Social security won’t be around long enough for me to collect it

by John Quiggin on March 23, 2014

Salon has a couple of interesting articles about millennials. Tim Donovan focuses on the plight of young people without college education who are suffering the combined effects of long-term growth in inequality and the scarring that comes from entering the worst labor market in at least a generation1. Elias Isquith has a piece debunking Rand Paul’s prospects of pulling the millennial vote (I’ve seen a few of these lately, which may or may not mean anything), which includes the following observation

Despite the fact that a whopping 51 percent of millennials believe they’ll receive no Social Security benefits by the time they’re eligible, and despite the fact that 53 percent of millennials think government should focus spending on helping the young rather than the old, a remarkable 61 percent of young voters oppose cutting Social Security benefits in any way, full stop.

The idea that “Social security won’t be around long enough for me to collect it” is a hardy perennial, and thinking about it led me to the following observation:

It’s now possible for someone to have spent their entire working life believing that Social Security would not last long enough for them to receive it, and now to have retired and started collecting benefits. This belief has been prevalent at least since the early years of the Reagan Administration when it was pushed hard by David Stockman, and I’m going to date it to the first big “reform” of the system in 1977. Someone born in 1952, who entered the workforce in 1977 at the age of 25, would now be turning 62 and eligible to collect Social Security. I’m betting that, in 20 years time, when the 1952 cohort reaches their average life expectancy, having enjoyed their full entitlement to benefits (assuming no ‘grand bargain’ intervenes) that the belief will be just as prevalent


  1. As I’ve argued many times, the shared experience of entering the labor market in a recession is one of the few instances where membership of a particular generation is more than a marketing label. 

{ 122 comments }

1

StevenAttewell 03.23.14 at 3:46 am

Seems like it would be a good idea to invest some time doing issue education to millenials on raising the Social Security cap to extend the fund through 2044, at which point we will be in striking distance of retirement…

2

hardindr 03.23.14 at 4:36 am

Mainstream people in the media have been dissembling about Social Security for decades now, so why wouldn’t people be totally confused?

Example: http://www.dailyhowler.com/dh120804.shtml

3

hix 03.23.14 at 5:15 am

I will get no benefits whatsoever is a very extreme position. Are Americans really that pessimistic? Ill never get a return that can match tips, that one would already be less crazy. Now move back to the 1990ths stock market and the widespread asumption that it is normal for stocks to return 15% and that there is no risk in them. In such an environment, it is understandable that social security looked like a horrible deal for many.

4

Joey 03.23.14 at 6:36 am

Maybe on some level they don’t really believe they’ll live to be that old.

5

shah8 03.23.14 at 7:15 am

I don’t particularly believe it will be the case for those so lucky enough to be workers because I believe that this era is a slow motion crisis/meltdown. Between the worldwide economic demand crisis (effectively because disempowerment of normal people rather than no cash, precisely) and global climate change, I expect that world governance tendencies will be changing by the end of the 2020s. Of course, people my age could possibly get SS, but I strongly doubt Millenials will.

6

Phil 03.23.14 at 9:25 am

I may be reading this wrong, but… despite the fact that they believe that SS will have been cut down to nothing by the time they become eligible, they oppose cutting down SS now? In what world is that a surprising finding?

7

Metatone 03.23.14 at 9:56 am

To add on to the comments so far – I think there’s a number of questions at work here regarding this belief.

1) Why?
2) Given that why, is it likely?

I might believe that by the time I retire, the right wing will have dismantled it. I think that belief has reasonable odds.

Looking at my own mother’s pension situation in the UK, one can also believe reasonably that there’s a mismatch between the way these things are designed and the inflation environments involved. Is £X, which is enough to live on now, still enough in 10 years time – let alone Y years time when I get to retirement age?

(For any work ethic moralists out there, I have no desire to stop working, but one must be realistic about the way job market views older people…)

However, as noted, media narratives have concentrated on the “it will be bankrupt” meme – which seems the least likely to actually occur…

8

Peter Whiteford 03.23.14 at 10:20 am

Also expressed as “we must cut benefits now so that we don’t have to cut them in the future”.

9

Shane 03.23.14 at 11:02 am

John, thanks for spelling this out. It’s one I hear all the time and attempt to counter, but it’s so hard to effectively counter cynicism like this (dismissing positive arguments being what cynicism’s all about). It’s nice to have a simple deployable push back like this.

10

UserGoogol 03.23.14 at 11:24 am

I have to wonder how much of that statistic is active pessimism about the fate of the Social Security program and how much of it is just general uncertainty about what the world be like in the far-off year of 2050, for good or bad.

11

David J. Littleboy 03.23.14 at 11:34 am

You called? (I was born in ’52.)

FWIW, when I was in my teens and early 20s, it wasn’t clear that my generation would make it 30, let alone 62. (Given the draft, worrying about what one would be doing after 30 wasn’t something that made much sense in those days.) In those days, 30 was seen as old. “When I’m 64″ was proof positive that the Beatles were on LSD. So expecting Social Security to be there was far from my thoughts. I was also quite unconcerned with health insurance, assuming that the universities I was at (I managed to remain an on-financial-support grad student until 32.) would have medical facilities. Those assumptions were probably quite wrong…

Nowadays, though, given how the Republicans hate Social Security, I’m not sure assuming it’s going to be there is a good idea. Even people who really should know better talk about the government’s repaying the loans (i.e. paying the interest on, and paying off as they come due, the SS trust funds government bonds) it has taken out from the SS trust fund as the “cost” of SS. That is, it looks to me that the Republicans _intend_ to default on the (US government) bonds the SS system is forced to save it’s trust fund as. So not seeing SS as a 100% guaranteed thing may not be all that dumb or even odd.

On paper at least, the SS system is doing really well: it’ll be in the black for another 35 years or so even without raising the cap on the payroll taxes. But that “on paper” bit assumes that the Republicans don’t take over the government and default on the SS trust fund’s bonds. This bit that the Republicans think it a good idea for the US government to default on its debts is new and disturbing.

Oh, yes. By the way, Japan’s current ratio of elderly to working age population is higher than that ratio will ever be in the US, so the idea that the US is facing some sort of demographics disaster is completely silly.

12

ifthethunderdontgetya™³²®© 03.23.14 at 12:21 pm

As noted above, there is a huge amount of constant propaganda devoted to attacking Social Security.

But I’ll note that it isn’t just the Republicans going after it now. Bill Clinton made an effort, and Barack Obama has tried even harder. And you have people like Fred Hiatt and Robert Samuelson in our so-called liberal media catapulting the propaganda.

And that’s the rub…when even ‘your side’ isn’t on your side, it’s hard to be optimistic.

and now they’re coming for your Social Security money. They want your retirement money. They want it back so they can give it to their criminal friends on Wall Street, and you know something? They’ll get it.
~

13

Change 03.23.14 at 1:10 pm

I agree with your sentiment but 20 years from now there will be no social security because the global economy will have collapsed. Another financial disaster, like 2008’s, or food shortages because of climate change, or massive resource wars between countries with nuclear capability, or a big methane burp that rapidly raises the temps causing havoc in lower lying areas, or all of these things will have happened by then. SS will no longer matter. We’ll all be fighting for our survival.

14

The Raven 03.23.14 at 1:35 pm

One thing to remember is that personal savings, like 401(k) accounts, are less secure than Social Security, not more. If the government won’t protect something as popular as Social Security benefits, it will never protect the private savings of small fry; it has and will allowed the looting of that savings.

15

MPAVictoria 03.23.14 at 1:44 pm

“And that’s the rub…when even ‘your side’ isn’t on your side, it’s hard to be optimistic.”

Very well put.

16

DavidtheK 03.23.14 at 1:59 pm

Someone has to begin a campaign to proclaim MMT across this land. Absent that, the looting will just continue. Millenials (and a great many others) have had it planted into their heads that the problems are of an objective actuarial nature. And that is just BS. The government cannot run out of money; and the only thing that can stop benefits being paid is will not to do so.

17

djw 03.23.14 at 2:37 pm

I might believe that by the time I retire, the right wing will have dismantled it. I think that belief has reasonable odds.

Their previous efforts to do so have been a spectacular failure. In 2005, they had an enthusiastic president, both houses of congress, a compliant press and plenty of squishy deficit hawks in the minority party seemingly ready to give them bipartisan cover. They didn’t come remotely close to accomplishing their plan. In order to think it’s likely for such a plan to be more successful, you need to imagine a set of circumstances considerably more fortuitous to the goal of dismantling social security than that moment. I suppose such a thing is possible, but political and demographic developments since 2005 have been moving squarely in the other direction, and the coming 401K disaster is going to make SS all the more important to more people, intensifying support for it. I can’t see a good reason to think a moment considerably more conducive than 2005 for SS destruction has ‘reasonable odds’ of emerging.

18

BruceJ 03.23.14 at 3:19 pm

shah8 has it right. When the adverse effects of global warming simply cannot be denied or ignored any more TPTB will simply say “We cannot afford such fripperies, our survival is at stake, the money must be spent elsewhere!” as they mount the 0.01%’s last ditch efforts to retain their fortunes and power. The 99.9% will be sacrificed, as they always have, and in vain.

