Doing the Math

Via Marshall

NY Senator Chuck Schumer has posted an actuarial calculator to help citizens see the personal effects of Bush's proposed efforts to "strengthen" their social security benefits.

I lose about $4500/year under Bush's plan.

Let the parsing begin.

Comments

[cleek]

$7300/yr loss under Boosh. yeah baby. sign me up!

[LizardBreath]

Man, I like my legislators. Chuck, Hillary and Charlie (Rengel), although I don't agree with them all on everything, consistently bring little moments of happiness to my day.

Me, I lose 24% of my benefit.

[digital amish]

What are you guys complaining about? Says I only lose about $210/yr. Small price to pay to support the ownership society.

(Looks like my kids lose 6 to 10k/yr but that's their problem, right?)

[Edward]

The kids...yeah...do the calculations for someone born recently and this is really depressing.

[Sebastian Holsclaw]

That is presuming that benefits can keep increasing at the current rates--a presumption which I suspect is wrong unless the economy does fabulously well which would tend to indicate that private accounts would do better.

But before piling on, I'm not a supporter of private accounts. I think they will encourage government meddling in the market. I support killing the benefit for well-off people. :)

[CaseyL]

I lose $1700/year. Thanks, George.

Kids? Thank god I never had any.

[Edward]

This just in: Bush to try and sell younger folks on his SS Raw Deal

Melissa Wise, 18, assumes that the nation's retirement system will be seriously short of money by the time she'll be ready to collect. So why not try something different?

Melissa...please use Schumer's calculator before you answer that question. Assuming you average 80000/year, you will ...oops...that site has gone down.

Well trust me Melissa, you don't end up ahead.

[Edward]

OK...it's back up. Melissa would be out $13,243/year under Bush's plan.

[ScottM]

A persuasive calculator. I do wonder about its assumptions, but not enough to investigate thoroughly.

[Edward]

It's assumptions are handily outlined here, (pdf file) ScottM.

[Jonas Cord]

The question the calculator doesn't answer for me is this: How much does the general taxpaying public save through everyone's "losses" by not having to raise general revenues to cover the trust fund liabilities?

[sidereal]

"by not having to raise general revenues to cover the trust fund liabilities?"

Wait. . what? Is anyone seriously considering letting Social Security effectively default? I thought even the President's (rumored. . wouldn't want him to 'show his cards' to the American people) plan included transition costs to cover the benefits for people who have already paid into the system.

If the money taken out of the Social Security fund for general use is not returned, we will have been witness to (likely) the most regressive period of taxation in American history. If Social Security payments are taken and used to pay for roads and schools and national defense, as they have been, they are serving as an effective income tax. A flat income tax, with no regard for decreasing utility, and with a contribution cap. . a profoundly regressive feature. The only way to repair that regressivity is to pay back into Social Security with a progressive tax. To say that we can just skip out on the plan, or even to regressivize the tax code that pays back into Social Security's IOUs is to spit in the face of the middle and poor class of the last 50 years that's been regressively paying for American infrastructure.

[Dantheman]

"If the money taken out of the Social Security fund for general use is not returned, we will have been witness to (likely) the most regressive period of taxation in American history."

It's a feature of the proposal, not a bug.

[Jay C]

