Social Security is bankrupt or vital, depending on whom you ask

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Given that the only one who can accurately estimate the true cost of paying Social Security benefits is God (since only God knows exactly how long each of us, including the yet-to-be-born, will live), it isn’t surprising that people would differ on whether or not Social Security is solvent.

What is kind of interesting is that we can find this difference of opinion within one book: Get What’s Yours: The Secrets to Maxing Out Your Social Security.

The book has three authors. One is a professor of economics at Boston University. He says that the system is broken and bankrupt:

Our Social Security system is a disgrace, not in its objectives or in the tremendous help it has provided older people over the years, but in the way it’s been designed and the way it’s been financed. Its complexity is beyond belief. The formula for the Social Security benefits of a married spouse involves ten complex mathematical functions, one of which is in four dimensions! It leads all kinds of people to make all kinds of mistakes in deciding when to take benefits and what benefits to take. And the good folks at Social Security will far too often tell you things that are one hundred percent untrue with one hundred and fifty percent conviction.

Democracy is collective choice by the people. But having indecipherable institutions, be they our Social Security system, our tax system, our health-care system, or our financial system, deprives the people of the knowledge they need to make choices. Instead it leaves social choice not to the people but to the bureaucrats, who get to decide what’s best. The way the new Social Security law was passed is about as good an example as one can have of the incredibly nondemocratic processes that suffuse “America’s democracy.” I say bureaucrats rather than elected officials because our representatives are also at the mercy of the bureaucrats. Indeed, there is, I’d wager, not a single member of Congress with detailed knowledge of Social Security’s 2,728 rules or its tens of thousands of rules about those rules. And when it comes to Social Security, the big picture is the sum of all the small pictures.

Radical change in our Social Security system is inevitable for the simple reason that the system is broke—indeed, in worse fiscal shape than Detroit’s pensions when that city declared bankruptcy. My evidence for this? It’s the $26 trillion infinite-horizon fiscal gap shown in table IVF1 of the 2015 Social Security Trustees Report. This present value shortfall is net of the system’s trust fund and is almost $1 trillion larger than the system’s fiscal gap reported in 2014. The table shows that Social Security is 31 percent underfunded.

The economics labeling problem is the reason that the Inform Act has been endorsed by more than 1,200 economists, including 17 Nobel laureates (see www.theinformact.org ). The Inform Act mandates infinite-horizon fiscal gap accounting by government agencies for the entire fiscal enterprise. My own estimate based on the Congressional Budget Office’s Alternative Fiscal Scenario Projections puts the country’s overall fiscal gap at $199 trillion for 2015. This is 53 percent of the present value of all future federal taxes, so our federal government, taken as a whole, is 53 percent underfunded. Stated differently, we need a 53 percent hike in all federal taxes to permit our federal government to meet all its expenditure commitments. And if one focuses just on Social Security, the requisite immediate and permanent Social Security FICA tax hike to ensure that Social Security pays all scheduled benefits is 31 percent!

The less our generation pays, the more your kids and grandkids will have to pay; mine, too. And we are moving full speed ahead to leave our kids and grandkids with fiscal bills that are far, far beyond their capacity to pay.

The other two authors are journalists and they are quite sanguine about the system; it just needs a couple of tweaks:

even the darkest official forecast still assures people as young as 18 today something like 75 percent of the paychecks their elders are currently receiving. Official forecasts, however, are deeply misleading. That’s because they rely on the notion that there’s a Social Security “trust fund” that is running out of money; that a so-called Social Security lockbox has been “raided” to pay for other expenditures. Such palaver is misleading, if not arrant nonsense. First of all, the so-called trust fund is an accounting fiction: the money supposedly stashed away for future generations is nearly $ 3 trillion worth of U.S. government bonds— Uncle’s Sam’s IOUs that he gives as a legal promise to pay back what he’s borrowed.

Many of us will give a little. Some will give more than others— presumably Americans who earn enough not to need Social Security’s checks. There will be a huge outcry, as there always is when people are asked to pay more or get less.

if we changed, starting in 2021, the way in which benefits are indexed— from using average wage growth to using inflation as the basis— the actuary reports that we would not only wipe out the entire Social Security deficit over the next 75 years but in fact build a substantial surplus. Indeed, even over the infinite time horizon Larry favors, 89 percent of the deficit would be eliminated by this one change alone.

