Friday, June 28, 2013

Not Quite True

I recently saw a post on Facebook (and it has appeared elsewhere) that argues Social Security should not be termed a "Federal Benefit" because it was earned. As this post contains a number of errors (and misses some important facts about Social Security as a whole), I thought I would reproduce it here and then comment on it:
Just a reminder, better pass this around, it's the clearest presentation
I have seen in quite some time.

Subject: Social Security check
Date: Friday, April 20, 2013, 5:00 AM

Here we go.

JUST REALIZED THAT WITH REQUIRED AUTO DEPOSIT, I NEVER GET TO SEE THE CHECK ....

ALERT EVERYONE YOU KNOW. THIS AFFECTS ALL OF US.*

*Subject:*
SOCIAL SECURITY becomes FEDERAL BENEFIT CHECK

Have you noticed, the Social Security check is now referred to as a

"Federal Benefit Payment"?

I'll be part of the one percent to forward this. I am forwarding it because it Touches a nerve in me, and I hope it will in you.

Please keep passing it on until everyone in our country has read it.

The government is now referring to our Social Security checks as a Federal Benefit Payment.

This isn't a benefit it. It is earned income! Not only did we all contribute to Social Security but our employers did too.
It totaled 15% of our income before taxes .

If you averaged $30K per year over your working life, that's close to $180,000 Invested in Social Security .

If you calculate the future value of your monthly investment in social security( $375/month, including both your and your employers contributions) at a meager 1% Interest rate compounded monthly, after 40 years of working you'd have more than $1.3+ million dollars saved!

This is your personal investment.
Upon retirement, if you took out only 3% per year , you'd receive $39,318 per year, or $3,277 per month .
That's almost three times more than today's average Social Security benefit of $1,230 per month, according to the Social Security Administration

(Google it - it's a fact).

And your retirement fund would last more than 33 years (until you're 98 if you retire at age 65)! I can only imagine how much better most average-income people could live in retirement if our government had just invested our money in low-risk interest-earning accounts .

Instead, the folks in Washington pulled off a bigger Ponzi scheme than Bernie Madoff ever did.

They took our money and used it elsewhere. They forgot (Knew) that it was OUR money they were taking. They didn't have a referendum to ask us if we wanted to lend the money to them .

And they didn't pay interest on the debt they assumed . And recently, they've told us that the money won't support us for very much longer .

But is it our fault they misused our investments? And now, to add insult to injury, they're calling it a benefit ,
as if we never worked to earn every penny of it.

Just because they borrowed the money,
doesn't mean that our investments were a charity !

Let's take a stand.

We have earned our right to Social Security and Medicare. Demand that our legislators bring some sense into our government .

Find a way to keep Social Security in OUR POCKETS!
*You can bet I WILL !!!* Security and Medicare going, for the sake of that 92% of our population who need it. *Then call it what it is: Our Earned Retirement Income. *

99% of people won't forward this.

Will you?
Now, I suppose I should start off by pointing out that I am opposed to Social Security for a number of reasons. (See "Social Security is Not Insurance", "Selling Yourself Cheap", "A True Conservative Platform" and "How Not To Argue About Social Security".)  First, and foremost, because it forces a given amount of saving on individuals regardless of their own desires or financial situation. That is why I have opposed not just Social Security, but also plans to "privatize", as that amounts to still forcing savings, though it is a bit better in that it allows individuals to choose their investments, but it is still a needless imposition. Just think, when you first were starting out, how much benefit you would have gained from a 15% raise, compared to the relatively small return on Social Security. Of course, you would forego some benefits, but that should have been your choice, not a government regulation. However, all of that is not important for this post, so I will simply direct readers to the posts cited earlier for a more thorough discussion.

Instead, let us look at the essay above and ask if it is truly accurate, and, more important given the topic, if it gives the whole picture.

Well, let us start with some logical problems. First, the essay here somehow manages to overlook the considerable amount of inflation that has taken place in the last several decades. Just to make one simple point, I recall when The Price Is Right had to add a fifth digit to the showcase bids. prior to that, they could include trips to Europe and Hawaii, boats and luxury cars and still bid in four digits. For that matter, I recall when $25,000 a year was comfortable salary, when cigarettes were under a dollar, when a dollar or two fed you very well in a fast food place and so on. Just to put a number on it, between 1973 and 1983, relative to gold -- so as to avoid the distortions in CPI deflators due to high energy prices -- prices rose almost 600%. As a result, the idea that someone contributed the same amount in the 70's as they do now is absurd.

A second problem with Social Security, and this argument, is that most people earn very little early in their lives, when the money earns the most interest, and the most when they are about to retire, and thus when it earns the most. However, their final benefit is based largely on the last few years of earnings, thus inflating the payout, while the amount paid in is much less.

I recall reading a few years ago that, considering the return based on what Social Security is nominally invested in -- treasury bills -- the average recipient ends up using up their contributions in something like four years, while they tend to collect for over ten years. And that does not even consider the Medicare portion of things.

