So, here we are in a federal government shutdown. I saw that coming but am surprised that the DJIA is up.
I think the liberals are hoist by their own petard; by refusing to negotiate, they have actually cut government spending by a lot more than a deal could have produced.
How much?
With 800,000 federal employees furloughed at an average pay of $66,000/year ($254/day), the shutdown saves $203 million/day. This assumes that congress won't vote to restore back pay like they did the last time; they should not.
If we assume that the shutdown will persist through the debt ceiling expiration on the 17th, we'll have saved nearly enough to fund Obamacare in 2013 by defunding everything else except the military and the two real entitlements; SS and Medicare; a conservative dream come true.
And the battle of the titans will continue.
When it continues, the ante goes up to $2.4 billion/day since the feds borrow $2.2 billion/day and that will have stopped. In addition, treasuries will become less valuable, thus making the national debt smaller.
Liberals have trouble with arithmetic outside of opinion polls.
Conservatives watch the dollars; they rightly believe that they belong to those who earned them whereas liberals believe that the dollars are all theirs. Liberals want their fair share; conservatives ask what is your fair share of someone else's earnings?
The President was wrong when he said that "one faction of one party in one house of Congress in one branch of government doesn’t get to shut down the entire government"; they just did. He was also wrong by signing off on Obamacare when he knew that all Republicans and many others were opposed to it; roughly half of the country. He manipulated the anti-Bush fervor and was foolish to believe that it would not hound him like it has.
And the President still has not answered my question (after three attempts) regarding the $50 trillion missing from the Social Security Trust Fund. This tells me that there isn't enough money to satisfy his desire for redistribution; fair share = ALL.
Tuesday, October 1, 2013
Friday, September 27, 2013
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
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
Tuesday, September 24, 2013
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.
That said, I must offer a defense. My counter argument is that:
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.
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.
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 (%) |
- 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.
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.
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
Tuesday, September 3, 2013
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.
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.
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 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.
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.
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).
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.
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).
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 |
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.
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.
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:
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?
"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
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.
Tuesday, August 20, 2013
The Wealth Gap
I took a break from blogging, having covered most of the fiscal issues of our time. However, a subject about which I have not commented is coming up in the news frequently enough to warrant a new post.
The wealth gap is now being used by the liberals to highlight their desire for more redistribution of wealth.
The News
The graphic that caught my eye is shown below.
That one is usually backed up with something like this one but neither one makes sense to me since 40% of the workforce is a pretty big number; like 56 million people.
Although Dr. Wolff (named on lower figure) has impressive credentials, I'm not buying his result.
Some Reasoning
First, regarding the map. It's hard to link income to wealth.
But even if the bottom 40% all made minimum wage, they take home (no income taxes on this income) $15,000 x 56,000,000 workers (40% of US workforce) or $840 billion; roughly 5% of US GDP.
Add to this the portion of 9% of GDP spent on welfare and medicaid and we're talking 2.5% more of GDP for the bottom 40% (after subtracting the 263% overhead of government delivery). In addition, the reality is that the top end of the bottom 40% earns twice the minimum wage, adding another 2.5% of GDP for them for a total of 10%.
Take away government spending of 40% of GDP and we have 50% left for the top 60%.
So, 10% for the bottom 40%, 50% for the top 60% and 40% for government. On first glance, it appears that government and the bottom 40 are reversed but sadly, it ain't so.
Of the 40% government 'take' we have roughly 10% ($1.6 trillion) for actual government, 10% for entitlements, 10% for education and 10% for charity (welfare and medicaid) of which about 2.48% actually makes to to the poor people.
The wealth gap is now being used by the liberals to highlight their desire for more redistribution of wealth.
The News
The graphic that caught my eye is shown below.
Although Dr. Wolff (named on lower figure) has impressive credentials, I'm not buying his result.
Some Reasoning
First, regarding the map. It's hard to link income to wealth.
But even if the bottom 40% all made minimum wage, they take home (no income taxes on this income) $15,000 x 56,000,000 workers (40% of US workforce) or $840 billion; roughly 5% of US GDP.
Add to this the portion of 9% of GDP spent on welfare and medicaid and we're talking 2.5% more of GDP for the bottom 40% (after subtracting the 263% overhead of government delivery). In addition, the reality is that the top end of the bottom 40% earns twice the minimum wage, adding another 2.5% of GDP for them for a total of 10%.
Take away government spending of 40% of GDP and we have 50% left for the top 60%.
So, 10% for the bottom 40%, 50% for the top 60% and 40% for government. On first glance, it appears that government and the bottom 40 are reversed but sadly, it ain't so.