Alternatively, according to the actuary, we could increase the normal retirement age three months per year starting for those aged 62 in 2017 until it reaches 70 in 2032 and increase it one month every two years thereafter. Deficit reduction? Sixty percent over 75 years; 48 percent, infinite horizon.

Larry has interesting ideas for replacing Social Security with a fairer and better program. They’re never going to happen. We’re not going to replace an eighty-year-old program that has become an enormous bureaucracy, with rules to match, and that touches the lives of virtually every American.

 

Only someone with a crystal ball can say who is right, of course. Certainly Detroit had plenty of actuaries who signed off on its fiscal vitality. The last word from the economist:

Yes, Paul, I know you and Phil feel this will never happen and that small adjustments will be made and that all will be fine. This is Panglossian in the extreme, as a quick glance at Argentina’s century-long economic decline confirms. Yes, things that can’t go on will stop. But they will stop too late. The fact that the Social Security actuaries raised their, not my, measure of the system’s unfunded liability by almost $1 trillion in one year shows how quickly things are changing and why small, slow changes won’t work any better for Social Security than they did for Detroit.

More: Read  Get What’s Yours: The Secrets to Maxing Out Your Social Security.

Related:

Society Security and our world of no-fault divorce

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Social Security was set up so that a married couple that put $X in would get more cash than a single worker who put $X in (see Social Security: How do you run a retirement system for people who spend like drug dealers? for how this tends to make Social Security a system that takes from the poor and gives to the rich; part of how we tax the rich more heavily than almost any other country, but don’t really help the poor).

Back in 1935 when Social Security was established, however, Americans couldn’t envision the world of no-fault (“unilateral”) divorce that would be established by 1980 in nearly every state (see “History of Divorce”).

What happens when you combine Social Security with a no-fault, no-shame divorce system? Get What’s Yours: The Secrets to Maxing Out Your Social Securityexplains:

Social Security provides incentives, sometimes very strong incentives, to change your marital status. There are, depending on your circumstances, reasons to get married, reasons to stay married, and incentives to divorce, to remarry, and not to remarry. These decisions hinge on many factors, of course. But play your Social Security marital status cards right and it can mean making or keeping more money, and, in some cases, a lot more money. Play them wrong and you can get seriously singed for the rest of your life.

It turns out that, for Americans who get divorced, the median length of first marriages—the length of time by which 50 percent of them end—is 8 years. That means more than half of the divorced may be making a big, if not huge, financial mistake with regard to future Social Security benefits, especially our female readers. Women currently file roughly two-thirds of divorce cases in the United States, but women are the prime beneficiaries of sticking out a marriage for 10 years. The simple fact is that you need to stay married 10 years and not a day less to be able to collect divorced spousal and divorced survivor benefits as an ex. So, we caution you not to officially unhitch before a decade’s up without at least considering these costs.

The new [Obama-era] law encourages divorce, as we’ll explain in Chapter 11. It’s true that Paul and Jan would have benefited had they gotten divorced, because each could have taken spousal benefits on the other’s record. But the way the law reads now, the only way for same-aged couples who were 62 by January 1, 2016, to do what Paul did (collect a full spousal benefit while waiting till 70 to take his retirement benefit) is to get divorced two years before they reach full retirement age—an amicable divorce (amicable to the point of intimate, even). Then, after six years of equally amicable cohabitation, they can reunite, maybe even throw a new wedding to celebrate. Want to guess how much they could afford to spend on the event just from having collected spousal benefits on each other for the four years between full retirement age (66) and age 70? If both were top earners, $128,000 in 2016 dollars. If they were not top earners, but getting only the average benefit these days—$15,000 a year—they would still have collected $60,000 over the four years.

People who divorced after being married for 10 or more years—and thus became eligible for ex-spousal benefits—have an advantage over married couples under the new law, provided they are grandparented against post-FRA deeming. If they were at least 62 before January 2, 2016, they can file for a full ex-spousal benefit when they reach their FRA and then wait till 70 to collect their retirement benefit, which will have grown all the while. They can do this only if their ex is at least 62 and they’ve been divorced for two years when they do this, or if their ex already is receiving retirement or disability benefits or has filed for retirement benefits and suspended them. So then does it pay to get divorced?