Thanks, Edward - Senator Chuck's "Social InSecurity" calculator is a brilliant idea: even if my own "loss" according to its figures would only amount to $583/yr, it's still not enough to convince me that Bush's "privatization" plan is anything close to a good idea.
That is, of course, assuming that Bush IS pushing for a complete dismantlement of the SS system. I think he is, but then, I get a lot of my info from reading blogs, so who knows? AFAICT, though, so far his inane road-show circus-tour has focused mainly on windy rhetoric and scaremongering sloganeering, accompanied by the usual flinging about of seriously non-credible figures as to the size of the "crisis", not to mention the costs of his proposals to "fix" it.
I have always been somewhat mystified as to why, if there IS such a significant "crisis" looming for the Social Security System, (and I think there MAY be, even if 25-30 years off) - some sort of incremental changes could not be worked into the system to bolster it up - phased in over a long-enough period to spread out the effects on the economy.
A rise in the SS "cap" for contributions, some sort of means-test for the wealthiest minority of seniors, a modest curtailment in the level of benefits, tinkering with the age-level for retirement, etc,: all would strengthen the fiscal underpinnings of the System while phasing in more beneficial tax treatments for private accounts (whether government-run or not), and, maybe, a revival of the Clinton-era proposals re investment-opportunity latitude would ease the "crunch" of post-baby-boomer stresses on SS. If done gradually, so as to
avoid shocks, this might solve the "crisis" without too much pain.
Instead, Bush & Co. seem fixated on simply eliminating the Social Security System altogether, and, characteristically, framing the issue as an all-or-nothing, our-way-or-the-highway club to, mainly, beat Congressional Democrats with. Oh, and deaf to all criticism, as usual.

[Jonas Cord]

Wait. . what? Is anyone seriously considering letting Social Security effectively default?

No. But containment of costs to keep it in surplus - which will inevitably still be raided by greedy congresspersons - means that general revenues would not have to be increased. Sorry, but 12% of nearly all payroll of working Americans is the absolute maximum I'm willing to consider to keep this thing going.

And it's looking like Jay C., Sebastian and I are roughly in agreement of what we'd like to see instead.

[travis]

"12% of nearly all payroll of working Americans is the absolute maximum I'm willing to consider to keep this thing going."

And if the economy hits the Trustees' low-cost estimate benchmarks, we're in balance indefinitely.

[Sebastian Holsclaw]

"Wait. . what? Is anyone seriously considering letting Social Security effectively default?"

Social Security bonds aren't typically redeemed when they mature. Everyone knows that right?

[LizardBreath]

Well, of course they aren't. Social Security is still in surplus, so it pays benefits out of current revenues. What are you talking about?

[GT]

Sebastain,

What does that mean?

[felixrayman]

Social Security bonds aren't typically redeemed when they mature. Everyone knows that right?

You are simply wrong on the facts. Since 1970, in 11 different years bonds from the trust fund have been redeemed without any problem. If they have not been redeemed recently, it should not take a rocket scientist to look at the finances of Social Security and figure out why.

[Jeremy Osner]

If I own a 5-year bond, when it matures I may well roll it over into another 5-year bond, assuming my finances are in order. It does not follow that "Treasury bonds are not typically redeemed when they mature."

[Jeremy Osner]

In other words -- rolling over a bond is two separate actions, redeeming and reinvesting, occurring simultaneously. It seems weird that that would even need to be spelled out.

[travis]

SS bonds are different from regular treasury bonds. He means that SS bonds are rolled over into new SS bonds, and that SS bonds are meaningless IOUs.

The point of the "trust fund doesn't exist" argument is that the SS bonds are a scam perpetrated on the payroll tax-paying workers, who are now to be punished with benefit cuts for falling for it in the first place.

[GT]

travis,

All debt are IOUs. Why you think some US govt debt is rated AAA and risk free while other is 'meaningless" I don't understand.

[travis]

Why, you may ask, are SS bonds meaningless IOUs, as distinct from regular USG bonds? Good question. Why should the government be able to get away with defaulting on SS bonds, and expect regular USG securities to continue to be regarded as solid assets? Good question.

[GT]

Travis,

In fact the AAA rating includes all public debt of the US govt, which includes the SS debt.

[travis]

To clarify, I was following up on SH's comment.

"Why you think some US govt debt is rated AAA and risk free while other is 'meaningless' "

This is exactly right. Why should privatization advocates be able to get away with this argument - sorry for confusing!

[GT]

OK, I thought that was your position, that SS debt was worthless.

[Sebastian Holsclaw]

"In other words -- rolling over a bond is two separate actions, redeeming and reinvesting, occurring simultaneously. It seems weird that that would even need to be spelled out."

Oh good heavens. Of course it needs to be spelled out. Rolling over a bond into another bond is the same as redeeming it? When the IOU and the 'asset' are both held by the federal government? Not hardly. Where is the money coming from?