Of the 40% government 'take' we have roughly 10% ($1.6 trillion) for actual government, 10% for entitlements, 10% for education and 10% for charity (welfare and medicaid) of which about 2.48% actually makes to to the poor people.
No card-carrying liberal who is interested in an equitable society can fail to be irked by this unfairness. I have said myself that nobody has a harder job than the president of the USA (salary $400,000) so nobody deserves a $1 million (or greater) salary. Stock in a private company is different; if you built it, it should be yours to do with as you please. Stock in publicly-held companies is controlled by shareholders; they own it and should also be able to dispose of it as they please though many of us question the mega-compensation of industry executives.
The Reality
But the unfairness is not unexpected.
But the unfairness is not unexpected.
What the liberals are fighting (consciously or unconsciously) is the 80/20 rule – a staple in scientific, economic and business textbooks, the go-to idea to show how the outcome of a set of natural events is not always what you might recognize as, well, natural.
The math underlying the 80/20 rule, known as the power law distribution, is found in many natural systems over which no single human has much influence. Its concentration of the extremes seems built into the fabric of complex systems that depend on numerous factors that continually change over time.
According to Wolff (second diagram from top), the bottom 80% have just 16% of the wealth.
I'd say that if the bottom 40% earn 7.5% as reasoned above, then the next 40% earn 15% (since the power law curve tail section is fairly linear). The total for the bottom 80% is then 25% (with the ineffective 2.5% government contribution thrown on top; without this it would be 22.5%).
The simplest version says that 80% of your company sales will come from 20% of your customers; that 80% of the world's internet traffic will go to 20% of the websites; 80% of the film industry's money gets made by 20% of its movies; 80% of the usage of the English language involves just 20% of its words. You get the picture.
I'd say that if the bottom 40% earn 7.5% as reasoned above, then the next 40% earn 15% (since the power law curve tail section is fairly linear). The total for the bottom 80% is then 25% (with the ineffective 2.5% government contribution thrown on top; without this it would be 22.5%).
The simplest version says that 80% of your company sales will come from 20% of your customers; that 80% of the world's internet traffic will go to 20% of the websites; 80% of the film industry's money gets made by 20% of its movies; 80% of the usage of the English language involves just 20% of its words. You get the picture.
A distribution based on a power law says extreme events (or richest people, or biggest websites) account for most of the impact in that particular world, and everything falls off quickly afterwards. The combined wealth of the top 10 richest people in the world is much greater than the next 10, which is much greater than the next 10, and so on. The rest of the field sits in a long, almost-irrelevant tail.
This distribution might sound odd. At school, we're introduced to a different distribution, the more familiar "normal" (or Gaussian), which is best displayed in the bell-curve spread of values around an average. Measure the heights of a random selection of men, say, and most will be around the average value, with progressively fewer as you go in either direction away from the middle. Plot this on a graph and you get the bell curve.
Power law distributions, however, do not cluster around a single value. The impact of one big earthquake, for example, is bigger than the sum of millions of smaller, more common ones. Very few huge solar flares erupt from the surface of the sun, but those few are more significant than the endless thousands of smaller ones. The same applies to the numbers of big cities, the size of the Moon's craters and the occurrence and citations of scientific papers.
For the USA, I'd guess that our inventiveness has played a large role in the distribution; the transistor, the telephone, the light bulb, the personal computer, the internet and the affordable automobile were all invented here so a very few people made tons of money; illustrative of the Power Law distribution.
For the USA, I'd guess that our inventiveness has played a large role in the distribution; the transistor, the telephone, the light bulb, the personal computer, the internet and the affordable automobile were all invented here so a very few people made tons of money; illustrative of the Power Law distribution.
Verifiable Data
Once you know power law distributions exist, they become very useful. The concept of the "average" or "mean" is useless, for example, when talking about things that follow power laws. The average height of the people in a room (following the normal distribution) might tell you a lot about the spread heights of people in that room, but the average wealth of a country's citizens (which follows a power law distribution) tells you little or nothing about how rich or poor most people are. It is useful in flat taxation schemes as opposed to the bizarre tax code in the US.
Once you know power law distributions exist, they become very useful. The concept of the "average" or "mean" is useless, for example, when talking about things that follow power laws. The average height of the people in a room (following the normal distribution) might tell you a lot about the spread heights of people in that room, but the average wealth of a country's citizens (which follows a power law distribution) tells you little or nothing about how rich or poor most people are. It is useful in flat taxation schemes as opposed to the bizarre tax code in the US.
Now, going from a discussion about income to a discussion of wealth is problematic since public records are not available on the wealth of individuals. For that matter, there are no public records on gross incomes either.
Given roughly 115 million US households, and the median net worth of them, this table suggests that the wealth is; $142 billion for the bottom 20% ($6,200 net worth times 23 million households) and $589 billion for the next 20% for a total of about $731 billion.