As before, Gene and Joan were both too young to file and suspend before the end of April 2016. But, being 62 before January 2, 2016, they are both grandparented so that neither will be deemed when they reach FRA. If they remain married, as we’ve said, one will have to file for their retirement benefit earlier than 70 to enable the other to file a restricted application just for spousal benefits, while letting their own retirement max out until age 70. However, as we suggested in Chapter 1, they could cook up some irreconcilable differences and get divorced at age 64. Then, at age 66, each could collect full divorced spousal benefits on the other’s work record while letting their own retirement benefits grow. If they were very high earners, this could mean $120,000 more just for getting divorced. After 70, they could reconcile those irreconcilable differences and remarry. Meanwhile, between 64 and 70, they could remain together. If anyone asks why, they could say they were attempting to patch up their relationship.

THE THIRD INCENTIVE IS A PERVERSE ONE: TO GET REMARRIED EVERY DECADE Having been married for a decade, once you get divorced, you retain the right to potentially collect divorced spousal and divorced survivor benefits from your ex’s work record. After being married for a decade, staying married won’t increase what you can receive based on your spouse’s earnings, whether dead or alive. So, the gold diggers out there might consider shopping for a second spouse, preferably a high-earning one, to marry for a decade and then divorce. Social Security generally won’t let you collect more than one benefit at a time. But if you have multiple exes on whom you can collect, you can collect on the one who provides the highest benefit available at any given time. Will getting remarried and staying remarried wipe out your ability to collect spousal and survivor benefits on your prior spouse’s work record? Yes, when it comes to divorced spousal benefits; no, when it comes to survivor benefits, provided you remarry after 60. And if you remarry before 60 and an ex dies, you can get divorced if it pays to receive a survivor benefit from that first ex. Then you remarry after turning 60.

And one of the best parts of spouse-hopping is this: when you start collecting early on a different former spouse’s work record, Early Retirement Reductions from taking benefits on another spouse at an earlier date don’t carry over, as we will illustrate shortly.

Why would anyone not want to remarry? Because remarrying wipes out your ticket to divorced spousal benefits on any ex’s work record to whom you were married for at least a decade. Remarrying before age 60 also wipes out your eligibility for survivor benefits on any deceased former spouse’s work record for as long as you stay remarried. So be careful before you strategically remarry.

A group of people who stay married will receive less cash from the government than a group that divorces:

Divorce Benefits Are Not Subject to the Family Maximum Benefit Benefits to divorced ex-spouses are not restricted by the FMB and don’t affect what your current spouse and children can receive. This secret means that the spousal benefit for your divorced ex-spouse may be higher than for your current spouse.

How can it work in practice?

It is time at last for the story of William H. Gigolo, our hypothetical master of Social Security’s marital status game. He worked not a day in his life (so any excess spousal benefit will also be a full spousal benefit), but instead lived off the relatively high earnings of three lovely ex-wives—call them Sarah, Sally, and Suzie. In each case, William waited until their 10th anniversary, chose a romantic restaurant, and over dessert, announced he was filing for divorce. Positing William as a sociopath, we picture him pleased to have lived off successive exes and helped himself to half their assets thereafter. Now 62 and single for 2 years, he remains attractive to women,

