June 11, 2005
The Wizard's News
June 11, 2005From the Wizard....
The Wizard's take on social security reform
Bluejay's intro: The Wizard has been strict about keeping politics off of WizardOfOdds.com, but I've been pressuring him for a long time to write about Social Security reform because he's uniquely qualified to do so. He's not only an expert on the subject but he's also fair and evenhanded, and not biased towards any political party. I insisted that our readers would appreciate the benefit of hearing his thoughts on the matter, and he ultimately agreed. I'm excited now that we're able to bring you an analysis that's not only informed but also trustworthy. So without further adieu, take it away, Wizard!
Normally the Wizard of Odds is an apolitical website. I certainly am for legalization of gambling but that is about as far as I've let the site get politically. However after eight years I'm going to break with tradition and offer an opinion on something that has little to do with gambling.
Before I was the Wizard of Odds I was an actuary from 1992 to 2000 at the Social Security agency headquarters in Baltimore. The Social Security actuaries are the ones who keep track of when Social Security will run out of money, among many other things. Personally I was a short-range actuary. My job was largely to determine the effect that congressional legislation had on trust funds. Whenever anyone in Congress wanted to change Social Security there was a good chance I was the one who calculated how much the change would cost or save over a period of 5 to 10 years. I was heavily involved in two big changes during the 1990's, the increase in the tax on benefits for high earners, and the phase out of the earnings test for those over 65.
I knew the long-range actuaries well and tried my best to transfer to their division. There was talk of an opening for an actuary to be largely devoted to the issue of private accounts, and I made my interest known that I wanted to be that actuary. However a couple big retirements in my own unit kept me where I was. Management felt they couldn't afford too much turnover in my unit in a short time, and I can't blame them. Stuck where I was I felt bored and frustrated, which eventually resulted in my resignation so I could pursue building my website and consulting on gaming math. Had things turned a little differently in the year 2000 I may have become the Wizard of private Social Security accounts instead of the Wizard of Odds.
It is very difficult for me to write briefly about the whole big enchilada of Social Security long-term financing and private accounts. I used to spend weeks on internal memos on topics affecting very small groups of beneficiaries. I have strong feelings about the topic, am well qualified to address it, and have a captive audience (you). However it pains me to briefly address I topic I could write 100 pages about.
First let's review some numbers from the 2004 Trustees Report, which my fellow actuaries produce once a year.
- Year in which monthly benefits will exceed monthly tax revenue: 2018
- Projected date trust funds are exhausted: 2042
- Tax increase necessary to ensure solvency over 75-year period: 1.89% of taxable payroll
- 75-year projected shortfall in revenue: $3.7 trillion in 2004 dollars.
- 2003 benefits paid: $479 billion
- 2003 tax revenue: $632 billion
- Average interest earned on trust funds in 2003:
Basically, Social Security is a "pay as you go" system. Most money that comes in goes right back out to somebody else. Currently more money comes in than goes out. The difference is invested in interest-earning government securities. While things are fine today there is a huge long-term crisis approaching. The baby-boomers are nearing retirement age and life expectancy continues to increase. There are currently 3.3 workers supporting each 1 Social Security recipient, but this ratio is projected to decline to 2.0 by the year 2040 under intermediate economic and demographic assumptions, and to continue to decline after that.
It is a good thing we are taking in more than we need now to prepare for the rainy day we know is coming, but it isn't enough. As I quoted above we would need to increase the Social Security tax by 1.89% now to be solvent for a 75-year period. We've known about this problem for years but nothing substantial has been done since the Reagan administration. At the time Reagan phased in tax increases and increased the retirement age, but it wasn't enough. Since then commissions have studied the problem during the first Bush and Clinton administrations, but it was mostly just lip service. I do applaud Clinton for finally phasing out the earnings test for beneficiaries age 65 and over, which is another topic but something I strongly agreed with doing.
Social Security is so huge it can't be looked at without considering the entire national economy. Although there was $1.53 trillion in the trust funds at the end of 2003 it could be argued that the money does not really exist. When it comes time to cash in those bonds and securities the money does not exist to just hand out. Taxes will have to be increased at the time, less money spent on other things, or we'll have to borrow more. The big picture here is that right now the baby boomers are at the peak of their earning potential, and the number of Social Security recipients is relatively small. This is the time that as a country we should be preparing for the future by paying down the national debt and building up a surplus for the day when there will be only two workers for every one beneficiary. Yet what are we doing? We continue to spend more than we take in, adding to the debt, at precisely the time while we are young, strong, and should be running a surplus. We did have a surplus during many of the Clinton years, but alas no longer.
I applaud President George W. Bush for taking a big political risk and actually making this topic a priority. However I disagree that his proposal of private accounts, presumably largely invested in stocks, is the answer. If we let workers move some of their Social Security taxes into private accounts that would leave a shortfall in terms of paying existing benefits. As I said before we have a pay as you go system. Another problem is that Social Security was never meant to be entirely a "money's worth" program. It is no secret that it is welfare-weighted, giving low-income workers a much better rate of return than high-income workers. If you let people partially opt out of the current system it will be mainly the higher earners that do so. That will leave another shortfall. Simply put, the rich subsidize the poor when it comes to Social Security. The poor generally get more than they put in. If you let the rich partially opt out then who will subsidize the poor?
