check outThe Trust Fund Ratio explained. In brief the Trust Fund is a lot closer to a checkbook than a savings account. Contributions and interest earned go in, checks go out. The Trust Fund ratio is simply your balance expressed as a function of time. For example the Trust Fund ratio at the end of 2004 stood at 305 which means 3 years 18 days Table VI.C6.—Operations of the Combined OASI and DI Trust Funds
in Fiscal Years 2000-14 That is our current reserve and the direction of the curve is headed up under all three alternatives: Intermediate, High Cost and Low Cost Figure II.D7.—Long-Range OASDI Trust Fund Ratios Under Alternative Assumptions and if you look at our old friend Intermediate Cost (II) you see familiar dates like 2017 (when the curve peaks) and 2041 (Trust Fund Depletion). But what's up with curve (1): no drawdown until 2023? a slight dip then we sail through the 75 year window with a 450 Ratio? Are the economic numbers of Low Cost so optimistic that this is just pie in the sky? Judge for yourself. Personally I think 2.1% for 2005, 2.2% for 2006 and no number higher than that in the out years is more than doable.
Payroll vs Productivity: What would it take
2005 Report: Economic Assumptions
Low Cost is doable. In my view it is already done. You plug current growth numbers into this model and that ratio just keeps on rising.
If anyone responds maybe we can talk about what this would all mean. Meanwhile you might want to check out the terrific Rock the Vote flash Social Security: Don't get played and maybe follow that up with Lee Arnold's animation Social Security: The Real Connections. Lots to chew on. Mangia.
Social Security Solvency with no changes in benefits, retirement age or payroll tax is not an impossible dream. Each year the Trustees lay out a set of economic numbers that would would produce that result. This dataset, called Low Cost never gets a bit of attention. But that doesn't make it go away. You can get a little (okay a lot) of background at my website starting with What does Low Cost mean? More below the fold.
Welcome back, if you left at all. Over the last ten years Low Cost consistently returned the same result: flat trust fund ratio. What does that mean? For a fuller explanation you can check outThe Trust Fund Ratio explained. In brief the Trust Fund is a lot closer to a checkbook than a savings account. Contributions and interest earned go in, checks go out. The Trust Fund ratio is simply your balance expressed as a function of time. For example the Trust Fund ratio at the end of 2004 stood at 305 which means 3 years 18 days Table VI.C6.—Operations of the Combined OASI and DI Trust Funds
in Fiscal Years 2000-14 That is our current reserve and the direction of the curve is headed up under all three alternatives: Intermediate, High Cost and Low Cost Figure II.D7.—Long-Range OASDI Trust Fund Ratios Under Alternative Assumptions and if you look at our old friend Intermediate Cost (II) you see familiar dates like 2017 (when the curve peaks) and 2041 (Trust Fund Depletion). But what's up with curve (1): no drawdown until 2023? a slight dip then we sail through the 75 year window with a 450 Ratio? Are the economic numbers of Low Cost so optimistic that this is just pie in the sky? Judge for yourself. Personally I think 2.1% for 2005, 2.2% for 2006 and no number higher than that in the out years is more than doable.
Payroll vs Productivity: What would it take
2005 Report: Economic Assumptions
Low Cost is doable. In my view it is already done. You plug current growth numbers into this model and that ratio just keeps on rising.
If anyone responds maybe we can talk about what this would all mean. Meanwhile you might want to check out the terrific Rock the Vote flash Social Security: Don't get played and maybe follow that up with Lee Arnold's animation Social Security: The Real Connections. Lots to chew on. Mangia.
Saturday, July 02, 2005
Social Security: it it about Solvency or about Ayn Rand?
It was an odd moment. I was riding in the elevator with the Chair of my County's Democratic Party and he thanked me for my website. Taken aback I asked how he had stumbled on it and he said that people had been passing it around. So maybe it is time for me to give some sort of introduction.
