“The Elderly” for Beginners

By James Kwak

As the AARP says that it is open to modest cuts in Social Security benefits, it’s worthwhile asking a more fundamental question: are Social Security and Medicare programs that benefit the elderly?

The answer may seem obvious. After all, the bulk of Social Security Old Age and Survivors Insurance benefits go to people over 62, and almost all Medicare beneficiaries are over 65. So it’s often observed in passing that our long-range budget issues are the product of transfers to the elderly. For example, in Restoring Fiscal Sanity 2005, Alice Rivlin and Isabel Sawhill write, “These big programs, which benefit primarily the elderly, will drive increases in federal spending in the longer run” (p. 36). Other commentators have occasionally argued that the problem is that the elderly have become too powerful and therefore claim too large a share of government spending, especially compared to the very young.* When you add to that the frequent complaint that, by running budget deficits, we are imposing burdens on our grandchildren, this age-based inequity seems even greater.

But the problem with this framing is that “the elderly” change every year. There’s nothing inherently wrong or unfair with a program in which you pay insurance premiums while you work and collect benefits when you retire. Saying such a program benefits the elderly is like saying that life insurance doesn’t benefit the insured, only the beneficiaries: it’s true in a trivial sense, but people still want and buy life insurance anyway.

The more interesting question for any program in which you make contributions during your working years and collect benefits in retirement is whether it’s good for participants over their entire lifetimes. Currently, the Social Security payroll tax is 12.4 percent** of wage earnings up to $106,800 (that number is indexed). The benefit formula is progressive, so the more you pay in payroll taxes, the more you get back in absolute dollars, but your marginal benefit per dollar contributed declines. For middle-quintile earners born around 1975 and retiring around 2040, Social Security benefits will be about 55 percent of their immediate preretirement earnings*** (see Table 7 in this paper by Andrew Biggs and Glenn Springstead). For low earners, the replacement rate will be about 91 percent; for high earners, it will be about 38 percent.

So the real question is whether you would pay 12.4 percent of your wages for roughly 40-45 years in order to get back that distribution of replacement rates for about 20-25 years.**** There are a few different ways to think about this.

In aggregate, it is true in some sense that the people in the workforce today, plus all the people who will join the workforce in the future, will be net losers in Social Security. This is true because the first generations of beneficiaries were net winners; they received benefits that could not have been funded by their contributions. But that doesn’t mean that the median earner is worse off with Social Security. Most obviously, there is no way to replicate Social Security for yourself. You can’t find an insurance company that will sell you an annuity on Social Security’s terms in exchange for 12.4 percent of lifetime earnings, and that’s not just because Social Security exists. No insurance company could afford to offer such a product without mandatory participation, because of adverse selection; and if any insurance company does offer you such a product, you shouldn’t believe that they will still be around when it comes time to collect your benefits.

More importantly, you don’t know at age 21 whether you will be a low earner, a median earner, or a high earner, although you may have some idea. The progressive benefit formula gives you insurance against your career not working out as well as you might have hoped. Sure, if you’re a 45-year-old corporate executive making half a million dollars a year, you will be a net loser from Social Security, but that’s not the question; you can’t decide whether to buy insurance after you find out if the insurable event occurs. There are certainly some people who would opt out at age 21 if they could — notably, the scions of the rich, who don’t need old age insurance — but rationally speaking, it’s not just the people with below-median earnings potential who benefit from the existence of Social Security, it’s also a lot of the people with above-median earnings potential.

Of course, this analysis is predicated on the assumption that Social Security benefits will be there when your retire. If not, then Social Security is definitely a program that benefits the current elderly. And here it is necessary to point out that Social Security is projected to run a deficit starting around 2018.

But the key point here is that the deficit is not really that big. The 75-year deficit is equivalent to 2.22 percent of taxable payroll, which means that the program could be brought into balance through 2085 by increasing payroll taxes by 2.22 percentage points — from 12.4 percent to 14.6 percent. Alternatively, balance could be roughly achieved by eliminating the cap on earnings subject to the payroll tax and counted by the benefit formula.*****

But even without eliminating the cap on earnings, the question is: are Social Security benefits worth a 14.6 percent payroll tax? I think the answer is yes: (a) for median earners, because of the ability to use premiums during working years to pay for insurance against living too long; (b) for most people at age 21, because of the insurance against not making much money; and (c) for everyone behind the Rawlsian veil of ignorance. You might have a different answer to that question. But that’s the question: not whether we can afford to maintain benefits for “the elderly.”

(Medicare is the same issue, plus uncertainty about health care cost inflation. Because of the additional risk, the value of insurance is even higher.)

* Poverty among the elderly was an important historical factor behind the creation of both Social Security and Medicare. Since then, the programs have done a pretty good job of reducing old-age poverty, although they have by no means eliminated it.

** Actually, it’s 10.4 percent, but only for this year and next year, because of the December 2010 tax cut.

*** Average earnings over the five preretirement years. The full retirement age will be 67 by then under current law, so you can get slightly higher benefits by working for two more years.

**** Life expectancy at age 65 is currently around 19 years (see Table 22 in this CDC report), and will only be higher in 2040.

