Writing for Politico, former AARP CEO Bill Novelli argues that we shouldn't put off a Social Security fix, effectively endorsing the Dominici-Rivlin plan that Novelli was a party to creating: Reforming Social Security will require three things: policymakers to work together, the public to understand the situation and engage and a modest amount of sacrifice from workers and retirees. It will be much easier to address the problem now in a rational and equitable manner than to wait until the crisis is upon us, when much more drastic changes to revenues and benefits would be necessary. By enacting a plan within a year, we can slowly phase in the solution over the coming decades and require only limited modifications. This would allow future retirees appropriate time to adjust their plans for work, saving and retirement. I wonder whether the organization itself – which, it should be noted, opposed the last set of Social Security reforms in 1983 – would be on board for Novelli's ideas.
Tuesday, June 7, 2011
Former AARP head: Fix Social Security now
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18 comments:
There is no equitable fix for Social Security. Those born prior to 1938 were paid far in excess of what their and company matching contributions could support. The money has been paid to beneficiaries who took far more out of Social Security OASI than they paid. Just like Bernie Madoff's scheme, the money is gone. Is there any way to make the program fair?
For those not old enough to work, is it their responsibility to pay the debt of their parents? Let us put it more bluntly. This is not a national debt held by outside countries for the "betterment of the country" but simply the overpayment by ignorant politicians who failed their fiduciary responsibility and the voters for the past 74 years who buried the heads in the sand hoping to get to 65 before the scam was up.
No, those too young to vote should not be made to pay for the mistakes of great grandparents, grandparents or parents.
Cutting benefits now means those working will pay the same high payroll tax and get less benefits. There is no change, just shuffling the loss from OASI to workers.
Raising the payroll tax to pay the same benefits means workers will pay more for a lousy benefit. There is no change for workers who will throw good money after bad, decreasing the ability to save, making things worse. Again shuffling the loss from OASI to workers.
Raising the retirement age means working longer, paying more, receiving less. Again workers pay the price of 74 years worth scams and cover up. Again shuffling the loss from OASI to workers.
Raising the tax on benefits or means testing will affect current beneficiaries, not based on fairness but based on economics. Again workers get hit again. Shuffling the loss from OASI to workers.
What loss do I refer to? The loss is the current value of the present unfunded liability for OASI which stands at over $23 Trillion. The OASI trust fund needs over $25 Trillion in the fund to pay all those who have 40 quarters of work history.
Too bad for those who don't. I say Repeal SS-OASI now!!
“no equitable fix for Social Security”
There is no “equity” problem with SS. Humanity has always taken care of its elders. When we changed from a primarily agrarian society to an industrial one, we invented a better system to provide that retirement safety net. The mathematics of that transition creates opportunities to create diversions.
Do you think your grandparents were better off because they got a better “return on investment” from SS? I would rather live today than during the Depression.
The best fix is to raise payroll taxes to make up for the fact that each generation lives longer than the one before it and so the cost of retirement is higher. As our standard of living continues to increase, setting aside a portion of that increase will allow SS to continue to provide retirement security forever.
Part I
"Do you think your grandparents were better off because they got a better “return on investment” from SS?"
The problem is not the return on investment. The problem was identified very early 11-27-1944.
A. J. Altmeyer, Chairman
Social Security Board Before the House Ways and Means Committee November 27, 1944
“There is no question that the benefits promised under the present Federal old-age and survivors insurance system will cost far more than the 2 percent of payrolls now being collected. As I pointed out in my testimony of last year, none of the actuarial estimates which have been made on the basis of present economic conditions and other factors now clearly discernible result in a level annual cost of this insurance system of less than 4 percent of payroll.”
“Indeed, under certain assumptions the level annual cost has been estimated to be as much as 7 percent of payrolls. On the basis of a 4-percent-level annual cost it may be said that the reserve fund of this system already has a deficit of $6,600 million. On the basis of 7-percent-level annual cost it may be said that the reserve fund already has a deficit of about $16,500 million.”
http://www.ssa.gov/history/aja1144a.html
The payroll tax of 85 was not reached until the late 60's some 24 years later after 24 cohorts of workers.
Mathematically speaking my parents received six times what they paid in. My grandparents received 15 times what they paid in. I will if my children and those under 46 fail to vote and take action like my fellow baby boomers did in 1983 will get 52 cents on the dollar. How do you pay someone more than they paid in? Bernie Maddoff did this for two decades. Mr. Ponzi did this in the 20's for a few years. The truth is you cannot pay someone more than the fund earned otherwise you steel from others to do so.
