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Myths About Social Security

Joe Economist

Council Member
H.L. Mencken once observed "For every complex problem there is an answer that is clear, simple, and wrong." The debate about Social Security reforms proves his point.

Today there is a simple answer: Americans are living too long. This answer is supported by data which shows life expectancy increasing from 63 in 1940 to more than 77 today. The logical conclusion is that “Americans are living longer and thus receiving benefits for more years.” While clear and simple, the conclusion is a mix of bad data and faulty reasoning.

Increasing life expectancies does in fact create two financial burdens for Social Security. First, it can mean that people are living longer in retirement so that they will collect benefits for a longer period of time. Second, it also can mean that people become more likely to reach the age where they can collect benefits at all. Yes as Americans live longer, Social Security will pay more in benefits.

Those consequences are however only half of the story. What the argument fails to consider is that Americans who live longer, work longer and contribute more to Social Security. So it is very possible that rising life expectancies can improve the financial imbalances in Social Security. So whether the negative impact offsets the positive impact really depends upon at what age Americans are living longer.

The primary cause of this increase in life expectancy is a reduction of infant mortality. Believe or not, fewer babies dying is a financial plus for Social Security. Infants born after 1963 statistically will on average collect less than they contribute to Social Security. The data from the Urban Institute a non-partisan think-tank says that an average wage worker (single or married, male or female) contributes more than he expects to collect – and that assumes every worker lives to the age of full-retirement.

Many do not. Advances in medical science saved my brother at the age of 21. Better doctors and better medicine allowed him to work until he died at the age of 44. Over the 23 years of additional life, my brother contributed close to $60,000 without ever collecting a penny. Life expectancies of Americans rose because of people like my brother, and yet Social Security made a lot of money on the increase.

This argument also ignores the way Social Security works. The benefits formula uses the 35 highest years of earnings to compute benefits. Thus when a worker works 36 or more years, the benefits formula removes a year of earnings. As a consequence of math, Social Security in many cases collects free money by Americans living longer. Americans whose live expectancy extends from 55 to 67 are at times a cash-cow for Social Security.

Projecting life expectancy is not an exact science. In fact, the Social Security Administration has faced public scrutiny over its estimation model. I provide some research here to create some a framework for prospective. According to research from SSA,

· The life expectancy of the average 30 year-old male (someone who typically has attained eligibility for benefits) increased by almost 9 years since 1940.

· The average 65 year-old male in 1940 expected to live about 12 years, whereas in 2010 he expected to live 16.4 years. Today Social Security requires people to wait an additional two years, the increase in retirement benefits based on this research would be less than 2.4 years.

· Statistically, Americans are more likely to reach the age of full retirement. In 1990, the SSA projected that someone who was 21 had a 72% of reaching full retirement-age. The Social Security Administration reports that figure had risen to slightly less than 79% by 2009.

I wish that I could tell you that 9 more years of work could offset the additional benefits generated by Social Security. I can’t. I can tell you that life expectancy of an infant is not relevant to a discussion about a pension system and that the public debate about Social Security does little to clarify the question of how increasing life expectancies of Americans affects Social Security.

~ Disclosure: This is an article that is about to be published.
 

Klunker

Council Member
As life expectency continues to rise, the full retirement age needs to also go up.

Much of the Social Security dollars pay disability payments. There needs to be an incentive program implemented that will encourage SSA employees to weed our those who are scamming the system. We have seen too much fraud that allows "our" dollars to pay those perfectly fit and well enough to maintain employment.

Get Congress off their duffs and get this immigration issue worked out! We have thousands of people working for cash, while they and their employers don't pay a cent into the system. Do a better job of penalizing those who hire "day workers" and pay them under the table.

And... raise the Social Security tax where today's workers pay in more. Heck, my wife and I paid substantially to raise our kids. Let them toss a little more into my retirement fund. Or course, we're both in our late 60's and receiving full SSA benefits!!! :)
 

Joe Economist

Council Member
"As life expectency continues to rise, the full retirement age needs to also go up."

Why? Cost has risen as much as 10 fold since 1950. Cost has risen much faster than age. Separately we already raised the age limit.

Why should kids pay more anyway? Average retirees today statistically contributed less than they will draw-out, where has someone born in 1960 expects to collects about $.80 cents on the dollar.
 

Joe Economist

Council Member
Get Congress off their duffs and get this immigration issue worked out! We have thousands of people working for cash, while they and their employers don't pay a cent into the system. Do a better job of penalizing those who hire "day workers" and pay them under the table.

