Getting Warmer

Well, I got my second reply from the White House.

Much faster this time; perhaps because I told them that the first one showed either disdain or incompetence.

At least this one is on-subject though it still has the odor of a form letter.

I tried again with this:


***********************************


Mr. President,

Your last reply was on the right subject but you still didn't answer my question.

For the third time; where did the other $50 trillion that should be in the Social Security trust fund go?

I'd like for you to confirm that it was stolen by the federal government and that the 'real' national debt is closer to $65 trillion.

My math is at; http://mnhoffmann.blogspot.com/2013/09/social-security-mindblower.html

C'mon, you can say it! You know I'm right. Just admit it. We  wouldn't need all this wealth redistribution if you guys hadn't been stealing from us for all these years; since LBJ, I believe.

Of course, had the money not been stolen, the interest would cost $2 trillion/year but that's a different problem.

Waiting Less Patiently,

-Marty

White House 2nd Reply to SSTF Theft Question

 

Dear Martin:

Thank you for sharing your thoughts with me.  I have heard from many Americans who are worried about the future of their retirement savings, and I appreciate your perspective.

Retiring with dignity is a promise we must keep to all Americans, and I am working hard to strengthen our retirement system.  That is why I am committed to protecting Social Security and addressing Americans’ concerns.  Social Security cannot be subjected to risky privatization plans because the future of hard-working Americans should not be left to the fluctuations of financial markets.

To better secure their retirement and prepare for unforeseen circumstances, Americans must also save for their future in other ways.  We are laying the foundation for all individuals to participate in workplace retirement accounts.  Employees would be automatically enrolled in pension plans and could opt out if they choose.  Simple and automatic enrollment makes it easier for people to plan for retirement.  This would assist the 75 million working Americans—about half the workforce—who lack access to retirement plans through their employers.  Please join me online to learn more at www.WhiteHouse.gov/Issues/Seniors-And-Social-Security.

Thank you, again, for writing.

Sincerely,

Barack Obama

 

Follow Up on Wealth Gap Strategy

Our old friends Ed (#69) and Barb (Sixette) came to visit the other day. While our wives chatted, Ed noted that it's been a while since my last post.

In my last post, I was examining what the ability to pass unused Social Security savings from generation to generation would really have over the population; particularly, whether the program is self-sustaining or not and, if not, by how much.

What I found was that everyone leaves money on the table, a lot of money. I also found that the fund should have at least $52 trillion in it (IOUs or federal securities or cash) but has considerably less.

I'm not talking about unfunded liabilities (like the Wall Street Journal) since they are technically impossible for Social Security; at the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future.

I'm talking about real withholding (and, most importantly, interest) over the last 60 years.

I've been writing furiously to the Social Security Administration, my congressman, my two senators and even the White House. I want an explanation regarding the fact that there is only $2.7 trillion worth of IOUs in the trust fund when there should be at least $52 trillion worth of them.

Even my old pal Leo wrote to his representatives.

Leo's congressman, John Kline (R-MN) has replied by saying "he will keep the information in mind for any upcoming or pending legislation". Not encouraging but, at least, a response. Nothing from my Connecticut all-democrat leaders; as you may recall, it was their idea.

The White House replied today but said absolutely nothing about the Social Security Trust Fund. The letter sounded familiar and so I looked back over my previous replies and found it to be an updated copy of a previous reply. I think this shows arrogance, disdain and antipathy. I will write back and say as much.

It's been said that Social Security is the 'third rail' of American politics and the flaccid response thus far is testament to that dictum.

Disagreement with My Math
There was some disagreement about my math.

My brother-in-law Jeff suggested that I may have overestimated the savings of the 1947 control group by counting the entire population of 2,858,000. This seemed a valid observation since the average participation rate in 1967 was only 57% (close to the lowest ever) and since I'm reluctant to argue with conservatives.

