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Opening Arguments

Dancing with the debt

"Being nickeled and dimed to death" usually refers to little costs that add up while you're not paying attention. But its also apt for our lunkheads in Washington who argue bitterly over whether to cut nickels and dimes while the trillions in debt pile up:

The national debt jumped by $72 billion on Tuesday even as the Republican-led U.S. House of Representatives passed a continuing resolution to fund the government for just three weeks that will cut $6 billion from government spending.

If Congress were to cut $6 billion every three weeks for the next 36 weeks, it would manage to save between now and late November as much money as the Treasury added to the nation's net debt during just the business hours of Tuesday, March 15.

One step forward, 12 steps back. Sounds about right.

Comments

littlejohn
Thu, 03/17/2011 - 10:52am

Liberals won't touch entitlements and conservatives won't touch the Pentagon or raise taxes. What else is there?
Idiotic partisonship is to blame, and no one is in a mood to compromise.
You'd think that simply getting out of Iraq and Afghanistan would be painless enough, and liberals might agree to means-test entitlements and raise the retirement age a bit.
That simple deal would pretty much do it, without endangering our country in the least.
A pox on both their houses.

William Larsen
Fri, 03/18/2011 - 10:51pm

People who know me, know that I ran on repealing the Social Security Act pertaining to SS-OASI. It is nothing more than a ponzi scheme. However, no matter how much this ponzi scheme takes money from workers and returns pennies on the dollar later, it does not add one penny to the national debt. In 1984 after the big Greenspan Fix of 1983 which was in reality nothing more than a stop gap band aid, they (congress) realized that the same thing was going to happen by 2064, but this time it would be a much larger problem to patch. So they did the right thing. They passed legislation that prohibited Social Security and Medicare from borrowing money or using General Revenues to pay for these two programs. The restricted these two programs to only that dedicated tax, interest on the trust fund and the trust fund itself to pay promised benefits.

If you read page one of your Social Security Wage and Benefit statement it clearly states that if nothing is done, that in 2037 Social Security can pay 75% of promised benefits. They are telling all who receive this statement that they are not, cannot pay promised benefits unless changes are made. The changes being discussed will not change the payable benefits to promised benefits, but actually change promised benefits to payable benefits.

The National Debt is not being increased by ONE SINGLE PENNY because of Social Security or Medicare. THE NATIONAL DEBT AND DEFICIT IS CAUSED BY THE GENERAL BUDGET AND GENERAL REVENUES. Even if Social Security and Medicare were repealed today, not another check or payment made, the National Debt and Deficit would be identical.

To fix Social Security, the retirement age would need to increase past age 74. If you want to fix it by raising taxes, you are looking at raising SS-OASI from 10.6% to 18%. My question has always been, who are we trying to save social security and medicare for? My kids certainly don't want it and most of those under age 46 would if they had the chance opt out by just saying good by to all they have paid into both programs just to be able to save any future taxes they might pay till retirement.

When will the 118 million potential voters under age 46 speak loud enough that the 42 million seniors and 58 million boomers take notice?

Harl Delos
Mon, 03/21/2011 - 9:43am

Mr. Larson, whatever other criticisms you might have of Social Security, it is NOT a Ponzi scheme.

A Ponzi scheme is an mechanism by which people are encouraged to invest in a supposedly-profitable enterprise, which is, in fact, losing money.

Neither employers not employees, however, can opt to not participate in Social Security, nor can they opt to invest in Social Security at a higher level of participation.

Social Security is like any other government program in that people are taxed to provide a program, and people benefit from a program, and the people who are taxed aren't necessarily the ones who benefit.

The biggest single activity of the federal government, for instance, is to engage in war. About 23% of the gross domestic product goes to fight current wars, provide benefits for those who fought in former wars, develop weapons for future wars, or to pay interest on former wars. The beneficiaries of those funds are primarily corporations engaging in foreign trade, and yet corporations pay taxes only amounting to about 4% of the gross domestic product, about 2/3 of what corporations paid in the 1950s.

If Social Security is a Ponzi scheme, then the industrial-military complex is another one, much larger in magnitude.

William Larsen
Mon, 03/21/2011 - 10:06am

Question - What is a pyramid Scheme?

The definition I have heard and use goes something like this:

A person, whom I will call the seller, asks another person, whom I call the investor, to invest in a scheme. The seller of the scheme asks for a lump sum or a periodic payment into an investment proposal from the investor. In return the seller promises a return/payment to the investor. Normally the return/payment is far greater than can be obtained by the seller. It is not based on any actuarial basis and the risks have not been fully disclosed nor identified.

