Monday, April 8, 2013

Are you entitled to your entitlement benefits?

The argument against cutting Social Security and Medicare is that Americans “earned” those benefits through the taxes they paid over the years. But did they? The New York Times looks at the issue here.

I ran some numbers on Medicare benefits here.


JoeTheEconomist said...

These studies have a number of problems. They do not factor in unemployment for example which is a pretty unlikely hypothetical case. They also ignore the impact of the Trust Fund exhaustion.

This would lower contributions. On the other side, they adjust the contributions at 2% real. This means that you are effectively saving 100% of your retirement funding in Treasuries. The stock market through all of its crashes generally returns more than double that rate.

The persistent question that I see about these reports is that they do not connect life expectancy to wealth - rich people live longer.

What would happen to the returns if you used 4% real instead of 2%?

Have you seen any studies here that connect benefits based on longer-life expectancy for wealth?

Andrew G. Biggs said...

I think those results basically hold even if you discount at the government bond rate, which will (in these calculations) be around 5.5% nominal.

WilliamLarsen said...

The question as to whether you are are entitled to your Social Security Benefits is a double edge sword. First, workers page OASI taxes. This is easily identified as it the US Treasury Rate that would be earned on these funds had they been set aside for the worker. Calculating the present value of these funds is simple math and exact (tax rate, wages and US Treasury rates paid are KNOWN.) The more difficult calculation is how to calculate the annuity that could be paid based on the funds present at the year one retires. We are dealing with a compound gradient (COLA and Return rates). Life span for a specific cohort are fairly precise. Knowing the birth year, sex and age at which one would draw OASI, one can pin point the number of years one would draw.

One could be conservative and use a low rate for return and a high replacement rate. This would show a lower annuity value. When I performed the calculation for my father born in 1924 I calculated his funds would have been depleted seven years after he began drawing, yet his cohort life span was nearly 18 years. But the problem for my father's cohort got worse when I included my mom born in 1929 who never worked and was awarded a non working spousal benefit equal to 50% of my dad's. Now my father made above average wages, but then it was not difficult to reach the wage base in the 50's, 60's of 70's did.

Based on my calculations my dad took $8 in benefits out for each dollar in taxes and credited interest at the US Treasury Rate.

When I perform the calculation on my self, I find that I will get about 52% of what my OASI taxes would pay base on inflation at 2.5% and US Treasury Rate of 5%. Now if I add in my wife who has lower wages and far fewer years of work than I have, then the % increases, but not enough to get to $1.

For those born prior to 1940, I can say those cohorts did not "earn" there benefits. For those born after 1950 I can say you earned your benefits.

The problem is that Social Security was not designed to work. Those who have passed on were paid far more than their taxes paid would support. The fact that we boomers did nothing when Greenspan Commission proposed raising the tax, base, retirement age and began taxing benefits is our fault.

The fact that in moral terms we boomers can say we earned our Social Security benefits does not nulify the immoral theft that in order to pay our benefits we must propagate an immoral program on our children and future generations. When does it stop?