However, I do not really need to argue that the numbers are wrong because fo one overwhelming fact. Social Security is going bankrupt, and payments today are being paid out of fund taken in today. Yes, the government uses Social Security funds to pay for current spending, but it also reimburses with interest. So, if Social Security really was funded as the post above suggests, it would be running surplus and a growing one. However, the only time Social Security shows a surplus is when the economy is good. That is, when the current economy increases income. Thus, it should be clear, Social Security is in no way the insurance it claims, or this post suggests. I do not want to say those collecting are immoral, they truly do think they are just taking out what they put in, but in truth, whether they like to hear it or not, they are receiving welfare, as they are getting more than they put in, at least if they live to an average life span.

Some will argue that the deficit is not because of the reasons I suggest, but rather due to the other recipients, the disabled and others who start receiving benefits at a much younger age. And that is part of it, I agree. However, once again, that is a small part. By and large, the far larger group of recipients are those who receive money after retirement, and they are also the reason it is bankrupt.

Let us look at the numbers above. According to the census, the mean income for all households in 1980 was a little over $21,000, while in 2011 it was almost $70,000. Just looking at that, is it likely the contributions were flat the way the post above suggests? Assuming that all income is taxed for Social Security  -- which is not realistic as many categories often escape detection, such as tips, and those which are not taxed are often those earned earliest in life -- assuming you started in 1980 earning the mean income, you would have paid $3150, while in 2011 you would have paid $10500. On the other hand, it is unlikely you started out earning anything close to the mean. So if you were paying $105000 in 2011, odds are good in 1980 you paid in $2000 or less. As you can see, these are far from the numbers suggested in the post above. The fact is, the early earnings are both lower in absolute terms, as early in life you have fewer skills, and in terms of dollars, as inflation -- and inflation has been continual and relatively high ever since 1971 -- continues to erode the value of the dollar, increasing dollar salaries and costs, as well as Social Security payout, while earlier pay-in is much lower in dollar terms.

So let us be honest, whether or not you support Social Security -- and I do not -- it is no more "insurance" than Medicare and Medicaid  or unemployment "insurance" are. (See "Redefining Insurance... To Actually BE Insurance", "The Insurance Sham", "My Health Care Plan"""Medical Reform, An Overview", "High Cost of Medical Care",  "Bad Economics Part 10", "The GOP Health Care Plan", "Semantic Games""Bad Economics Part 14", "Democrats Envy the French", "Hurrah for Jindall!" and "Minimal Reforms") Perhaps the original concept was intended to be self-financing, but even as it was begun, the base of recipient extended, and the Federal Reserve expanded the money supply, resulting in damaging inflation, so I doubt it ever was self-financing. Instead, it is yet another for of welfare disguised as insurance so that the recipients and others think of it as something just, that is their due, and does not represent a wealth transfer, though in truth that is precisely what it is.

Of course, even were it self financing, I would oppose the idea of forcing individuals to save for retirement against their will, so my opposition does not rest on whether it is welfare or insurance. However, in discussing Social Security I think we must be honest and, though it will offend many who think they are just collecting what they paid in, we must recognize that Social Security is welfare.

POSTSCRIPT

In my post, I state between 1973 and 1983 there was a 600% rise in prices, relative to gold. Thinking about this number, I have to admit it may somewhat overstate inflation, as gold tends to appreciate during inflationary periods. On the other hand, thanks to oil prices raising the CPI early in the 1970's, the inflation is understated at 170% +/- using CPI deflators. Salaries show a rise somewhere between 200 and 300%, which is probably fairly close to the actual experience of consumers.

Of course, all of these are just estimates. In fact, there is no single "rate of inflation", as part of the harm of inflation is that it strikes without uniformity, harming some more than others, and even bringing benefit to some. Thus, it is kind of pointless to speak of a single rate of inflation. On the other hand, we do need some approximation of inflation's effect when making certain arguments, so, as in this case, so long as the measure used is provided, I have no objection to using one of these approximations. Of course, we might argue over which is better or worse, but so long as the measure is defined, at least we know what we are comparing. See "Inflation and Uncertainty", "Bad Economics Part 7", "Bad Economics Part 8", "What Is Money? ", "What Is A Dollar?", "The Gold Question, Not "Why?" But "When?"", "Bad Economics Part 19","Fiscal Discipline", "Putting the Bull in Bull Market" and "The Rubber Yardstick".)

POSTSCRIPT II

While looking for articles to use as citations in this post, I found an article that is especially amusing given my recent critic's accusations of me being a Keynesian. Just check out "WSJ Misses the Mark AGAIN" (as well as "Derivatives and Other Investments") and tell me how fond I am of Keynes and his theories and those of his disciples.


3 comments:

  1. I think your point about inflation is a very good one and I would really like to see a comprehensive analysis on it. Another flaw in the writer’s math as well is that Social Security tax rates have been increasing over the years. It was initially 2% and now it’s 12.4% (the 15% includes Medicare, I presume, which is another flaw). Back in 1970 SS taxes were 8.4%. So not only does that affect his math but just the fact that the rate is continually being raised should demonstrate that payments into the “trustfund” are not keeping up with payout obligations.