Since a wife has to be at least 62 for the husband to collect spousal benefits, William was careful to marry at least one ex older than himself. This ex, Sarah, is 64 and the lowest earner. The next-highest earner is Sally, 60. Suzie is only 56, but she’s earned more than the others. To maximize his lifetime Social Security benefits, William files for a divorced spousal benefit at 62 and starts to collect half of Sarah’s full retirement benefit, although reduced by 30 percent because he takes it early. Then, after 2 years, when Sally turns 62, William files for a divorced spousal benefit based on her earnings record. And why not? Since he’s now eligible to collect on two exes, he can file for benefits on both. He won’t get two divorced spousal benefits—just the larger of the two. But since Sally’s full retirement benefit is larger than Sarah’s, he gets hers. And here’s another advantage from William’s perspective: he’ll be able to collect half of Sally’s full retirement benefit, but it will be reduced by only 13.3 percent, not 30 percent! Why? Because William is now 64 and his early claiming reduction is smaller; that is, the reduction in a spousal benefit from claiming early does not carry over from one ex to another. Yes, he claimed 4 years early (before his FRA) on the divorced spousal benefit provided by Sarah, but he is doing so only 2 years early on the divorced spousal benefit provided by Sally. So far, so good, as long as you have no scruples. We have already stipulated that William doesn’t. So his cash-out plan is working. And here’s a yet more perverse part three. When Suzie reaches 62 and William hits 68, he can start collecting a completely unreduced divorced spousal benefit on Suzie’s heftier earnings record since he doesn’t start collecting this particular benefit (which exceeds the other two) until or after he reaches his FRA. (In William’s case it’s after.) Is William done with his optimization? Not necessarily. Let’s fast-forward to his 70th birthday and suppose that Sally, who waited until FRA to start collecting her benefit, dies. Sally’s full retirement benefit, while lower than Suzie’s, exceeds the half of Suzie’s on which William has most recently been collecting. So William can now file for and begin collecting a completely unreduced divorced widower benefit on Sally’s record. That benefit would be equal to 100 percent of Sally’s full retirement benefit. Fast-forward again. William is now 76 and Suzie dies, having also waited until FRA to collect her retirement benefit. What might William do? He files for an unreduced survivor benefit based on Suzie’s earnings record. Fast-forward one last time. William is now 88. He’s met a very lovely 94-year-old named Sandra, who earned more than any of the exes and is on her last legs. William realizes that he can marry Sandra and, after 9 months, qualify for survivor benefits on Sandra’s earnings record. He whisks Sandra off to Las Vegas for a quickie marriage and, 9 months to the day after their nuptials, Sandra falls and breaks her hip. Her last leg gives out. So does the rest of her. William leaves the funeral early in order to get to the local Social Security office before it closes and file for a full (unreduced) widower benefit on Sandra’s account. This appears to be William’s last Social Security play, but who knows? He’s still got his looks and, as you read this, he’s on Match.com checking out his options. Considering that there were 3.2 million women aged 85 and older in 2012, and only 1.8 million men of those ages, William’s pickings are far from slim.

One of the authors says this whole system has developed too many special cases. Certainly the designers don’t seem to have imagined the day when Americans would be marrying or divorcing with an eye to the cash incentives. The author says that we could scrap it and replace it with a system like New Zealand’s, which “has one rule: you reach retirement age and you get a monthly check—the same check as everyone else.” Instead he advocates a system that is more like Singapore’s (TIME article).

What’s the downside of keeping what we’ve got?

… you can add health care to the list of essential components of an advanced society that are increasingly too complicated to be understood by the public they are supposed to serve. Such is the nature of national government. It is a major failing of the United States. It is a source of rising public anger and disaffection toward government that weakens our democracy and provides oxygen to the fires that are stoked by antigovernment extremists. It debases political discourse and puts needed political compromises out of reach. This situation is not about the welfare state, nor is it an indictment of the aims of these programs. It is an inescapable truth of complexities—of the systems we’ve built to govern ourselves, of the technology that has evolved to do so, and of the underlying challenges our social, economic, and political problems present.

More: read Get What’s Yours: The Secrets to Maxing Out Your Social Security

Related:

Why do young people passionate about diversity choose to go to non-diverse colleges?

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There is nothing that students at top schools love more than (a) denouncing Charles Murray for purportedly writing about a correlation between race and IQ, and (b) celebrating the merits of studying among a diverse student body (therefore we need affirmative action programs). Yet  “Even With Affirmative Action, Blacks and Hispanics Are More Underrepresented at Top Colleges Than 35 Years Ago” (nytimes) shows that they have chosen to attend schools where (a) the admissions officers behave as though they agree with the race-IQ thoughtcrime, and (b) they are unlikely to see a non-white/Asian student.

If these good-hearted young people are as passionate about diversity as they say, why didn’t they choose to save a ton of money and attend a state-run school whose student body is more representative of the American population (which leaves open the question, still, of whether to count up all Americans and sort by skin color or to look at the population of 18-year-old Americans)?

Bye Aerospace claims to be able to make a 3-hour electric airplane

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The founder of Bye Aerospace has written an IEEE Spectrum article about a 2-seat 3-hour trainer: “Cheaper, Lighter, Quieter: The Electrification of Flight Is at Hand”

I’m skeptical that this small company, founded in 2007, can do what has eluded Airbus and Pipistrel. But the editors of Spectrum are supposed to know stuff about electricity. So maybe this isn’t crazy.

