Thursday, March 26, 2009

Why are we in an economic mess

In 1984 I wrote a computer program to project SS-OASI cash flow. In 1984 I projected November 2037 would be the year SS would have problems paying 100% of promised benefits under current law. The SSA projected 2064. Over the years it has moved to January 2038. I predicted that SS-OASI would be the cause of a dramatic down turn in our economy because it robbed workers of the ability to save while promising them a benefit that could not be paid without extracting an ever higher cost from future workers. The Social Security program has stimulated our economy beyond our ability to maintain it. SS took 10.6% of wages that should have been set aside for future workers benefits and paid them to current beneficiaries. This is no different than what Bernie Maddof did. He took new investors money to pay older investors returns that far greater than could be generated. In fact Bernie never made a single investment. In many ways it is just like SS. SS has spent 95% of every penny paid into SS-OASI on benefits leaving just a tiny fraction, 5% to be set aside.

Now with the economy is in the pits, President Obama is signing trillions of dollars of stimulus adding to the national debt, where do we stand? We have a Social Security problem that is far greater than the economic problem we have now and no one is looking at it thinking it is far off. Social Security needs over $19 trillion today earning 5.5% to pay full benefits to all without anymore fixes. Anything less means that some future generation will be having to bailout out SS-OASI one more time with either benefit cuts or higher taxes.

Let me present a hypothetical scenario. Had Social Security never been passed, what would our economy be like today? I know that the boomers would have never paid $5 Trillion in SS-OASI taxes. They would have most likely saved it just as their parents saved. Saving could have been in the form of house. Applying the 10.6% to a mortgage reduces the term from 30 years to 14 years 4 months. The interest saved would have been staggering. This would have grown to $14 Trillion over the same period of time. Would boomers be looking at reduced Social Security benefits, no, just the opposite. They would be relying on their own savings that would pay twice what SS-OASI has promised.

The Earned Income Tax Credit for low wage earners would never have been passed saving over $1 trillion in federal expenditures. Families would have been able to save, send their children to college reducing the need for government involvement saving nearly $1 trillion in expenditures. People would not have turned to credit card debt or home equity loans. This would have reduced private debt. Families would have had greater take home pay allowing them to save and buy homes using sound financing. This would have most likely eliminated the need for the government "artificial stimulating" the housing market. In other words, the economic mess we are in now would not have occurred and the Social Security unfunded liability would never have happened.

We have let our elected representatives dictate how we spend and save. Our government is to last far into the future. An individual has a limited time on this earth. Their ability to accrue debt ends with their passing. However, our government has the ability to saddle future generations with astronomical debt. We need to clean house now! Please participate in the Tax protest downtown April 18 from 11 am to 1 pm.

2 Comments:

At 11:59 AM, Anonymous Anonymous said...

Larsen

I thought I'd check back. can't find my comment anywhere. may have something to do with "deleted by site owner."

well mine was not abusive, i thought, but here is another thought.

on biggs blog you ask "what are numbers." well, they are useful things if you treat them honestly and not superstitiously.
for example your analysis of the 2% increase in the payroll tax to balance SS for 75 years claims alarmingly that at the end of 75 years huge increases will be required because of falling out the window.

not quite. the 2% (combined) increase today would effectively create a bigger trust fund that would run out in 75 years (instead of about 30). but at the end of that time, the tax would already have been raised 1% for each the worker and his boss, and to continue social security from that date on a pay as you go basis would require approximately another 1% increase (each).... and unlike the pay in advance trust fund treatment... the pay as you go, with a tax rate of about 8.5% (each) can continue forever with no window to fall out of.

ultimately, of course, there is no way i could guarantee the tax rate would stay at 8.5, but it looks to me very unlikely it could ever go above 10%... and that, my friend, is about what my grandparents expected tosave out of their pay each month in order to fund a retirement they didn't expect to last ten years.

feel free to delete this. i can't promise i'll be back.

 
At 7:18 PM, Blogger WilliamLarsen said...

the 2% (combined) increase today would effectively create a bigger trust fund that would run out in 75 years (instead of about 30).

Actually a 1.9% payroll increase creates a surplus that only runs 40 years. For 35 years the trust fund subsidizes the payroll tax. At the end of 75 years, we will end up with 2.3 to 2.4 workers (optimistic) for every beneficiary. To pay a 42% targeted benefit with 2.4 workers means that each of these workers must contributed 17.5% of their wages. This means the 10.6% plus the 1.9% to get to 17.5% in 2085 would be another 5%. The first 1.9% is an 18% tax increase. The 5% increase in 2085 would be 47% more based on current tax for an overall tax increase of 75%. This 17.5% payroll tax would not produce a surplus, it would be purely pay-as-go.

ultimately, of course, there is no way i could guarantee the tax rate would stay at 8.5, but it looks to me very unlikely it could ever go above 10%... and that, my friend, is about what my grandparents expected tosave out of their pay each month in order to fund a retirement they didn't expect to last ten years.

The U.S. Savings rate during the 50’s was over 15%. During the 60’s it fell to 10%. During the 70’s it fell to 5-6%. Before the depression is was close to 20%. During the 50’s a person buying a home put 25% down and it was a term of 10 years.

I am an engineer by education and experience. I use a computer model to project SS-OASI's cash flow over 75 years. I also use this program to run what if's. For example, change in work force, wages, inflation, rate of return, retirement age to find solutions to the mess. I can even set the program that calculates the size of trust fund needed today that grows at the same rate as benefits in year 75. This ultimately produces the present value of the liabilities. I can even phase out SS-OASI based on age. I have run millions of iterations and I have yet to find a solution that is not very painful.

I am curious as to what you base your numbers on. Did you calculate these or read them somewhere?

Thanks for your comment. you can contact me at larsenforcongress@gmail.com if you would prefer not to post. I have not yet deleted anyone's comments. I like open and direct discussion.

 

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