I can't do this again. Never mind. You have permission to think that I am exiting this argument because I can't defend it rather than the fact that I can't stand to see so many people exhibit a complete lack of financial understanding--again. Even d-squared knows that the IOUs aren't assets--they are at best accounting place-holders. Where is Brad DeLong? I saw him around here earlier.

[LizardBreath]

Sebastian--

They're an asset of the Trust Fund, and a liability to the general fund, which are separate accounting entities. The seperateness of the accounting entities is important because the Trust Fund is funded by a regressive tax, which voters agreed to on the condition that the proceeds of that tax be reserved for Social Security. The way we maintain that accounting seperateness is by keeping track of the obligations of the general fund to the Trust Fund in the form of bonds.

The bonds have been redeemed in the past when current payroll taxes didn't cover benefits for that year -- they will be redeemed again in the future when the same conditions hold. In times like the present, when payroll taxes exceed current benefit payments, the bonds are rolled over. What point did you intend to support by bringing this up?

[felixrayman]

Where is the money coming from?

Same place they came from in the 11 years since 1970 when bonds from the trust fund were redeemed to pay benefits. Hope you find DeLong. He'll explain it to you.

[GT]

Jeez Sebastian, of course they are assets, they are assets of the Trust Fund as LB explains.

[fdl]

yes, SH, we are ALL familiar with your and Jane Galt's posts about the lack of economic significance when an entity lends money to itself. As a number of people have pointed out, many of us disagree that the argument is that simple.

One reason the argument is more complex than you assert is that corporations, individuals and even governments can set up pensions, trusts and other legal entities which are separate from themselves. You are not your 401K fund. And another reason is the political promise which is reflected in the bonds.

you know these arguments and disagree. that's fine; please understand that those who disagree with your accounting unity argument do so in good faith.

Francis

[Kevin Donoghue]

"Even d-squared knows that the IOUs aren't assets...."

If d-squared has posted a theory which says that IOUs aren't assets, please provide a link. Given his form it could be very funny.

Sebastian, haven't you noticed that he likes to take the piss now and then? An IOU is not only an asset, it is a standard example of an asset, often used when explaining the fundamentals of double-entry book-keeping.

And what's with the "even"? Is d-squared your idea of someone with a minimal understanding of finance?

[Sebastian Holsclaw]

No, d-squared is my idea of a person with often good ideas about finance and half-cocked left wing ideas about politics.

"An IOU is not only an asset, it is a standard example of an asset, often used when explaining the fundamentals of double-entry book-keeping."

An IOU from another entity is often an asset. An IOU to an entity wholly under the control of an entity is merely a bookkeeping entry to that controlloing entity. From the standpoint of the US government, an IOU from the US government is not an asset of an entity wholly controlled by the US government.

[felixrayman]

We could get sidetracked like usual talking about whether an IOU is an asset (it is), but that's not relevant to the issue.

Sebastian asks, "Where is the money coming from"? And the answer is that the money is going to come from the exact same place it came from the 11 times since 1970 that bonds from the trust fund were redeemed to pay Social Security benefits. Sebastian claims, "Social Security bonds aren't typically redeemed when they mature". Sebastian is simply wrong on the facts here. He is trying to use a false statement to imply there is going to be some issue with redeeming the bonds in the Social Security trust fund when in fact there has been no issue with doing so in the past.

Don't let yourselves get sidetracked on moot issues. The way Social Security is financed works, no matter what false claims its ideological opponents may make.

[LizardBreath]

It is an asset for accounting purposes (the only sense in which anything is ever an asset. "Asset" is an accounting term.) of the separate Trust Fund. The separateness for accounting purposes of the Trust Fund is important because the Trust Fund's revenues come from a regressive tax, which was agreed to by voters under the condition that those revenues be reserved for Social Security.

