As I pointed out in my recent Bloomberg op-ed, Social Security is desperately broke -- 31 percent underfunded to be exact. This is not my opinion. This is Social Security's own measure of its unfunded liability contained in table IVB6 of its most recent Trustees Report.
The table's a bit hard to decipher, but it shows that the system is short $20.5 trillion in present value. It needs a 31 percent immediate and permanent increase in annual revenues to pay, over time, all of Social Security's promised benefits. That's close to a 4 percentage-point payroll tax hike! If we wait 20 years, the 31 percent figure rises to 50 percent, which translates into a 6.2 percentage-point tax hike.
In transmitting their report to the public, the seven trustees, including Treasury Secretary Geithner, Labor Secretary Solis, and Health and Human Services Secretary Sebelius, failed to scream "Fire!" Instead, they called for fixing Social Security in "a timely way." I wonder if these people have children or grandchildren.
Presidential hopeful Mitt Romney opposes all tax hikes. Presumably, then, he'd favor resolving Social Security's massive funding gap by immediately and permanently cutting all Social Security benefits by 23 percent.
Why 23 percent? Because Table IVB6 also shows that benefit cuts of this magnitude are what's needed to eliminate the system's long-term funding gap if taxes remain unchanged.
For his part, President Obama has said, "No current beneficiaries should see their basic benefits reduced and [I] will not accept an approach that slashes benefits for future generations." Presumably, then, the president wants to a) eliminate the current 2 percentage-point payroll tax cut and b) raise the tax rate an additional 3.8 percentage points.
Funny, I haven't heard governor tell the country he wants to cut benefits of all current and future Social Security recipients by 23 percent. Nor have I heard the president tell the country he wants to raise Social Security payroll taxes of all current and future workers by 31 percent, which would come on top of a 16-percent hike needed to eliminate his current payroll tax cut.
Maybe the governor thinks keeping taxes too low will raise revenues. And maybe the president thinks keeping spending too high will lower expenditures. Or maybe these gentlemen care more about the next election than the next generation.
Usually, the press would raise some questions. But I haven't found a single article in any of the top newspapers, magazines, or websites referencing table IVB6.
Things are a lot different in New Zealand, which I just visited. The day I landed, the Superannuation Report -- New Zealand's equivalent of the Trustees Report -- came out. I was amazed to hear one talk radio host after another debating how bad the situation was and how much needed to be done now to preclude a bigger burden for younger people in the future. The Kiwis, as strange as this sounds, actually worry about their children's future taxes and benefits. In New Zealand the underlying theme is "Our Kids Are Us." In the U.S. the theme is "Our Toys Are Us."
I've received a large number of comments to my Bloomberg column, which lays out why table IVB6 is the only appropriate measure of the system's insolvency. Many of the comments suggest that Social Security can never go broke because the government can always print money and give it to Social Security beneficiaries.
But Social Security's obligation is to paying real benefits, i.e., providing people with money that will suffice to purchase a basket of real goods and services. The government can hand us each 20 million $1 bills. As we spend it, this will drive up the price level sky high and leave us, on average, consuming nothing more in real terms. So printing 20.5-trillion dollar bills is no answer. Doing so will lead to hyperinflation and leave our country in even worse shape.
The other frequent response to my column was "Let the kids fend for themselves. I paid in my taxes. I'm entitled to collect every single dollar of Social Security benefits I earned. We baby boomers need to defend our rights." This too is an inappropriate response. If our government makes promises it can't keep/afford, we all can't say, "But Uncle Sam promised!" Instead, we need to come to an agreement about how to deal with our government's insolvency (and Social Security's problem is just a huge tip of a gargantuan iceberg) that's fair across and within generations.
A third response was to lift the ceiling on the payroll tax. Under this policy, people making above $110,100 this year would pay Social Security's 12.4-percent combined employer/employee tax on every penny of labor earnings they receive whether on the job or due to self-employment. Whether or not you feel this is the right thing to do, it's not enough. It comes up with only about 40 percent of the revenue needed to balance Social Security's books over time.
I think we need much greater progressivity in our fiscal system, but I also think that patchwork fixes to Social Security aren't the way to go. At www.thepurpleplans.org, you'll see how non-partisan economists would fix many of the economic problems we face. This red plus blue makes purple policy platform is available for free to both the Democrats and Republicans. Please feel free to send the link to your members of Congress and to the President and Governor.
I'm not asking you to do this. Your kids are asking you to do this.
