Monday, August 10, 2015

Republicans debate Social Security changes

Hazel Bradford of Pensions & Investments looks at an exchange between Gov. Chris Christie and former Gov. Mike Huckabee at last Thursday’s Republican presidential debate:

New Jersey Gov. Chris Christie, who plugged a 12-point entitlement reform plan, proposed raising the Social Security retirement age to 69 from the current 67, by increasing it one month each year over the next 25 years, starting in 2022. He also called for eliminating benefits for people with retirement income above $200,000 and more than $4 million in savings. Not dealing with Social Security, he said, “will bankrupt our country or lead to massive tax increases.”

Former Arkansas Gov. Mike Huckabee defended the program, saying that of the 60 million Americans receiving Social Security benefits, one-third rely on it to provide 90% of their income. Mr. Huckabee challenged members of Congress to give up their own retirement benefits first.

Check out the whole story here.


WilliamLarsen said...

Means testing is coming. When the IRA was first introduced when SS-OASI was running continual negative cash flows and its ability to pay full scheduled benefits was just a few years away, my siblings I discussed why an IRA was really being introduced.

It was clear that those who already were saving after tax would simply save using an IRA. The ira would have little impact on overall savings. Politicians stated that individuals needed to save more. The problem was where would the working class get funds to save? the only place was to cut spending and that was minimal at best. So if the government could get people to save then they could be made out to not need SS in the future solely because they had saved enough and would not need SS-OASI as badly as others.

In many ways the IRA, Roth, 401K were all tax give aways. Decreasing general income tax revenues while increasing spending increasing the national debt overall. Now the government is saying its time to pay up. You did well saving and now you do not need SS.

It was only a matter of time. Segregate a small fraction of the voting block and garnish the others to rise up and agree with politicians. Reminds me of the cartoon that has a politician talking to a group. One in the group one can you do for me. The politician replies "I can take that person money and give it to you."

Social Security broke up the family unit and now it is breaking moral laws as well.

Not one politician understands the problem, yet all have basically the same solution - kick the can down the road.

Arne said...

"Social Security broke up the family unit"

It seems to me that SS is a response to the reality that industrialization was changing society (breaking up the family unit as you say it). Those of us lucky enough to have family or to not be laid off or to not have huge medical bills enter into a compact to take care of those who are not so lucky. We do so willingly because it is moral and because we do not know when we are young which group we will be in. SS is popular because most of us know people who it has helped even if we can do the math to see that it does not pencil out (spreadsheet out?) for the lucky folks who get to save for their retirements for a full 45 years.

Most people are willing to pay what it actually costs for that insurance if they can just get someone to tell them how much.

JoeTheEconomist said...

Andrew, It was an exchange was heavy on drama and light on facts. Christie's plan isn't detailed, and doesn't work. There is no source for SS to measure net-worth. There is no detail on how Christie would shelter existing retirees. Huckabee's plan doesn't make the system remotely solvent.

They fill time with distraction. It is silly to talk about Congressional pensions as though it is a major contributor to the problem. Huckabee talks about retirement age as though it were still 65. Christie closes with a reference to the IOU non-sense.

In all, the questions weren't hard, and the answers weren't clear.

Arne said...

JtE, you say, "Today’s workers do not expect to live appreciably longer in retirement than retirees today."


Life expectancy for males at age 65
1940 11.9
1975 13.7
2010 17.6
2045 20.4 (est)
2080 22.2 (est)

A 26 percent increase in 70 years. If people were not living longer, SS would be close to a permanent surplus (given the raise in retirement age to 67).

JoeTheEconomist said...

The expected increase in life expectancy of a retiree between 2000 and 2050 is about 2.5 years longer according to the actuarial study 120. (So we may be looking at different estimates.) In order to collect full benefits you have to work an additional two years which almost pays for the longer-life expectancy by itself.

Given that the cost of the program has risen roughly 15 fold, yes I would call 26% tiny.

Arne said...

"the cost of the program has risen roughly 15 fold"
If the benefits have also risen, then this is not particularly meaningful.

JoeTheEconomist said...

It is very meaningful in the context of retirement. In the 1950s you could buy a dollar of insurance protection for $0.12. Today it is closer to $1.10.

Life expectancy is a centerpiece of the calculation. The longer life expectancy that a worker has the lower the cost if it remains constant. The problem is that the cost is rising much faster than the benefits associated with the insurance.