I used the median in keeping with the idea that means (or averages) are meaningless in discussions of power law phenomenon.
The top 10% has $13.7 trillion, the next 10% has $3.2 trillion, the next 20% has $2.9 trillion and the last 20% has $1.5 trillion.
Income (%) Net Worth ($ Billions) Percentage Mean/Median
Bottom 20 $ 142 0.64 18.8
Next 20 $ 589 2.67 4.9
Next 20 $ 1,500 6.81 3.0
Next 20 $ 2,900 13.18 2.3
Top 20 $ 16,900 76.81 2.1
Next 20 $ 589 2.67 4.9
Next 20 $ 1,500 6.81 3.0
Next 20 $ 2,900 13.18 2.3
Top 20 $ 16,900 76.81 2.1
Total $ 22,031
So, from a total of $22 trillion, the bottom 40% has 3.3%, the bottom 80% has 23%; very close to the 22-25% I predicted above. This also refutes Wolff, as expected.
Observations
The big driver is that lower income folks save a lot less; this is shown in the rightmost column of the table.
The big driver is that lower income folks save a lot less; this is shown in the rightmost column of the table.
To understand why the wealth gap is so large, the mean data becomes instructive.
In the lowest group, the ratio of mean to median net worth is 18.8 whereas in the top groups it is only 2.1. This suggests that higher income groups have much more similar (and better) saving habits than lower income groups. It also suggests that workers don't stay on the bottom long enough to accumulate much, but some do.
Similarly, the ratios of top/bottom medians is 192 whereas the ratios of top/bottom means is just 25. This suggests that the wealth gap is largely self-inflicted by lack of saving in the lower income groups where saving was clearly possible (as shown by the mean data).
What Can be Done?
The (liberal) politicians will try to fix this by punishing earners above the inflection point of the power-law distribution curve because, hey, that's where the money is, right?
The (liberal) politicians will try to fix this by punishing earners above the inflection point of the power-law distribution curve because, hey, that's where the money is, right?
This is a slippery slope since power-law curves are scale invariant.
The formula for a Power Law distribution is f(x) = Kx^-α. The constant K essentially represents the total money supply. The exponent α represents the complex economic behavior of society as a whole.
This stuff makes my head hurt but the idea is that the final curve looks just like the original, sort of like fractals. I plotted a few variations of this equation to see what happens.
The basic curve is shown in blue with K=1, and the exponent α=-1. The vertical axis shows wealth and the horizontal axis shows population; few have a lot and many have little.
Scaling the curve by a constant (red curve, K=1.2) adds more to the left (the top 20% get $3.4 trillion while the bottom 80% get $1 trillion based on the CRS table) than it does for the right (the poor) even though everyone gets a 20% boost.
I'd guess that all of the money printing of the last decade has served to widen the wealth gap by artificially inflating the money supply.
I'm no economist but I'd also have to guess that raising the minimum wage would have the same effect since it also inflates the money supply artificially; wage increases lead to cost increases lead to price increases which lead to larger revenue all around; a good argument against raising the minimum wage.
Reducing the exponent from α = -1 to α = -0.8 (green curve) has the intended effect of increasing the height of the right tail portion, increasing the relative wealth of the poor. This curve actually has a pretty good fit to the actual gross income distribution in the US; if an income of '1' is normalized to the $900,000 (projected gross income from adjusted gross income) of the top 1% then a minimum wage earner at $15,000 is at the bottom. $150,000 at the 10% mark also fits nicely.
Making α = 0 makes the curve totally flat; the socialist's ideal. However, the exponent in nature is typically between 1 and 3 for wealth distributions. Having an exponent of 0.8 is actually pretty good for an inventive, entrepreneurial society like ours (see section 1.2.1 in the hyperlink).
I suspect that since the exponent doesn't naturally go much below a value of 1, this is the reason for the graduated tax brackets; they serve as a shovel to move cash progressively from the head to the tail.
The problem is that most of the shoveled money (except for Social Security and Medicare) lands at the curved section between the head and the tail in the form of government employee salaries, benefits and pensions; bloat.
What Else?
A couple of things come to mind.
The first thing is that there is no natural way to get a flat curve; and it would not be desirable since it takes away the incentive for excellence.
The second thing is that since poor people retire on Social Security and Social Security savings cannot be transferred between generations by inheritance, it is difficult for poor families to move from the tail to the head over time.
The third thing is that society encourages spending over saving. The Congressional Research Service table above shows that this alone can increase the wealth (wealth is the accumulation of assets) of the lowest earners by roughly a factor of 20 or more.