***** Today, only 83 percent of wages are subject to the payroll tax, so eliminating the cap would increase the tax base by over 20 percent — equivalent to a 2.5 percentage point increase in the payroll tax rate. However, increasing the cap would also increase future benefit payouts, although by much less because of the progressivity of the benefit formula.

52 responses to ““The Elderly” for Beginners

  1. Typo: “retiring around 1940″ ;-)

  2. Count de Money

    So everything is all right with social security. What a relief; I thought we had a problem. Let me go watch a movie on Netflix.

  3. According to the aarp.org website in a post dated June 17, 2011, the AARP has not changed it position on Social Security.

    http://www.aarp.org/about-aarp/press-center/info-06-2011/aarp-has-not-changed-its-position-on-social-security.html

    They say media reports of a change in position are incorrect.

    So has the press got it right and aarp is unwilling to admit their change in position?

    James is corrrect,by just removing the cap on earnings subject to social security taxes the problem would likely disappear. More so if earnings subject to tax included various forms of compensation now treated as capital gains such as carried interest.

    A second change would add one or more additinal bend point to the existing single bend point in the benefit formula whereby as higher and higher levels of average lifetime earnings, benefits would decrease as a percentage of those average lifetime earnings.

  4. “Life expectancy at age 65 is currently around 19 years (see Table 22 in this CDC report), and will only be higher in 2040″.

    James, I’m curious about your certainty that life expectancy will only rise. It reminds me of people who say “the economy will only grow.” Or “people will only get fatter.” Can you tell us about the reasons for your confidence that life expectancy will only increase?

  5. Moses Herzog

    Hey Jamesy, you’re becoming (have been) a powerful voice now. Daniel Shaviro’s book has gone from 99 cents to over 10 dollars on Amazon now. Let’s hope you have stronger cultural staying power than Newt Gingrich. But really, thoughts fluttering in my mind on an enjoyable Friday evening:

    —-Feeling wistful for the voice of the illustrious commenter “Bond Girl” to tell us that junk bonds and credit default swaps (her version of free speech and apple pie???) will save America from the abyss. I guess she’s too busy telling us that municipal bonds are now the way to salvation.

    —-Wondering why protecting a friend from the repercussions of adultery and negotiating his exit fees gets you less attention than phone porn.
    See here:
    http://www.msnbc.msn.com/id/26315908/vp/43025241#43025241
    and here:
    http://www.msnbc.msn.com/id/3096434/vp/43029119#VpFlash

    —-Wondering why Republicans whine that President Obama isn’t being active enough to confront Gaddafi, then 2 weeks later says he may be “violating the war powers act”.

    —-Wondering why Republicans give lip service to worry about the national deficit after clamoring for two unfunded wars, voting for an unfunded prescription drug benefit plan, and asking for less tax revenues from the rich and multinational conglomerates.

    —-Wondering how the following graph magically never finds its way on television when the “experts” and “analysts” discuss the deficit / national debt.
    http://2.bp.blogspot.com/-8LVw3-YXt_A/TdWj8nQyUkI/AAAAAAAAQ1w/wGI39TSyujc/s1600/DeficitChart.png
    You can read more details here: http://www.cbpp.org/cms/index.cfm?fa=view&id=3490

  6. For the AARP to even suggest such a ting is solid proof how out of touch they are with the people they claim to serve. They obviously have nary a clue that social security alone will only purchase you destitution in any American city – that’s IF you don’t have a car. And it will be even worse for the people whose benefits they propose cutting are part of this generation who have no money left over after pay day to put in savings. AARP is a disgrace!!! Let NO ONE accuse them pf advocacy!

  7. “Alternatively, balance could be roughly achieved by eliminating the cap on earnings subject to the payroll tax and counted by the benefit formula.”

    You mean by turning the tax into an actual progressive tax, in stead of the highly regressive tax it is now?

  8. Social Security is not an insurance program, it is a re-distribution program. SS does not take contributions from a pool of participants and then distribute this pool among the participants depending om some outcomes. SS takes goods produced by today’s workers and distributes them to today’s retirees in exchange for the promise to today’s workers that they will be similarly supported by future workers (yes, an inter-generational contract).
    Therefore, the key drivers of the SS sustainability are the number of retirees supported by an average worker and the productivity of that average worker.
    At the society level, the deficit is a red herring, only tweaking further redistributions across generations. SS recipients can’t really eat Treasuries (which aren’t even paper), they need Treasuries to redeem for real goods produced by the current workers.

  9. Eliminate the income cap. Include capital gains as regular income. As a single 62 yo on SSDI & Medicare as 99% of my income, I have trouble paying my normal monthly expenses & I often have to delay paying screening procedure bills, etc. & even though SocSec benefits have been frozen for 3 years, Medicare Part D premiums, annual deductibles, Rx copays have increased to the benefit of the private insurance companies. Also, remember that the “increase” that starts in January 2012 will not cover the beneficiary costs imposed over the last 3 years.

    The AARP may be changing its mind soon as its own discussion page is full of people stopping their membership, dropping AARP insurance programs, etc.

    LIke our representatives in DC who have been deaf to the jobs depression since the meltdown, AARP could find itself with new competitors, & it already has a few – not including the RW astroturf “groups” from Koch & Co.