This site is all about the numbers. You get links to every Social Security Report from 1942 to 2005, you get breakouts to particular tables from all Reports from 1997 to 2005, you get some explications of what those tables mean. The numbers are important, if you are going to participate in the debate over the future of Social Security you need to understand them, you need to understand their implications, you need to be able to measure them against the numbers you read in the paper every day. Because oddly enough this debate is not about numbers and in most respects it never has been.
A certain portion of the Republican Party has always hated Social Security on principle. You see it most starkly in some of the novels of Ayn Rand, but from Alf Landon to Grover Norquist large portions of the Right simply despise the very idea of collective social responsibility. They disguise it in many fashions, the current version is "The Ownership Society", but it really boils down to "I got mine, and screw Grandma Millie" (Enron- the gift that keeps giving).
Advocates of private accounts, with a few exceptions, don't care about retirement security for lower income workers. They just don't. They want to kill Social Security and with it wipe out the New Deal. They are not even particularly secretive about this, a little Googling on Grover Norquist or the Cato Instistute will open some eyes. They want to wipe the legacy of FDR right out, they want to set the clock back to McKinley and Hanna in 1898.
To most Americans this must seem like over the top hyperbole, but the Norquists, Roves and Gingriches of this world are dead serious. They not only want to repeal the entire legacy of Franklin Roosevelt, they fully intend to erase the Trust Busting legacy of Teddy Roosevelt. From a legislative point of view they would simply wipe the 20th century off the table as if it had never existed.
Social Security is target one. But it is wildly popular, taking it on head on was in practical political terms impossible, it was deemed the Third Rail of American Politics for a reason. So in 1983 the Right decided to attack it at its weakest point. The impending retirement of Baby Boomers would put considerable strain on the system, even the reforms of the 1983 Act could only defer the challenge. So the Cato Institute took that challenge head on, they confronted Solvency and cheerfully concluded "Can't happen" and so started selling private accounts and phase out as alternatives. They didn't try to advance the ideological case, they just pushed "bankruptcy".
But unfortunately the numbers bit back. The original entry point to this site is Social Security is not broke: by the numbers You don't have to buy into my political spin, but you should know the numbers in play. Hmm, Table V.B1.
This site is all about the numbers. You get links to every Social Security Report from 1942 to 2005, you get breakouts to particular tables from all Reports from 1997 to 2005, you get some explications of what those tables mean. The numbers are important, if you are going to participate in the debate over the future of Social Security you need to understand them, you need to understand their implications, you need to be able to measure them against the numbers you read in the paper every day. Because oddly enough this debate is not about numbers and in most respects it never has been.
A certain portion of the Republican Party has always hated Social Security on principle. You see it most starkly in some of the novels of Ayn Rand, but from Alf Landon to Grover Norquist large portions of the Right simply despise the very idea of collective social responsibility. They disguise it in many fashions, the current version is "The Ownership Society", but it really boils down to "I got mine, and screw Grandma Millie" (Enron- the gift that keeps giving).
Advocates of private accounts, with a few exceptions, don't care about retirement security for lower income workers. They just don't. They want to kill Social Security and with it wipe out the New Deal. They are not even particularly secretive about this, a little Googling on Grover Norquist or the Cato Instistute will open some eyes. They want to wipe the legacy of FDR right out, they want to set the clock back to McKinley and Hanna in 1898.
To most Americans this must seem like over the top hyperbole, but the Norquists, Roves and Gingriches of this world are dead serious. They not only want to repeal the entire legacy of Franklin Roosevelt, they fully intend to erase the Trust Busting legacy of Teddy Roosevelt. From a legislative point of view they would simply wipe the 20th century off the table as if it had never existed.
Social Security is target one. But it is wildly popular, taking it on head on was in practical political terms impossible, it was deemed the Third Rail of American Politics for a reason. So in 1983 the Right decided to attack it at its weakest point. The impending retirement of Baby Boomers would put considerable strain on the system, even the reforms of the 1983 Act could only defer the challenge. So the Cato Institute took that challenge head on, they confronted Solvency and cheerfully concluded "Can't happen" and so started selling private accounts and phase out as alternatives. They didn't try to advance the ideological case, they just pushed "bankruptcy".