Follow Laurence J. Kotlikoff on Twitter: www.twitter.com/kotlikoff
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| Obama | Romney | |
|---|---|---|
| Electoral Votes (270 to win) |
332 | 206 |
| Obama | Romney | |
|---|---|---|
| Total | 65,899,660 | 60,932,152 |
| Percent | 51.1% | 47.2% |
| Democrats* | Republicans | |
|---|---|---|
| Current Senate | 53 | 47 |
| Seats gained or lost | +2 | -2 |
| New Total | 55 | 45 |
| Democrats | Republicans | |
|---|---|---|
| Seats won | 201 | 234 |
Here are some of my notes and links, the links may not be in order.
http://www-siepr.stanford.edu/RePEc/sip/08-061.pdf
2007 Social Security Administration study of mortality and income.
In 2007, the Social Security Administration did a study of mortality and income. ......... among 65-year-old men born in 1941, those with income in the top half were projected to live an average of 5.3 years longer. Thus, requiring wealthier Americans to wait five more years to claim Social Security and Medicare has the effect of giving an average rich and an average poor person nearly the same number of years of benefits.
http://query.nytimes.com/gst/fullpage.html?res=9401EFDE133CF932A15756C0A9649D8B63
Poor people actually pay more into Social Security then they get back because 1) they are rarely college educated meaning they start paying earlier in their life, 2) many of these same people are unmarried making them ineligible for spousal benefits, and 3) they end collecting benefits for fewer years because their life expectancy is shorter.
http://money.msn.com/retirement-plan/us-retirement-trails-other-nations-cnbc.aspx
http://opinionator.blogs.nytimes.com/2012/05/20/entitlement-reform-for-the-entitled/
For it to clarify anything, you also need to know how many of the first time checks were boomers and how many were injured or disabled soldiers. Those who held a job before going to war qualify for Social Security and Medicare....even though we pay taxes to pay VA for those war related services.
When interest rates go up that will make a big difference in Social Security. They are supposed to be paying at least 4% interest rate now, but who knows? They keep leaving the 2.8 trillion saved as if it isn't growing. It should be. If they didn't take out the bonds for 30 years for a large part of them, then they have never tried to do right by Social Security.
They are figuring to infinity when they come up with that 20.5 trillion debt. It is like figuring your $300,000 mortgage as a totally present debt. They think we were born yesterday.
The younger workers are still paying double into Social Security. That should make up for a lot of the unemployment.
Most of the boomers are still working. That means they are not taking money out, but are still paying money into the Social Security system. Two thirds of the boomers do not plan on retiring, one third do not want to retire, they love to work. The other third cannot afford to quit work.
So only one third plan to retire and part of each of the three groups will die, so it doesn't look like the boomers will be a massive group of retirees and there could even be money left over.
If you look at the article, you see that the Trust Fund isn't significant. All of the money is already allocated to existing retirees. On top of that fund, there is a 20.5 trillion dollar short fall. Basically there is $10 of promises for every dollar of asset.
OR current workers could DO ABSOLUTELY NOTHING and Social Security will still not go broke.
What would happen is that the rate of benefits would have to be adjusted to match the rate of payroll tax income. This would result in a 25% or so cut in PROJECTED benefits. But those projected benefits are 60% greater in real value than today's. So if you cut them 25% you will still be getting a benefit 20% greater in real value than today's.
I don't think you should do that because you will miss that 25% after you retire a whole lot more than you will miss the 2% extra you would otherwise pay in payroll taxes while you are working.
It's a question of deciding when to spend the money you are going to be making. All of it when you are young. or save some of it for when you are old.
Your entire commentary is based on absurd assumptions. You are assuming that future workers will continue to fund a system AT THE SAME LEVEL as they do today. You're assuming that they will pay the same amount for 25% less at a time when their parents are losing benefits. Mind you, to maintain 25% reduction in benefits, the retirees have to continue to spend at the same level despite the fact that they benefits have been reduced. There is no economic model that explains your statements.
You are assuming that insolvency will not affect SS. In 2024, medicare will require that we (1) pull payroll tax resources away from Social Security or (2) pull general taxes away from debt control or (3) redefine Medicare benefits. I make the assumption that you understand the Trustee's report - and you aren't simply repeating hack material from some agenda-driven think tank.
"So if you cut them 25% you will still be getting a benefit 20% greater in real value than today's."
Ok if this is OK, let's cut the benefit levels back to 1990 levels today. Opps....
I didn't get an invitation.
He didn't mention how many other things can hurt our competiveness overseas. Here are a few examples:
Taxes needed to back student loans for expensive schools like Harvard.
Too high charges from the medical industry.
Excess profits of our businesses.