Workforce Participation Rates (%)

That said, I must offer a defense. My counter argument is that:

• I did not count those under 20 or over 65 in the overall calculation (4% of workforce).
• I think I have another few percent hiding in my conservative curve fit.
• I did not count the top 9% of earners in the calculation for the control group of 1947.
• The straight percentage of payroll tax paid by this group is 17/50.9 or 33%.
• The ratio is found by the top 9-10%'s red to all of the red in the figure below; some groups pay more than 7.65% because small business owners pay both sides of FICA.
• Even this is overly conservative because 1% of a top 10 percent earner's income is a lot more than 1% of lower quartile earner's income. 
• Using annual instead of continuous compounding, my savings estimates are 10% low.
• The net result (47% on the low side) more than compensates for the labor participation rate.

I hope my defense is sufficient for Jeff. To him I say thanks for reading and for trying to keep me honest. If more of us treated government with the same critical eye, we'd all be a lot better off.

On Wealth
My supposition in my post on the Wealth Gap was that, rather than trying to address the wealth gap by inefficiently (263% overhead) spraying cash on those with limited earning power, it might be more effective to help them keep more of what they do earn, thus increasing their wealth. This is like wealth un-distribution.

My proposals included the elimination of regressive taxation that hurts low wage earners disproportionately; sales taxes, fuel taxes sin taxes and property taxes.

The national average sales tax is about 6%. Given that low wage earners spend everything they don't save, this amounts to at least $500/year.

To a low wage earner struggling to save (after the government takes $1,860 from him and his employer for Social Security), $1,000 in yearly fuel tax is huge (fuel taxes average $1/gal).

A low-to-middle wage family with a car or home or both will pay perhaps hundreds of dollars in tax on the car and 1.4% of the home's market value (typically 2% of the 70% assessment value) in tax. In the bottom 20%, the home-ownership rate is 45%. The sum of these taxes has to be worth at least $2,000/year on average given that even a renter is paying some or all of the landlord's taxes.

By the way, where is the 'middle class' is this distribution?

If this money were saved directly instead of collected as tax and redistributed by inefficient means, it would have a huge impact on the wealth of low income households; this amounts to an average of at least $3,000/year in total. For the bottom 20% of earners (28 million workers), that adds up to $84 billion/year; roughly the cost of the food stamp program but worth a great deal more because of overhead and lack of opportunity for fraud.

Sin taxes are good for another couple of billion/year to the bottom 20%.

For Social Security inheritance, the lifetime minimum wage earner retiring last year will leave an average $130,000 on the table at death. Given the 2.5 million deaths each year, this is another $65 billion/year for the bottom 20%. More than twice that much for the bottom 40%.

The total of $155 billion/year for the bottom 20% is worth $562 billion in government subsidies given the average 263% delivery overhead of government subsidies.

If you don't buy my overhead calculation (or similar findings by others), I can easily argue that the federal government borrowed virtually all of the money ever dispersed as welfare; $15 trillion total since 1964 minus $5.4 trillion in Medicaid leaves well over $10 trillion (when interest is added) in debt to other than ourselves. This means we can also tack on the federal debt payments of $395 billion/year to the $155 billion detailed above; by the way, at 4% interest, $395 billion isn't even enough to keep the debt from self-growth so add another $55 billion/year.

We spend $450 billion/year on non-health-related charity but these suggested moves are still worth over $550 billion/year. Sadly, we still have to pay the debt but I think I've made my point; we wouldn't have the debt and we'd have a lot less poverty were it not for government interference.

Regarding my overhead number and the $450 billion in Welfare we spend each year, excluding charitable donations ($516 billion) and all healthcare spending; think about it, does anyone really believe that the poor are getting $10,000/year for each of the 45 million? If so, please contact me at your earliest convenience; I've got this bridge for sale..

Regarding 'having to pay the debt', do we really? If our government will steal $50 trillion from us, what's to stop it from stealing $11 trillion from them? Maybe that's why House Republican's see the 'Obamacare versus default' as a win-win proposition? Perhaps it's time for payback for being the world's policeman for 70 years?

The savings to states is also huge but not calculated here due my laziness but it is probably close to half of the total. This is because of the insidious means by which such well-intentioned but foolish programs, started at the federal level, are eventually pushed off onto the states to make Congress look better while everything else gets worse.

Problem
The less-than-obvious problem is that if the government had not stolen the $50 trillion from the Social Security Trust Fund (taken without so much as an IOU), the interest of 4% would cost the federal government over $2 trillion/year. My brother and I came to this grim realization while discussing my last post.