  10. “This is true because the first generation of beneficiaries were net winners; they received benefits that could not have been funded by their contributions.”

    Indeed …most were “Depression Baby’s”, that had grown into WWII households – that paid the ultimate sacrifice! Government was well aware of this medicated “Ponzi Scheme”. Why? There were a myriad of good reasons when it came to the countries unquestionable prosperity. Therefore, being able, and willing to do something tangible for the great acts of altruistic patriotism the people of America society so rightfully deserved. Thusly, with a great deal of merit to back them up…more so than too just do nothing (subtle mediocrity?) with America now on top of the world – both fiscally and militarily.

    Of course the government knew of its failings, or for the use [?] of a better word, weaknesses, and would deal with them per usual as they have done so admirably in the (good old days?) past? This is when America’s vibrant congress was intoxicated with “Real Life Chivalry” – a pure and unadulterated love… as in a frenzy of self-proclaimed citizens’ troubadours

    But… it was a Democrat that got the keys to the “People’s Treasure Chest” and squandered it! That being LBJ and his anecdote – “The Great Society” as a panacea to his unpopular Vietnam War! He actually made Nixon look good when it came to social engineering (open for discussion)? Congress raided/pillaged the coffers of our ” Social Security Trust Fund” ever since the late 60’s! That’s fifty (50) plus years folks that these fools have been writing worthless IOU’s. Surprisingly it is the democrats that have been doing most of the withdrawing. Just ask Nancy Pelosi and Harry Reid? I’m an independent, but at one time in my past life, I’m certain that I was a Democrat (never ever a republican…never).

    Lastly…the dilemma regarding today fixes has a great deal of workable solutions (JMHO):

    #1) Immigration (Mexico) – #2) no-limit for shut-off to defined contributions(as James speaks about) – #3) upping the retirement age to 67 with no early retirement (starting in increments of one (1) year beginning in 2012 and being fully implemented by 2015.

    Fabulous post James!

  11. JP wrote above: “For the AARP to even suggest such a ting is solid proof how out of touch they are with the people they claim to serve. ”

    Exactly, correct. AARP has been soliciting membership from me since before I turned 50; I have been considering becoming a dues paying member.

    Oopps. Why waste money on an organization so out of touch with the needs of retired people?

    Not gonna happen, here.

  12. “For middle-quintile earners born around 1975 and retiring around 1940″ – that should be 2040, right?

  13. @Woop and JP: the AARP is just a front for the insurance industry. Under the guise of being a “non-profit” do-gooder organization, they sell medi-gap policies to Medicare beneficiaries. Most, if not all, of the AARP medi-gap business goes to United HealthCare, probably the worst of the worst in the health insurance field.

    There was never anything benign about AARP. I used to belong because membership was cheap and you could get discounts on a range of travel products, etc., but my membership has lapsed, so I no longer have an AARP card to burn.

  14. It is always worth remembering that Social Security is not solely for the elderly. There are also disability benefits and survivor’s benefits for minor children. These may be a small fraction of the total spending, but their importance to those who receive them could hardly be overstated. No serious discussion of the future of Social Security can ignore them.

  15. CBS from the West

    @Carla and James Kwak

    “Life expectancy at age 65 is currently around 19 years (see Table 22 in this CDC report), and will only be higher in 2040″.

    Well, of course, nobody has a crystal ball. These predictions are based on extrapolation of established trends–which is always risky business. More reliably, they are often based on models that relate life expectancy to other social phenomena, such as economic well being, education, etc.

    But interestingly, this particular prediction may well be wrong. A few days ago the LA Times reported an interview with the authors of a forthcoming paper which concludes that life expectancy for white women has been *declining* for more than a decade in many parts of the United States–mostly in poor counties.

    http://www.latimes.com/news/science/la-na-womens-health-20110615,0,7351576.story

    The paper itself is as yet unpublished, so I cannot offer an opinion about the validity of its conclusions.

    Anyway, if, as appears to be the case currently (more extrapolation from current trends!), the US does not recover economically for a long time, the standard demographic models will also predict declines in life expectancy.

  16. CBS from the West

    @MrM
    “Therefore, the key drivers of the SS sustainability are the number of retirees supported by an average worker and the productivity of that average worker.”

    This is truly the key point, which JK gives no evidence of understanding. In _real_ economic terms, SS provides retirees (and certain other small groups) with food, shelter, clothing, etc. You cannot “save” those up or magically create them as “returns on investment.” Those things must come from what younger workers produce synchronously (or what we can trade their products for). The demographics over the next few decades are the most adverse ever, in this regard, and pose a serious burden on younger workers.

    At this point, it is probably too late to increase per-worker productivity to the point where this burden can be met without imposing noticeable hardship on the younger generations. We should have been doing that for the past 4 decades, but we squandered that opportunity. An alternative approach, politically far beyond realistic in the current environment, would be to rapidly expand the number of younger workers through massive immigration (and job training to make them productive enough) or union with a country with a broader demographic pyramid (Mexico, the 51st State?).