And... raise the Social Security tax where today's workers pay in more. Heck, my wife and I paid substantially to raise our kids. Let them toss a little more into my retirement fund. Or course, we're both in our late 60's and receiving full SSA benefits!!! :)
Immigration does not fix Social Security. In fact, adding low wage workers to the system will make the shortfall worse because of the subsidizes in Social Security for low-wage workers.

And... raise the Social Security tax where today's workers pay in more. Heck, my wife and I paid substantially to raise our kids. Let them toss a little more into my retirement fund. Or course, we're both in our late 60's and receiving full SSA benefits!!! :)
The amount that you paid to raise your kids was your choice. Whether they kick in more to your retirement is honestly theirs. Frankly I think it is a bad idea to have parents depend upon the kids of other parents.

According to CBO, SS's Trust Fund reaches exhaustion in 2031. That is 17 years away. As such a 67 year-old expects to outlive full benefits. Doing nothing is risky.
 

Klunker

Council Member
Okay, the OP suggests this is an article you plan to "publish". As I read it, the article contains nothing except painting everything with gloom and doom. No solutions are suggested. The only solution that would seem hinted at by your article is the implementation of a "culling of the species"... eliminating folks who will be drawing SSA benefits. Are we going to do this by wealth, former career choice, social status, political leaning????
To "fix" the exisitng system will take some difficult decision making on behalf of Congress. The ability for Congress, in its current state of turmoil, to solve anything is marginal. SSA will be something this Congress will not address, leaving it to future legislative bodies as the "critical hour" draws nearer. You suggest the SSA Trust Fund will be exhausted by 2031. The age in which we live lends itself to rapid cycles of the global economy. So much of the predictions are based on guesses. A greatly improved U.S. economy could see more people earning higher wages, paying more into the Fund. Another long term recessionary period... or the shipping of jobs oveseas... may exhaust the Fund sooner than predicted.
Solutions??????
 

Joe Economist

Council Member
Okay, the OP suggests this is an article you plan to "publish".
The disclosure comes because some commenters claim that I plagarized the work, threatening to report me to the authorities. I put the OP here to get feedback. That is why I ask all the questions.

As I read it, the article contains nothing except painting everything with gloom and doom. No solutions are suggested.
The piece has almost no doom or gloom. It simply says that the financial imbalances in SS cannot be explained by changes in life expectancy at birth from 1940 to 2010. Yes the system has massive financial problems, but they cannot be attributed solely to changes in life expectancy. Politicians are selling you something to get you to believe it.

Another long term recessionary period... or the shipping of jobs oveseas... may exhaust the Fund sooner than predicted.
Since 1983, roughly 30 years, SS has lost solvency about twice as fast as predicted. The problem is overly optimistic assumptions. SSA offers a 2027 as a possible exhaustion point under less favorable economic assumptions. So 2031 is not guaranteed. Understand that neither is a prediction. It is a LIKELY outcome.

Solutions??????
Solutions go outside of scope. I will tell you that the problem is that most of 'solutions' do not actually work - see increased immigration. I work with a group that tries to put alternatives into layman terms. I don't care what direct reform takes, only that it is a honest discussion.

My opinion is that Congress will wait until it is too late to fix.
 
I fail to see why SS continues to be such a sounding board for alarmists. ? The SS fund includes around 3 trillion in notes secured by the Treasury. In addition, the maximum amount taxable could be raised easily without harming a soul. I can tell you that once you hit the taxable limit, that extra dough just goes into your pocket like free money. A person making 200 grand is not going to notice if the taxable amount goes up beyond the current amount. I know because I have been there many times. Raise the limit and get this over with.
 

ya-ta-hey

Mayor
H.L. Mencken once observed "For every complex problem there is an answer that is clear, simple, and wrong." The debate about Social Security reforms proves his point.

Today there is a simple answer: Americans are living too long. This answer is supported by data which shows life expectancy increasing from 63 in 1940 to more than 77 today. The logical conclusion is that “Americans are living longer and thus receiving benefits for more years.” While clear and simple, the conclusion is a mix of bad data and faulty reasoning.

Increasing life expectancies does in fact create two financial burdens for Social Security. First, it can mean that people are living longer in retirement so that they will collect benefits for a longer period of time. Second, it also can mean that people become more likely to reach the age where they can collect benefits at all. Yes as Americans live longer, Social Security will pay more in benefits.