This ridiculous yet factual result illustrates the futility of the program's design; $2 trillion in interest for $0.8 trillion in benefits is not a good deal and is an even worse plan! It also explains why our elected representatives are so reluctant to discuss it (I think I hear them running away screaming like little girls).

Solution
As I have been saying for several months now in my posts, the government has to get out of the retirement business (and healthcare and education) except for forcing us to save and making employers contribute to our retirements. Forcing us to save and then stealing the savings is just not right.

A lifelong minimum wage earner starting today would accumulate $242,000 over 45 years with today's minimum wage, 12.4% withholding and today's 4% interest rates (no 15% rates like the early 1980's).

The same math for those starting to earn in 1967 would yield $33,000 after 45 years ($1.60 minimum wage, 7.6% withholding and 4% interest) even though they ended up with $198,000 at age 65.

Interest rates will go back up. As government grows relative to GDP and more are forced to borrow to make ends meet; supply and demand. We'll go (further) into debt just like government does.

Put this forced savings into individual accounts holding low-risk securities; no US Treasury bonds since we all pay taxes to pay the interest on Treasuries; remember that government itself is not profitable and paying yourself interest (via  taxation) really isn't profitable. Knowing what I now know, I would only buy Treasuries if I had my citizenship elsewhere; the US government almost makes Lehman Brothers and AIG look good!

By the way, all of this reasoning applies equally to federal and state employee pensions and we're beginning to see the impacts there.

Current Events
Regarding the budget battle, I sent this letter to my democrat senators:
*****************************************************
Senator,

I'm writing to ask you to vote for the house CR to fund government and defund the ACA.

The ACA is a $150 billion 'solution' to a $50 billion problem.

Poor people can't afford even cheap premiums but they can't be turned away from emergency care.

As more companies opt for a fine instead of providing employee's insurance, the whole wage basis of the middle class will come unhinged.

The MLR provision isn't working either; insurance companies still post 30% profits.

The only good thing is the pre-existing thing but that would be a good standalone law.

You rightly bucked the party on place something here, please do it again.

-Marty
******************************************************

I encourage you all to send this to your senators. It's worth 10 minutes of your time and there's only a week left before chaos. I think I'm getting out of the market again as a precaution.

White House Reply to SSTF Theft Question

 
Dear Martin:

Thank you for writing.  I have heard from many Americans about Government spending and our national debt, and I appreciate your perspective.

This is a make-or-break moment for the middle class and those trying to reach it.  After decades of eroding middle-class security and after a recession that plunged our economy into a crisis from which we are still fighting to recover, it is time to construct an economy built to last.  To put our Nation back on a path of living within our means, we must cut wasteful spending, ask all Americans to shoulder their fair share, and make tough choices on some things we cannot afford.

Over the last few years, Democrats and Republicans have worked together to reduce the Federal deficit by more than $2.5 trillion—mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans.  As a result, we are more than halfway toward the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances.

To hit the rest of our deficit reduction target, we must address the rising cost of health care for an aging population.  The Affordable Care Act is helping us meet that challenge, and the entitlement reforms I have proposed would take us even further.  But we should also do what leaders in both parties have already suggested, and save hundreds of billions of dollars by getting rid of tax loopholes and deductions for the well-off and the well-connected.  The American people deserve a tax code that helps small businesses expand and hire, ensures billionaires cannot work the system and pay a lower rate than their hardworking secretaries, and reduces tax rates for businesses and manufacturers that are creating jobs right here at home.

We know these reforms will not be easy, and neither side will get 100 percent of what they want.  But Congress must set party interests aside and work to pass a budget that replaces reckless cuts with smart savings and wise investments in the future.  The greatest Nation on earth cannot keep conducting its business by drifting from one manufactured crisis to the next.

An economy built to last also demands we renew the American values of fair play and shared responsibility—principles that must guide our approach to solving our Nation’s deficit problem.  Just as we extended middle-class tax cuts to help working families, I am pursuing the end of costly tax breaks and special deductions for the highest-income Americans and biggest corporations.  I have repeatedly called on Congress to stop giving away $4 billion a year in oil and gas subsidies to an industry that has never been more profitable, and instead, to pass clean energy tax credits to cultivate a market for innovation in clean energy technology.  I also proposed a fee on big banks and other major financial institutions to recoup taxpayer assistance that was crucial to saving our economy.