    But tweaking social security benefits or taxes doesn’t do anything to fix this underlying demographic/productivity problem. The younger and older generation will be competing with each other for the basic goods of life. Changing the financial details simply tilts the playing field somewhat in one direction or another and somewhat redirects production toward the goods preferred by one or the other generations. In fact, I suspect that there is a multiplier effect, with multipliers less than 1, on any such maneuvers. If benefits are cut and the elderly receive fewer nominal dollar benefits from taxes collected on the younger, part of this decrease will likely be mitigated by a fall in nominal prices for those goods which are preferentially consumed by the elderly.

    I would love to see a cogent analysis of the real economic outlook for both generations under different scenarios. We ought to be talking about that–not about juggling accounts.

  17. Thank goodness some else is willing to acknowledge that the Social Security “problem” can be completely solved by simply eliminating the cap on earnings. Do any math you wish. Use any assumptions you wish. The answer is always the same. A budget surplus, period. Now more people need to start calling attention to this simple solution.

  18. @Carla, yes, I’ve heard that before about AARP, and with AAA, which is really a benign and helpful organization, I get discounts on travel, triptiks, and eyeglasses….the latter alone pays the entire yearly membership cost for me and my spouse.

  19. The issue of solvency for the trust fund is simple, remove the wage base limitation on FICA, and you have a healthy funding mechanism for a long time. It doesn’t make a lot of sense to remove the most successful government program in world history, but exempting high wage earners from the tax, about one hundred thousand odd bucks. Make the tax progressive, and lose its’ retrogressive characteristic.

    Also, impose a sales tax on WALL STREET transactions, and your national budget crisis recedes……but you would need an independent body politic and strong president to make it happen, neither of which is extant.

    The rich have realized a tremendous windfall, while the country and world teeters on massive collapse and dissolution. It is class warfare, they started it, and are still seeing what they can suck down from the ruinous catastrophe they created = IMF.

  20. typo: “….by exempting….”

  21. “Michael Hudson: Free Money Creation to Bail Out Financial Speculators, but not Social Security or Medicare”

    “If there was a silver lining to all this, it has been to demonstrate that if the Treasury and Federal Reserve can create $13 trillion of public obligations – money – electronically on computer keyboards, there really is no Social Security problem at all, no Medicare shortfall, no inability of the U.S. government to rebuild the nation’s infrastructure. The bailout of Wall Street showed how central banks can create money, as …MMT explains. But rather than explaining how this phenomenon worked, the bailout was rammed through Congress under emergency conditions. Bankers threatened economic Armageddon if the government did not create the credit to save them from taking losses.”

    FROM:

    http://www.nakedcapitalism.com/2011/06/michael-hudson-free-money-creation-to-bail-out-financial-speculators-but-not-social-security-or-medicare-or-you-know-its-bad-when-michelle.html

  22. The problem isn’t “the elderly.” The problem is the elderly who demand their SS and Medicare payments and have voted for tax cuts their entire lives.

  23. @ James B

    ,…and dear pray, what have their votes gotten them?
    A steady diet of two cans of cat food and a bag of (evaporated?) powered milk,..with a dog biscuit as desert!

  24. Mr Kwak is an estimable fellow, and often writes “almost right” stuff. This
    latest post “for beginners”(does he need to do that?) is a case in point.

    He writes: “And here it is necessary to point out that Social Security is projected
    to run a deficit starting around 2018.” That is not accurate. What he means,
    and what _is_ accurate, is: around 2018 the Social Security fund, in order
    to make payments at current levels, is projected to have to call in some of
    the special bonds which it has been issuing to the U.S. gov’t since about
    1985. These are IOUs to the Soc Sec fund. The gov’t promised to pay
    this money back when it received it.

    At present rates of expenditure, all these bonds will have been redeemed
    by 2037. That’s a while into the future, friends; maybe New York, D.C. and
    Oakland will be under water then, or maybe we will have started to elect
    some economically knowledgeable people to Congress. I dunno; I will
    long since have passed from the scene.

    So, for slightly advanced readers, the question is: should the government
    default on its obligations to the Soc Security trust fund? My opinion: this
    won’t help us, but will hurt us.

    Maybe Mr Kwak will read this correction? I’m still not quite clear whether
    he reads all the comments he draws forth from us . . .

    Best wishes,

    Alan McConnell, in Silver Spring MD

  25. CBS from the West

    @Anonymous

    Thanks for that link. Outstanding!

  26. “….yes, I’ve heard that before about AARP, and with AAA, which is really a benign and helpful organization, I get discounts on travel, triptiks, and eyeglasses….the latter alone pays the entire yearly membership cost for me and my spouse.” says Woop.

    Please understand, Woop, that AARP is BY NO MEANS a benign organization (nor is AAA, but I’ll just stay on topic here) because AARP in fact supports a criminal enterprise: the private health insurance industry.

    We must comprehend, and learn how to communicate to others, that the entire web of nonprofit organizations that has been spun by the corporate empire to support its own ends is NOT really nonprofit, is not benevolent or benign, and in fact extracts a huge price from all of us: a financial price for sure, but also a political price and in the end a huge societal price.

    And I haven’t even begun to address the nonprofits that were actually started with worthy goals and pure motives, but have been co-opted and corrupted by the corporate sphere.