Those consequences are however only half of the story. What the argument fails to consider is that Americans who live longer, work longer and contribute more to Social Security. So it is very possible that rising life expectancies can improve the financial imbalances in Social Security. So whether the negative impact offsets the positive impact really depends upon at what age Americans are living longer.

The primary cause of this increase in life expectancy is a reduction of infant mortality. Believe or not, fewer babies dying is a financial plus for Social Security. Infants born after 1963 statistically will on average collect less than they contribute to Social Security. The data from the Urban Institute a non-partisan think-tank says that an average wage worker (single or married, male or female) contributes more than he expects to collect – and that assumes every worker lives to the age of full-retirement.

Many do not. Advances in medical science saved my brother at the age of 21. Better doctors and better medicine allowed him to work until he died at the age of 44. Over the 23 years of additional life, my brother contributed close to $60,000 without ever collecting a penny. Life expectancies of Americans rose because of people like my brother, and yet Social Security made a lot of money on the increase.

This argument also ignores the way Social Security works. The benefits formula uses the 35 highest years of earnings to compute benefits. Thus when a worker works 36 or more years, the benefits formula removes a year of earnings. As a consequence of math, Social Security in many cases collects free money by Americans living longer. Americans whose live expectancy extends from 55 to 67 are at times a cash-cow for Social Security.

Projecting life expectancy is not an exact science. In fact, the Social Security Administration has faced public scrutiny over its estimation model. I provide some research here to create some a framework for prospective. According to research from SSA,

· The life expectancy of the average 30 year-old male (someone who typically has attained eligibility for benefits) increased by almost 9 years since 1940.

· The average 65 year-old male in 1940 expected to live about 12 years, whereas in 2010 he expected to live 16.4 years. Today Social Security requires people to wait an additional two years, the increase in retirement benefits based on this research would be less than 2.4 years.

· Statistically, Americans are more likely to reach the age of full retirement. In 1990, the SSA projected that someone who was 21 had a 72% of reaching full retirement-age. The Social Security Administration reports that figure had risen to slightly less than 79% by 2009.

I wish that I could tell you that 9 more years of work could offset the additional benefits generated by Social Security. I can’t. I can tell you that life expectancy of an infant is not relevant to a discussion about a pension system and that the public debate about Social Security does little to clarify the question of how increasing life expectancies of Americans affects Social Security.

~ Disclosure: This is an article that is about to be published.
Mr. Economist,

Several things wrong with your discussion:

You say the benefits formula is for the highest 35 years of work, so if a person works more than 35 years, it is free money to the system. This is flawed thinking. The 35 years of work is a constant, no matter how long a person works. If fact, what you call free money is actually a detrement to the system. In calculating the benefits formula, as a person works longer due to a longer life expectancy, the wages from the entry level years where a person contributes little to Social Security are replaced by wages from the person's highest earning years. Thus, the longer a person works, the higher the benefit, and the greater the onus on the system.

Your discussion about life expectancy is also flawed. True, part of the increase in life expectancy is the lower infant mortality, and the improved health system which is keeping younger people for dying young. but it doesn't negate the fact that a greater number of people are indeed living longer, thus collecting SS benefits for a longer period of time. Your argument that with the lower infant mortality rate, and increased health system keep young workers healthty is negated by the decreasing birth rates. In essence, there may be less people dying, but also, there are less people coming into the system to begin with. This is borne out by the fact that when SS was first introduced, there were 100 workers per beneficiery, whereas today there are only 2 workers per beneficiery.

However, the 900 pound gorilla in the room is not retirees, but rather, the disability receipients out there, essentually retiring early, after putting next to nothing in the system, then taking out of the systems for 50+ years or so.
 

Joe Economist

Council Member
I fail to see why SS continues to be such a sounding board for alarmists. ? The SS fund includes around 3 trillion in notes secured by the Treasury. In addition, the maximum amount taxable could be raised easily without harming a soul. I can tell you that once you hit the taxable limit, that extra dough just goes into your pocket like free money. A person making 200 grand is not going to notice if the taxable amount goes up beyond the current amount. I know because I have been there many times. Raise the limit and get this over with.
If I thought that raising the cap would solve the problem, I probably would fail to see why SS draws alarmists. Basically that is taxing someone else, and it wouldn't affect me.

But none of that is the case. It is not much different than saying why should we worry about Social Security, when leprechans can spits out gold coins to pay for it. Completely eliminating the cap does not make SS solvent much less fixed. Solvent only means that we make our problem a problem for our kids.