But unfortunately the numbers bit back. The original entry point to this site is Social Security is not broke: by the numbers You don't have to buy into my political spin, but you should know the numbers in play. Hmm, Table V.B1.
Saturday, May 21, 2005
Why are they so insistent? (From Brad DeLong's blog)
"What puzzles me is energy and persistence of this propaganda campaign with scant positive results."
It is not economics it is ideology. Exactly zero in this campaign has the interest of future retirees at heart. We have to talk numbers, because in the end this will be decided on numbers, but when I point at 2.0% as being the productivity number for 2005 currently used to set policy I am not making an economic case, instead I am making a forensic case that these people are simply not serious. They don't believe these numbers, they can't. Economic reality has already left Intermediate and Low Cost's numbers in the dust and surely someone in the Bush Administration understands that.
The numeric case for Social Security solvency was made by 2001. Anyone who was seriously concerned with the question of whether the American economy could meet its mid-century obligations to Social Security had only to read the 2001 Report, take its numbers seriously, and measure them against any reasonable projection going forward. It wasn't broke then and it is not broke now.
2001 Report: Economic Assumptions
These people took an economy that returned 3.2% in 2000 and put up 2.2% as their "optimistic" Low Cost number for 2001. The notion that sharp slowdown was in any sense a best case scenario was frankly bizarre then, stubbornly repeating it year in and year out when reality keeps slapping you in the face with better numbers begins to border on pathological. But only if you assume that this discussion is being carried out with economics as a backdrop.
The Right Wing case for killing Social Security is iron-clad in their own minds. It is Socialism pure and simple. And they are taking a simple page out of Goldwater's playbook: "Extremism in the pursuit of Liberty is no Vice". Small 't' truth is not going to stand in the way of capital 'T' truth.
Cato and Heritage and AEI took the lazy man's way out in 1983. Rather than making the case on the merits, rather than arguing that Social Security was a bad policy choice under any economic conditions, they chose the "It's going broke anyway" path, they put their whole weight behind "something is better than nothing". The dawning reality that "nothing" equates to full funded Social Security Trust Fund is rocking their world, they are desperately trying to play catch up with "infinite future liability" "intergenerational income transfer" "worthless IOUs", with pretending that "Full Faith and Credit of the United States" is just a meaningless catch phrase. God Damn it the numbers were supposed to be there for them, the impending wave of Boomer retirements was supposed to put an unendurable burden on Social Security. Numbers were going to be their Best Friends.
Well you don't go to war with the numbers you want, you go to war with the numbers you have. In this case Republicans declared War on Social Security in 1936, started drawing up War Plans in 1983, and simply assumed that they would have an unlimited Army of Numbers to back them up when push came to shove.
Well much as we have seen in the wholy tragic and unnecessary War on Iraq, Hope is not a Plan. And while most Americans will stand up and salute when you wrap yourself in the Flag and call out "Support the Troops", only a tiny minority are kneeling at the shrine of Milton Friedman and intoning "Markets".
These people are true believers and eager enlistees in the War on Social Security. Unfortunately for them they put their full trust in the Shock and Awe of Trust Fund Insolvency and they have no viable back up plan. Their "energy and persistence" is only a mask for desperation, admitting that their 70 year dream of killing Social Security is melting away before their eyes is killing them. But watch out, proverbally the dying beast always lashes out at the last moment.
(Or as the VP put it after I penned this: during its "last throes")
It is not economics it is ideology. Exactly zero in this campaign has the interest of future retirees at heart. We have to talk numbers, because in the end this will be decided on numbers, but when I point at 2.0% as being the productivity number for 2005 currently used to set policy I am not making an economic case, instead I am making a forensic case that these people are simply not serious. They don't believe these numbers, they can't. Economic reality has already left Intermediate and Low Cost's numbers in the dust and surely someone in the Bush Administration understands that.
