Tuesday, January 17, 2006

Another reporter who skipped math class

From the Denver Post, we have an article that urges minor changes in the US Social Security system that will make it viable until at least 2080.

The laughable proposal, from the office of Sen. Chuck Hagel, R-Neb, would raise the age for full benefits on "younger Americans" from 67 to 68. Further adjustments could be done to the full benefit's age on "really young" Americans if changes in life expectancy occur. They would also slowly up the maximum pay in to $15K/year from the current $13.5K/year that I and many of my fellow Americans pay.

There are a few things one needs to understand to do the math on this topic.

1. The demographics in the US are much like that of most of the "West". We are approaching the mass retirement of the baby boomers and a declining birth rate. When this retirement occurs we are going to find ourselves in a place where every retiree is going to be "supported" by about 3 current workers.

2. Most of those workers don't pay the max. I don't know the exact percentage of the non-baby-boomer workers who make $100,000 or more. Let us assume that it is 10%. If that is the case Chuck Hagel's staff is figuring that they can replace the income of taxing all the baby boomers with a 1% increase in revenues from the rest of us. If it is 20% (which I doubt) you are looking at a 2% increase in revenue.

3. The assertion that the system is viable through 2040 or more is almost laughable. When the boomers retire the Social Security system will quickly go from bringing in more revenue than it pays out to paying out more than it takes in. Further, with a larger percentage of retirees in the population, almost by definition the GDP will fall, ergo general income tax revenues will fall unless worker output increases dramatically. Our current deficit of < 5% of GDP will seem like by-gone glory days.

4. Changing the retirement age by one year for people who already can't retire for 30 years or more seems like a farily reasonable thing to do. In reality, the system will be broke before we get there. It is meaningless. Those of us in that age group don't plan to work until we can receive Social Security. Changing that date one year doesn't change my plans one bit. I am already not counting on seeing a dime of my pay in back. I have to retire based on my savings. Neither a change in my "retirement age" nor an increase of $1K/year in my taxes is going to dramatically alter my life.

5. In the last 2 or 3 decades the life expectancy in the US has gone from 72 to 77+. On first look, this is less than 10%. These numbers are misleading. When looking at a ponzi scheme like Social Security you have to look at the average number of years one pays in and the average number of years one collects. Adults in their 60s today paid in for 35-40 years. They are about to retire. Their life expectancy isn't 77, it is something much higher than that. Some of their peers are already dead, and they figure into the average. Think about it. If you can make the leap that someone who is 75 has a life expectancy of 77 it isn't hard to make the further leap that someone who is 80 has a life expectancy of 77. I assume my insurance company uses tables a little more accurate than this.

When is some brave politician going to hire a few actuaries and accountants and lay out the reality for the general public? If you assume that I plan to work until 67 or plan to die at 77 you are kidding yourself.


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