SS-OASI does not earn a lousy rate of return. From 1977 to 1992 SS-OSI earned well over 9% a year. The problem is quite simply, SS-OASI is a ponzi scheme. Based on $3,000 base, 2% payroll tax, they paid higher than today's 42% target of life time indexed wages. I do not care who you are, a program earning 3% then could not pay benefits in excess of 10%.
Why is the best fix "to raise payroll taxes?" Think about it, why "invest" more money into a bad "investment?" If SS-OASI is paying a lousy return, the best thing to do is cut your losses. Invest somewhere else, divest yourself from the problem. Why put 90% of potential savings into one entity like Social Security? Most advisors say limit exposure to anyone investment to under 5%. For Some SS-OASI is 100% of their investment.
The savings rate of the pre 70's was double digits when SS-OASI tax was just under 8% and close to 4.5% in the 50's. Today SS-OASI is 10.4%. The savings rate has decreased because the payroll tax has squeezed out savings. For many decades economists combined the US savings rate with SS-Tax based on the notion that SS-tax was a kind of savings. This concept was disproved in 1976.
Let us look at what the payroll tax has to be to support a fully funded program starting with those at age 21 today, working and retiring at age 67. To duplicate SS-OASI with wage indexed benefit formula, the payroll tax needs to be about 6% and this assumes all live to collect the average life span at age 67. However, we know this is not so, 20% of us will die before we reach retirement age. Thus the required payroll tax based on 5% is around with a flat tax of 5.5%.
The problem is we are paying 10.6% for a benefit that is worth 5.5%, but wait SS sent me a statement that says they can pay 76% of promised benefits under current law. What they do not tell you is under current law, COLA ceases when the trust fund falls below 20% of any given years expenses. What is COLA worth? Without COLA the difference between paying 100% of promised benefits with COLA is a payable benefit of 60%. Would you be satisfied with 60%?
Part II
Standard of living has gone up. You suggest as our standard of living increases, we can afford to support seniors in the same life style. You need to go back and do the math again. First COLO maintains the buying power of the person when they turned 60. That means that the goods and services available in the year they turn 60, they will be able to buy. In simple terms a person who retired in 1990 is to buy those things that were available in 1990, not 2000, not 2011. If you want to maintain the standard of living that workers get from slightly above inflation (becoming harder) then you need to raise the payroll tax.
However, in 1935 when the SS-ACT was passed, COLA was not even mentioned. COLA became a reality in the early 70's when SS-OASI was about broke.
It is not the responsibility of workers to take care of others. It is the individual’s responsibility to take care of themselves.
There is a myth about life span. The values most used are those at birth. Early in 1900 the infant mortality rate was very high 18%. This means that life expectancy was low 57 years. But at year one, life expectancy was another 62 years and by age 18 it was another 60 years. Life expectancy past age 67 is increasing at an ever decreasing growth rate. A baby born this year will live about 18 days longer than a baby born last year. 18 days divided by twenty years is about 0.25% growth a year. This is far less than inflation. Life expectancy is a red herring to mislead many from the true problem.
As my standard of living increases (I earn more) I saved more so that I could live in the same standard in retirement. If my "increased wages" due to knowing more, doing things better, etc is now to be taxed away, would my standard of living increase? Is this what those who came before me experienced?
When a person says “We Earned it!” what exactly do they mean?
To me, this phrase is a righteous euphemism for making the more truthful statement: "We were snookered by this Social Security Ponzi scheme, and now we are going to snooker the next generation!"
If Social Security benefits have been "earned" who is obligated to pay benefits to those who "earned" them? Workers? On a regressive tax basis? Why? Why perpetuate a fraud upon the innocent? Who is responsible for bearing the burden of a fraud? The person defrauded? Or an innocent or unborn child?
"It is not the responsibility of workers to take care of others. It is the individual’s responsibility to take care of themselves."
I guess we disagree at step one.
It is my responsibility to see that there is an adequate safety net for others, especially those who have built the society that has given me the opportunity to do well. My parents have “earned” their SS not because they contributed large chunks of payroll tax, but because they have been part of a compact to take care of our elders.
Part II
“The problem was identified very early 11-27-1944.” Altmeyer is just describing aspects of the transition period. You are playing the diversionary math games I warned about.
“The truth is you cannot pay someone more than the fund earned” The truth is SS is not about a fund that earns interest.