What will probably happen if we allow private accounts is the government will have to raise taxes or borrow even more to make up for the shortfalls in order to pay current recipients. Ultimately the private accounts probably will have a better rate of return for high earners than the existing system. However all that extra income will ultimately go towards paying more in taxes to subsidize those without private accounts, so those who get the private accounts won't really wind up with more money than they're getting now with the current system.
Let's also not think of the stock market as such a great investment that it's a panacea. Stocks returned only 7.8% from 1926-2001 without dividends reinvested. Social Security trust funds are already making 6.0%, which frankly isn't bad. However even if stocks were a much better investment, there is only so much of that to go around. If private accounts start competing for stocks it will drive out other investors. Ultimately stocks will only make or lose so much money, it is just a question of who will whether you give the proceeds to Peter or Paul. If the government didn't have a huge debt I wouldn't oppose investing some of the trust funds in stocks. However the rest of the federal government needs to finance their deficit spending from somebody, so we may as well borrow from Social Security. To do otherwise would be like borrowing to play the stock market, which is ill-advised for the average person, and thus should be ill-advised for the country at large.
Ultimately, the wealth of the country is mainly a function of how much in goods and services we produce. Private accounts will not cause anybody to work harder or longer. In fact I predict we will work even less as a country as we waste time on the job checking how the stock market is doing and another big bureaucracy will be created to run the accounts. Private accounts will simply be a shell game of moving money around. It does not address the long-term crisis we face as a country as the average age continues to increase.
There is no easy solution to the problem. We simply need to reduce benefits, increase taxes, or a combination of both. The sooner we do something the less painful it will be. Personally I favor a balanced approached, featuring an increase in the retirement age, smaller cost of living increases, and a modest tax increase. This I feel is a way to distribute the pain fairly. We don't need to come up with a completely new scheme; changing a few numbers in the existing system is all the fixing that we need. Let's do something now rather than continue to postpone the problem.
I wrote the above commentary on March 15. At the time I never imagined that on June 11 we still would not have put out a newsletter. (Bad Bluejay!) Since I wrote the above Bush proposed a plan to solve Social Security's long term deficit. His solution is to make the initial benefit (called the Primary Insurance Amount) grow more slowly, which is basically a way of cutting benefits. This would change how benefits grow starting now; all benefit growth that's already occurred would still use the old method.
The problem with this proposal is it unfairly puts the burden of long-range solvency on the young. According to the Washington Post, which quotes the Social Security chief actuary (whom I know well), those retiring in 2012 will only see a reduction in benefits of 0.9%, while those retiring in 2075 will see a 45.9% reduction.
To put it bluntly, the young are already screwed as they subsidize earlier generations through much higher tax rates and lower benefits. This plan only makes the inequity greater. The young should be mad as hell about this. This is a cowardly way of putting off the problem to younger Americans who for the most part have already lost faith in the program.
I at least give Bush credit for proposing something. Meanwhile the Democrats are obstructionists who will not even come to the bargaining table. My advice to the young is take the maximum advantage of employer matching contributions to a private retirement plan, Fruth IRA's, and any other such incentive. By the time you reach retirement age Social Security will be extremely watered down the way things are going. I'm just so mad about this I don't even want to talk about it any more!
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Wow, what a social security article, huh?! I certainly can't top that. But I can at least summarize it for those of you who got impatient and skipped to my section:
- The Democrats are wrong in saying that there's no social security crisis.
- The Republicans are wrong that private accounts are a solution to the problem, and their plan to index by the inflation rate is really unfair to younger workers.
- Social Security will go bust unless we reduce benefits, raise taxes, or a combination of both.
There, now we can all converse about this topic at parties like we know what we're talking about.
Anyway, I'm sorry there hasn't been a newsletter in several months. That's entirely my fault. But from now on I'm gonna make a concerted effort to get the newsletter out once a month at a bare minimum.
Hey, before I forget, the Wizard and I will be at the GIGSE convention in Montreal next week, so look for us if you're there.
Bluejay's Internet tip o' the month: Site-searching with Google
There's an easy way to tell Google to search on
just one website. For example, let's say you want to see
all the pages on Wizard of Odds that mention cheating.
It's easy, just go to Google and type in
site:Wizardofodds.com cheating. Ta-da! It's that
simple. Don't forget that you heard it hear first. Unless
you already heard it somewhere else.
What's new on the websiteThe Wizard and I have been busy as usual adding new stuff to the website and improving what's already there. There's too much to list it all so here are some highlights:
- Texas Holdem charts and calculators. Poker is all the rage these days and the Wizard is on top of it with some unique calculators and color-coded starting hands charts. Sometimes I think it's crazy that we give this stuff away for free.
- New sidebar menu. Now you can get to most anywhere on the site quickly and easily from any page, by using the handy menu in the sidebar.
- Expanded advertiser reviews I'm starting to review our casino advertisers along with the Wizard. Find out how I did the very first time I played poker for real money, and see how I blundered a generous promotion at Carnival Casino.