My own analysis shows that a minimum wage worker can accumulate more than $150,000 with just 5.25% more than Social Security (17.65% total savings) in a 3% interest account; this is the current mean net worth of someone in the 50th percentile.
The formula for a Power Law distribution is f(x) = Kx^-α. The constant K essentially represents the total money supply. The exponent α represents the complex economic behavior of society as a whole.
This stuff makes my head hurt but the idea is that the final curve looks just like the original, sort of like fractals. I plotted a few variations of this equation to see what happens.
The basic curve is shown in blue with K=1, and the exponent α=-1. The vertical axis shows wealth and the horizontal axis shows population; few have a lot and many have little.
Scaling the curve by a constant (red curve, K=1.2) adds more to the left (the top 20% get $3.4 trillion while the bottom 80% get $1 trillion based on the CRS table) than it does for the right (the poor) even though everyone gets a 20% boost.
I'd guess that all of the money printing of the last decade has served to widen the wealth gap by artificially inflating the money supply.
I'm no economist but I'd also have to guess that raising the minimum wage would have the same effect since it also inflates the money supply artificially; wage increases lead to cost increases lead to price increases which lead to larger revenue all around; a good argument against raising the minimum wage.
Reducing the exponent from α = -1 to α = -0.8 (green curve) has the intended effect of increasing the height of the right tail portion, increasing the relative wealth of the poor. This curve actually has a pretty good fit to the actual gross income distribution in the US; if an income of '1' is normalized to the $900,000 (projected gross income from adjusted gross income) of the top 1% then a minimum wage earner at $15,000 is at the bottom. $150,000 at the 10% mark also fits nicely.
Making α = 0 makes the curve totally flat; the socialist's ideal. However, the exponent in nature is typically between 1 and 3 for wealth distributions. Having an exponent of 0.8 is actually pretty good for an inventive, entrepreneurial society like ours (see section 1.2.1 in the hyperlink).
I suspect that since the exponent doesn't naturally go much below a value of 1, this is the reason for the graduated tax brackets; they serve as a shovel to move cash progressively from the head to the tail.
The problem is that most of the shoveled money (except for Social Security and Medicare) lands at the curved section between the head and the tail in the form of government employee salaries, benefits and pensions; bloat.
What Else?
A couple of things come to mind.
The first thing is that there is no natural way to get a flat curve; and it would not be desirable since it takes away the incentive for excellence.
The second thing is that since poor people retire on Social Security and Social Security savings cannot be transferred between generations by inheritance, it is difficult for poor families to move from the tail to the head over time.
The third thing is that society encourages spending over saving. The Congressional Research Service table above shows that this alone can increase the wealth (wealth is the accumulation of assets) of the lowest earners by roughly a factor of 20 or more.
My own analysis shows that a minimum wage worker can accumulate more than $150,000 with just 5.25% more than Social Security (17.65% total savings) in a 3% interest account; this is the current mean net worth of someone in the 50th percentile.
Of course, nobody should really have to work for minimum wage for their whole career but the point is that this is well above the mean in the Congressional Research Service table and would represent a major closure of the wealth gap.
Making this wealth transferable by inheritance would be highly desirable. Currently, many workers pay more into the system than they will receive in benefits. The benefit for a lifetime minimum wage worker would be less than $300/month ($3,600/year); a $54,000 payout over the expected 15 years. Compared to the $83,000 paid in, you'll see my point.
Spending by the rich is as good for closing the gap as saving by the poor; and better than government confiscation and redistribution since demand is created, giving a non-artificial boost to employment and wages.
The fourth thing is regressive taxation that hurts low wage earners disproportionately; sales taxes, fuel 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 $2,500 per year, $1,000 in yearly fuel tax is huge (fuel taxes average $1/gal). That hurts!
A low-to-middle wage family with a car of 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.
If this money were saved directly instead of collected as tax and redistributed by inefficient means, it would have a huge impact (60% or more) on the wealth of low income households.
Summary
The wealth gap in America is big because the income gap is big; the ratio of the income of a bottom-of-the-top 1% earner to a minimum wage earner is 60:1.
The gap is a well-known phenomenon and is probably driven by innovation and entrepreneurial spirit.
The actual gap, while undeniably large, is a great deal smaller than advertised by liberals; Wolff shows the bottom 40% at 0.2% while the Congressional Research Service table show 3.3%, a ratio of 16.5:1.
The easiest and most efficient remedy is for low wage earners to save more and be able to pass their wealth to their heirs.
Regressive taxes like fuel, sales and property taxes exacerbate the phenomenon by taking discretionary income away from what could be saved.
Scaling the currency supply has no positive impact on the wealth gap; printing money at the Federal Reserve and raising the minimum wage have the same negative impact; the wealthy benefit by a 3.4:1 margin.
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