That is going to happen sooner than later. You cannot look at a graph like this and feel anything but despair.

5 degrees of warming means catastrophic climate changes; 10 degrees is likely to mean a Great Extinction, because then two things happen: the ice all melts, enormously changing the distribution of mass on the planet, possibly leading to increased vulcanism, and the eruption of the clathrate deposits on the seabed in the Arctic , leading to gigatons or teratons of methane release into the atmosphere. This would be rather catastrophic

Humanity has likely already killed itself (along with most of the rest of the life on the planet).

We’re really only waiting for the body to stop twitching.

19

mud man 03.23.14 at 3:23 pm

That would be me, and here I am knocking it down. It had nothing to do with David Stockman; I was born in 1945 and in the ’60’s it seemed perfectly obvious to me and my friends that we were living through the last days of Western Civilization. Nothing has surprised me more than the longevity of this decrepit modernist hulk. I used to think it just takes a long time for a Dinosaur to bleed to death, but it turns out that the global afterburners have lit up and wherever we are going, we are getting there faster than ever before. Personally, I’m still looking forward to whatever comes next. Trying to build up some appropriate means of production against the day.

20

roger gathman 03.23.14 at 5:45 pm

Perhaps this is what happens when the Dems and the Reps agreed to make fica the most regressive tax on the books. Not only was income tax changed, in the 60s and 70s, from a tax that fell mainly on the wealthy – which was its original intent, from its inception through the 50s – but social security was ‘saved’ in the most absurd way possible by the Greenspan commission.
There was a nice article that appeared in 1995 in the New Yorker entitled Ain’t no Middle Class about a two income family in Des Moines that collectively made 31,216 dollars. Their tax situation was startling. Since they owned a home, they paid 2,481 dollars in federal taxes, 1042 dollars in state income tax, 3,980 dollars in property tax and 2,388 dollars in social security withholding. These are very grim figures, and they tell the tale of what it has meant, politically, to continually diminish the burden that should be on the wealthiest and to maintain the outlines of the Great Society state. This, in conjunction with the free trade, neo-liberal policy championed by both parties, which has created incredible wage stagnation, has made the reaganite slogan that the government is the problem seem very true. Over the last six years, the tax burden on people like this should have been forced down and down, especially on FICA, the benefits should have gone up and up, and the resulting deficit should have been bled from those with the money and wealth. In fact, though, there is no party that really represents working families such as those presented in that article – there hasn’t been for decades – so I think that the poll response is utterly coherent. It is easy to see that the elites of both parties would love to privatize social security, and it is easy to see that one of the tactics they will use will be to cut it, so that the burden of paying it will become much more hurtful – that is, will seem like payments for nothing. There is no recognition anywhere in any party that the tax burden on the producers is too much and on the speculators is too little. here are a considerable number of Dems, including the one who sits in the White House, who would love to play into what is already expected by the wised up population and screw them even more, cutting here, raising the rate there. It is not just Rand Paul.

21

Straightwood 03.23.14 at 7:51 pm

There is a widespread desire to make the plot line of history congruent with an individual’s lifespan. Thus decline and fall are widely predicted by those entering their final decades. But the long-wave cycles of history have no phase relationship with individual life cycles. British cities were choking on toxic levels of pollution from coal burning in the 1950s. American cities suffered race riots in the 1960s. The world was on the brink of nuclear war for decades and still faces that risk. Yet civilization advances, and the carnage of warfare diminishes.

Even the worst scenarios for global warming will leave a remnant human population that will continue to advance. We may even be able to avoid repeating obvious past mistakes. There is no rational case for despair, but that won’t prevent people who seek despair from finding it.

22

Omega Centauri 03.23.14 at 7:59 pm

I’m with the pessimists here. Four or five decades is a long time. While I think Bruce @16, overstates the climate change risk, it is still going to be real and costly. Add in resource depletion, and the unavoidable change from an exponentially growing economy to something more sustainable -and the need to create a new economic paradigm to support such, the challenges that BAU faces (and SS is a part of BAU) will be large. And we also have whatever political foolishness is set off by these pressures, as well as whatever political fashions may prevail even if we had had a stable economic environment, and the odds of this baby holding together aren’t great -probably under fifty fifty.

23

The Raven 03.23.14 at 8:45 pm

Could we stop talking about global disaster instead of social security, please? Maybe humanity won’t make it…but we’ve made it so far, and we’ve done so because of hope from unexpected places. Let’s go back to making policy as though we can make policy, instead of paralyzing ourselves with fear.

24

Layman 03.23.14 at 8:54 pm

@23

My sentiments exactly. It’s true that global calamity might prevent me from collecting SS benefits; but that’s true of pretty much any endeavor. Why get an education? Why wed, or have children? Why build roads, or buy stocks, when the coming comet strike means you’ll never get a payback on that investment? Why sow anything?

The argument that the young won’t collect SS is based not on calamity, but on (false) claims about whether we’ll be able to afford the payments as a matter of demographics.

25

djw 03.23.14 at 9:10 pm

@23 and @24: Thank you. It’s nice to know I’m not the only one who wishes this comment section weren’t so frequently used to host impromptu competitions for “most hopeless and bleak expression of despair” with little regard for the actual subject at hand.

26

Watson Ladd 03.23.14 at 9:10 pm

I’m one of the “abolish social security now” folks and I will explain why.
FICA tax is 12.4% of the first $1117,000 earned. (Yes, there is an employer share, but most of the cost is borne by the employee in the form of lower wages) That income, if invested in a target date mutual fund, would earn at least 3% a year, in assets which I would own, and if I was to die prematurely I could leave to any offspring. 12.4% is a very large amount to save for retirement each year, and even if we subtract the costs of the insurance in Social Security, we are still looking at more retirement savings than most Americans have.

By contrast Social Security promises an annuity of $12,000 annually, payable at the discretion of Congress. The value of such an annuity is only $500,000. Social Security is a terrible deal compared to the alternatives. If you still believe in Social Security, ask yourself this “Would I pay 12.4% of my income for forty years for an annuity worth only $500,00?” It’s an easy calculation of annuity values.

Social Security might last long enough for me to retire. It won’t last long enough for me to afford it.

27

Layman 03.23.14 at 9:25 pm

@26

Oh, I’ve never heard that argument before. I’m convinced.

28

Straightwood 03.23.14 at 9:32 pm

@26

For people who live paycheck to paycheck, with no savings, giving them another 12% a year would not provide them with “social security” because they wouldn’t save it. It is the enforced savings for retirement that protects these people from an impoverished old age. The Greg Mankiw ethos that anything that encumbers bright, successful people from maximizing their welfare is a moral outrage is a very bad basis for policy, because it abandons those who are less competent to lives of victimhood as smart predators rip them off.

It is not morally sound to punish people for having low intelligence. Mankiw would have us believe than anything the clever can grab away from the dullards is justifiably “earned.” It is a green light to predation.

29

John Quiggin 03.23.14 at 9:44 pm

Watson is making stuff up, as usual. To start with the obvious snark, the return *guaranteed* by a mutual fund is zero, so on his calculation, Social Security is infinitely better, as long as Congress doesn’t take his advice and repudiate its obligations.

More importantly, his $12000 number is totally bogus. The Social Security formula is complex, but someone earning $50 000 a year would get an indexed pension equal to around 50 per cent of that, which is a pretty good deal for an investment that’s risk free (apart from risks arising the efforts of Watson and his rightwing allies).

Social Security isn’t such a great deal for people at the top of the FICA scale (around $120 000) a year, with whom Watson is presumably concerned, but that’s part of the point. It’s an insurance/redistribution measure, not a vehicle for personal savings. Progressivity would be improved if the cap on FICA contributions were raised or removed, as noted @1.

30

John Quiggin 03.23.14 at 10:00 pm

Watson, I’d like a serious discussion, which means nothing further from you on this thread. I’m allowing further discussion, but will observe that arguments of this kind were thoroughly debunked during the debate over Social Security privatisation, where the Repubs (and Cato) effectively conceded defeat after 2005.

@23-25 I agree. Let’s leave the inevitable doom facing the planet to another thread (I might even post on it) and proceed on the assumption that retirement income is worth worrying about.

31

Peter Whiteford 03.23.14 at 10:04 pm

Watson

Social security also has disability insurance, survivors insurance, longevity insurance and redistribution which need to be taken into account. From an individual perspective, you may not want to pay for redistribution, but in the absence of social security you may need to pay extra taxes to provide it. How good an investment you think social security is also depends on where you are in the income distribution and your age. Also switching from Social Security to individual accounts has potentially very high transition costs – unless you plan to completely stop paying social security taxes to support current recipients,

32

Layman 03.23.14 at 10:12 pm

Apparently this sort of skepticism about Social Security has been pushed from the very beginning. Here’s an excerpt from a speech from Alf Landon, from his 1936 campaign against FDR:

“…Let me explain it in another way—in the simple terms of the family budget. The father of the family is a kindly man, so kindly that he borrows all he can to add to the family’s pleasure. At the same time he impresses upon his sons and daughters the necessity of saving for their old age.