To prevent Congress from worsening our deficit outlook, I pushed for and signed into law pay-as-you-go rules for Congress—rules critical to creating the surpluses of the 1990s.  Additionally, I established the Campaign to Cut Waste, which is aggressively rooting out misspent tax dollars, and sent Congress the Consolidating and Reforming Government Act to reinstate the authority past presidents have had to streamline the Executive Branch and create a leaner, more efficient Federal Government.  Through these and other efforts, we can reduce the deficit and ensure a more stable future for our children.

Thank you, again, for writing.  To learn more about our budget, please visit www.Budget.gov.

Sincerely,

Barack Obama

 

Social Security Mindblower

In my last post on the Wealth Gap, I noted that allowing excess Social Security savings to be inherited would be a useful tool for closing the wealth gap.

I decided to look at the impact this would really have over the population; particularly, whether the program is self-sustaining or not and, if not, by how much.

According to the Social Security Administration, the effective interest rate paid on 'deposits' is currently 4%.

This graph conveniently covers the working life of those currently retiring; 45 years.

Since everything I'll do here is interest rate-sensitive, my brother suggested that I back this up with treasury bond and prime rate data.

The 10-year treasury rate is shown below and the 30-year rates are higher:

...and the prime rate:

The basic shapes are quite similar to the first curve (from the SSA) with the first one having the lowest (most conservative) peak of the three; I'll use that one even though the SSA should arguably have invested in 30-year bonds.

There are similar charts for other Social Security details; minimum wage, tax rate, Social Security interest rates and the Social Security Wage Base (the maximum income subject to the tax).

I used the total Social Security tax rate (employee plus employer; currently 12.4%; table above shows only the employee half) and interest over the last 45 years to calculate the total Social Security savings of a life-long minimum wage earner.

In the first year, the savings is the annualized wage (assuming 2080 hours/year) times (twice) the tax rate, times one-half of the year's interest rate (half rate to account for the average of the year's withholding); except for 2011 and 2012 when the employee side was reduced by 2 points while the employer side remained unchanged.

In successive years (up to retirement), the savings is the sum of the first year's savings with interest plus the next year's wage (assuming 2080 hours/year) times (twice) the tax rate, times one-half of the year's interest rate.

After retirement, the accumulated savings is depleted by the calculated yearly benefit and at least partially replenished by the interest income on the balance; I assumed an interest rate of 4% going forward from 2012.

I used annual compounding instead of continuous compounding because it also produces a more conservative result.

I used the Social Security benefit online calculator and tediously put in 45 years of minimum wage incomes to find the current benefit.

I was surprised to find that the benefit was $916/month; I had guessed $300/month in the previous post. I must recant my guesstimate from my previous post; the average lifetime minimum wage earner will accumulate savings of just under $200,000 over 45 years, not $83,000.

In addition, if we assume that the interest rate stays at 4% during the expected 15-year benefit period (even though rates are rising), there is nearly $130,000 left after death, not $29,000. Allowing this to be inherited would be a very big deal for poor families. This would really help close the wealth gap; combining it with elimination of the regressive fuel, sales and property taxes would elevate many poor folks quickly.

I did the same exercise for someone starting at twice minimum (college or skills assumed) and ending in the 50th percentile; this is about $42,000/year right now.

The benefit here is $1,753/month; this 50th percentile wage earner will accumulate savings of $556,000 over 45 years.

However, if we again assume that the interest rate stays at 4% during the expected 15-year benefit period, the interest income exceeds the benefit and there is nearly $570,000 left after death. Also a really nice inheritance; Mom and Dad could leave over $1 million if they both worked; many do but never reap their just rewards.

I did the same exercise for someone starting at twice minimum (college or skills) and ending in the 10th percentile; this is about $142,000/year right now. For this case, the Wage Base was also employed to limit contributions.

This earns the maximum benefit of about $2,500/month; this 10th percentile wage earner will accumulate savings of nearly $1,600,000 over 45 years.