No one believes that the treasury bonds held by the Trust Fund can be redeemed against some magical pot of leprechaun gold -- the money to redeem them will come out of the general fund. Payroll tax revenues were used to buy bonds, and thus went into the general fund where they were used to pay for government programs other than Social Security. This is not a problem so long as those bonds are redeemed out of the general fund. If those bonds are not redeemed out of the general fund, then the Republican administration who raised payroll taxes in 1983 and the Republican administration now trying to sell the idea that those bonds aren't real obligations and may freely be defaulted on have cooperated to dishonorably and dishonestly lie to the American voters so that they could raise the regressive payroll tax and lower the progressive income tax.

Do you understand why we regard those bonds as real obligations? Because they are a commitment to the American taxpayers that their payroll taxes will be used to pay for the program for which they were earmarked.

[Sebastian Holsclaw]

Obligations, perhaps. Assets, definitely not.

[LizardBreath]

How far do you take this? Have you got some weird little personal crusade trying to introduce new accounting terminology for the books of wholly-owned corporate subsidiaries? Or are corporations still allowed to describe notes recording loans to corporate affiliates as assets?

Is the hostility to the conventional accounting term "asset" under these circumstances general, or does it only apply to the Social Security Trust Fund?

[GT]

Sebastian,

I really don't understand what the issue is. There are a great many institutions, both in the private and public sector, that are controlled by a larger entity but have separate financial statements. I used to work for one in fact. We had a higher credit rating than the parent company even if some of our assets were claims on the parent.

The public sector is full of these type of institutions.

[hilzoy]

Well, I lose 12% of my SS benefit (about 3k a year), and I am not even a certifiable young person any more, much to my chagrin.

[Bernard Yomtov]

hilzoy,

I am not even a certifiable young person any more, much to my chagrin.

Is it that you're not certifiable, or not young, or both?

[hilzoy]

Young. I've always been certifiable.

[Bernard Yomtov]

Having looked at Schumer's assumptions, I have to say this calculator is silly. He assumes a return of 3%, minus .3% for administrative costs, on the private accounts. So you get 2.7% and are borrowing at 3%.

This turns out to be a bad deal. What a surprise.

[Anarch]

I've been doing the math for 12 years. Can I stop now?

[felixrayman]

I have to say this calculator is silly. He assumes a return of 3%

He most certainly does not. He assumes a return of 3% above inflation. If you believe this assumption is too pessimistic, well guess what, if you are right then there is no need to worry about SS at all. The assumption is the same one used by the CBO when it discusses SS. So, we can start talking about what we can do with the excess money SS will have - we can lower payroll taxes, we can raise benefits, we can lower the retirement age, etc.

Which is a good thing. We need to start having that talk. As our country grows richer, things should get better for retirees in America, not worse. Under Bush's plan things will get worse. That's just wrong. I can't believe anyone is standing up for taking money away from future retirees to pay for tax cuts for the rich. It is simply wrong.

[felixrayman]

I've been doing the math for 12 years. Can I stop now?

Not if your teachers were any good.

[Bernard Yomtov]

Felix,

He assumes a return of 3% above inflation. If you believe this assumption is too pessimistic, well guess what, if you are right then there is no need to worry about SS at all. The assumption is the same one used by the CBO when it discusses SS. So, we can start talking about what we can do with the excess money SS will have - we can lower payroll taxes, we can raise benefits, we can lower the retirement age, etc.

Please calm down. All the numbers are in real (that is, adjusted for inflation) terms. Just as Schumer assumes 2.7% above inflation returns, he assumes a 3% above inflation rate on the payback. In any event, the specific numbers don't matter. If you borrow money at X% and invest it at Y%, where Y is less than X, you will be unhappy with the results. My point was, and remains, that Schumer's calculator is designed to produce this result for the investment portion of the account.

He does include the switch from wage indexing to price indexing, but it would be vastly more useful if he separated this effect out.

I do understand and agree with the argument that it is foolish to assume low growth when projecting Social Security finances and high growth when projecting investment returns. I am not an advocate of privatization or of any major overhaul of Social Security, but that doesn't mean I have to unthinkingly endorse silly analyses that support my point of view. I'll leave that to NRO.

I can't believe anyone is standing up for taking money away from future retirees to pay for tax cuts for the rich. It is simply wrong.

I do believe it, but I agree that it is wrong.