Friday, July 01, 2011

The Heratige Foundation

Over the past week, an individual contacted me about Social Security and what I thought of the Heritage Plan. The plan is 50 pages in length. After reading it I am very disappointed that those names on the plan, who endorse the plan did so.

The plan has no validity period. It does not use an independent model or provide any assumptions. It refers to CBO reports and from this speculate what changing table values by assuming different growths such as inflation, wage, GDP, productivity, etc will some how filter back into the original algorithum used to analyze a set of assumptions and create a new projection that is accurate. This is far from the truth. Projecting the cash flow of social security is a non linear process.

Population distribution or demographics are not linear. Each cohort has their own unique total numbers. A boom begets a boom and a bust begets a bust. As people turn 18, they generally begin to work and somewhere at age 65 they begin to retire or are retired. This is certainly not a linear progression, more like a big python eating a dog that can be seen from the outside as a lump moving down. Wages increase and then stagnate as you reach a particular age. The number of workers in each cohort for each year change slightly resulting in different non linear OASI revenues. Each working cohort will have their own replacement factor set when they turn age 60. This is used to determine that cohorts initial OASI benefit. Clearly this is non linear and assuming wage growth increases at a faster growth will increase revenues,but at the same time it increases the initial OASI benefit for each cohort at the same exact rate. By not using the same algorithum (assuming the CBO model is correct) there is considerable error.

The Heritage Foundation asserts that doing nothing to fix Social Security and Medicare will lead to economic collapse. They support this by stating that the trust fund for OASI will be exhausted in 2037 and there after will require more than $350 Billion of borrowing or funds from the general revenue fund. This is not true. Based on current legislation passed in 1984, neither social security or Medicare may borrow funds and general revenues may not be used to fund these programs. The simple fact of the legislation of 1984 clearly identifies that when a trust fund (either program) reaches 20% of any given years expenses, across the board takes place. Clearly there is no borrowing. The Heritage foundation cites a cut in OASI benefits of 22%, but fails to identify this as a benefit without COLA.

The Heritage Foundation then uses GDP as the benchmark for Social Security revenues and expenses. Table 6 in their plan clearly shows current benefits as a percent of GDP is far greater now than in the future. In fact the Heritage plan states they want a flat benefit for everyone, eliminating the link between wages and the initial OASI benefit. They state this benefit at $12,000 a year adjusted by wage growth. In addition their plan is to divert 6% of payroll taxes to a workers account such as an IRA. They make no changes to current or soon to be beneficiaries. but only to those in the future. Retirement age will be increased by a month every two years. This is about the rate of growth in life expectancy at age 67, but it far exceeds the actuarial basis of the cash flow. A person who delays retirement by one year, can be retired for 2.5 years more or it takes 2.5 years worth of additional benefits to recoup the delay in retirement and extra taxes paid.

However, the single largest sin I see in their report is the claim that they improve benefits. From table 6 they clearly show the benefit costs being reduced by 55%,far more than the 22% under current legislation. So is the Heritage Foundation attempting to con the American People with a plan to get something from nothing?

They say a flat tax of 18.5% of GDP will limit spending. The last time I checked, I do not pay income taxes, payroll taxes or excise taxes as a percent of GDP. I pay income and payroll taxes based on wages earned. GDP is nearly twice that of all income reported to the IRS for tax purposes. Clearly this would indicate that the true tax they wish to impose is 39%. They would eliminate the legislation of 1984 that separates the budgets and revenues for Social Security, Medicare and General budget. No longer would there be a mandated cap on Social Security or Medicare expenses. In fact much of the unfunded liability would be transferred to the General Budget that is already running $1.7 Trillion deficits and has a national debt of $14.3 Trillion.

The Heritage Foundation thinks they are saving or fixing Social Security and Medicare for future generations. Maybe they should ask these future generations if they want these programs. The Heritage Foundation proposes that $55,000 a year income for seniors is the point at which OASI Benefits would be taxed and when their non OASI income reaches $110,000 a year, their OASI benefits are 100% taxed away. This makes OASI a welfare program,clearly not want FDR envisioned.

The Heritage Foundation does not provide any information on how the transition between diverting 6% of payroll tax to individual accounts gets paid. A 21 year old today will work ~45 years before reaching retirement age. Clearly diverting and investing 6% will be more than enough to replace the OASI benefit, yet these workers may not save a dime in excess of the 6% and receive the equivalent $12,000 flat OASI benefit in the future. I see no basis on how this transition period is paid for over 45 years or how in 45 years the OASI benefit which higher than today's benefit can be paid.

As an engineer I have seen proposals that insinuate perpetual motion is viable, but in the end they have all failed. Social Security is no where near being viable. I have lost all respect now for the Heritage Foundation. I simply cannot trust what they present any longer. I suggest you ask them the hard questions as well.

My plan can be found at


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