The more cost exceeds $1.00 for the $1.00, all we are doing is shifting poverty through time.

Arne said...

My comment about rising benefits did not fit with where you were going, but I still think your comments lack real meaning.

Talking about buying a dollar of insurance is odd since there are no products to insure retirement income the way SS does. With SS the second dollar does not give you twice as much as the first did. The cost of insurance is lower for workers who end up needing insurance more, so your $1.10 number needs lots of qualifications to have even some meaning.

Comparing the insurance cost for someone in 1950 to someone today is downright silly. It is a feature of SS that those who were wiped out by the Depression paid less. Even if Congress had not changed the rules (and done a poor job of it for many years), there was a startup period of (at least 40 years) which needs separate treatment in any meaningful analysis.

Up until the late 70s the reason the ratio of workers to beneficiaries was dropping was primarily because we were still in the startup period. Since then it is mostly because we are living longer.

WilliamLarsen said...

"It is a feature of SS that those who were wiped out by the Depression paid less. Even if Congress had not changed the rules (and done a poor job of it for many years), there was a startup period of (at least 40 years) which needs separate treatment in any meaningful analysis."

Startup period? How many decades should it have taken to get the payroll tax from 2% to 7%? If you truly believe the legacy is a startup cost, who is responsible for it and when should an additional tax been levied to pay it?

Like any debt, the longer the term of repayment, the smaller any incremental decrease in annual payment there is.

A 5% debt with a term of 30 increasing the term by 10 from 30 to 80 shows the decrease in payment decreases exponentially to the point where the debt becomes perpetual.

term payment reduction in payment due to increase in term
30 100.0% 0.0%
40 89.6% 10.4%
50 84.2% 6.0%
60 81.2% 3.6%
70 79.5% 2.1%
80 78.4% 1.3%

Increasing the term from 30 to 80 increases the term by 166.7%, yet decreases the payment by less than 22%. How many generations must be held accountable to the startup that they did not benefit from?

Arne said...

" How many generations must be held accountable to the startup that they did not benefit from?"

The question again indicates an unwillingness to understand how Pay As You GO works. The is no debt to be paid.

JoeTheEconomist said...

If there is no debt to be paid, then you will have no objection if younger workers just end it. Otherwise you do believe there is a debt.

I think Bill does understand the concept of Pay As You Go. Your answer again indicates that your unwillingness to understand that pay-as-you-go systems don't work.

Arne said...

"Otherwise you do believe there is a debt. "

Something for me to think about, but if the numerical amount increases every year, is it meaningful to talk about paying it? SS had adjustments all through its 45 year startup period and it needs continuing adjustments going forward, but it has demonstrated that PAYGO can work. Still, Congress can screw it up if they listen to people who say it does not work.

WilliamLarsen said...


What is social security worth, pretty simple question. Most everyone is faced with choosing to buy or not buy a any given product or service every day. TO I splurge on the chocolate milk for my kid at $3.19 a gallon on sale or do I buy a 1/2 gallon of ice cream, which will my kids like best. Then there are the larger purchases. DI replace my 1999 Buick regal with 251,925 miles and get a car that has working AC and puts out heat all the time, a driver's side window that will not go up/down and is beginning to show rust - reliable, cheap to operate (insurance, registration), life time brakes, tie rods, discs, new tires and it is not driven more than 20 miles at a time?

Then we have social security. Today it costs a worker 10.6% up to $118,500 of wages. SSA says it can pay 75% of your scheduled benefits. Congress is talking about raising retirement age, taxes, base and mean testing benefits of those who saved.

The current program has 165 million workers and 43 million beneficiaries (age FRA) and is running a negative cash flow. It takes 3.74 workers paying 10.6% of their average wages to pay just one average beneficiary and still SSA runs a negative cash flow. Is this good? Arne says raise the tax rate as has been done in the first 45 years of the program. The OASI has change 28 times since 1937. However, of these 28 times 15 times were when the payroll tax was over 7%. Should we really count the payroll tax when it was under 7% when it created the problem we have today? Paying benefits far in excess of the payroll taxes paid created a perception that Social Security worked. Now everyone wants the benefit they believe they paid for.