You have a difficult sell to me on lifting the cap. I am fine with raising the taxes but new tax revenue needs to go to control the debt. Today our interest cost is 420 billion. That is on subsidized interest. If rates normalize, it is 800 billion. Where are you going to find 400 billion in cuts to pay for the interest.

The Trust Fund of 2.8 trillion is held against promises of 27 trillion. So basically, it can pay about a dime of promised benefits. That ought to worry you. The Trust Fund is basically economic parsley. Social Security depends upon payroll taxes. Here is what you are betting on (if you aren't worried), that future workers will pay more in taxes in order to get less back while having to increase the support of their parent because SS has had to cut its benefits. That is what you are betting on.
 

Joe Economist

Council Member
Mr. Economist,

Several things wrong with your discussion:

You say the benefits formula is for the highest 35 years of work, so if a person works more than 35 years, it is free money to the system. This is flawed thinking. The 35 years of work is a constant, no matter how long a person works. If fact, what you call free money is actually a detrement to the system. In calculating the benefits formula, as a person works longer due to a longer life expectancy, the wages from the entry level years where a person contributes little to Social Security are replaced by wages from the person's highest earning years. Thus, the longer a person works, the higher the benefit, and the greater the onus on the system.
I don't sense that you read what I wrote completely. "As a consequence of math, Social Security in many cases collects free money by Americans living longer". It is not every case, but many. It depends upon your work history. The work history that you have suggested would still be cheap money.

I have a friend who is a lawyer, who is 69. He maxes out his contribution every year. His contribution goes into the benefit formula, and a lower earning year comes out. His increase is about $40 a year. So he pays about $11,000 in order to get $40 extra per year. That is close to free money.

The benefits formula is not stagnant. The 'entry level' wage is indexed to wages so it can be fairly sizable. The other factor is that someone like my friend is contributing at the max. The replacement weighting on his contribution is very small.

The 36th year is certainly cheaper money than was the 35th.
 

ya-ta-hey

Mayor
I fail to see why SS continues to be such a sounding board for alarmists. ? The SS fund includes around 3 trillion in notes secured by the Treasury. In addition, the maximum amount taxable could be raised easily without harming a soul. I can tell you that once you hit the taxable limit, that extra dough just goes into your pocket like free money. A person making 200 grand is not going to notice if the taxable amount goes up beyond the current amount. I know because I have been there many times. Raise the limit and get this over with.
Mr. Woolley,

Given that the problem is that people are living longer and the longer they live, they take much out of the system than they put in. If you raise the cap, your wage earner earning $200K/year, now gets a benefit based on $200K, not the current cap of about $110K. Further, the wealthier a person is, it stands to reason, the healthier he is, and the longer he'll live. Ergo, he'll take even more out of the system compared to a lower wage worker.
 

crowfoot

Mayor
Mr. Woolley,

Given that the problem is that people are living longer and the longer they live, they take much out of the system than they put in. If you raise the cap, your wage earner earning $200K/year, now gets a benefit based on $200K, not the current cap of about $110K. Further, the wealthier a person is, it stands to reason, the healthier he is, and the longer he'll live. Ergo, he'll take even more out of the system compared to a lower wage worker.
feel free to provide data showing increased life expectancies for 200k earners vs 110k earners
 

Joe Economist

Council Member
Mr. Economist,

Several things wrong with your discussion:

Your discussion about life expectancy is also flawed. True, part of the increase in life expectancy is the lower infant mortality, and the improved health system which is keeping younger people for dying young. but it doesn't negate the fact that a greater number of people are indeed living longer, thus collecting SS benefits for a longer period of time. Your argument that with the lower infant mortality rate, and increased health system keep young workers healthty is negated by the decreasing birth rates. In essence, there may be less people dying, but also, there are less people coming into the system to begin with. This is borne out by the fact that when SS was first introduced, there were 100 workers per beneficiery, whereas today there are only 2 workers per beneficiery.
First, if you have better life expectancy tables you should provide them. As I tried to point out in the article, it isn't an exact science. I have provided tables which say that people are living longer - just not in retirement. The average 30 year-old expects to live an additional 9 years. The average 65 year-old expects to live an additional 4. I have no doubt that you can find other tables, but what I have seen from SSA says that people are not living that much longer.