  27. “In aggregate, it is true in some sense that the people in the workforce today, plus all the people who will join the workforce in the future, will be net losers in Social Security. This is true because the first generations of beneficiaries were net winners; they received benefits that could not have been funded by their contributions.”

    That is misleading. The “winnings” of the first participants was finite. If we consider it a cost to future participants, the more future participants there are, the less the cost per future participant. It approaches zero in the limit.

    Suppose that the cost is simply passed along to the indefinite future. Assuming economic growth, the real value of the cost will diminish with time, also approaching zero.

  28. MrM: “Social Security is not an insurance program, it is a re-distribution program. SS does not take contributions from a pool of participants and then distribute this pool among the participants depending om some outcomes. SS takes goods produced by today’s workers and distributes them to today’s retirees in exchange for the promise to today’s workers that they will be similarly supported by future workers (yes, an inter-generational contract).”

    And exactly how does that differ from long-term insurance?

  29. Lady in Red

    Off topic, but this is a fascinating analysis Germany must leave the EU to save the euro:

    http://www.telegraph.co.uk/finance/financialcrisis/8584064/Why-Germany-must-exit-the-euro.html

    And, a question:

    Why do you not link to the highly insightful and analytical blog ZeroHedge: On a long enough timeline, the survival rate for everyone drops to zero…..
    ….Lady in Red

  30. This perpetuation of the Social Security system running out of money idea is a distraction from the real problem. Do we want to provide a living benefits floor to our retirees or not? That money collected is destroyed (well, a compensation never delivered) and the money paid to retirees is created out of thin air by the only agent that is able to make create money in the U.S. So, the lengthy presentation above with the seemingly useful arithmetic is much ado about nothing. A useful question is why does the AARP think it is ok to reduce retiree benefits?

  31. This is one of the most intelligent framings of the issue I have ever seen — for both Social Security and Medicare. Thank you.

  32. The Social Security account is the cookie jar for the “full faith of the USA economy”.

    Why not go find the 6.6 BILLION $$$ *lost* in the fog of war in Iraq…? That paper CASH was based on SS funds, at first, then savings then *equity* in homes – prove me wrong….

    The baby boomers – especially the flower children of the last decade of the boom – have contributed more than the media will acknowledge to WEALTH CREATION (….ask what you can do for your country…). They were born when there was about 3.5 Billion people on the planet – there are now about 7 Billion. And quite frankly, that’s not our problem. As a Native American noted – “we had 100 of us in the tribe and 1000 buffalo – we considered that the proper balance”.

    This is many an observation from various “minority cultures” to the facts of a billion here and a billion there in other countries – seriously, what were they thinking to get to a billion?

    As always, a very educational website – if you read between the lines, you can see what’s gonna happen next in the “economy” and can make the proper moves…predators are 100% predictable – no risk whatsoever in assuming they are out to take your health and wealth – they have no other plan.

  33. Understand this simple fact. The typical Social Security recipient is a sixty-something widow and her only source of income is $13,000 from Social Security.

    Wake up boys and girls. That is your grandma you are talking about! Not some remote government program and theory.

  34. @Annie
    Sorry, the bill for Iraq was in TRILLIONS, not BILLIONS. (Or as old Ev Dirksen used to say “A billion here, a billion there, and pretty soon you’re talking real money.”)

    “predators are 100% predictable – no risk whatsoever in assuming they are out to take your health and wealth – they have no other plan.”
    It’s not even at the level of prediction. They’ve been at it in earnest for about 30 years. The top 10% of Americans have taken 96% of ALL income gains since 1980. I’ve enjoyed that as one of the top 10%, but it should not have been. Got to stop.

    Anyone care to discuss the moral dilemma of maintaining an AARP membership (to get the discounts), when they’ve gone over to the Dark Side? They didn’t just cross over, of course, but their past defense of SS & Medicare made up for some of their less savory aspects. Now…..

  35. @jakepgh – I was referring to the 6.6 BILLION in paper cash that arrived in Iraq and either fell in the couch from the pocket or got blow away by the wind when they opened up the C-5 transport plane that DID have much more than 6 .6 billion – check out a Jenk rant on Ratigan about the details since I am well aware that the top 10% have a genetic and moral deafness to anything a *white women* has to say about fiat money and *morality*

    nobody gives a flying fig about AARP….

  36. I’m all for privatizing social security when I get guaranteed 7.5% yearly returns forever from a company that can’t go bankrupt. The only sure thing from private industry is commissions.

    The argument about social security forcing the younger generation to pay for the older generation is pointless. Think one second about the alternative. Will you not be paying for the older generation when your parents are living with you? Besides, the social security trust fund is no less real than your bank account. Do you really think your bank is holding a bunch of dollars just for you?

    Likewise, will you not go bankrupt when you are forced to pay for your parents medical bills in old age once all of their cash has been sucked up by medical bills? Or, will you tell your mother and father no you won’t pay for their medical care?

  37. “Most obviously, there is no way to replicate Social Security for yourself.”

    All those words, and it boils down to one sentence. Transfers will be a zero-sum game, at least in the first instance. (It’s possible, through the magic of interaction, to have a positive or negative sum game – in fact, almost certain.) But, if the goal of a federal program is to create something that would not otherwise exist (you know, like national defense or universal literacy), then that is the basis on which the program should be evaluated.