The numeric case for Social Security solvency was made by 2001. Anyone who was seriously concerned with the question of whether the American economy could meet its mid-century obligations to Social Security had only to read the 2001 Report, take its numbers seriously, and measure them against any reasonable projection going forward. It wasn't broke then and it is not broke now.
2001 Report: Economic Assumptions
These people took an economy that returned 3.2% in 2000 and put up 2.2% as their "optimistic" Low Cost number for 2001. The notion that sharp slowdown was in any sense a best case scenario was frankly bizarre then, stubbornly repeating it year in and year out when reality keeps slapping you in the face with better numbers begins to border on pathological. But only if you assume that this discussion is being carried out with economics as a backdrop.
The Right Wing case for killing Social Security is iron-clad in their own minds. It is Socialism pure and simple. And they are taking a simple page out of Goldwater's playbook: "Extremism in the pursuit of Liberty is no Vice". Small 't' truth is not going to stand in the way of capital 'T' truth.
Cato and Heritage and AEI took the lazy man's way out in 1983. Rather than making the case on the merits, rather than arguing that Social Security was a bad policy choice under any economic conditions, they chose the "It's going broke anyway" path, they put their whole weight behind "something is better than nothing". The dawning reality that "nothing" equates to full funded Social Security Trust Fund is rocking their world, they are desperately trying to play catch up with "infinite future liability" "intergenerational income transfer" "worthless IOUs", with pretending that "Full Faith and Credit of the United States" is just a meaningless catch phrase. God Damn it the numbers were supposed to be there for them, the impending wave of Boomer retirements was supposed to put an unendurable burden on Social Security. Numbers were going to be their Best Friends.
Well you don't go to war with the numbers you want, you go to war with the numbers you have. In this case Republicans declared War on Social Security in 1936, started drawing up War Plans in 1983, and simply assumed that they would have an unlimited Army of Numbers to back them up when push came to shove.
Well much as we have seen in the wholy tragic and unnecessary War on Iraq, Hope is not a Plan. And while most Americans will stand up and salute when you wrap yourself in the Flag and call out "Support the Troops", only a tiny minority are kneeling at the shrine of Milton Friedman and intoning "Markets".
These people are true believers and eager enlistees in the War on Social Security. Unfortunately for them they put their full trust in the Shock and Awe of Trust Fund Insolvency and they have no viable back up plan. Their "energy and persistence" is only a mask for desperation, admitting that their 70 year dream of killing Social Security is melting away before their eyes is killing them. But watch out, proverbally the dying beast always lashes out at the last moment.
(Or as the VP put it after I penned this: during its "last throes")
Sunday, April 24, 2005
Solvency and the Long Bond: Economic Life after Crisis
Most discussion of Social Security Solvency has been in the context of Privatization and more narrowly on whether private accounts help or not. A certain consensus has shaken out: to the extent that "Crisis" exists it doesn't manifest itself until the 2040's and private accounts in and of themselves wouldn't help anyway. So there is a tendency to agree with the following memorable phrase: "Social Security Privatization is as dead as Bob Dole's dick, let's move on".
But it is not just about private accounts. Sure killing the 70 year dream of the Republican Party of killing Social Security by privatizing it is important for all kinds of reasons, notably 2006 midterms. But there are important macoeconomic implications to Solvency. Assessments of the impacts of Current Account deficits and the impact of Bush Tax Cuts both depend critically on the Trust Fund balance in the year 2025, Solvency will rock our world.
Supporters of Social Security have been playing defense since November, time to play offense. I am going to assume a certain familiarity with the numbers and terminology here, those who want some background can find it on these pages: The Three Alternatives and What is the Low Cost Alternative
For the purposes of this diary I am going to assume Low Cost, that is that economic productivity growth for 2005 will meet or exceed 2.1% and that growth in the outyears will meet or exceed 1.9%. Not a stretch by any means, reported 2004 came in at 3.3% and the average over the last six years has been better than that. 2005 Report: Economic Assumptions
We start with the graph 2005 Report: Trust Fund Ratios Now outcome ( II ) is our old friend Intermediate Cost, Trust Fund Ratio peaks in 2013 and sinks more or less rapidly to 2041. But Low Cost produces outcome ( I ): the Trust Fund Ratio doesn't peak until 2022, sags a minor amount and then sails through the 75 year window maintaining a 4 1/2 year reserve.