    I also am opposed to Social Security and although I think the math arguments make sense my reason is because I don’t think it’s Constitutional, regardless of what the courts have said. I don’t know if that was among your arguments as I don’t have time to read the other posts.

    One thing I don’t understand is your claim that it’s not insurance. When you buy insurance you pay premiums in exchange for receiving some kind of payout upon the event of an agreed trigger. You may end up getting much more than you paid in or you may end up getting nothing at all. Insurance is a gamble. Irrespective of the government’s mismanagement of the program that’s resulted in the predictions of its eventual bankruptcy – a position reputable insurers would hopefully never be in – it seems to me that SS works like insurance. You pay premiums (in the form of FICA taxes) and you may or may not get a payout depending on how long you live. Of course, the fact that your “benefits” are payable to survivors seems to be at least one distinguishing factor. So I would be curious to see your reasoning there.

    I find it interesting that the writer takes such issue with the term “Federal Benefit Payment.” Regardless of whether SS is an insurance program or a retirement savings program, payouts under such programs are typically labeled at “benefit” payments. Personally I am far more offended by those who wail on and on about “entitlements,” which includes, I presume, SS, as if it’s purely welfare. I would certainly agree with you that payments received in excess of what someone puts in amounts to welfare; however, at least people are ostensibly paying into them to some degree, unlike the myriad of programs that are purely welfare but that are never considered for the chopping block. That’s why I am angered by Paul Ryan’s socialist “means testing” plan under which you pay in all of your working life and if you’ve done well enough your reward is that you get nothing. That completes the process of converting entirely to a wealth transfer scheme.

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  2. I did not mention the constitutionality as it is actually one of the weakest arguments. I know that seems out of character for my usual approach, but the truth is the Constitution has only the power the public gives it. If they choose to believe there is a Constitutional right to extensive government powers, then telling someone it is unconstitutional will not help much. I do believe Social Security is against both the original intent and the literal meaning of the Constitution, but courts and government have said otherwise, and much of the public chooses to believe that, so a Constitutional argument won't hold much water for them. (see http://ghostsquirrels.blogspot.com/2012/11/bar-fights-riots-and-drug-markets.html and even earlier http://andrews.blogtownhall.com/2009/09/07/the_single_greatest_weakness.thtml )

    As far as not being insurance, I suppose it is more of an insurance plan than universal medical "insurance", as that pays for expected regular payments, which is completely contrary to the plan of insurance, but Social Security violates enough tenets of insurance to still be welfare rather than insurance.

    Well, first, as we said, it is not self-funding, which is a fundamental principle of insurance. Insurance, through risk pooling and charging based on risk, then investing the income, funds itself. Social Security is not self funding.

    Second Social Security, with the introduction of SSI, payments to orphans and others, introduced payments to those who did not pay in, which violates the principles of insurance. Some of these were originally based on payments by the recipient or family members, but some (eg SSI) can now pay out to anyone, which clearly means it is not insurance.

    Third, insurance charges premiums based on expected risk and payout. As most of us are expected to live past 65, Social Security should be charging much higher rates. In addition it should base those payments upon our health, our age, other actuarial numbers. by charging one rate for everyone it shows it is not insurance, but simply a tax to fund a welfare scheme.

    Fourth, insurance works through risk pooling, that means being able to deny coverage, or at least charge sufficiently high premiums for some to discourage them from joining the pool. Social Security is universal. This is not a certain sign it is not insurance, but combined with the others, it is.

    Finally, insurance is voluntary. This is not. We are forced to pay into Social Security. That makes it a tax and transfer payment, that is welfare. Not insurance.

    I think that covers it. But if I think of something else, I will add it shortly.

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  3. I forgot a few points that prove it is not insurance:

    1. Insurance is a contractual relation, which imposes an obligation upon both parties, the insured to pay premiums, the insurer to pay out benefits. If whole life, there is also an ownership interest on the part of the insured, but even term life has a contractual obligation. However, the courts have ruled the government has no obligation to pay Social Security and you have no ownership in it. That makes it welfare, plain and simple.

    2. As an extension of the point above, the government is free to change the benefit, the retirement age, everything, at its will. Insurance does not allow such freedom on the part of insurers. Insurance relies upon defined contractual terms.

    3. To elaborate upon another point, about risk pooling and adjusting premiums, an insurance scheme would never ask the same premium of a 20 year old and 50 year old when promising the same payout. However, so long as you have enough qualifying quarters, you get the same benefit for the same premium regardless of age. This is also why Social Security is facing bankruptcy. If I suddenly start working at 55, or if my pay increases dramatically late in life, I can get the same payout as someone who paid in the maximum since his thirties or twenties. That is not only a recipe for bankruptcy, but also contrary to the principles under which insurance works. Considering the much greater expected pay-in, the younger beneficiary would pay a much lower premium than the older, yet government does nothing of the kind.

    I am sure I am missing some other points, but those seem to make a pretty good case, especially added to the points above.

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