Now lets assume the boomers are paid 100% of scheduled benefits without anything more than a payroll tax increase. Do you have any conceivable idea what that payroll tax would have to be? The SSA states the worker to beneficiary ratio will be about 2.3 to 2.5 in 2045. With the decrease in birth rates it is pretty obvious that the 60 million boomers would need at least 230 million workers. That means we need 65 million more workers over the next 30 years? But wait, the boomers will not be the only generation collecting at the same time. The will be some born prior to 1946 collecting and those born after 1962 collecting for a period of time raising the total number of beneficiaries to around 72 million.

The worker to beneficiary ratio has been slowing decreasing for a long time. The pill and abortion have dramatically decreased the population trend line. That "tend line" is a bit of cliff in terms of beneficiaries and workers that did not affect beneficiaries today or their predecessors.

What do you think will happen if the payroll tax went to 16.4% - .41/2.5? Can you you even grasp this? What happens if the ratio drops to 2.3 - 17.8%? This type of tax increase is magnitudes larger than any before them.

In 1950 the payroll tax was raised 50% from 2% to 3%, a large percent increase, but with a small payroll tax you could raise it 100% and it was not much of a dent, in fact it was still inadequate to pay even 60% of the current benefit.

I just do not see my grand children paying 18% to OASI, 4% to DI and 7% to Medicare and then pay federal taxes of 18% in the future. If that were to happen, then my generation of boomers are nothing but a bunch of greedy old farts. We voted for representatives and if they screw up it is our fault. We need to own up to this.

Arne said...
This comment has been removed by the author.
Arne said...


There are a few problems with your analysis. 3.74 workers per beneficiary is an historically high value. The ratio trends down as productivity improves, but has fluctuations when recessions depress wages. It has been as low as 3.2 in 1990 and is forecast to be at 3.1 in 2045. On top of that you are only including income from payroll taxes. There is also income from taxation of benefits and income from interest on the Trust Fund.

According to the SSA a tax increase of 2.6% (to 13.4%) would fix OASI for 75 years. Your numbers are unbelievable.

The cost of retirement will continue to rise as long as we keep living longer whether we pay for it through SS or through private savings. As average wages rise, people will need to set aside an increasing portion of the increase if they want to maintain their standard of living, but it will only be a part of the increase. Our kids will still be richer than we are.

WilliamLarsen said...


You brought up some good points. I will try to address them. If I miss any, please let me know.

Let me clarify a few things. When I speak about SS-OASI I am talking only about OASI and not DI. In addition any values I use are related to Full Retirement Age (FRA). Early Retirement Age (ERA) at age 62 is generally when most take SS-OASI. ERA reduces the initial OASI Benefit by 5/9ths of 1% per month. In general ERA is 80% of FRA benefits and it will increase as the FRA reaches age 67.

That being said the targeted FRA OASI benefit is 41%. That would mean the targeted ERA OASI benefit is 80% of 41% or roughly 32.8% of life time indexed wages.

When I began modeling OASI I had a population file sent to me by the SSA with ages 0-100, males, females, married, never married, divorced widowed, single. I could attempt to model OASI with varying numbers at each age or I could assume FRA. I am told that ERA is based remotely on actuarial calculations, but I have not been able to verify this. Therefore, I assume everyone is FRA. This means when I talk about 41% targeted benefit divided by worker to beneficiary ratio I am talking about those over age 65+ and not those who are actually retired age 62-65. This increases the ratio.

However, we can look at ERA since 90% take OASI at age 62 - 2 months is the last I saw. This would reduce the initial OASI Benefit by 18.9% assuming ERA of 62yr 2mo. Keeping it simple we then have a targeted ERA of 33.3% of life time indexed wages. Using your ratio, 10.6% x 3.1= 33.9% of life time indexed wages. This is slightly higher than the Targeted 33.3%. However, you brought up 2045 of 3.1. Assuming it ERA and it is 2045, FRA is now 67 and this means a reduction of 32.8% for a target of 27.56% life time indexed wages. According to the SSA’s intermediate population file I have, the US population is 360.285 million with 66,249,495 age 67 and over. Ages 19 – 66 total 218,478,530. If 100% of these potential workers work the ratio would be 3.17. The problem is the highest labor participation rate we have ever had was around 77% which would mean we would have 168,228,468 workers. This would be a ratio of 2.54. However, looking at labor participation rates I would estimate that with today’s 63% labor I would not expect much higher than 70.

Labor participation rate is reduced by woman having babies (4 million babies a year), unemployment (4%-5%), job changes, sickness, early retirement, stay at home spouses.