Friday, May 10, 2013

Matt Miller: Expand Social Security

Wiring for the Washington Post, Matt Miller speaks favorably of the New America Foundation proposal for expanded Social Security, an additional flat dollar benefit that would increase the size and cost of the program by around 75 percent.

I’m not a fan of the idea – as I discuss here, I think it will cost too much while hurting the economy – but Miller hits on a second issue, of how to pay for it. Miller says,

One way to fund it would be through a chunk of the proceeds from the value-added tax that’s almost certainly coming in an aging America.

This highlights Washington’s perennial problem: starting a new program before you’ve paid for the ones you’ve already got. We’re already well short of the revenues we need to pay for the Social Security, Medicare and Medicaid programs we’ve got, and the shortfalls in those entitlements would be enough to swallow up pretty much the whole of any politically-palatable VAT plan. To start allocating the proceeds of a tax we don’t even have to a new entitlement before sorting out how to pay for the underfunded entitlements already on the books seems ill-advised.


Politics Debunked said...

re: "We’re already well short of the revenues we need to pay for the Social Security, Medicare and Medicaid programs we’ve got"

Yup, and a bigger problem is that we don't really don't even have credible estimates for how much the will cost, let alone adding something more. As I pointed out before, someone from the tech biz world did a critique of the government's "business plan", its annual report for the long term future of social security and had difficulty believing the government gets away with such a low quality report for such a major program. The comments on the page just scratch the surface of the critique that should be done on it.

Although privatizing it seems a better option than expanding it (and dealing with the question of the poor separate from the issue of it as a retirement plan), that is a debate for another time. The issue is that at minimum they need to make sure the existing program is planned better before even considering expansion.

Arne said...

I also would focus on Social Security's current condition before expanding (or privatizing) it. That focus should include getting people to better understand SS is (and is not). Pretending that the annual report is a "business plan" is definitely a step in the wrong direction.

The report deals with the Trust Fund, which is there to accomodate the variation in difference between income and costs. It is a report to Congress, because it is Congress' job to continually modify the Act to keep income and costs in balance.

If you analyze SS as a retirement plan, you find that it is not a good one. Instead on concluding that it is a bad retirement plan, you should conclude that it is not a retirement plan.

When you read the annual report and find that "High Cost" is not the highest cost, you should reassess your assumptions. "High Cost" is simply the economic and demographic variables all taken to limits that reduce the life of the Trust Fund. HC is not even considered a meaningful scenario, as the variables are not independent.

The annual report is more than adequate to demonstrate that Congress is going to need to do something about SS to adjust for the fact that living longer in retirement costs more. It will be a challenge, not because SS does not do what it was designed to do, but because so many people want it to do something different.

WilliamLarsen said...

So what is social security? Does it really matter. Some say it is is ponzi scheme, others a retirement plan, others a guarenteed benefit while others say it is an insurance policy. What ever one wishes to call it does not change the fact that it stinks for current workers and will only get worse for future workers. It was a fantastic deal for those born prior to 1940 and most likely for those with a non working spouse born prior to 1955 and after 1940 was a good deal.

The problem since 1950 when Social Security first recognized its funding was a problem began the base, tax and age increases that have made the program an ever growing expense for current and future workers.

I agree with Arne, people have totally different views of what SS is. If you look at historical records, the vision was a fully funded program. Reality shows the design could never fully fund the program and that in reality as Altmeyer testified in 1943 and 1944 some future generation would pay far more in taxes than the benefits are worth.

If we scrap it, current and future workers loose less while current beneficiaries under age 75 will carry the brunt of the cost (no benefits).

Arne says SS is not a retirement plan, if it is not that what is it?

Arne says living longer increases cost, but "living" longer is not quantified. When you look at SSA's cohort life tables, the true cost to SS-OASI of living longer is ten times smaller than CPI. A person born in 2013 will lives 18 days longer than a baby born in 2012. When you look at a half month additional SS-OASI benefit cost over a working span of age 21 to 67 and a life span at age 67 of about 21 to 22 years, you find that the percent incremental cost due to increased life span is less than 0.03% amortorized over a working life time.

Do you want government controlling your future or do want to control it?

Arne said...

SS is how an industrialized society takes care of its elders. A form of "Honor your father and your mother".

Why on Earth would you compare the increased cost of living longer to CPI? On top of that you have the number wrong - it is about 36 days per year, which is about 3 years every generation, which is about 15 percent of a typical retirement.

Whether through private accounts or through SS, living 15 percent longer in retirement than your parents is going to require more funds.

WilliamLarsen said...

Arne the latest SSA cohort tables show the average increased life expectancy is 18 days at age 67.