However, if we again assume that the interest rate stays at 4% during the expected 15-year benefit period, the interest income far exceeds the benefit and there is nearly $2.25 million left after death. This group is getting totally hosed.

WTF?
This is a shocking set of results, to say the least. I have been led to believe that Social Security benefits are so crappy because we are always paying for those who came before us. However, the analysis above tells a radically different story.

By my calculations (described below), the fund has produced a surplus from every crop of workers since those who retired in 1998 and I see no reason to believe that this has not been the case for a lot longer.

It looks like we contribute far more than enough to account for the paltry $2.7 trillion in the Social Security trust fund.

How much more? Using the wealth/income distribution curve developed in my last post and the three data point from above, we can make a good, yet conservative estimate of the total accumulated Social Security savings of the group born in 1947 and retiring last year; the crop of 1947.

How Much Did The Crop of 1947 Save?
All we have to do to estimate the total savings of this group is curve-fit the inflection points (between work and retirement) of the three curves above to the wealth/income curve below and integrate the area of the curve thus found.

The process involves summing the areas of rectangles under the curve as shown below (some of you will no doubt recognize this process from long-ago Calculus classes).

The vertical value is $/person and the horizontal value is population (people) so the area of each rectangle produces $.

Here's the wealth/income curve from my last post. I multiplied the curve by a constant to get a good fit to recent gross personal income data statistics; good alignment of individual percentile points and an area under the curve of $8.6 trillion (gross personal income in US) last year.

The curve-fit result is shown below. I used the savings points calculated in detail above (10th percentile=$1.6 million, 50th percentile=$565,000 and 20th percentile=$200,000) and fitted them conservatively to a graph with the same Y = X^-0.8 formula as the wealth/income curve above.

The fitted curve (in blue; 'Saved') is always below the reference (in red; 'Curve-Fit') to be sure I didn't over-estimate the crop savings as a whole.

To get the area under the curve (the integral), we just multiply the estimated savings of each group to the number of members in each percentile; each 5-percentile group has 5% of the number of people born in 1947 (2,858,000) in it; 142,900 people per 5-percentile group.

Again, to be conservative, I didn't start to integrate until the 10th percentile since I'm not sure how many of the top 9 percentiles actually pay in to the system at all; many probably never worked a day in their lives.

The result; $1.32 trillion.

The Problem
Here's where I have a problem.

If the crop fro 1947 saved $1.32 trillion and there are 44 more such groups currently paying into the system (those born between 1948 and 1992) and preceding crops left a balance (gathering interest) and we currently pay out about $0.8 trillion/year in benefits, how can it be that the trust fund has a balance of only $2.7 trillion?

Shouldn't the balance be more like $30 trillion?

What Should the Trust Fund Balance Be?
This question is also a tough one but not as tough as the last one; no curve-fitting or integration required. 

To solve it, I needed the GDP data from 1952 to 2012, the average Social Security benefits for the last 15 years and the yearly birth rates from 1932 to 1992. I went back to 1952/1932 since some of those folks (born in 1932 and now over 80 years old) are still beneficiaries. I didn't count those over 80 or those under 20; I called it a push since the over-80 crowd is already figured into the life-expectancy figure (bell curve distribution) and the under-20 crowd has earnings near zero (and are highly underemployed).

Using the 1947 crop as a baseline for savings-per-crop, I assigned a potential savings for other crops equal to the 1947 savings scaled first by birthrate ratio (to the crop of 1947) and then by GDP ratio of the year they entered my workforce to the year the 1947 crop entered (the 1947 crop entered in 1967).

Birth Rates

GDP Growth Percentage

You can see that GDP growth (blue curve) tracks population pretty well but I also used the trend-line (black curve) to graph actual GDP growth since 1952 (by shooting for $1.58 trillion in 2012). The curve after 2012 is a guess and somewhat improbable given the lackluster state of the economy.

The GDP data scales the wages of prior and successive crops so that the potential contributions of later groups increases appropriately. Again, a conservative estimate since personal income used to be a substantially greater share of GDP than it is now.

Once I got this data, I further scaled the potential contribution of each crop as follows;

For those over 65, I added to their potential contributions the difference between interest income on per-crop savings since retirement and their average Social Security benefits; year by year over the last 15 years multiplied by the crop size to get an actual contribution. This was really tedious.