Every month they bring 6 per cent of their wages to him so that he may act as trustee and invest their savings for their old age. The father decides that the best investment is his own I O U. So every month he puts aside in a box his I O U carefully executed, and, moreover, bearing interest at 3 per cent.

And every month he spends the money that his children bring him, partly in meeting his regular expenses, and the rest in various experiments that fascinate him.

Years pass, the children grow old, the day comes when they have to open their father’s box. What do they find? Roll after roll of neatly executed I O U’s.

I am not exaggerating the folly of this legislation. The saving it forces on our workers is a cruel hoax.

There is every probability that the cash they pay in will be used for current deficits and new extravagances.”

http://historymatters.gmu.edu/d/8128/

33

john c. halasz 03.23.14 at 10:19 pm

JQ:

I haven’t followed this thread, (since it seems so obvious), but isn’t it enough just to state that SSA is a universal annuitization scheme, which the selective mechanisms of “private” markets would never achieve, with a “private” default risk eliminated, and at a transaction cost that is remarkably low? (And further, the alleged problems are, aside from the fact that the “combined budget” has allowed looting by tax cuts for the rich, due to the fact that the Greenspan Commission, relying on then historical data, assumed the “trust fund” would accumulate 90% of earned income, rather than, as it turned out 85%, and that, further, removing the cap entirely, would allow for not just eliminating any shortfall, but expanding the program, to deal with the loss of “private” pensions and personal savings?)

34

Alan White 03.23.14 at 11:13 pm

John (if I may)–

Just a note of thanks not just for a great OP but your comments to WL–who unwittingly provided the foil for your increase of my grasp of these things by a good 10%. (I did at least catch that WL’s average figure was off the mark by about 50%.) This from a 60-year old approaching retirement who thought he had a good handle on all this. Now, a better handle.

35

ezra abrams 03.23.14 at 11:50 pm

One often reads, or hears, of odd poll results.
I respectfully submit that most people havn’t really thought *hard* about things like this – I mean, how many people have the energy, math skills and political interest to think about this ? Let along young people.

one might ask, with all the public intellectuals giving the lie to D Brooks, why doesn’t the author of the original post, or one of the commenters, link to the authoritative, clear, simple website liberalfacts.com, which has a clear, simple explanation of soc sec ???
including something i’ve never understood, the loaning to the gov and repay of soc sec money – I understand that as we draw down the trust fund, the gov’t will exchange ious from the soc sec trustfund for other IOUs, but I still don’t get how that whole thing…

36

Watson Ladd 03.24.14 at 12:32 am

JQ graciously offered to let me explain where I got the numbers from.

Take someone turning 65 this year, who for purposes of making arithmetic easy, earned 50,000 dollars each year. They paid each year into the Social Security trust fund around 5,000. (Actually more, but as Peter Whiteford explained, we have to account for some insurance functions, and I wanted to make my life easy). For this they get a choice between three annuities.

The first starts at age 63 and nine months, and pays $1,128.00 per month. The second starts at age 66 and pays $1,371.00. The last one starts at age 70 and pays $1,920.00.

Short of careful scrutiny of the death tables we can’t value this. But we can assume that 40 years of life is a high valuation, and see that the first annuity is $ 541,440, the second $658,080, and the third $921,600.

To get this benefit the man worked 40 years, paying $5,000 a year. Now, at an interest rate of 3% this stream of income is worth $388,316.49, at 5%, $634,198.81, and at 6.1% $841,936.95. At 7%, the real long term equity return, we get $1 million.

So social security is comparable with private savings, assuming you live to be 105, or 110. But if we reduce those lifetimes to the more realistic 30 years, or 35 years, then private investment begins to outperform. In addition, the annuity valuation we used was also overly conservative, but this affects both scenarios equally.

As incomes increase, the cost of social security massively increases, while the benefit does not increase correspondingly for lower incomes. Furthermore, if we simply redistributed income, while saving the retirement money in the market, the result would have the same higher returns for everyone, while preserving the redistributive effect. Such systems exist in the Netherlands, Singapore, and probably some other countries I have forgotten about.

One can also factor in the disability and survivor benefits by looking at the private market valuations for these. However, disability insurance has a functioning private market, as does term life insurance, meaning we can simply subsidize those unable to participate, rather than create a universal scheme. (There is a selection effect for severe disabilities present at birth, but this is quite rare).

37

Omega Centauri 03.24.14 at 12:51 am

Well I’ve been one of those confortably above the FICA limit, and like many here am 62. Depending upon when I start taking benefits they will be around or above $3K per month. Like most people at my income level I will have other income streams arising from retirement programs, -I am not complaining. Sure a scheme that didn’t try to redistribute downwards would have netted me even more, but that would be just greedy of me to feel cheated. As it is I expect to have all the income I need in retirement without dipping into investment prinicple, the kids can get that when the day comes. People in the top 5-10% have no reason to complain.

38

Layman 03.24.14 at 12:57 am

Watson, Social Security is not an investment or retirement savings scheme, in which your payroll taxes are invested on your behalf to provide you with a personal retirement fund. It is an inter-generational bargain, in which one generation agrees to pay taxes to fund the current, minimal retirement needs of an older generation; in return for which a future generation will provide the same courtesy. It is at face value free of any risk, and can’t be expected to perform, either for good or ill, in the same way investments do.

If you want to argue against it, you need to address your arguments at it. Should society guarantee a minimum standard of living for the elderly? If so, how ought it to be funded?

39

Watson Ladd 03.24.14 at 1:21 am

Omega Centuri: The problem isn’t the redistribution, it’s the low returns. Because you are over the FICA cap, this hurts you less then someone under it. The redistributive effect of social security is extremely complicated, because the years of life remaining have a major impact on the value of benefits. However, even if the money was still redistributed the same way, the low returns hurt everyone.

Layman, I support mandatory savings schemes. I don’t see why a retirement savings scheme can’t, in combination with income redistribution, achieve the same goal more efficiently in terms of percentage of income devoted to it. The problem is particularly acute when capital gains at the expense of labor: at the moment saving should be cheaper, social security gets more expensive.

40

Layman 03.24.14 at 1:28 am

Watson @ 39

I repeat my questions, because you didn’t answer them, and they’re key to the issue:

Should society guarantee a minimum standard of living for the elderly? If so, how ought it to be funded?

41

Widmerpool 03.24.14 at 1:57 am

Since no in the thread has mentioned it, I’ll add that the financial industry and popular financial advisers propagandize to young people to expect SSI to disappear. One of the the first things you’re told when you try to grow up and plan for retirement (it happened to me 20 years ago, and I still see it repeated constantly) is to ignore possible SSI, because who knows, right? Now, obviously, young people don’t take advice, so this isn’t a perfect transmission mechanism, but “everybody knows” it’s the “smart” way to look at things. I personally think it’s nuts, and I think any real threat to SSI would make younger voters how much *they* rely on SSI to take care of their parents, but I’m no poli sci expert.

42

Bloix 03.24.14 at 2:29 am

Watson Ladd has apparently never heard of inflation. A man who earned $50,000 forty years ago (1974) would have had a salary equivalent to 238,000 today. In 1974, the taxable salary cap was $12,000.

Social Security calculates your benefits based on your highest 35 years of income, adjusted for inflation. It has built-in annual raises in benefits for inflation.

Perhaps to doesn’t mean that everything Watson Ladd has said is utter balderdash, but if not I’d like an explanation as to why not.

43

Bloix 03.24.14 at 2:32 am

#3 – yes indeed, educated, politically liberal, and activist young people do not believe social security will be there for them. Even middle aged people don’t believe it. A 40-something once told me that “of course Social Security is a Ponzi scheme” and the whole lunch table of 30 to 40 year olds nodded in agreement.

44

Watson Ladd 03.24.14 at 2:37 am

Layman: The same way all other social benefits are? I don’t see why a bit of revenue should be tied to a particular social program, or why old age is not a foreseeable condition against which people take precautions. Blather about an ‘integerational bargin’ obscures that this is a simple program with costs and benefits, apportioned to different sets of people, and capable of analysis, and one for which many alternatives exist.

45

Layman 03.24.14 at 2:45 am

Watson @ 44

So, in fact, you agree that society should guarantee a minimum standard of living to the elderly, and you agree it should be funded by income transfers. What was your objection to Social Security again?

46

Watson Ladd 03.24.14 at 3:16 am

@Bloix: I see the argument. The answer is that the returns I used were real returns, and I got the Social Security data from here which uses the last year of income to estimate benefits. So when I calculate the amount saved assuming the income was the same all the way back, that’s fine for a rough guess because I’m using real dollars and real returns, so the inflations cancel out. If you think this gives the wrong answer, do the calculation incorporating inflation, and see what it produces.

@Layman: Look at it over one year. It takes 12% of everyone’s income, then sends it to retirees, with largely little regard to how much those retirees or those taxed actually have or need the money. That’s not a good system for a safety net to insure the elderly don’t die of starvation. It also isn’t a good system for retirement savings.

47

The Temporary Name 03.24.14 at 3:28 am

It takes 12% of everyone’s income, then sends it to retirees, with largely little regard to how much those retirees or those taxed actually have or need the money. That’s not a good system for a safety net to insure the elderly don’t die of starvation.