The seller normally provides a statement showing how well the fund is doing. This statement shows the buyers investment is paying off as stated. This can be in dark contrast to a reality. The seller will show new prospective investors the statement as proof the investment is sound.

What normally happens is the first investors are being paid their promised returns from two sources. One source is real returns and the other is from the contributions of later investors. The seller was unable to earn the stated return on the original investors money. The seller is forced to use some of the money received, for investment, from new investors, and show it as a return on the original investors money. It is a game of moving money around to show investors good returns, keep them happy and unaware there is a problem.

When the seller can no longer enroll new investors, they have a problem. They can not indefinitely continue to pay unreasonable returns. Without new investors, the sellers cash flow is insufficient to pay promised returns to all the investors. When this happens, the investors tend to become angry with the seller. Those who were the last ones enrolled normally loose the most.

Old Age Survivors Insurance began with a low tax rate of 2% and promised to pay a return in the form of a benefit equal to 42% of ones average wage. Was this sound? Based on the investment vehicle (US Treasury notes), United States Wage Growth and Inflation at the time, the tax rate was over five times too low. It should have been 11.83% and this does not count the original unfunded liability based on some paying only a few years before benefits were paid.

Just as a pyramid scheme requires ever more participants to keep its current participants happy, Social Security ran into the same problem in the early 1950's. OASI ran into difficulty when the benefit expense began to grow faster than revenues. The US Treasuries were being redeemed thirty years before they should have been. This Trust fund should not have been tapped until well after all the original participants had retired. To keep the system afloat, they redeemed the treasuries masking the real problem. But some smart people finally realized the trust fund would be exhausted in a few years and the game would be up.

To keep the original participants happy (continue the payments of benefits) and make it appear Social Security was a great idea, they increased the OASI tax by 50% to 3% and then increased the Base by 50%. At the same time they enrolled more non covered workers into Social Security. This is exactly what a pyramid scheme needs to do in order to continue to survive. It needs new investors. The new participants contributed revenue but by and large would not retire for decades.

In the 1960's the problem became acute when once again Social Security began to run deficits and the trust fund was being redeemed much earlier than it should have. They then increased taxes, the base and enrolled all those workers who were not covered by Social Security. Again social security increased its revenues to pay current participants and keep them happy (buy votes and PR) while also increasing the tax and base.

By the 1970's the problem was really becoming acute. Almost every worker was covered. There were no more non-covered participants (suckers). The seller could not admit benefits would have to be cut to continue Social Security. The seller would loose the senior vote for sure. The only thing left to do was raise the tax and base even more. But even raising the tax and base proved insufficient and now the seller had to raise the retirement age.

Social Security is the "standard" for what a pyramid scheme is. I do not think there is any other pyramid scheme which has existed as long as Social Security, which has suckered as many people and which will destitute more families in the history of the world.

You can define pyramid scheme in two words "Social Security."

The 1936 Government Pamphlet on Social Security
2% payroll tax in 1937 increasing to 6% in 1949.
$25 weekly payroll would pay 50 cents a week for a benefit at age 65 of $53 a month.
$50 weekly payroll would pay $1.00 a week for a benefit at age 65 of $74.50 a month.
Death Benefit prior to age 65 was 3.5% of OASI wages.

http://www.ssa.gov/history/ssb36.html

A. J. Altmeyer, Chairman
Social Security Board Before the House Ways and Means Committee November 27, 1944

Harl Delos
Mon, 03/21/2011 - 7:19pm

You're ignoring the tontine effect, sir.

If you assume that everyone alive at age 21 will still be alive at age 65. That's not true. When I was publishing obits 40 years ago, an awful lot of people were dying in their 50s, having paid into Social Security for decades, and not collecting old age benefits.

I can't find mortality tables for 1935, but the idea of storing up wealth for future decades is absurd. Money is a fiction, and when you look at the underlying wealth, you need to look at the fact that we have a service economy.

You can't save up labor in 1965 in order to use it in 2015 any more than you can raise a lot of lettuce in June in order to have it the following March.

Your description of Social Security sounds like every other government program. The taxes on tobacco don't cover the medical costs of caring for people with lung cancer and their lost wages. The fines levied on criminals don't begin to cover the costs of police, courts, and prisons. Some people get more out of a program than than they pay in taxes. Other people pay more in taxes than they get out of a program. That's how things work.