“This concept was disproved in 1976. “ to the satisfaction of people who want to kill SS.
“To duplicate SS-OASI with wage indexed benefit formula, the payroll tax needs to be about 6%” Only if you assume you can invest all of it at real returns exceeding what we have seen in the last generation. Without SS you would need to set some of that aside to support your parents, so it is not a valid analysis.
“SS sent me a statement that says they can pay 76% of promised benefits under current law” Since initial benefits are indexed to wages, not COLA, that 76% for someone retiring in 2037 will buy a better standard of living than 100% for someone retiring in 2011. There
“You suggest as our standard of living increases, we can afford to support seniors in the same life style.” Not what I said. A portion of the increase in our standard of living is enough to cover the increase in lifespan of our parents. This will be true for our children and their children as well.
“There is a myth about life span.” You are correct and I use the same post-retirement figures.
“Life expectancy past age 67 is increasing at an ever decreasing growth rate.” Take a look at the SS reports and you will find that the growth rate is not decreasing.
“If my "increased wages" due to knowing more, doing things better, etc is now to be taxed away, would my standard of living increase? Is this what those who came before me experienced?” No, but that is not what you are experiencing either.
It will be much easier to address the problem now in a rational and equitable manner
I just read the Chuck Blahous book, and if 20% of what he said about AARP is true (not only in 1983 but ever since then, and during the Bush proposal controversy in particular), then the "former head of AARP" has a lot of nerve to say any such thing.
It's just too bad that people in influential leadership positions like that don't have the nerve to speak the truth about what they really believe, while they are still in the influential leadership position -- because it would be so uncomfortable, compared to "leading" by aping the position of the populist herd.
REPLY A - Part II
“The problem was identified very early 11-27-1944.” Altmeyer is just describing aspects of the transition period. You are playing the diversionary math games I warned about.
REPLY: The transition cost has never been paid and it has grown to $23 Trillion. Why should the future generations agree to pay this when past generations did nothing to minimize the impact?
“The truth is you cannot pay someone more than the fund earned” The truth is SS is not about a fund that earns interest.
REPLY: The Interest paid to SS-OASI is the same bench mark rate paid to any owner of US Treasuries. The SSA web site identifies the notes, rate of interest and term. If it had not paid or credited the interest, then the Trust fund would be very zero today.
“This concept was disproved in 1976. “ to the satisfaction of people who want to kill SS.
REPLY: How was it disproved? They raised the tax and base again as had been done since 1950 when SS-OASI was on the verge of being unable to pay full benefits. In 1950 they began enrolling the other 50% of low income and very high income workers who were excluded from the 1935 SS Act. The reason to exclude low income workers was based on cost. Low income workers take far more out of the system than they contribute as a whole. High income workers under Rosevelts plan did not need SS-OASI and for that reason it was seen as a program supported by workers for workers, not wealfare.
“To duplicate SS-OASI with wage indexed benefit formula, the payroll tax needs to be about 6%” Only if you assume you can invest all of it at real returns exceeding what we have seen in the last generation. Without SS you would need to set some of that aside to support your parents, so it is not a valid analysis.
REPLY: You missed the point. To create a fully funded program you cannot begin to pay benefits until the age you start with at age 21 reaches age 67. This means that those who are over age 21 when you begin the program do not pay and do not collect. In 1937 when the payroll tax was begun at 2%, they had 50% of the work force contribute. Some were age 62 who in three years would collect a benefit that would be little different from that of a 21 year old who would pay for 46 years. The problem is the person who was age 62 would have to pay a tax greater than 100% to pay for his benefit. You are correct, when creating a program such as SS-OASI you need to design it in such a way as to meet the payment criteria. In this case Congress did not design SS-OASI to take care of the transition period; they just ignored it. Now it is the large elephant in the budget that is gobbling up workers paychecks.
REPLY B - PART II
“SS sent me a statement that says they can pay 76% of promised benefits under current law” Since initial benefits are indexed to wages, not COLA, that 76% for someone retiring in 2037 will buy a better standard of living than 100% for someone retiring in 2011. There
“You suggest as our standard of living increases, we can afford to support seniors in the same life style.” Not what I said. A portion of the increase in our standard of living is enough to cover the increase in lifespan of our parents. This will be true for our children and their children as well.
REPLY: Please provide the math for this. I have done it and it does not work. COLA has been paid by current workers payroll taxes. They took current funds and transferred them to current retirees, thus increasing their standard of living. This increase in cost has created much of the unfunded liability and therefore cause much of the reduction in payable benefits of 76%
“There is a myth about life span.” You are correct and I use the same post-retirement figures.