Yes it is. It is simple, easily applied, and popular enough to survive decades of assaults on it.

48

Layman 03.24.14 at 3:31 am

@ Watson

“It takes 12% of everyone’s income, then sends it to retirees, with largely little regard to how much those retirees or those taxed actually have or need the money. That’s not a good system for a safety net to insure the elderly don’t die of starvation. “

Surely this is just quibbling over the details, right? You think too much is being taxed, and too much is being paid, to too many who don’t need it, but otherwise a system which transfers income to the elderly (those in need) is okay with you?

“It also isn’t a good system for retirement savings.”

Nor is it a good system for winning at blackjack. So what?

49

nick s 03.24.14 at 4:05 am

Someone born in 1952, who entered the workforce in 1977 at the age of 25, would now be turning 62 and eligible to collect Social Security.

Those stereotypical someones (if white) would likely have had parents who benefitted from the GI Bill, for instance through subsidised mortgages to move out to the Levittown of their choosing, would themselves have benefitted from a relatively cheap college education, then had the chance to vote for Reagan and Bushes to keep taxes low through large chunk of their working lives, and now complain that young people are lazy and entitled, while watching Fox News.

That’s a fairly singular generational pathway.

50

js. 03.24.14 at 4:41 am

despite the fact that they believe that SS will have been cut down to nothing by the time they become eligible, they oppose cutting down SS now? In what world is that a surprising finding?

I would guess that the belief being characterized is not that SS will be cut, say by Republican administrations, bit rather that SS funds under the current funding regime will have run out by the time they’re eligible. The latter, at any rate, is the big lie that’s been relentlessly pushed.

51

js. 03.24.14 at 4:44 am

Also, just seconding (fourthing?) @23–25.

52

StevenAttewell 03.24.14 at 5:47 am

The problem with the calculations above is that they:

- assume someone who enjoyed lifetime employment at steady middle-class wages.
– assume someone who doesn’t have to tap into their savings to deal with a sudden economic crisis.
– assume that someone doesn’t retire in November of 1929, or late 2000-2002, or October 2007.
– assume there are no transaction costs or fees in private retirement investment.

53

bad Jim 03.24.14 at 8:23 am

I’m 62 too!

The expectation of imminent catastrophe is a surprisingly durable tradition; indeed, it’s one of the founding beliefs of Christianity. It pervades the New Testament, and the experience of two thousand years has done little to temper it.

I can remember being a ten year old astronomy enthusiast despairing of ever seeing the return of Halley’s Comet or the year 2000. The span of time I faced was dauntingly immense, so I can understand people who don’t think Social Security will exist by the time they retire. They’re childish.

My father died at my age, and, as one might imagine, was not very happy about it. Back then I thought he was pretty old. Now, not so much.

54

reason 03.24.14 at 9:51 am

“Despite the fact that a whopping 51 percent of millennials believe they’ll receive no Social Security benefits by the time they’re eligible, and despite the fact that 53 percent of millennials think government should focus spending on helping the young rather than the old, a remarkable 61 percent of young voters oppose cutting Social Security benefits in any way, full stop.
.”

I haven’t read the entire thread – so I’m sure someone else has pointed this out, but struggling millenials must be damn glad that SS is there to look after their parents.

55

Straightwood 03.24.14 at 1:21 pm

The dirty secret of those who wish to abolish Social Security is that they think financial predation is a healthy and natural part of society. The fleecing of ignorant or otherwise incompetent people to concentrate wealth in the hands of the clever and ruthless is how they wish the world to be. Unleashing the wolves of Wall Street on the retirement savings of the masses is exactly what they want to see.

56

Watson Ladd 03.24.14 at 1:31 pm

StevenAttewell: I’ll be the first to admit that these calculations are imprecise. However, two of your considerations go the wrong way: the tapping into private savings to deal with a crisis is not possible with social security. Secondly, I used conservative return estimates for a reason: they account for the gradual transition to bonds as you near retirement, which insulates you from shocks. The wage path question I overlooked, so yes, we have a problem. But I would need some sort of model of wage histories to determine how to do this. The fees I neglected because they are tiny ever since the invention of the index fund. If you want, subtract .1 % from each of my numbers.

However, we can look at the Dutch pension industry terms and prices to see what private savings achieves. Unfortunately, I’ve been unable to find the data I really want, namely the benefits and costs.

Layman, it’s quibbling over the details to the point where I want a negative income tax and mandatory savings. That looks very different from the current system. It looks a lot more like what George W. Bush was proposing.

57

Layman 03.24.14 at 2:25 pm

@56

Then I misunderstood you. Sorry, but this would be easier if you just made clear statements like ‘I don’t believe society should guarantee a minimum standard of living for the elderly’, if that’s in fact what you mean. A mandatory savings plan doesn’t meet that objective – that’s the objection to it.

58

David 03.24.14 at 2:42 pm

Do the Europeans have the same fears vis-a-vis their own social safety nets, or are Americans just programmed to be cynical about these programs for the benefits of the right wing?

And I thought Watson Ladd was banned?

59

djw 03.24.14 at 2:43 pm

My father died at my age, and, as one might imagine, was not very happy about it. Back then I thought he was pretty old. Now, not so much.

Unless your father was a very old father, his life expectancy, once he made it over 50, was probably only a few years less than yours.

60

Watson Ladd 03.24.14 at 3:16 pm

Layman, that’s why I supported a negative income tax in addition. Giving an income to all retirees might accomplish the goal of ensuring they can retire, but so would giving one only to those with no other means of support. Equating social security as currently constituted with the goals it is designed to meet is not the way to soundly evaluate it.

Of course I could ask you what you think about the ethics of charging a burger flipper 12% of their income to send $36,000 a year to Warren Buffett given your vocal support of the currently constituted system. But I won’t. Demanding that those who disagree with you adhere to a weak position on the basis that it’s what “they really mean” is fundamentally unconvincing.

David, the Netherlands has lots and lots of money backing up the pension promises, and Pillar 1, the part closer to Social Security, is much less expensive in part because more Dutch people have adequate savings in the form of the pension funds. So there isn’t a concern about the future of the pension schemes, because they are (mostly) fully funded. I don’t know about other European countries.

61

Barry 03.24.14 at 3:20 pm

John Quiggin 03.23.14 at 9:44 pm

” Watson is making stuff up, as usual. To start with the obvious snark, the return *guaranteed* by a mutual fund is zero, so on his calculation, Social Security is infinitely better, as long as Congress doesn’t take his advice and repudiate its obligations.”

Regarding the last clause: if this were to happen, it’d be the result of a political – not just realignment, but a revolution in American politics, which would make the Reagan Revolution look like a triviality. At that point, the safety and growth of any private savings is also in jeopardy.

62

Barry 03.24.14 at 3:23 pm

StevenAttewell 03.24.14 at 5:47 am

The problem with the calculations above is that they:

” – assume that someone doesn’t retire in November of 1929, or late 2000-2002, or October 2007.” Or anywhere near; such a crash might effectively wipe out one or two decades’ worth of savings for another decade or two.

” – assume there are no transaction costs or fees in private retirement investment.”

Social Security administrative costs are 2%; private funds are much higher. And any ‘privatization’ of Social Security will have the primary goal of looting as much as possible. In such a case 25% ‘administrative costs’ are not unreasonable. Please note the ‘administrative costs’ include such things as ‘profit’, so a ceiling on them is not desirable from the viewpoint of the looters reformers.

63

Layman 03.24.14 at 3:25 pm

Watson, giving social security to every senior is a poltical compromise aimed at making the program hard to kill. It seems to have worked, since the program has survived 30 years of conservative efforts to kill it.

That aside, I’m really not trying to play a game with you. I’m mystified by two things – first, your need to compare SS with retirement savings / investment programs, when you seem to understand quite well that it is not such a program; and second, your willingness to support income transfers to the needy while decrying Social Security, which is at its core a program transferring income to the needy.

But I’ll say no more, as I don’t expect agreement to suddenly erupt here.

64

Watson Ladd 03.24.14 at 3:50 pm

Barry, I have never seen a mutual fund that charges 2% of AUM. 0.2% is more like it. Granted a lot of that overhead is not from SSI, but SSD adjudication. Lastly, your estimate of the impact of a crash is woefully wrong: we have excellent data on long term stock returns here. In particular 2001-2002 only wiped out three years: older returns immediately recovered. The worst event was the mid-1970’s, but that was poor fiscal policy, and not a market crash.

Layman, the US needs a retirement system. Currently Social Security is the closest thing: pensions died because pre-ERISA the unions were too stupid to understand the actual costs, and the people paying for them took advantage of them massively. (Look at Detroit for an example of how this worked: Christmas bonuses for retirees, even as it was clear the assets set aside were insufficient), and workers don’t save in 401(k) or IRA unless you make them mandatory. They are also very poorly regulated: no maximum prices, no requirements on options that must provided, etc. We can do much better, and part of any system will be an income guarantee.