  38. kharris: “All those words, and it boils down to one sentence. Transfers will be a zero-sum game, at least in the first instance. (It’s possible, through the magic of interaction, to have a positive or negative sum game – in fact, almost certain.)”

    Generally, aren’t the recipients of Social Security benefits more likely to spend the money than those who pay the current taxes? So in general the effect is positive for society as a whole? (Aside from the social benefits of providing for the elderly and disabled.)

  39. I regret having to say this but like most economists the social and political aspects of the issue elude you. Social Security and its derivatives are acts of inter-generational solidarity as well as a means to provide a measure of financial security for the elderly. You work today for the elders of yesterday; tomorrow’s generation works for you etc. A sad commentary that the obvious needs restatement for those who do not grasp it. In addition, Social Security in the U.S. is one expression of an historic compact in Western societies that for 60 years has brought social harmony, political stability and a sense of communality. It has helped drain away the passions of religion, class and ideology that had wracked industrial societies. Only obliviousness to history and humans’ social nature explains the cavalier attitude toward this civilizational accomplishment that now prevauils in America and is advancing in Europe.

  40. @sfaxes1: There isn’t any clear explanation that current U.S. workers fund their elder’s Social Security benefits. There are very clear explanations that they don’t. I haven’t seen any credible explanation of how the U.S. government must pay it’s way like a state or household. The accounting doesn’t add up. All I can see is the presumption that the U.S. and similar countries must balance its budget and fund its spending. I like the inter-generational solidarity though. Nicely done.

  41. Monique Morrissey

    Thanks for writing this–a much-needed corrective. I would add that in addition to the fact that nearly all of us will eventually become Social Security and Medicare beneficiaries, all but a few hardhearted billionaires should appreciate the peace of mind that comes with knowing our elderly relatives and friends are taken care of.

  42. Unless you’re self-employed, your contribution to Social Security is 6.2%; your employer pays the other half. When you say that workers contribute 12.4% of their income to SS you presume that employers wouldn’t just keep the other 6.2% if they weren’t required to make that contribution, i.e., that they would pass it along to their workers in higher wages.

  43. James, the issue is not one of old vs. young, it’s a sad tale of generational conflict. Simply, Boomers vs. GenX/GenY.

    Various states have looked at “confronting” retirement obligations by upholding entitlements to CURRENT recipients and anyone over 50. In essence, through the tail end of the population bulge. The upshot is that MORE elderly will be supported by a SMALLER BASE of workers at CURRENT obligation levels, but then when that smaller base has it’s turn to retire, it sees immediate and harsh cuts.

    The cruelty of this resides with the utter failure of the Boomer generation to save – rather than taking the surplus of their historically high worker-to-retiree ratio, and saving at very high rates (or spending it on long term investments), they spent it on consumption and short-term investments (big, short-lived houses that are far away from urban areas, etc.) They incurred massive PUBLIC debt by lowering their tax base, and then spent it on themselves. They PRIVATIZED the future income stream of the next generation (both their own children, and the children of their neighbors). They engaged in massive borrowing from abroad.

    So, now, the AARP wants to cut obligations. But… not for the Boomers. Never for the Boomers. And surely we’ll get around to raising taxes AFTER the Boomers retire.

    At some point, however, enough of the older Boomers will die off and enough GenY’ers will advance to voting age that the preponderance of voting power will shift – it’s already happening – and politics should get very interesting.

  44. CBS from the West

    @BradK

    Your points are all, in a sense, correct, but, in my view, beside the point.

    Yes, there will always be an older generation of retirees and a younger generation of workers. And, in real terms, of course the sustenance of the former must come from what the latter produce (or what they can trade what they produce for). In old times, people supported their own parents with no public assistance. But that system would not be viable today given mobility and longer life spans.

    My point is, though, that the ratio of retirees to workers is soaring to unprecedented heights, and the burden on the younger workers has never been greater. While juggling the accounting of the social security system and tweaking its funding and benefits can alter the balance of power between the two generations somewhat, nothing financial will change the reality that the so-called dependency ratio imposes an excessive burden on the upcoming generations of workers.

    Stats Guy, above, has actually made my point in a different way, arguing that we missed the opportunity to save at very high rates instead of spending on consumption. In real economic terms, of course, nothing can be saved except perhaps durable goods. But most necessities of life are perishable goods or services and need to be produced in real time. But a higher “savings” right would have made it possible to divert capital into investments that would have improved technology so that future workers’ productivity would be high enough that even with the enormous burden of the boomers on their back, there would still be plenty to go around for them and their children. But, Stats Guy and I agree (in different language) that this opportunity was squandered, and squandered in egregiously frivolous ways.

    Let me, at this juncture, also note the finance sector’s role in this. Since the 1970’s they have shown a clear preference to use other people’s money for gambling and blowing asset bubbles, avoiding real investment to the extent possible.