For Males, the life expectancy at age 67 in 1990 was 18.47 years or 6,741 days. In 2000 the life expectancy at age 67 was 18.94 years or 6,013 days. Interpolating this linearly shows that the increase in male life expectancy at age 67 over 10 years was 171.55 days or 17.5 days a year.

For Females, the life expectancy at age 67 in 1990 was 21.39 years or 7,807.35 days. In 2000 the life expectancy at age 67 was 21.90 years or 7,993.50 days. Interpolating this linearly shows that the increase in male life expectancy at age 67 over 10 years was 186.15 days or 18.6 days a year.

We can get a combined male/female cohort increase per year by looking at the number of males and females living at age 67.

When one looks at the SSA cohort life tables starting in 1900 and evaluate the rate of change of this 100 years, one finds that the rate of change in increase life span has been decreasing and more rapidly in the last 30 years. In other words when you look at fitting a curve to increase life span at age 67 it is slowing . This is why I say a baby born in 2013 will live about 18 days longer than a baby born in 2012.

CPI is related to increases in costs for SS-OASI. If the cpi goes up the cost goes up. If the cpi goes up by 2%, the costs go up. Over 22 years on average for those born in 2012, a COLA increase of 1 to 2% is much larger than the longevity cost of OASI. That is why I made the comment. The longevity cost is a red herring.

The more red herrings that are circulated, the more difficult for people to understand social security. The more SS-OASI is misunderstood and the more myths that are circulated the more fractured any consensus will be. In other words politicians love red herrings, myths and lies to avoid making difficult decisions.

Arne said...

I did not see that you used this year as the birth year instead of this year as the retirement year. If you use guesses for what will happen 67 years from now you do get a 50 percent difference. It just confirms what I said in another thread about doing the wrong analysis. Even so, living 8 percent longer in retirement than your parents is also going to require increased funds.

Arne said...

"If the cpi goes up the cost goes up"

As I explained to Debunked, the concern is not total cost, it is the difference between cost and income, which is not particularly sensitive to CPI, because income also increases when CPI increases. Sure it is important to know, but it is not something to compare to.

Andrew G. Biggs said...

I believe there's a tiny gain from higher inflation, because benefits aren't indexed to inflation between age 60 (the year wages are indexed to in the benefit formula) and age 62, when benefits start being adjusted with COLAs. A very small effect, though.

WilliamLarsen said...

Decades ago I came up with what I call the Critical Worker to Beneficiary Ratio related to the payroll tax for a pay-as-go program. With the current 10.6% payroll tax, the ratio took into account the slight difference between US Wage growth and CPI (COLA). As Andrew pointed out there is a slight difference which is generally positive for Social Security, thus reducing the actual ratio of (42% targeted benefit divided by 10.6% payroll tax). This ratio is 3.96.

The ratio I came up was around 3.3 to 3.4 workers to beneficiary. The difference between 3.96 workers and 3.4 - 3.5 workers is the slight advantage of wage growth over COLA.

" If you use guesses for what will happen 67 years from now you do get a 50 percent difference. It just confirms what I said in another thread about doing the wrong analysis."

I have always stated that trying to predict the future is difficult, especially for a program like Social Security that is designed by politicians who for the most part could not balance a check book. As an engineer I have done a lot of back of the envelope calculations to show just how far the concept is from success. Some of these calculations are so far from reality, they are not pursued. However, when some calculations show it is close more in depth analysis is done. Social Security's design is so from from being successful, any rational person would not even attempt such a thing.

"Even so, living 8 percent longer in retirement than your parents is also going to require increased funds." My father was 32 years older than I was. When I look at his birth cohort life expectancy at age 65 and mine at age 65, I find my cohort will could live 15% longer. When I look at my son's cohort, it appears he will live 10.6% longer than I at age 65 (I was 31 when he was born).

The rate of growth between my dad and me is 0.44% a year. With inflation of 2.5%, which has a greater affect on the amount I need to set aside today to fund my retirement in the future? Clearly inflation is much higher. If I wish to fund my retirement based on the growth in standard of living of society, I need to us Wage Growth which is even higher.

For my son, the rate of growth compounded yearly over 31 years is 0.33% a year.

The problem is that Social Security is not prefunded. It is because of this problem that taxes, base, retirement age and taxing benefits has sustained it thus far. We are pushing the cost higher. What if we were to keep costs the same and reduce benefits? In simple terms keep the tax at 10.6% and index the CAP based current US Wage growth (pretty much the way it is now).

The 1984 legislation that mandated Social Security have a balanced budget (no general revenues may used to pay benefits) basically does this. The problem is that today's workers are getting the shaft compared to what they paid in. I do not think this is the American Way, it is the way Ponzi schemes rip people off.