65

David J. Littleboy 03.24.14 at 4:00 pm

Nick s @ 49

ROFL! That’s me, almost exactly (well, except for the politics). My father grew up poor in NYC (immigrant, but WASP, parents), and leveraged the GI Bill to an engineering degree. He turned 30 living in a GI Bill loan financed house on Beacon Hill (!!!), with a DAR wife and space cadet kid. (Said kid, on the other hand, turned 40 living in a one room apartment in Tokyo. Oops.)

Although I talk the pro-SS line, having worked outside the US most of my life, I’m not even vested in SS/Medicare yet. It looks, though, that at the point I retire, I should have 12 years or so of SS contributions, and that will probably give me more income than the 25 years I contributed to the Japanese SS-like system. Maybe. So I’m dependent on the US banks holding my life savings not losing them. The possibilities for disaster are near infinite. I’d be better off if I had stayed freelance and spent those 20 years I worked in-house contributing to both systems. Oops, again. On the other hand, I wouldn’t have said life savings if I had kicked in almost 20% of gross income to the SS system.

But having been born into a WASP middle class family at the optimal place and point in human history, I’ve been able to do whatever I please with almost no adverse effects for all of my 60 odd years. (Even the funky one-room turned into a comfy three-room when we renovated the building 2 years later.)

66

The Temporary Name 03.24.14 at 4:20 pm

Equating social security as currently constituted with the goals it is designed to meet is not the way to soundly evaluate it.

Um…

67

mud man 03.24.14 at 5:47 pm

JQ @30: @23-25 I agree. Let’s leave the inevitable doom facing the planet to another thread (I might even post on it) and proceed on the assumption that retirement income is worth worrying about.

I thought the OP topic was irrational anxiety about receiving SS benefits in the future, which being widespread is likely to impact the future availability of SS benefits. Whether the anxiety is rational or not, its persistent existence is empirical. If not rational, then all the more likely to be solved through sociology (or something) rather than economics education, although good economics will surely be useful. So a legitimate question maybe, is this just the normal excess discounting of the future that humans do? Or is it related to the projection of systemic terror Corey was on about?

68

Crickets Chirpping 03.24.14 at 5:53 pm

With all the Aussies on this blog I’m suprised none of them have spoken up for superannuations – provides the private savings that Watson seeks, while ensures through means testing the social net is safe and affordable by the government…

69

Straightwood 03.24.14 at 6:23 pm

@64

If you view the S&L looting, the dot.com collapse, and the 2008 mortgage meltdown as irrelevant distractions, then you would have ample faith in the superiority of Wall Street managed retirement over Social Security. Are you really so naive?

Social Security protects ignorant, poorly-informed, and semi-senile people from victimization by financial predators. You propose regulation of private sector retirement plans to provide similar protections. Such a regulatory apparatus would be easily manipulated and bypassed by Wall Street. The argument of superior private sector investment efficiency opposed to the stewardship of Social Security is implausible because of repeated major failures of trust in the private investment sector over the last 20 years.

70

James Wimberley 03.24.14 at 6:28 pm

Barry in #62: the administrative expenses of Social Security are not 2% – they were that in 1960 so you may have an obsolete folk memory. The expenses in 2012 were 0.8%. Further computerisation will presumably keep these costs, which are determined more by the number of people taxed and paid than by the sums per head, on their historic downward path. The 0.8% is close to the current average expense load of US mutual funds – excluding the sometimes large initial charges (up to 5% for small investors, which the millions thrown out of Social Security by a Republican privatization would be).

71

Barry 03.24.14 at 7:27 pm

Straightwood 03.24.14 at 6:23 pm

” @64

If you view the S&L looting, the dot.com collapse, and the 2008 mortgage meltdown as irrelevant distractions, then you would have ample faith in the superiority of Wall Street managed retirement over Social Security. Are you really so naive? “

It amazes me. It never ceases to amaze me. Social Security has been going on, and on and on, while Wall St gives us catastrophe after catastrophe. And these people don’t just invest (which I do), but seek to put *every single egg* in that basket.

72

Barry 03.24.14 at 7:38 pm

Thanks, James!

Watson, you might want to read his comment (or probably not).

73

Barry 03.24.14 at 7:42 pm

mud man: “So a legitimate question maybe, is this just the normal excess discounting of the future that humans do? Or is it related to the projection of systemic terror Corey was on about?”

Probably both, but I believe that it’s the result of decades of well-funded and ideologically-driven propaganda. I recall Gore saying that if hundreds of billions of $$$ rode on whether or not mankind had actually walked on the Moon, that would still be ‘controversial’. And it’s been pointed out that the same people who talk about Social Security ‘shortfalls’, and ‘undfunded liabilities’ don’t apply that accounting to most other governmental and private things (e.g., what is the ‘unfunded liability’ of the US Department of Defense?).

74

Nine 03.25.14 at 1:04 am

My time machine must be broken, it seems to be 2005 again … I’m not going to slog thru’ Watson Ladd’s stuff but can someone tell me if he’s got around to mentioning Chilean provision of private social insurance yet ? I vaguely recall that one being knocked out in the first match.

75

Watson Ladd 03.25.14 at 2:38 am

Barry: Actually, I know of funds with 0.09% expense ratio and no front-end load. Anyone can buy them: minimum investment $3,000. Front-end loads are vanishing, as more people realise active management isn’t worth it. Furthermore, you can avoid the expensive ones, and so do better then the mean. You can’t avoid the expense of social security.

Even better, that same source says the average target date fund costs .67%. So Social Security is more expensive then what most people would replace it with. Computerisation has massively reduced mutual fund expenses as well as Social Security administration. But this isn’t a fair comparison, because the insurance functions require more administration, and returns net of fees are more important then the fees themselves. (A T-bill fund with 0.05% expense ratio is worthless)

Lastly, social security has not been going on and on. Benefits have been cut and taxes raised since the 1960s. Even the supporters call for more cuts and more taxes. This is hardly the model of a sustainable system. Remember 6% FICA? Lump-sum payments in case of premature death?

You asked a technical question about unfunded liabilities, and why the DoD doesn’t count. One answer is that because Congress can not pay the DoD or Social Security any given year (except retirement benefits, which are funded in the Federal Retirement System) they are not actually liabilities. To the extent that you consider this unlikely you should add the incurred benefits to the Federal debt. However, Congress has cut benefits to preserve the ability to pay before, so I don’t think the unfunded liability line is accurate. Empty promises is much more descriptive. “We’ll pay, if we want”.

76

Layman 03.25.14 at 3:04 am

” To the extent that you consider this unlikely you should add the incurred benefits to the Federal debt.”

Yes all future liabilities for all things should be paid for now. Thus we’re all broke. Film at 11.

Sheeze.

77

Bruce Wilder 03.25.14 at 3:05 am

Feed the poor, eat the rich.

The problems of Social Security are the problems of a country in which the plutocrats are taking an unconscionable share of income. They do that by disinvesting. Cashing out and predatory financial schemes. So, the idea that there’s some alternative investment strategy for median Mrs. Everyman’s retirement is utter nonsense. Mrs. Everyman’s savings is Mr. Plutocrat’s loot. Freeing the hoi polloi from Social Security is just a method to make even more of their income and paltry wealth available for upward re-distribution. The idea that Mrs Everyman is going to be able to invest for return is just crazy. She is the return on investment.

78

Watson Ladd 03.25.14 at 3:34 am

Layman: No, future payments should be counted as debt. If you have continuing income to pay them off, all is good. If when the time comes to make good, you don’t, life gets rather sad. All liabilities of the US are unfunded. I just valued the cash flows in my original and second post.

With pension payments special rules exist because you want the security of the pension not to depend on the financial health of the issuer, a lesson Detroit’s retirees are about to learn the hard way. I don’t think the comparison to Social Security is sound because the US government cannot go insolvent. It can refuse to pay, or increase the cost of the benefits, which it has done several times in the past (COLA reductions, raising FICA taxes).

79

Lee A. Arnold 03.25.14 at 3:37 am

Social Security is not an investment program. It is the safety net.

80

Layman 03.25.14 at 3:38 am

@77

This, in spades!

81

Lee A. Arnold 03.25.14 at 3:50 am

Bruce #77 old friend, I was just thinking that, to all the stuff you’ve written about this over the years, we can now add the macroeconomic specter of a savings glut, zero interest rates, lack of consumer demand, and “secular stagnation”. Thus, in addition to the immoral political economy of neoliberal privatization schemes, taking more money out of the real economy to put more in the private financial system would be just about the Stupidest Macroeconomic Idea Ever. (Although there are several out there in competition for that title.) It would cause more stagnation. Social Security has been a huge fiscal stabilizer in this downturn.

82

Watson Ladd 03.25.14 at 4:03 am

Yeah, so what’s the investment program component of US retirement? How many Americans have an IRA or 401(k)? How many will depend solely upon Social Security when they retire? For a safety net, not a retirement program, it’s providing the retirement to a lot of people. It’s also a wildly expensive safety net, financed through an unconscionable tax that takes from the poor and gives to the rich.

$1.3 trillion dollars is enough to end absolute poverty in the US with a simple transfer program. Is Social Security the best use of those $1.3 trillion?

Retirement in the US got shredded for many Americans. And it wasn’t Wall Street that did it. It was simple laziness and procrastination combined with government inaction, and a failure to regulate pensions properly when they were being issued.