This doesn't fully capture the dollar picture, the Trust Funds continue to grow even after the ratio begins to decline. For Intermediate Cost the dollar peak occurs in 2023. Under Low Cost interestingly enough the peak never comes. Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2005-80 Which still doesn't capture the entire picture, as long as payroll tax exceeds benefit costs interest earned on the bonds is just bookkeeping. The crux is when benefits exceed payroll, which for Intermediate is around 2018. Ironically we start borrowing five years before the actual dollar peak.
The main point for this entry is that the markets and economic forecasts generally have outcome ( II ) built in, 99% of the market assumes that the US will be faced with replacing a $6 trillion dollar bond portfolio with public borrowing to that same tune. What if that portfolio never had to be redeemed? What if borrowing didn't start to around 2023? And never hit an inflation adjusted amount of $150 billion a year until 2060 Estimates in Constant Dollars And all of this assuming just 1.9% productivity growth?
Short answer: Social Security Solvency transforms everything. Your view of the bond market and the role of the Chinese Central Bank may be about to change.
But it is not just about private accounts. Sure killing the 70 year dream of the Republican Party of killing Social Security by privatizing it is important for all kinds of reasons, notably 2006 midterms. But there are important macoeconomic implications to Solvency. Assessments of the impacts of Current Account deficits and the impact of Bush Tax Cuts both depend critically on the Trust Fund balance in the year 2025, Solvency will rock our world.
Supporters of Social Security have been playing defense since November, time to play offense. I am going to assume a certain familiarity with the numbers and terminology here, those who want some background can find it on these pages: The Three Alternatives and What is the Low Cost Alternative
For the purposes of this diary I am going to assume Low Cost, that is that economic productivity growth for 2005 will meet or exceed 2.1% and that growth in the outyears will meet or exceed 1.9%. Not a stretch by any means, reported 2004 came in at 3.3% and the average over the last six years has been better than that. 2005 Report: Economic Assumptions
We start with the graph 2005 Report: Trust Fund Ratios Now outcome ( II ) is our old friend Intermediate Cost, Trust Fund Ratio peaks in 2013 and sinks more or less rapidly to 2041. But Low Cost produces outcome ( I ): the Trust Fund Ratio doesn't peak until 2022, sags a minor amount and then sails through the 75 year window maintaining a 4 1/2 year reserve.
This doesn't fully capture the dollar picture, the Trust Funds continue to grow even after the ratio begins to decline. For Intermediate Cost the dollar peak occurs in 2023. Under Low Cost interestingly enough the peak never comes. Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2005-80 Which still doesn't capture the entire picture, as long as payroll tax exceeds benefit costs interest earned on the bonds is just bookkeeping. The crux is when benefits exceed payroll, which for Intermediate is around 2018. Ironically we start borrowing five years before the actual dollar peak.
The main point for this entry is that the markets and economic forecasts generally have outcome ( II ) built in, 99% of the market assumes that the US will be faced with replacing a $6 trillion dollar bond portfolio with public borrowing to that same tune. What if that portfolio never had to be redeemed? What if borrowing didn't start to around 2023? And never hit an inflation adjusted amount of $150 billion a year until 2060 Estimates in Constant Dollars And all of this assuming just 1.9% productivity growth?
Short answer: Social Security Solvency transforms everything. Your view of the bond market and the role of the Chinese Central Bank may be about to change.
Saturday, April 16, 2005
Productivity: 2006 Budget vs Trustees' 2005 Report
They let the cat out of the bag. I did some poking around the 2006 Budget and found the following on p. 191. I have posed the question here and there: How do the Presidents' men predict productivity when they are talking tax cuts? The answer is here. "conservatively, to be 2.6% per year". How then do they get away with 2.1% as their optimistic number when talking Trust Funds?