    @Stats Guy
    It is impossible to know if this is an old vs young problem (age effect) or a Boomers vs GenX/GenY problem (cohort effect), because we have only one period of observation. My perception is that the modern system of retirement benefits has only existed since the 1930’s, and its potential for exploitation only recognized still more recently than that. We Boomers are no saints, to be sure, but my take on the GenX/GenY people is that they’re not really any different, and would have done the same to those who follow them if they had the opportunity. Probably we’ll never know–because the modern system of retirement benefits may not survive to another generation anyhow.

  45. All this heavy breathing! Intergenerational this and that, burden on
    younger workers, etc. As long as we are casting our non-penetrating
    glances into the shrouded future, let’s take account of the experts
    who have done the future projections with expertise that few of us
    can match.

    Here is an excerpt from the Trustee’s Report Summary, to be found
    at http://www.socialsecurity.gov/OACT/TRSUM/ :
    “Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the
    weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.”

    Note “redeeming trust fund assets”. In layman talk, the Soc Sec tax has taken in way too much from
    the payers(employers and employees). It lent those excesses to the General Fund. What else could it do
    with them? Neither the gov’t in general nor the Soc Sec Trust Fund in particular is allowed to buy stock,
    or real estate, or precious metals.

    After 2022, eleven years away, the Soc Sec administration will have to start redeeming the excesses in a
    big way. All the excesses will be gone by 2036. I wrote 2037 in my earlier Comment; see above. But
    the gist of my earlier comment still stands.

    We’re supposed to be smart, thinking people here; I expect smarts and thinking even from Mr Kwak,
    who I’m sure is often burdened by his legal studies. I suggest that we all poke around a bit in
    socialsecurity.gov, convince ourselves that the Repubs, and the Petersons, and the Kochs, are
    doing a Halloween number on us, and let’s get back to worrying about Medicare and push for
    single payer.

    Greetings to all,

    Alan McConnell, in Silver Spring MD

  46. Blah, Blah, Blah……endlessly. Stop, just stop all that blathering about generations, Boomers and complete nonsense. Just Stop and deal with reality. Get out your calculator and do the math and stop posturing.

    Here are the facts. In 2007 (last IRS data available), 17,993,000 income tax returns were filed that showed income of +$100, 000 or more. They paid 6.2% of that income up to $106,000, and their employers matched it, into the Social Security fund. Then they paid no more, period. End of story.

    Divide those 18 million households anyway you wish. Then multiply those numbers by 12.4% and put into the Social Security fund. End of story. End of the problem, End of the blah, blah, blah.

    But only do this if you are truly interested in taking Social Security of the table.

    Otherwise, keep on preening.

  47. CBS: “We Boomers are no saints, to be sure, but my take on the GenX/GenY people is that they’re not really any different, and would have done the same to those who follow them if they had the opportunity.”

    Sadly, probably true.

    Your comments about the meaning of savings are valid and relevant (particularly in the context of long term investments, many of which were not made). But I would add two points – the boomers borrowed internationally from countries that should have been borrowing from them (given age cohort structures) – china, latin america, middle east. Much of this was facilitated by a strong dollar due to rising demand for dollar reserve holdings. Second, I’m not 100% convinced that internal debt is irrelevant; otherwise, why would we have 10% unemployment? We have a future expected demand problem created by the awareness that much of the current consuming population will need to dramatically cut consumption NOT because we have a supply shortage (that should cause inflation, right?), but because they lack the ability to call in obligations (savings, or get credit) to sustain future consumption.

    Not that current macroeconomics even understands this – private debt load is essentially a _distributional_ issue, and distributional issues do not affect aggregate output, just the distribution of consumption. Except this is plain dumb – current macroeconomics does not even understand the basis of a balance sheet recession, except as an exogenous shock that is reflected in an increase in demand for liquidity. They can “fix” the liquidity shortage, but without fixing the underlying problem (distribution of debt/money), they need to continue a constant liquidity injection, and this becomes politically taxing (observe the backlash against the Fed) if the injection must occur through QE (which is perceived as more interventionist than simple rate manipulation, even though rate manipulation essentially has the same real effect – but people are blinded by money illusion). Nor do we have evidence that liquidity injection is forcing real long term investment – the savings/investment gap remains significant, even though liquidity was being injected AND the savings rate increased. Banks are failing as the vehicle (witness ultra high reserves), corps are hording cash, and investors are deploying cash to short term liquid speculation activity, not long term fixed capital, because no one has stabilized expectations about the future. The Fed, which has suddenly rediscovered a role for government (once they saw their precious financial system in jeopardy) in stabilizing short term expectations, is unable to stabilize long term expectations because those are _structural_, but the neoliberal economists still refuse to walk back from their dismantling of the institutions that coordinated long term growth. They actually like incompetent government, because it provides proof points to reduce government overall, but suddenly they realize that expectations of structural failure are constraining their management of the money supply. Oh no, NOW something needs to be done!

    Yet the monetarists, keynesians, and austrians all keep shrieking from their purist soap boxes.

  48. Daniel Marans

    James,

    Great article. Too few emphasize that Social Security is an insurance program and the benefits that offers.

    A couple of things I take issue with:
    -Social Security is not projected to run a deficit in 2018. It is running a cash-flow deficit now, but when interest is included, it had a $69.3 billion surplus in 2011. It will be able to pay full benefits, without any changes until 2036–and after that pay 77% indefinitely. So all in all, it’s still gonna be there, no matter what.