83

Lee A. Arnold 03.25.14 at 4:28 am

Social Security is not wildly expensive. The Wall Street crash was wildly expensive.

It doesn’t “take from the poor and give to the rich”. It takes from everybody starting at the beginning of their work life, and pays out to everybody at the beginning of retirement. The pay-out is mildly progressive. By including everybody regardless of need, it avoids moral hazard and the need for a big means-testing bureaucracy. It is almost the perfect design for a safety net.

Before the financial crash, 1/2 of retirees would have been below the poverty line without Social Security. The fraction is probably larger now. So Social Security is also an anti-poverty program. One that you work to receive, thus avoiding free-riding, so that’s a good thing.

The fact that many people now need it, is not Social Security’s fault. The underlying supposition there is that the amount of money allocated to each person (the distribution of income) is correlated to their worth to the economy (thus the sneer about “laziness and procrastination”). That supposition is false, due to things like market failure, capital-biased technological change, and financialization of the economy — and even some economists who aren’t intellectually corrupt will tell you so.

Social Security takes care of a multitude of sins beyond enumeration. Go worry about something else.

84

John Quiggin 03.25.14 at 4:34 am

Watson, I was happy for a clarification, but you’re monopolizing the thread. Nothing more please.

85

Lee A. Arnold 03.25.14 at 4:59 am

John, to respond to your top post: As you may know, hundreds of millions of dollars have been spent in the U.S. over the last few decades in a coordinated campaign that is targeted at high school and college kids under titles like “Fix the Debt”, in order to inculcate fear of government spending and fear about the viability of Social Security. But most Millenials probably also learn from their parents and elders that Social Security is a good thing, and that some of these fear-mongers are financial crooks. So that would account for the unusual results in the polls. But I don’t have much hope for a better economic understanding 20 years from now, given how dismal it is now. Just go right on up the economics ladder past the Wall Street traders through some economics Nobelists to the highest policymakers during this economic crisis, even look at some current statements from the Board of Governors of the Federal Reserve. The amount of intellectual incompetence among people who should know better, or perhaps it is the extent of subjugation of their intellectual honesty to the hard-money social cognitive bias of the plutocracy, always astonishes me. It is inept. So I am not sure that the relatively untutored will know much better, even in 20 years.

86

Lee A. Arnold 03.25.14 at 5:16 am

I mean John, I am sitting here looking at my bookshelves with a copy of your Zombie Economics. You have autopsied an enormous pathology of corpse rot. I’m not sure that 20 years is enough time to exorcise it, even from your own profession. I am running out of morbid metaphors. Just about the only way I would take your bet is to think that maybe people will say instead, “Oh they have been trying to scare us for 50 years — it is a load of baloney.”

87

Barry 03.25.14 at 11:26 am

Watson ” To the extent that you consider this unlikely you should add the incurred benefits to the Federal debt.”

Layman: “Yes all future liabilities for all things should be paid for now. Thus we’re all broke. Film at 11.”

Except for whatever the right wants; we can always afford that.

88

Trader Joe 03.25.14 at 12:51 pm

@76 and @87

There is one small difference with SS is that its designed to be self-funding. Apart from the two years (2011 and 2012) when there was the 2% cut in the SS tax, no part of SS payments have ever been made from the general budget. It was designed to be a self-funding entitlement and has been successful at that.

As a result, it is quite possible to look at the sum of the expected future inflows and sum of future outflows and forecast that there will be a deficit. In the past, governments have chosen to fix such projected deficits by some combination of more tax (raise inflows) or cut benefits (reduce outflows).

The third option – so far never taken-up because that bridge has never been reached, has been to fund SS deficits from the general budget. To the extent that option is ever chosen, it would entail the same calculus – cut other spending or raise general taxes. In that sense, and only that sense, a future SS deficit might be viewed as a potential Federal debt liability.

To weigh in, I think SS has done a very good job of delivering what it promises to do and provide some level of retirement income support. If anything, I’d means test the benefits even more heavily so that those with ample sources other retirement income would get less, thereby leaving more dollars available for those who need more.

The failure, if there is one, is that an age 65 retirement when people lived to 70 allowed for a far shorter average retirement than people currently enjoy today with longer life expectancies. If the rate of taxation over the course of ones contributing life was adjusted higher to allow for this actuarial fact, the system would remain solvent and able to do what it has always done. Unfortunately, no one sees it as an actuarial problem, but as a tax and wealth transfer problem.

89

David J. Littleboy 03.25.14 at 1:12 pm

“The failure, if there is one, is that an age 65 retirement when people lived to 70 allowed for a far shorter average retirement than people currently enjoy today with longer life expectancies.”

That turns out to not be a problem, actually. First of all, life expectancy at birth (which most people think of as life expectancy) is a very different number from life expectancy at 65 (the latter has gone up only by about one half as much since 1960). Much of the gains in life expectancy in the 20th century were due to reduced infant mortality rates. But most significantly, if you look at life expectancy at 65 by wealth, you find that working class stiffs aren’t living significantly longer than they ever did; it’s only rich folks who are living longer.

So Social Security’s job isn’t getting anywhere near as much harder as most people think. It’d be financially sound forever with some very minor adjustments, e.g. eliminating the income cap and means testing.

90

Straightwood 03.25.14 at 1:14 pm

Watson’s highly selective responses to criticisms and questions about his Social Security abolition arguments expose an unpleasant fact about many neo-liberal partisans: they don’t argue in good faith. They engage in discourse as a game. Like attorneys in an adversarial proceeding, they view logic and truthfulness as nothing more than tactics – to be adopted and discarded as necessary in pursuit of a win.

Implicit in Watson’s argument is the assumption that all people should plan responsibly and efficiently for retirement, and that those who do not should be punished though pauperization. Making poverty the just penalty for wickedness is very stale doctrine indeed. It is a pity that it does not apply to Wall Street.

91

Bloix 03.25.14 at 1:27 pm

#88 – “it is quite possible to look at the sum of the expected future inflows and sum of future outflows and forecast that there will be a deficit.”

Yes, if you are willing to believe that the sum of future inflows can be estimated with sufficient accuracy 20 or 30 out. And even then, the deficit that is forecast is not large and can be handled with minor adjustments 10 or 15 years from now.

“an age 65 retirement when people lived to 70 allowed for a far shorter average retirement than people currently enjoy today with longer life expectancies.”

This is a widely held but false belief about the cause of the forecast deficit. First of all, the retirement age has been raised to 67 (people somehow haven’t noticed this). Second, life expectancy at 65 has never been five years Most of the increase in life expectancy In 1940, the average 65-year old man could expect to live to be 77, and a woman could expect to live to be 79. http://www.ssa.gov/history/lifeexpect.html Social Security was always intended to pay for more than a decade of benefits.

Yes, people live longer and there are fewer workers per retiree. But these actuarial changes were understood perfectly well when Social Security was reformed under Reagan in 1983. All the arguments you hear – we live longer, too many baby boomers, fewer workers per retiree – these were accounted for in the 1983 SS tax increase.

So why do we have a shortfall now? The main reason is increasing income inequality. The actuaries assumed that the distribution of income would remain roughly the same as total income increased, thus putting more workers up near the top of the cap and fewer toward the bottom. This hasn’t happened – more workers are at the bottom, much more income escapes SS taxation entirely, and thus the cross-subsidy built into the system is more expensive than forecast. You could cut half the projected shortfall simply by raising the salary cap to capture the same percentage of income that the cap was designed to capture.

http://thinkprogress.org/economy/2012/07/17/532621/how-income-inequality-has-damaged-social-security/

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Trader Joe 03.25.14 at 1:55 pm

@81 and #91

“The actuaries assumed that the distribution of income would remain roughly the same as total income increased, thus putting more workers up near the top of the cap and fewer toward the bottom. This hasn’t happened – more workers are at the bottom, much more income escapes SS taxation entirely, and thus the cross-subsidy built into the system is more expensive than forecast. You could cut half the projected shortfall simply by raising the salary cap to capture the same percentage of income that the cap was designed to capture.”

Help me with this…I’ve heard this before and I don’t understand it – not saying its wrong, but the math puzzles me.

If a rich guy makes $200,000 per year, and his SS caps out at $107,000 (or whatever it is right now). The maximum basis on which he can collect benefits is still $107,000. If this guy keeps getting richer and fatter…250, 500, 600…whatever, he still can’t draw more than whatever the payout is for $107,000 base. If there are more such people now than was predicted because of income inequality I don’t see how it makes the outflow increase faster than expected. Which is to say, if the actuary though 1m people would get paid based on $107,000 and it turns out to be 1.1 million, those additional 100k also paid in based on higher wages – seems like it should solve itself to the extent that the tax rate is high-enough to fund the benefit calculation. Equally, raising the cap only helps to the extent that the benefit remains capped – i.e. tax up to 250,000 but pay as though earning 107,000.

A was under the impression that life expectancy from retirement (65 or 62 or 67 whatever) had in fact increased by about 2 years. Perhaps that is incorrect – good, not biased data, being hard to come by. If that’s the wrong perspective my error. I agree, in any event, with the suggested prescriptions.