William Larsen
Mon, 03/21/2011 - 10:47pm

tontine effect - "a joint financial arrangement whereby the participants usually contribute equally to a prize that is awarded entirely to the participant who survives all the others"

Actually I used the period life tables from the SSA starting in 1900 and ending in 2000. There has been little movement in life span past age 21. The largest improvement in life span has been between birth and age 1. In 1900 life expectancy at birth was 51.52 for male and 58.29 for female for a combined 54.9 years. However, at age 1 life span increased 59.27 years male and 65.16 years female for a combined life span of 62.26 years. At age 21 life span was an additional 47.28 for males and 52.66 years for females for a combined additional life span of 49.65 years. By age 65 at full retirement, out of the 152,820 people alive at age 21 there were 103,088 still alive at age 65.

http://www.ssa.gov/OACT/NOTES/as116/as116LOT.html

Based on the number of people working, the average wage paid, the OASI tax applied to wages up to the base and the benefits paid to the first 20 years of cohorts, none of these people paid collectively enough to fund their own cohorts. That means taking into account those who paid and died and adding their contributions plus interest to those who lived along did not pay enough to fund their collective benefits. In fact I have calculated the life time present value of taxes paid by cohorts and their life time present value of benefits paid by cohorts.

Here is an interesting note: in 2008 was the first year a boomer could retire on SS-OASI. Based on the wage history of boomers, I calculated in year 2007 boomers had paid the present value of $7.9 Trillion in taxes (included US Treasury Interest), yet not a single boomer was eligible in 2007 for SS-OASI. The SS-OASI trust fund had a tad of $2 Trillion, yet the cost to pay just those currently retired on SS-OASI would be more than $6 trillion. Will the boomers bankrupt SS-OASI, NO? They had nothing to do with. Will the boomers children bankrupt SS-OASI, NO? They are far from retirement, yet those who have yet to benefit from SS-OASI have paid far more into the program than they could ever receive and now all I read is raise the retirement age, tax and base. Why not just scrap social security and let our children live their own lives?

You say you cannot save up money and use it later. Great, let us all spend every penny we make and see what happens. What social security did was take current savings that should have been used to create the means to produce future needs more efficiently and spent it in the year it was taken and increased the economic growth more than the economy could support long term. Spending it early means that ownership is not transferred as has been done for centuries. But a promise to pay a benefit in exchange was stated, not guaranteed. Not only were workers deprived of the first dollar to save, but they were deprived of owning a piece of the economy as it grew. Now we have seniors who were taxed little, receiving full benefits who do not need to sell assets to live off of, allowing their assets to grow.

However, by saving and owning the infrastructure to produce goods and services, that person has the ability to trade their ownership in that means to produce goods and services to a worker for things they need now that they cannot produce themselves. So in retirement a person who has worked all their lives should be selling their assets to someone who is saving for their retirement. The person who is working should save 15%. I disagree with you, one can set aside the means today to live without working in the future.

The link has been broken by social security.

Harl Delos
Tue, 03/22/2011 - 9:42am

Social Security is a tax on both employee and employer. That was as true in 1935, not just today.

I put together calculations showing 1935 mortality rates, for a cohort of a million people who were born in 1917, reached 18 in 1935, and worked until retirement at age 65, then collected until death at ages up to 110.

To simplify things, I ignored inflation which would have been unpredictable in 1935, instead assigned constant wages of $5,000/yr from start to finish, and retirement benefits of $2,000 (which would be 40% of earned income). Return on investment would go up and down, but I assigned a relatively conservative 3% internal rate of return.

What I haven't done is show payouts to widows and children, or to the disabled, but as far as payments to the workers, the fund is quite ample even if the tax rate were only 3% (1.5% each, employer and employee) instead of 4% (2% each, employer and employee.)

If you'd like to take a look at the spreadsheet, it can be downloaded from http://canthook.com/socSec/1935.xls

William Larsen
Tue, 03/22/2011 - 1:39pm

First here is a SSA Link to calculating the SS-OASI benefit.

http://www.ssa.gov/OACT/COLA/AWI.html

Second, whether the employee pays or the employer pays the tax is splitting hairs. Prior to Social Security, no one paid period. After Social Security began, wage growth slowed. In addition there is a direct correlation between increase in FICA tax and a decrease in US Savings rate. If you take the position that employers pay the OASI Tax, then it is passed along to consumers who are workers or reduces profits of companies who would pay dividends, grow the business or lower prices to gain market share. Either way the employee ends up with less in the end. I take the view the Employee pays ends up paying the tax with lower wages or higher costs.