Second, birth rate is not mentioned in the article. My point is that increasing life expectancy from 1940 to 2010 does not explain the mess that Social Security has become. In 1950, there were 16 workers for every retiree. Today it is about 3 1/2 if you treat the Trust Fund as a worker. (it is a projected 2 to 1 in 2030) Our workers pay up to 15 times what a 1950 worker paid, so compare worker to retire ratios as though the workers were the same is my next article in memory of HL Mencken. In an apple to apple version, we might have as many as 45 workers to every retiree.

A lot of what you are saying may be true, but it isn't related to the article. The one thing that I am fairly confident of is that changes to aging patterns between 1940 and 2010 did not create a 27 trillion dollar hole. Who knows the change of life expectancy from 2010-2050 may be where the problem is, but that isn't what people are saying.
 

Joe Economist

Council Member
Mr. Woolley,

Given that the problem is that people are living longer and the longer they live, they take much out of the system than they put in.
This is not the case. If you look at the data from Urban Institute, it shows that even average workers are losing money on SS. That return is for those who actually live to collect (and 20% or so do not). That return assumes that SS will simply find money to pay future retirees without higher taxes. The UI returns likely overstate returns rather than understate them.

Mr. Woolley,

If you raise the cap, your wage earner earning $200K/year, now gets a benefit based on $200K, not the current cap of about $110K. Further, the wealthier a person is, it stands to reason, the healthier he is, and the longer he'll live. Ergo, he'll take even more out of the system compared to a lower wage worker.
You need to look at the moneys worth studies from SSA and the data from the Urban Institute. The high-wage earner may get back as little as $0.50 on the dollar contributed. The low-wage worker gets back a significantly higher return. The reason is that the benefits formula has breakpoints at which the weighting on the contribution is dropped.
 

Joe Economist

Council Member
feel free to provide data showing increased life expectancies for 200k earners vs 110k earners
I happen to have research out of SSA on the subject, but before you spend time with it understand that the benefit formula weights the contribution. That weighting falls over 3 different breakpoints. The weighting on the last dollar is pretty low.
 
If I thought that raising the cap would solve the problem, I probably would fail to see why SS draws alarmists. Basically that is taxing someone else, and it wouldn't affect me.

But none of that is the case. It is not much different than saying why should we worry about Social Security, when leprechans can spits out gold coins to pay for it. Completely eliminating the cap does not make SS solvent much less fixed. Solvent only means that we make our problem a problem for our kids.

You have a difficult sell to me on lifting the cap. I am fine with raising the taxes but new tax revenue needs to go to control the debt. Today our interest cost is 420 billion. That is on subsidized interest. If rates normalize, it is 800 billion. Where are you going to find 400 billion in cuts to pay for the interest.

The Trust Fund of 2.8 trillion is held against promises of 27 trillion. So basically, it can pay about a dime of promised benefits. That ought to worry you. The Trust Fund is basically economic parsley. Social Security depends upon payroll taxes. Here is what you are betting on (if you aren't worried), that future workers will pay more in taxes in order to get less back while having to increase the support of their parent because SS has had to cut its benefits. That is what you are betting on.
Today the shortfall is around 40 billion or so largely because we have a tax holiday on employer contributions. Bring the taxes back, raise the caps and you will balance inflows and outflows into SS without drawing up the trillions in redeemable bonds the government owes the fund. You do understand those bonds must be paid back don't you? And how do you pay those back? You either tax us or pay them back with fiat money pulled straight out of the treasury and Fed. Your entire shtick here is really based upon concepts that might have been appropriate during the gold standard days. There is absolutely NO SS problem for the foreseeable future, like 40 years from now. If you think anyone can predict what is going to happen 40 years from now you are a fool.
 

Joe Economist

Council Member
Today the shortfall is around 40 billion or so largely because we have a tax holiday on employer contributions. Bring the taxes back, raise the caps and you will balance inflows and outflows into SS without drawing up the trillions in redeemable bonds the government owes the fund. You do understand those bonds must be paid back don't you? And how do you pay those back? You either tax us or pay them back with fiat money pulled straight out of the treasury and Fed. Your entire shtick here is really based upon concepts that might have been appropriate during the gold standard days. There is absolutely NO SS problem for the foreseeable future, like 40 years from now. If you think anyone can predict what is going to happen 40 years from now you are a fool.
I can see why you do not see the problem. Virtually every sentence includes beliefs that differ with what the Trustees of the system say. Maybe you are smarter than they are.

I am happy to provide you facts from the Trustees, but it doesn't sound like you are going to listen anyway.
 
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