For those under 65 it's a bit trickier. Since savings growth over time is decidedly non-linear, I normalized the 10-percentile growth curve from above to 1.000 for retirement day and then for each crop I multiplied the potential contributions by the normalized fraction over the 45 years they've contributed to get an actual contribution.

The end result is plotted against birth year........drum roll please....

I get a Social Security Trust Fund balance of $51.8 trillion; not $2.7 trillion.

As noted, the horizontal axis is the birth year of the various crops of people; it ends in 1992 because that crop is just starting to contribute.

The curve starts to flatten out in the early 1960's because of the drop in birthrates and because the savings growth of those born after 1960 is just starting to blossom, having not joined the workforce until 1980. The curve will start an upward trajectory again in a few more years.

The result is higher than my guess of $30 trillion because the retirees of the last 15 years left $9 trillion behind (or, were denied $9 trillion of their own money) and also because the area under the non-linear growth curve is quite a bit higher than for straight-line growth.

What the f___!

How is This Possible?

Aside from the larger question of 'where's the other $49.1 trillion?", this large balance is based on the beauty of compounded interest.

If you go back and look at the 1st graph in this post, your eye should tell you that the average interest rate of the last 45 years is easily 6%. The actual average is 7.08%.

So start with the minimum wave in 1967 of $2,912/year and a withholding of $227.14 for that year.

Then multiply the withholding by 1.0708^45 (29.36) to get $6,670 as the value of that first year's withholding. Repeat 44 times with a slowly increasing minimum wage and decreasing exponent and you get a big number. Multiply that by millions of people per crop and dozens of crops and you get stupidly big numbers like $51.8 trillion.

Where's the Other $49.1 Trillion?

This one has me totally stumped.

My first guess was that the government pissed away the contributions as soon as they were received and never paid any interest and is now claiming it is only on the hook for what it stole.

However, when I do that math (withhold the historical Social Security rates on 41% (bottom 90% of earners) of half of the historical GDPs (personal income is currently about half of GDP but was a higher percentage in the past) I still come up with $5 trillion, not $2.7 trillion. This tells us the principal has also been substantially spent.

My friend Steve asked if it might be because of labor participation rates or women in the workforce but the Bureau of Labor statistics shows that the current rate (thanks to the mass thievery of 2007-2008) is roughly the same percentage of population as the average of the rates over the last 60 years; higher percentage of women, lower percentage of men but with the same overall proportion.

I wrote to the Social Security Administration and asked:

"I think that the group that retired last year (born ~1947) had amassed savings of at least $1.3 trillion on top of $9 trillion left over from the 15 previous groups. When added to the savings of all successive groups with interest, I get about $52 trillion. Where did it go?"

I'm still waiting for an answer.

On the Accuracy
I'd have to say that my numbers are conservative (and therefore on the low side) for these reasons:

• Conservative interest rates
• Annual instead of continuous compounding
• Conservative curve fit
• Did not include top 9% of earners (more than half of all income)
• Did not include those under 20 years of age
• Personal income was historically a much larger fraction of GDP but was treated as a constant ratio
• Otherwise used government-supplied numbers 

Implications for the National Debt
I'd have to say that if the Social Security Trust Fund balance is understated by $49 trillion, then the National Debt is underestimated by the same amount; it is really closer to $66 trillion.

The good news is that we become our own biggest creditor; not China.

The bad news is that annual debt service must increase from $300 billion to $1.2 trillion and that, at that rate of payment, the debt will take a loooooooooong time to repay.

The worse news is that this revered (by liberals) program to help the poor is actually serving to keep them poor by stealing their hard-earned savings.

How Can It Be Fixed?

• Get Congress' hand out of the till.
• Start individual withholding accounts for all Americans using Social Security numbers as a means to keep them separate and transferable after death.
• Pre-populate the accounts of those still working with the correct amounts.
• Increase the current annual benefits paid to 1/15th of the correct savings.
• Pay death benefits to those who got ripped off; everyone.
• Follow my Grand Bargain plan to reduce government spending and pay off the now gargantuan National Debt of over $60 trillion.