Why did you use constant wages? Your $2,000 value is low. The SSA website has the average US Wage for each year?
http://www.ssa.gov/OACT/COLA/AWI.htm Use a vertical lookup table to extract the wages for a particular year and multiply it by your population in column G.

Why did you assign constant inflation?
http://www.ssa.gov/OACT/COLA/colaseries.html Use a vertical lookup table to extract that years inflation, nominal treasury rate paid, etc.

Actually the 40% you used for those born in 1935 is pretty good. However, the OASI benefit was about 30% higher prior to the 1977 change which created the current benefit formula.

The SSA website shows the increases in social security with the first one in 1950 at 70%. Prior to COLA, Congress legislated the increase in OASI. This far out stripped COLA by nearly 50% between 1935 and 1970. This was one fix congress took to control OASI expeness. The SSA website has changed the location of this file identifying the increases. I am searching for it, but have not found its new location as of yet.

The SSA website lists the tax rates for every year.
http://www.ssa.gov/OACT/ProgData/oasdiRates.html

The SSA website lists the contribution base for OASI for each year.
http://www.ssa.gov/OACT/COLA/cbb.html

Nominal interest rates paid to SS-OASI trust fund by month/year
http://www.ssa.gov/OACT/ProgData/newIssueRates.html
http://www.ssa.gov/OACT/ProgData/interestrates1937-89.html

Here is SSA link that attempts to calculate the OASI taxes/benefits paid by age group.
http://www.ssa.gov/policy/docs/ssb/v65n1/v65n1p33.html

My calculations do not include SS-DI since that is a separate program, with a dedicated tax of 1.8%, a separate trust fund and totally different requirements for benefits. Many like linking the two programs in order to mask the problems of both and to gain support for Social Security in general.

If you would like a easier method to determine if Social Security is a good program by calculating its net affect, I invite you to one of the most used programs on the internet when looking for a means to calculate retirement needs. It was first derived many decades ago to determine if SS-OASI was a good deal. Social Security because it bases benefits on life indexed wages and pays COLA on benefits is a compound gradient. In simple terms simply subtracting cola from income rate does not produce a net return rate for that year.

http://www.justsayno.50megs.com/java_retire_1.html

I suggest using the Treasury rate since by law that is what SS-OASI is invested in. Using something else changes the rational for determining if SS-OASI is a good deal.

Using 5% for rate of return, 3% for inflation, $12,000 a year for initial OASI benefit which at 40% of life time indexed wages would be $30,000 a year income, start work at age 21, retire at age 67 (full retirement) use age 90 which means you outlive over 94.88% of those in in the 1950 cohort. In my case, my extrapilated period life table expectancy at age 67 is an additional 16.5 years so I would for my cohort use 16.5+67 = 82.5 years. This indicates at full retirement, my life time tax would be for my cohort would pay a total yearly tax of 7.5%. The problem is my life time tax is over 9.5% or 26% too much. The problem is that SS-OASI has been sending me statement for over ten years stating they cannot pay promised benefits starting in some future year. Anywhere from 73 to 75%. What you do not understand is by law passed in 1984, COLA's are eliminated when the trust fund hits 20% of any projected yearly expense. This occurs around 2031 to 2032, possibly much earlier with low interest rates. Therefore, changing the replacement rate in retirement to 0% calculates that my life time tax should be just 6.1%, but I am paying 10.6% or 74% too much. But, wait the fantastic SSA states they an pay 75% of promised benefits, so let us change the $12,000 to just $9,000. This means the SS-OASI tax rate by cohort should be 4.6% in which case the SS-OASI tax rate is twice as high as it should be. This method shows that for those who die prior to collecting an OASI Benefit, there is a large amount of funds that are lost to the family. SS-DI is a separate fund that pays for death and disability. Therefore, using

http://www.justsayno.50megs.com/pdf/social_security.pdf If it does not come up, copy link to address bar and go from there. The problem occurs the service does not allow external sites from accessing the file, but you can access it from the address bar.

Your spreadsheet is on the right track, just clean up the details and you have got the method down.

Harl Delos
Wed, 03/23/2011 - 4:50am

Whether the employer pays or the employee pays is splitting hairs. The fact that the tax was 4%, not 2%, is not.