“Life expectancy past age 67 is increasing at an ever decreasing growth rate.” Take a look at the SS reports and you will find that the growth rate is not decreasing.
REPLY: I did look at the period cohort life tables. The rate of growth has been slowing since 1900. When I was born the rate of growth from one year to the next birth year was over 30 days, now it has dropped to 18 days.
“If my "increased wages" due to knowing more, doing things better, etc is now to be taxed away, would my standard of living increase? Is this what those who came before me experienced?” No, but that is not what you are experiencing either.
REPLY: There is a mathematical formula called a GRADIENT. It takes two exponential curves such as rate of return and replacement rate (inflation) and allows you to calculate what rate of savings from the day you begin work to the day you project retirement and death to meet a particular output.
I suggest you take a look at http://www.justsayno.50megs.com
"It is not the responsibility of workers to take care of others. It is the individual’s responsibility to take care of themselves."
I guess we disagree at step one.
It is my responsibility to see that there is an adequate safety net for others, especially those who have built the society that has given me the opportunity to do well. My parents have “earned” their SS not because they contributed large chunks of payroll tax, but because they have been part of a compact to take care of our elders.
REPLY: I mistyped. It is not the responsibility of government to take care of those in need. I believe it is the people themselves who do a better policing and providing than one fit all legislation. For me to help others, I must first take care of my own family. After providing for my own family, I then can help others such as family (parents) and others. The problem today is the government has mandated that 15.3% of my wages, my family income is to be taken and given to someone I do not know, who in many cases may live far better than I do. In 2002 according to the IRS, the median income of a senior was nearly $85K. Eliminating pension and SS-OASI reduced the median income to $50K. This means we have two categories of people in the US. Those who saved and those who did not.
By my calculations using the Gradient formula I wrote about above and is on that web site, a savings rate of 10.6%, identical to the SS-OASI tax rate would provide 52.58% of a person’s income living at age 90. This is far better than SS-OASI has promised and nearly 100% more than SS-OASI can pay. It does not take high rates of return, but safe returns such as US Treasuries or US savings bonds indexed to inflation.
Think about wealth creation. What if better wealth wise: paying 5% mortgage for 30 years or using SS-OASI tax to pay a higher principal? In essence using SS-OASI tax to apply to a mortgage reduces the term from 30 years to 14 years 8 months. The net at the end of thirty years is a home paid for, plus over $282K. With SS-OASI you have a home and a promise that SS-OASI would pay a present value of less than $140K.
“Why should the future generations agree to pay [the transition cost] when past generations did nothing to minimize the impact?”
They should not, but they do not have to. The unfunded liability (transition cost, backward transfer, whatever name) is never paid because that is the way it works. Mathematically, it keeps growing forever. Dwelling on the number is a diversion.
“Please provide the math for this”
http://www.ssa.gov/OACT/TR/2011/lr6f6.html
Using a representative payout of 45 percent:
Average wage this year: 43517, CPI adjusted 42360, 45% -> 42360.
Average wage 2037: 121470, CPI adjusted 62552, 76% * 45% -> 47540.
The 2037 retiree can buy more with his benefit even if it is cut to 76 percent. Note that in about 5 years this will not be true anymore.
“In 2002 according to the IRS, the median income of a senior was nearly $85K.”
You need to check the validity your data. ftp://ftp.bls.gov/pub/special.requests/ce/standard/2009/age.txt says the average senior household income was only $39K in 2007. The median would be significantly less.
“By my calculations using the Gradient formula …”
Your calculation sounds about right for that size investment, but the size is wrong. You need to reduce your 10.6% by the amount that would go to your parents/grandparents if there was no SS. (My grandmother was wiped out by the Depression and lived to 98 – SS was not enough.) You are double counting – investing the money, but also spending the same money.
"Think about wealth creation." SS is not about wealth creation; it is about providing for those who were unable to create enough wealth to last their whole lives.
Note that if there were an endowment to cover all of the benefits SS pays each year, it would be larger than the entire capitalization of the NYSE. It would be larger than the US debt.
“Why should the future generations agree to pay [the transition cost] when past generations did nothing to minimize the impact?”
They should not, but they do not have to. The unfunded liability (transition cost, backward transfer, whatever name) is never paid because that is the way it works. Mathematically, it keeps growing forever. Dwelling on the number is a diversion.