93

Bloix 03.25.14 at 2:01 pm

Oh, and you also hear (and see scary charts) that the SS trust fund has moved from growing to shrinking – more money out than in. But this is an intended result of the 1983 reform.

Think of Social Security as a big tub. A stream of income (SS taxes) pours money into the tub, and benefits flow out the bottom. When SS was established, it was decided to keep a few inches in the bottom of the tub to make sure that in the event of temporary reductions in flow (e.g., recessions), benefits would continue to be paid. This is the trust fund. But mainly the system was designed to be pay-as-you-go – current workers pay for current retirees.

Then the baby boom happened, and the actuaries saw by the late ’70’s that there would be a lot of retirees all at once, too many for pay-as-you-go. How to pay for them? The idea was to increase taxes much more than needed to pay current retirees, and tub would fill up. Baby boomers would pay for current retirees, and would also save for their own retirements.

So the tub filled up for twenty years. Now the boomers are retiring, and the tub will drain for 20 years back down to just a few inches in the bottom, the baby boomers will eventually all die, and things will go back to pay-as-you-go.

This is supposed to happen. It’s the plan. The shouting that the system is suddenly paying out more than it takes in, as if it were some kind of disaster, is demagoging by people who hate SS and want to get rid of it. (Oh, and who want to steal the money in the tub – that’s the main reason for all the SS hate.)

94

Crickets Chirpping 03.25.14 at 2:06 pm

“Equally, raising the cap only helps to the extent that the benefit remains capped – i.e. tax up to 250,000 but pay as though earning 107,000.”

No, it pushes the ponzi scheme back another 10-15 years. Taxes are collected (and spent) today. So what if they guy who makes 250 is promised high benefits, that’s tomorrow’s problem…

“A was under the impression that life expectancy from retirement (65 or 62 or 67 whatever) had in fact increased by about 2 years. “

It has, but I think the point is life expectancy increased more for rich, white, hetro peoples than non^3. Smoking is still much high among poor, non-white, non-hetero populations, hence they don’t receive the same value from their SS taxes.

95

Layman 03.25.14 at 2:09 pm

@92

The mechanism seems straight-forward. If more income accrues to those above the cap, that income escapes the tax; so program revenues fall below the forecast curve, while payments are largely unaffected. Eliminating the cap solves that problem though of course the growing inequality fuels a lot of other problems as well.

96

Trader Joe 03.25.14 at 2:40 pm

@93 and @94
Thank you, that’s helpful.

As far as the income inequality point, however – it must be income inequality among the retired base, not among the base of current workers, that would need to be the problem for it to be draining the tub at too fast a rate (if it is, which it may well not be).

I don’t see what the % SS funding of all wages has to do with the calculation. If an x% SS tax rate was sufficient to fund (or overfund as Bloix described) benefits up to $110,100 (current max)….then as long as dollars up to that level, or perhaps a little more (for a safety marging) are taxed the system should continue to properly fill and drain the tub as Bloix described. More people currently making money in excess of that level would actually help with filling the tub, however fewer people making far more than the limit wouldn’t deprive the tub of any of its flow rate.

97

Bloix 03.25.14 at 3:09 pm

#94 – “the ponzi scheme”
Jesus H. Christ on a motorcycle, it’s not a Ponzi scheme.

Look, Social Security is funded by a tax on productive work. As long as people are working and earning, there will be an income stream to fund it. The tax may be higher than needed to pay 100% of current benefits (as it has been for the last 20 years) so a surplus builds up. Or, it may be lower than needed to pay 100% of promised benefits, but still enough to pay 75% or 80% forever. That is predicted to happen in 20 years’ time, and if the projections are right either the promised increases in benefits will have to be cut somewhat or the tax will have to be increased somewhat.

But as long as there is a United States of America, there is a rock-solid source of funding for Social Security.

There’s no smoke and mirrors here. You’re not being lied to about where the money is coming from. There’s no possibility of a collapse of income due to a failure of confidence. It’s not Ponzi, it’s not Madoff, and the people who have convinced you that it is are evil fucks who want to steal your right to the money that is still in the tub.

98

Cian 03.25.14 at 3:11 pm

#94 No, it pushes the ponzi scheme back another 10-15 years. Taxes are collected (and spent) today. So what if they guy who makes 250 is promised high benefits, that’s tomorrow’s problem…

Tomorrow when the economy will be larger, the tax cut will be larger. Not really seeing the problem here. Unless you’re assuming economic stagnation for the foreseeable future, in which case come out and say it.

The only way to make Social Security look unsustainable is by using economic forecasts that predict effectively predict depression for the next 50 years. Now maybe that’s an accurate prediction, but as Doug Henwood observes, in such a scenario Social Security is the least of our problems…

99

EqualToJake 03.25.14 at 4:01 pm

I dont see why young peoples beliefs about social security are considered a problem, it seems to me the millenials have been paying attention.
They dont want ss to be cut because its a very good thing, and they know that if it is cut now it is less likely to be there when they retire.
They think it wont be there for them because one of the 2 major parties is determined to get rid of it.
These opinions are good, it means the kids know that the Republicans are determined to get rid of something that the millenials want to keep. This fear should translate into electoral success for liberals and left wing solutions over the long term.

100

Barry 03.25.14 at 4:31 pm

Trader Joe, income inequality is a problem because of its effects on the 90%, not the 10%. Wages and salaries for a massive chunk of the US labor force have been stagnating for decades; that’s caused problems because the part of the salary distribution increasing is the part not taxed by Social Security (ie., over the currrent cap).

To all – Krugman has extensively covered Social Security.

101

Barry 03.25.14 at 4:33 pm

Cian: “It has, but I think the point is life expectancy increased more for rich, white, hetro peoples than non^3. Smoking is still much high among poor, non-white, non-hetero populations, hence they don’t receive the same value from their SS taxes.”

This has been covered by Krugman, as well.

102

Barry 03.25.14 at 4:36 pm

Cian: “The only way to make Social Security look unsustainable is by using economic forecasts that predict effectively predict depression for the next 50 years. Now maybe that’s an accurate prediction, but as Doug Henwood observes, in such a scenario Social Security is the least of our problems…”

As I believe that he (and others) have pointed out, if the US economy goes into a serious ‘Long Depression’ for several decades, investments in US stocks will yield very poorly, far below historical levels. That means that there would be no domestic 401(k) salvation.

103

Cian 03.25.14 at 5:18 pm

Barry: Actually one way of looking at any retirement scheme (including 401Ks and other neoliberal wet dreams) is that they are a claim on a certain proportion of today’s GDP by the retired. A 401K is no different from social security. You can’t save for the future in any real sense. Society doesn’t have to honor your ‘ownership’ of stocks/bonds any more than it has to honor social security. It’s all make believe at the end of the day.

104

Zamfir 03.25.14 at 5:36 pm

Cian, that’s somewhat true, but not entirely. After all, society as a whole can divert a larger or smaller share of its economic output towards real investments. And pensions funds or 401ks or Singalorean forced savings systems are vehicles to divert output towards investment, while social security is not.

Of course, it’s far from obvious that a hard decrease in social security would lead to significantly higher real investments. Its strongest effect is likely that young people spend a higher fraction of their ‘consumptive’ income to support their parents directly, instead of through a paygo system. And that rich young people consume more and old, poor people less.

But there would presumably still be some increased saving, leading to some increased real investment (after the bankers took their cut). Then again, the empirical link between investment levels and long-term economic growth is surprisingly weak. The really worthwhile investments get done anyway, and then you get diminishing returns all the way.

105

Bloix 03.25.14 at 5:43 pm

#99 – “They think it wont be there for them because one of the 2 major parties is determined to get rid of it.”

But that’s NOT why think it won’t be there. They think it’s a sham, a Ponzi scheme, a house of cards that will collapse of its own weight. I have talked to millenials and to a person they believe that the FICA tax is just money thrown down the sewer – they expect to get nothing for it. It’s nice for mom and grandma but it will never help them. And they say this with the calm lack of concern about the future that comes from being 25.

The Republicans know this – they know that when they say, “Social Security will be guaranteed for everyone over 55,” they may be causing some worry for 40-55 year old voters, but younger ones have already written off Social Security so their votes won’t be affected. And they know that when Dems say, we will save Social Security for future generations, the younger voters don’t believe them. It’s not anyone’s fault, they think, it’s just that the system is unworkable.

It’s a really serious problem, and I don’t see the Dems doing much about it.

106

John Quiggin 03.25.14 at 7:34 pm

most significantly, if you look at life expectancy at 65 by wealth, you find that working class stiffs aren’t living significantly longer than they ever did; it’s only rich folks who are living longer.

In fact, working class white women have declining life expectancy, I believe. This shocked me when I first read it, though it’s now part of a steady drumbeat of similarly depressing news about US inequality. I don’t think anything comparable has been observed in other developed countries, at least not yet.

107

Tangurena 03.25.14 at 7:58 pm

pensions died because pre-ERISA the unions were too stupid to understand the actual cost

No. Pensions died because of legislation passed in the 1980s severely penalizing over-funded pensions with a 50% excise tax (line 2 of Form 5330). So pensions could not save for rainy days, and when times were tough, many companies couldn’t afford to make up the difference. In addition, too many corporate raiders used pension funds to repay the costs of taking over the company, so the Ivan Boeskies and Mitt Romneys of the world could get richer (my current employer went private due to Bain).