You are saying that the program wasn't sound in 1935, but you're using inflation to prove it. In 1935, nobody knew what inflation was going to be in 1963 or 1974 or 1981, just as nobody knows today what inflation is going to be in 2020 or 2050. What we DO know is that by pretending that dollars are dollars. They're obviously not.

You pretend that we can "ake current savings that should have been used to create the means to produce future needs more efficiently". Really? What investment did you have in mind?

In 1970, the logical investment was AT&T, an investment so safe it was considered a widows and children's stock, except 20% of all households have no land line, and it's the 20% that used to buy the most long distance.

Or maybe you could invest in Sears, which amounted to more than 1% of the economy, or invest in the highly profitable shopping malls. Except Sears went bankrupt, and gee, so did General Growth Properties.

Maybe you could invest in NCR. They were doing wonderful in 1970. Of course, by 1977, they had laid off 40,000 machinists because mechanical cash registers were kaput. Or you could invest in GM. Or you could invest in travel agencies, or in radio, or in daily newspapers.

Maybe you needed to diversify, by investing in a mutual fund. Have you noticed that the DJIA has dropped considerably over the past five years? Maybe you needed to invest in the home you were living in. The housing market has gone down the tubes, too.

They used to come into the schools and tell us to buy stamps each week, filling booklets we could trade for US Savings Bonds. Invest $1 at the time of Christ, at only 2% interest and it'd be worth gazillions today, and the math worked out, but the problem is that there's risk in any investment. If you invested $1 any time prior to the 18th century, it would be worthless today.

The best bet is to accept deferred compensation with a creditworthy organization, such as the gummint - except that the TEA party is going to come along and steal that pension from you, saying you don't "deserve" it.

Sorry, sir. When I was growing up, conservatives were the people who were insisting the government needed to be honest, needed to pay bills when they come due. These days, people calling themselves "conservatives" believe that welshing on obligations is moral. If that's conservative, I'm a ring-necked pheasant.

William Larsen
Wed, 03/23/2011 - 9:35am

Actually in 1935 they new was inflation was. It has been calculated yearly since at least 1913 when the cpi was 9.8.

year cpi
1935 13.600
1936 13.800
1937 14.100
1938 14.200
1939 14.000
1940 13.900
1941 14.100
1942 15.700
1943 16.900
1944 17.400
1945 17.800
1946 18.200
1947 21.500
1948 23.700
1949 24.000
1950 23.500

You are correct that no one knows what inflation will be. That is one major reason why Social Security should not attempt to provide a COLA adjustment.

However, there is a good correlation between rate of return and inflation over long periods of time. Instead of sticking ones head in the sand and saying it is impossible, there is at least a means to calculate what one needs in order to retire. It is called a compound gradient. If one reviews their investments as they should at least every three months, then they can update their plan based on current return rates and inflation. Some years will be bad, others great.

You picked AT&T. I bought AT&T just prior to the breakup and believed the sum of the parts were greater than the whole; I turned out to be correct. There is only one stock I owned in 1975 that I still own today. An investor needs to keep up with their investments and make changes.

Actually the two categories I like are food and energy. Without food, you can have all the money in the world and it does nothing for you. Energy is similar. Our economy runs on energy. During the Depression, people put their last nickle into gasoline. All the oil tenders on the East Coast kept moving oil, no one was laid off.

Economic growth is dependent on growth. The major source of growth is population. As population growth slows as it has across the world (Europe is negative, US is zero) the rate of growth has slowed while productivity has increased. Government attempted to stimulate growth in the US by making buying homes easy. This allowed people to buy homes who could not afford one. After ten years of this we now have millions of homes that we have no need for, thus bank failures, lower property values, etc.

Actually I did not use inflation to prove Social Security was not sound. A. J. Altmeyer stated this in 1944. He was Chairman Social Security Board Before the House Ways and Means Committee November 27, 1944 testified that Social Security after paying benefits for less than four years owed far more than it could pay. This is when a payroll tax of 2% was law from 1937 to 1950.

When Social Security began, there was no thought of COLA and Altmeyer's calculations took this into account. The problem is that the tax rate did not reach a level that would pay for any cohorts benefits until 1968. However, by that time they had added non working spousal benefits and were about to add COLA.

"Today's beneficiaries are not living off financial assets accumulated in the past. Today's workers are not accumulating financial assets for the future. Workers invest their payroll taxes not in financial assets but in the willingness of future politicians to tax future workers to pay future benefits."

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