REPLY: IF the transition cost is never paid, then the unfunded liability is infinite. Who is going to fund this? The only way to fund it is to raise taxes. The tax rate needed to pay benefits at the current rate based on population is: http://www.justsayno.50megs.com/ss.html
http://www.justsayno.50megs.com/pdf/old_age_tax.pdf
“Please provide the math for this”
http://www.ssa.gov/OACT/TR/2011/lr6f6.html
Using a representative payout of 45 percent:
Average wage this year: 43517, CPI adjusted 42360, 45% -> 42360.
Average wage 2037: 121470, CPI adjusted 62552, 76% * 45% -> 47540.
The 2037 retiree can buy more with his benefit even if it is cut to 76 percent. Note that in about 5 years this will not be true anymore.
REPLY: The beneficiary in 2037 can buy more than a person today because of wage indexing. However, that beneficiary in 2037 will buy less than the beneficiary in 2067 due to wage growth. What you want to do is make today’s standard of living the same for all. Inflation maintains buying power in the year the beneficiary turns 60. Because wage growth is used to determine the initial SS-OASI benefit, each succeeding cohort will have a slightly higher initial benefit (unless the US average Wage decreases).
To get a wage in 2037 of $121,470 requires slightly more than 5% wage growth a year. I am not sure where you get this from and if you believe this, then you need to look at http://www.ssa.gov/OACT/COLA/AWI.html.
You are confusing CPI, Wage Growth and Buying power.
“In 2002 according to the IRS, the median income of a senior was nearly $85K.”
You need to check the validity your data. ftp://ftp.bls.gov/pub/special.requests/ce/standard/2009/age.txt says the average senior household income was only $39K in 2007. The median would be significantly less.
REPLY: Go to IRS web site” Table 1.--Individual Income Tax, All Returns: Sources of Income and Adjustments, by Size of Adjusted Gross Income, Tax Year 2002” http://www.irs.gov/pub/irs-soi/02in01si.xls used to be the link. I went, but it is no longer bringing up their data file. Actually, the average is far less than the median income for seniors. When I looked at the data, there was a MAY-WEST SHAPE CURVE.
“By my calculations using the Gradient formula …”
Your calculation sounds about right for that size investment, but the size is wrong. You need to reduce your 10.6% by the amount that would go to your parents/grandparents if there was no SS. (My grandmother was wiped out by the Depression and lived to 98 – SS was not enough.) You are double counting – investing the money, but also spending the same money.
REPLY: No, per SS-ACT that was signed by congress and FDR, the program was to be a self funded program, paid by workers for workers. It was never meant to require three generations of workers to fund one generation of beneficiaries. Your grandmother was wiped out by the depression, what about other family members? Your grandmother seems to have taken all your parents paid in plus what you are going to pay in. How is that working out for you? The actuarial tax rate for SS-OASI is between 5.1% and 6.5% for a fully funded program. The SS-OASI payroll tax is 10.6%. Where am I double dipping? What you seem to fail to realize is that SS-OASI ran negative cash flows between 1957 and 1965, 1970 through 1983 when the trust fund was exhausted and was allowed by legislation to borrow $11 Billion from the SS-DI and Medicare Trust funds. This borrowed money was paid back over the next three years. The sum total of the SS-OASI trust fund is solely due to surplus tax revenues since 1985.
In 1937, there was liability, no unfunded liability and no beneficiaries, just workers. Benefits were not to be paid until 1941, but Congress decided to pay benefits beginning in 1940. Did your grandparents generation or for that matter your parents generation have any responsibility for paying their fair share of Social Security?
Library closing, got to go
Follow the link. latest census
http://www.census.gov/hhes/www/cpstables/032009/hhinc/new01_001.htm
65 years and over - median income = 29,744
65 years and over - mean income = 45,536
Andrew,
You need to have a system that allows links as text without cutting them off.
http://www.census.gov/hhes/www/cpstables/032009/
hhinc/new01_001.htm
census data
"Your calculation sounds about right for that size investment, but the size is wrong. You need to reduce your 10.6% by the amount that would go to your parents/grandparents if there was no SS."
Bill - Andrew ought to pay you to contribute here. I would suggest that SSA should hire you but I think you might close the place down.
@Arne, Social Security isn't suppose to take care of our 'elders'. Otherwise it would paid to all elders. It is only provided to people who contribute. So the logic that it is necessary to take care of the elderly is faulty.
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