When 401k plans were created in the 70s, they were only being offered as supplements to existing pensions. Over time, as companies abandoned pensions, all that remains are 401k plans. They weren’t intended to be your retirement savings, they were intended to give highly compensated employees extra gravy. It wasn’t until the late 80s that 401k plans had to be opened up to all employees. It wasn’t until the 90s until you could contribute to an IRA while being covered by a pension/401k at work.

If you haven’t seen a mutual fund with a 2% load, then you haven’t looked far. This page lists a dozen funds with loads over 2%.
http://www.cnbc.com/id/100746205

I work in the pension industry.

108

faustusnotes 03.25.14 at 8:26 pm

I have a super fund in Australia and another in the UK. They both consistently under-perform cash savings in their rate of return, after fees. Also it is worth noting that when you are young you are advised to make them high risk and slowly move them to lower risk as you get older (as implied by Watson Ladd above). However, there has been a major financial crash every -what – five years? since super was introduced in Australia, so they consistently lose 10% of their value, and have just returned to pre-crash levels when the next one comes around. This is why they underperform cash savings.

Privatized super is a fraud perpetrated on the middle- and working-class to expand the size of the finance industry. Privatized mandatory super funds should be abolished and the money returned to a decent social security system which is zero risk, low cost and rewards honest work.

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Bloix 03.25.14 at 8:38 pm

“working class white women have declining life expectancy”

I have seen reports of studies about this, and I am skeptical. Not that they’re incorrect but that they don’t seem completely reliable.

One study finds that white men and women without a high school diploma have shown a decline in life expectancy. It’s from a researcher named Olshansky at the University of Illinois-Chicago.

http://www.chicagomag.com/Chicago-Magazine/The-312/September-2012/Why-Are-Lifespans-Among-Low-Education-Whites-Declining/

See the comments to this article, in which a questioner asks whether we’re seeing a selection effect: half a century ago, plenty of well-adjusted, healthy people didn’t graduate from high school, but over time, more and more did, increasing the fraction of non-graduates who have a problem that would affect life expectancy — either health- or behavior-related. And the study’s author answers, but not satisfactorily – he limits his comment to the change in graduation rates between 1980 and 2008. To be fair, this is what the questioner asked, but the author should have understood the question more broadly and it seems to me he might have been dodging the issue.

Another study (or studies, from the same data set) shows that women in poor rural counties have shown a decline in life expectancy.

http://www.nytimes.com/2014/03/16/business/income-gap-meet-the-longevity-gap.html?_r=0

http://www.theatlantic.com/health/archive/2013/10/us-women-are-dying-younger-than-their-mothers-and-no-one-knows-why/280259/

The problem with these county studies is that many poor rural counties have experienced significant depopulation in recent decades. If the emigrants are disproportionately healthy and non-self-destructive (as seems likely), then by removing themselves from the population they have decreased the county’s life expectancy.

But if white working women are dying younger, the most likely culprit is cigarette smoking. Right up to the 1970’s there was a stigma associated with women’s smoking in public, and this stigma was more pronounced among less educated white women, so their smoking rate was lower. Then the stigma dropped away and smoking rates for all women went up, but much more among the less educated. Women’s smoking rates have now dropped, but much more so among educated white women. So if there’s been a decrease in life expectancy it may be the result of increased lung and other cancers among less educated white women.

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1380333/pdf/amjph00513-0089.pdf

110

Shirley0401 03.25.14 at 8:44 pm

@34
I second that. It’s incredibly useful to see the most common (to my ears/eyes, at least) argument raised and so succinctly rebuffed. As a layman, I’ll admit I’m sometimes at a loss for a riposte to those with whom I disagree — even when I know there is a brief, common sense explanation. I’m considering printing and cutting out the relevant comments and keeping them in my wallet.
@77
“She is the investment,” with preceding text. Also going in the wallet.

111

Shirley0401 03.25.14 at 8:45 pm

Should read as follows.
@77
“She is the return on investment,” with preceding text. Also going in the wallet.

112

djr 03.25.14 at 10:03 pm

Zamfir @ 104:
“But there would presumably still be some increased saving, leading to some increased real investment”

Maybe I’m missing something here, but if you compare 30 years of FICA money being loaned directly to the US government with a counterfactual situation where people were able to invest it privately, then (given that the US gov’t would presumably want to build as many highways / educate as many children / run as many wars as it actually did over the last 30 years) then surely the the US gov’t would have simply borrowed the same amount of money from the financial sector instead? Or increased some other taxes to have the same effect.

So the money you lose from SS being a bad investment, you gain from your government having lower borrowing costs?

113

faustusnotes 03.25.14 at 10:06 pm

but djr, if the govt borrows that money from the financial sector, how much of it would be super funds investing in government bonds?

114

djr 03.25.14 at 11:14 pm

No idea. Not sure whether it matters in terms of Zamfir’s “increased real investment” – if the money to buy bonds came from source X (somewhere other than the pension funds) then that’s money that X isn’t putting into whatever it would have done with it otherwise.

115

faustusnotes 03.26.14 at 12:10 am

I don’t think that’s right … what basically happens then is that ordinary people pay someone to manage their money, and then that someone puts a large portion of that money into government bonds, which the government uses to finance infrastructure that leads to economic growth. Under a classic social security system, those ordinary people simply give the govt the money without going through the high-cost financial dealer. It’s just shuffling money around to the same end, with the dealer pocketing a commission and the ordinary people wearing the risk.

116

Fu Ko 03.26.14 at 1:07 am

Ironically, the FICA tax was a compromise to satisfy people of Watson’s ilk in the first place. Now its peculiar tax structure is the core of their (bad faith) argument for doing away with the whole system and leaving the elderly in abject poverty.

117

John Quiggin 03.26.14 at 1:30 am

@68 As the most prominent Aussie on the blog, I’m thoroughly ambivalent about our retirement income system. Superannuation (= private retirement accounts) is heavily subsidised in various ways, and the system has been repeatedly rejigged. I’d be happy enough with a means-tested public pension, transitional subsidies for private savings for those getting part-pension because of the means test, and self-reliance for those above that level, but that’s a long way from the reality.

118

faustusnotes 03.26.14 at 4:14 am

John I read somewhere that the cost of those subsidies to the govt now exceeds the cost of the pension system itself. I have certainly watched in dismay as my super fund consistently underperforms my savings account, and pondered what I would do with that 9-17% of my income that has been forcibly withheld from me over the years.

This type of retirement saving scheme also, by increasing the amount of money flooding investment programs, must necessarily force the investors to find a wider range of investment options, some of which will be riskier. And when investment bubbles crash we see low-interest central banking regimes in the aftermath, which make low-risk investments even less profitable, so you don’t just take a 10% hit on your pension fund after a crash – you then suffer years of low returns as central banks lower interest rates to climb out of the hole. This naturally encourages the finance folks managing the (ever-growing) pool of investment funds to find risky alternatives, making your money more vulnerable to another crash.

Just looking at the Australian system, I don’t understand how we can be pumping 10% of the entire labour force’s wages into super funds, increasing the total pool of available investment money by billlions every year, and not be creating a huge incentive for that money to be dealt with riskily. There are only so many private investment fund options that are low risk, surely? As the pool of funds grows, either ever-larger proportions of it get dumped in cash and govt bonds (in which case we might as well just keep our money and save it, or put it straight into taxes) or ever-larger proportions of it go looking for ever riskier investment vehicles.

It’s a disaster and a rort.

119

djr 03.26.14 at 8:53 am

faustusnotes @ 115

Yes, exactly. Zamfir covered the disadvantages to letting the finance industry play with SS at the end of the sentence I quoted (“after the bankers took their cut”) and I was taking that as a given, I was just querying whether his suggested advantages actually existed.

120

Billikin 03.29.14 at 2:25 am

Rule of thumb:

Anybody who tells you that you won’t have Social Security says that so that you won’t object when he takes it away from you.

121

hix 03.29.14 at 10:59 pm

There is no rule that bankers always have to take a huge cut in a capital based system. See Norway or Japan. Sweden isnt to bad either.

There is however a rule that the most apocalyptic claims about the demise/unsustainability of put trough pension systems are made by the worst parts of the financial industry that want to sell the most overpriced crap retirment product thinkable.

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ezra abrams 03.30.14 at 8:22 pm

Today, Kristof had another great column
Of all the Pompous Jerks in the world, why does he come in for such harsh criticism ?

I mean, if there really were public intellectuals who were not spending most of the time on their own obsessive projects, would not there be a website, we could all go to, basic facts and figures about soc security – and all the crap I have had to wade thru on this bloq, I could simply say, go to the website maintained by those hard working public intellectuals….

part of the proble is that there are no GREAT CAUSES like civil rights or communism (pre 1920, saving the world)
cause when their are great causes, public intellectuals are willing to subordinate themselves (eqaual to their brand- I love P Krugman and B deLong, but their websites are about brand krugman or brand delong)

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