Too low of a wage base that payroll taxes are collected on for Social Security and Medicare. The maximum base is about $110,000 now, while the multimillion dollar CEO doesn't pay on a penny over $110,000. The contribution cap should be eliminated and all who draw a pay check should pay according to their income. The higher paid live longer and draw the most benefits. That needs to be compensated for.
There are many other programs and costs that affect our competiveness overseas.
It would end up that the middle class would never retire, but would work til the day they die or become disabled to pay for the pensions of our state and federal government and military.
It is pretty obvious many have made this debt mess in the government as an excuse to gut Social Security and Medicare.
Many business owners don't like Social Security because they are required by law to match what we put in. They would have to pay us more if we didn't have a future Social Security retirement, though. We would need a lot more to invest because of the risk.
I am not talking about sacred cows. I am talking about decency and honesty in dealing with our self funded retirements that we paid for while working.
This is such an easy fix. Nobody likes it. Why should they? But we're not petulant children. Everyday, we ordinary Americans make tough readjustments just like this. You gotta do what you gotta do. If it makes anybody feel better, my dad died at 66 without drawing any Social Security benefits. And I won't live to draw my Social Security benefits in 18 years. So there you go.
it is very unlikely you know what is wrong. Peter Peterson has been spending a billion dollars to make sure you don't know what is wrong. The simple fact is that nothing is wrong.
retroactive tax increase, which would fall most heavily on middle and working class
earners because their income was below the payroll cap. an outrage!
The shortfall is on top of the Trust Fund. 20.5 trillion assumes that the Trust Fund assets earn 4-5% when thanks to Ben Bernanke we are replacing older debt at 1 3/8s%. That means that the shortfall is actually much higher. Thanks Ben.
Social Security is a pay-as-you-go system which gets very little economic support from the Trust Fund. 2.6 trillion sounds like a lot of money, but it is basically economic parsley compared to the outflow of the system.
let me quote kotlikoff:
"So why did the trustees ignore the magnitude of the problem? One answer is that this is an election year and the trustees are political appointees. Another is that the trustees assessed the system’s finances based on a different table, IB.IV5, which reports a much smaller unfunded liability -- only $8.6 trillion.
The $20.5 trillion measure is called the infinite-horizon unfunded liability because it considers all future Social Security benefit commitments and tax receipts. The $8.6 trillion measure is called the 75-year unfunded liability because it considers only the next 75 years."
There is no research that says that raising the cap will make SS solvent much less fixed. 30 years ago the cap was roughly 32K, which in 2012 on an inflation adjusted basis is 82K.
If you roll back the payroll tax which rewards companies for outsourcing jobs - opps.
Social Security is only doomed if we ignore the warnings that the Trustees have provided. These people get paid to ensure the safety of the system, and they have not suggested that lifting the cap will solve a 20.5 trillion dollar problem.
The Boomers make an easy target. Of course -- make it about the kids. What the kids don't understand is that they may have to end up supporting their parents and their grandparents if the benefits are cut.
of course the government spent the money it borrowed. that's what you do with borrowed money. all that matters is you pay it back when due.
the government can easily afford to pay it back. but it might have to raise the taxes of the people who got the tax cuts made possible by borrowing the money.
http://www.ssa.gov/oact/progdata/fundFAQ.html
"How are the trust funds invested?
By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds.
What happens to the taxes that go into the trust funds?
Tax income is deposited on a daily basis and is invested in "special-issue" securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund."
In other words, SS Trust money is treated just like ordinary tax revenue except that the government is obliged to repay these monies plus interest to the SS as needed. These are government debt obligations, just like the $1.2 trillion in Treasuries held by China and the $.9trillion held by Japan that make up part of the $4.5trillion held by foreign governments.
not so easy. SS is supposed to be insurance not welfare. you pay for what you get. raise the cap and you get into making people pay for something they will not get.
easier solution, raise the payroll tax of the people who will get the benefits. forty cents per week each year will cover the 20 Trillion that Kotlikoff is talking about. after all there are a hundred and fifty million taxpayers and the 20 Trillion doesn't have to be paid until... "the infinite horizon." A more honest estimate of the shortfall is about five trillion over the next seventy five years. i think you can do math well enough to get an approximate answer. but it would help if you knew that you don't have to pay it all at once... a gradual increase of one half of one tenth of one percent per year while wages are going up over one full percent per year will cover it.
And once we have raised taxes on the rich, where are we going to raise taxes to fund medicare, and to fund infrastructure and to fund debt control.
The one thing I agree with is 'boom'. You fixed SS by breaking everything else.
If we want economic Justice, don't pick a color, pick someone with a proven record and one committed to ensuring Social Security solvency and continued Medicare benefits, Rocky Anderson.