2006 Budget: Analytical Perspectives
"Potential growth is approximately equal to the sum
of the trend rates of growth of the labor force and
of productivity. Potential GDP growth is projected to
be 3.2 percent through 2008, and then edge down to
3.1 percent during 2009–2010, primarily because of an
assumed slowing in labor force growth. The labor force
is projected to grow about 1.2 percent per year through
2008 on average, slowing to about 0.8 percent yearly
on average during 2009–2010 as increasing numbers
of baby boomers enter retirement.
Trend productivity growth is assumed, conservatively,
to be 2.6 percent per year. That pace is noticeably below
the average since the business cycle peak in the first
quarter of 2001 (4.2 percent per year). It is, however,
close to the pace during 1996–2000 (2.5 percent) and
not far from the average since the official productivity
series began in 1947 (2.3 percent)."
(Bolding mine)
2006 Budget: Analytical Perspectives
"Potential growth is approximately equal to the sum
of the trend rates of growth of the labor force and
of productivity. Potential GDP growth is projected to
be 3.2 percent through 2008, and then edge down to
3.1 percent during 2009–2010, primarily because of an
assumed slowing in labor force growth. The labor force
is projected to grow about 1.2 percent per year through
2008 on average, slowing to about 0.8 percent yearly
on average during 2009–2010 as increasing numbers
of baby boomers enter retirement.
Trend productivity growth is assumed, conservatively,
to be 2.6 percent per year. That pace is noticeably below
the average since the business cycle peak in the first
quarter of 2001 (4.2 percent per year). It is, however,
close to the pace during 1996–2000 (2.5 percent) and
not far from the average since the official productivity
series began in 1947 (2.3 percent)."
(Bolding mine)
Sunday, March 27, 2005
The 2005 Report
(Aug 08 edit: I have left the original text untouched. But as it turns out my exuberance was a little premature, productivity in fact fell off a cliff in Q4 2005 with the result that year end productivity came in pretty much in line with Intermediate Cost projections. But it was fun while it lasted, during the interval between the release of this Report and the BLA release of Q4 it seemed that full solvency of Social Security would have to be recognized by all at latest by 2008. Well that is reality for you.)
Pardon the incoherency, I am running around the room high-fiving myself. But first the numbers:
Entry Page
Table of Contents
List of Tables
List of Figures
Economic Assumptions Under the Three Alternatives
Trust Fund Ratios Under the Three Alternatives
Social Security is not broke. Exactly no one expects the economy to perform down to the levels of Intermediate Cost. I was stunned to see that the Trustees chose to take the whole hit in 2005. They chose to stick to their guns and return a Low Cost projection that showed the Trust Fund fully funded, but not over funded, consistant with past practice What is the Low Cost Alternative? In so doing they were constrained by definition to keep Intermediate Cost somewhere below Low Cost. Which yielded the following result: productivity growth slowing to 60% of 2004 rates in the face of a strong 1st quarter 2005.
According to the Trustees' own numbers the economy returned 3.3% in 2004. Now they would have us believe that 2.1% is an optimistic number and 2.0% a realistic number for 2005. Who are they trying to kid?
Pardon the incoherency, I am running around the room high-fiving myself. But first the numbers:
Entry Page
Table of Contents
List of Tables
List of Figures
Economic Assumptions Under the Three Alternatives
Trust Fund Ratios Under the Three Alternatives
Social Security is not broke. Exactly no one expects the economy to perform down to the levels of Intermediate Cost. I was stunned to see that the Trustees chose to take the whole hit in 2005. They chose to stick to their guns and return a Low Cost projection that showed the Trust Fund fully funded, but not over funded, consistant with past practice What is the Low Cost Alternative? In so doing they were constrained by definition to keep Intermediate Cost somewhere below Low Cost. Which yielded the following result: productivity growth slowing to 60% of 2004 rates in the face of a strong 1st quarter 2005.