    -Good discussion of lifting the cap. One thing you left out: eliminating the cap and not counting new earnings toward benefits would get rid of entire shortfall. SSA has scored it.

    -Replacement rate is no longer 55% for the average worker (equivalent of middle quintile). It’s at 39% for the average worker retiring at age 65, and going down to 32% by 2030. That’s because of the rising retirement age, and increasing Medicare Part B premiums. This is all the more reason to focus on the adequacy of benefits, rather than concentrate solely on shoring up the financing.

    I’d love to stay in touch with you on these issues. My name is Daniel Marans and I handle policy for Social Security Works. You can shoot me an e-mail at dmarans@socialsecurity-works.org.

    Best,
    Daniel

  49. @sfaxes1 “Social Security and its derivatives are acts of inter-generational solidarity as well as a means to provide a measure of financial security for the elderly. You work today for the elders of yesterday; tomorrow’s generation works for you etc. A sad commentary that the obvious needs restatement for those who do not grasp it. In addition, Social Security in the U.S. is one expression of an historic compact in Western societies that for 60 years has brought social harmony, political stability and a sense of communality. It has helped drain away the passions of religion, class and ideology that had wracked industrial societies. Only obliviousness to history and humans’ social nature explains the cavalier attitude toward this civilizational accomplishment that now prevauils in America and is advancing in Europe.”

    Very nice comment – thank you for posting it.

    It is crucial to understand that nothing that people like you say, and even do to continue the good work, will change either the basic craven avarice of their sub-human nature or the militaristic plans of the Nihilists, the Wrecking Crew, etc.

    They KNOW full well what they are doing, they are not oblivious at all to the nano-second driven destruction of “civilizational accomplishment”.

    Unless all plans are made for a *Just War* against the Nihilists with that crucial understanding of their truth, what is good will not prevail.

    What mercy have they shown so far? The psychobabble was endless, wasn’t it? Still is…what President of the USA agrees with “….SOME people don’t deserve to own a home…”? Planet Earth is not our current *home*?

    What could have been more *cynical*, politically, than to plan the troops to come home the summer of his re-election bid?

    As for the *elderly*, shouldn’t Haliburton be picking up the health care costs – the *personalized medicine* crowning achievement that is Dick Cheney?

    Grandma was slowly killed off with opiods, so there’s another day in the life of Dick payed off with tax payer $$$- he’s like Stalin choosing from a list – her half-year now his?…but that’s another story for another day – how Ryan’s Plan created a window for health providers to get rid of Grandmas – curious how many others reading along just lost someone in their 90s….? Doing great one day (May 21), something very bad happening to her the next day – with no explanation…

    Crucial to KNOW what, not even a *who* we are dealing with – and I am 100% grounded in *just the facts, ma’am”….

    7 billion is not a human # – it does not bring out the best in humans to have so much *competition*….

    100 banksters, 40 million under the bus – their version of a *balance* in the fittest….

  50. I always appreciate your perspective, which is often different than mine. Isn’t it a bit misleading to suggest that whether we can afford benefits for the elderly is on the table? Is there anyone who’s really suggesting we end social security and health care subsidy for the elderly? No, not really. You advocate a simple tax hike. Others a mixture of benefit reductions (including raising the retirment age), perhaps offsetting it with other savings subsidies, perhaps some means testing, etc., etc.

    In short, who does claim that we need to consider whether we’ll continue to have a government run programs for income and support and health care support for the elderly outisde the occassional crank / irrelevant think tanker?

    Also, I suspect there are serious macroeconomic ramifications from 2.22 of income payments out of the economy and transfering them.

  51. It is helpful to see this in plain English:

    “Most obviously, there is no way to replicate Social Security for yourself. You can’t find an insurance company that will sell you an annuity on Social Security’s terms in exchange for 12.4 percent of lifetime earnings, and that’s not just because Social Security exists. No insurance company could afford to offer such a product without mandatory participation, because of adverse selection; and if any insurance company does offer you such a product, you shouldn’t believe that they will still be around when it comes time to collect your benefits.”

    There is a perception that individuals can do better than SS through shrewd investment of 401k’s, which follows another widely held perception that 401k’s are equivalent or better substitutes for traditional employer-provided pensions. So for most our working lives we hear nothing but doomsday stories about SS and happy talk about 401k’s while most of us will likely only be able to rely with certainty on SS for the duration.

    Another good argument for SS is that individuals benefit from the SS of their family members by not having to support multi-generations in one household. It’s nice for big families to live together if they want to but prior to SS, the working generation supported the retired generation by living in one house whether they liked it or not. So ‘if you’re a 45-year-old corporate executive making half a million dollars a year, you will be a net loser from Social Security’, but in reality that corporate executive likely gets to keep more of his or her money by not being directly responsible for the support of elderly family members.

    The old Italian film Umberto D is another very convincing argument for SS: http://www.criterion.com/films/371-umberto-d

  52. How much of Social Security goes to people under 65? I’ve heard people claim it’s a very high percentage but I’ve never seen an actual number. Anyone know what it is?