According to the Trustees' own numbers the economy returned 3.3% in 2004. Now they would have us believe that 2.1% is an optimistic number and 2.0% a realistic number for 2005. Who are they trying to kid?
Friday, November 26, 2004
Boiled Down to Basics
Take the following two columns of Social Security years: what are the implications?
1996 2030
1997 2030
1998 2032
1999 2034
2000 2038
2001 2039
2002 2041
2003 2042
2004 2042
2005 2041
Okay, if you like you can ignore the stuff below, it was written before the release of the 2005 Report. But the recalculation to achieve 2041 required a couple of things, first some dirty work reconfiguring the mortality tables, second simple acceptance of a ridiculous growth number for 2005. Trust Fund exhaustion would have been pushed out under any realistic growth figure, 2.0 for 2005 is a joke.
The number on the left is easy, it is the Report Year of the Annual Reports of the Trustees of Social Security. But consider the second column. Something is being moved out twelve years, moreover it is moving out a rate of more than a year per year. If this number moves over the next nine years like it did the last we would expect it to be something like:
2013 2056 and the nine after that
2022 2068
In reality the second column represents the dates of exhaustion of the Social Security Trust fund under the Intermediate Cost alternative (the standard one reported in all coverage).
Without delving into the numbers and the reasons for the change, we can see that the outlook for the Trust Fund, in the absense of any reform at all, is improving nonetheless at an average of 1.33 years/year. In 2068 the youngest Boomer will be 104, the Trust Fund will have done the job assigned in 1982, it will have successfully handled the demographic bulge of the Baby Boomers.
It seems to be that it is up to the Privatizers to identify why this number is moving out in the way it has been, and make a case why it won't continue to improve. That will require actually grappling with the various Economic Assumptions under the Three Alternatives and examining their impact on Trust Fund health going forward Trust Fund Ratios under the Three Alternatives. And most importantly producing the economic projections underlying their own privatization models.
If Social Security Privatization is Necessary, it won't be Possible. If Social Security Privatization is Possible, it won't be Necessary.
Links a-plenty from the main page The Bruce Web or from the Intro page Social Security is not Broke: by the numbers
1996 2030
1997 2030
1998 2032
1999 2034
2000 2038
2001 2039
2002 2041
2003 2042
2004 2042
2005 2041
Okay, if you like you can ignore the stuff below, it was written before the release of the 2005 Report. But the recalculation to achieve 2041 required a couple of things, first some dirty work reconfiguring the mortality tables, second simple acceptance of a ridiculous growth number for 2005. Trust Fund exhaustion would have been pushed out under any realistic growth figure, 2.0 for 2005 is a joke.
The number on the left is easy, it is the Report Year of the Annual Reports of the Trustees of Social Security. But consider the second column. Something is being moved out twelve years, moreover it is moving out a rate of more than a year per year. If this number moves over the next nine years like it did the last we would expect it to be something like:
2013 2056 and the nine after that
2022 2068
In reality the second column represents the dates of exhaustion of the Social Security Trust fund under the Intermediate Cost alternative (the standard one reported in all coverage).
Without delving into the numbers and the reasons for the change, we can see that the outlook for the Trust Fund, in the absense of any reform at all, is improving nonetheless at an average of 1.33 years/year. In 2068 the youngest Boomer will be 104, the Trust Fund will have done the job assigned in 1982, it will have successfully handled the demographic bulge of the Baby Boomers.
It seems to be that it is up to the Privatizers to identify why this number is moving out in the way it has been, and make a case why it won't continue to improve. That will require actually grappling with the various Economic Assumptions under the Three Alternatives and examining their impact on Trust Fund health going forward Trust Fund Ratios under the Three Alternatives. And most importantly producing the economic projections underlying their own privatization models.
If Social Security Privatization is Necessary, it won't be Possible. If Social Security Privatization is Possible, it won't be Necessary.
Links a-plenty from the main page The Bruce Web or from the Intro page Social Security is not Broke: by the numbers
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