It starts with a huge weight savings on the engine:

You rev the motor not with a throttle but a rheostat, and its high torque, available over a magnificently wide band of motor speeds, is conveyed to the propeller directly, with no power-sapping transmission. At 20 kilograms (45 pounds), the motor can be held in two hands, and it measures only 10 centimeters deep and 30 cm in diameter. An equivalent internal-combustion engine weighs about seven times as much and occupies some 120 by 90 by 90 cm.

Then there have been big improvements in batteries, supposedly, since 2007:

Bye Aerospace has worked with Panasonic and Dow Kokam; currently we use a battery pack composed of LG Chem’s 18650 lithium-ion batteries, so called because they’re 18 millimeters in diameter and 65 mm long, or a little larger than a standard AA battery. LG Chem’s cell has a record-breaking energy density of 260 watt-hours per kilogram, about 2.5 times as great as the batteries we had when we began working on electric aviation. Each cell also has a robust discharge capability, up to about 10 amperes. Our 330-kg battery pack easily allows normal flight, putting out a steady 18 to 25 kW and up to 80 kW during takeoff. The total energy storage capacity of the battery pack is 83 kWh.

A little fantasy doesn’t hurt:

Should something go wrong with the batteries in midflight, an alarm light flashes in the cockpit and the pilot can disconnect the batteries, either electronically or mechanically. If this happens, the pilot can then glide back to the airfield, which the plane will always be near, given that it is serving as a trainer.

This isn’t true even for pattern work at a typical busy training airport where the control tower might say “extend upwind two miles.”

Illustration of how it never works to tell people to calm down

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As far as I have seen, saying “calm down” is nearly always a waste of breath. ” “Trump Isn’t a Threat to Our Democracy. Hysteria Is.” (nytimes) and associated comments illustrate this principle nicely.

The authors, eggheads from Yale and Oxford, saying “calm down”:

The sky is not falling and no lights are flashing red, but Americans have nonetheless embraced a highly charged, counterproductive way of thinking about politics as a “new Cold War” between democracy and totalitarianism.

History raises serious doubts about how helpful this tyrannophobic focus on catastrophe, fake news and totalitarianism really is in dealing with the rise of the populist right, of which this bumbling hothead of a president is a symptom.

If there is one lesson from the 20th century worth learning, it is that an exclusive focus on the defense of liberal fundamentals against a supposed totalitarian peril often exacerbates the social and international conflicts it seeks to resolve.

Reader comments, picked by the NYTimes editors:

Democracy purposefully corrupted in so many different ways put Trump in power.

Seeing the threat that Trump is to democracy is a rational conclusion to rational analytical thought.

Word salad dressed up as coherent thought. Trump IS a threat to our democracy and to dismiss everyone who sees it as being hyperbolic is disingenuous . You can’t ignore how millions of people feel.

No, Trump and his enablers have not yet declared themselves our forever rulers. But they are taking steps to undermine the government and our system of the systems of checks and balances.

Some reader comments, upvoted by other readers:

Democrats are united in wanting a fairer distribution of the economic pie. The Republicans are not. They are the tyranny.

And what of the recent reported survey findings that more than half of self-identified Republicans would support suspension of the 2020 presidential election until the country could fix the mythical voter fraud problem

I would rather err on the side of fighting tyranny now, rather than regretting its implementation later. As an earlier commentator observed – of course, panic and hysteria are bad. But anyone paying attention to the current state of democratic institutions in the USA should be alarmed. Perhaps the authors of this piece have not been paying attention.

All-gender restroom sign for aircraft?

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Given the crazy prices that one can charge for anything aviation-related, how about this brilliant idea for making money: “all gender restroom” signs for aircraft.

The big market is, of course, airlines, but one could also sell them to the bizjet and turboprop crowd.

[Here’s an example from the San Diego Airport (KSAN), which I used for a recent Facebook post: “I’m so old I remember when the palm tree was the symbol of California.”

]

What’s interesting about the iPhone X for photographers?

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The “telephoto” camera is finally more than a gimmick on the iPhone X? What else is improved for photographers on this new phone? Apple didn’t go for a bigger sensor or do anything else dramatic, did they?

Coffee in Lisbon (Avenida Palace) next Tuesday, September 19?

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I’ll be in Lisbon next Tuesday, September 19. Meet for coffee at the Avenida Palace at 5 pm? If interested, please add a comment to this posting. I will have limited email access, but should be able to check this site on Tuesday morning.

How to get news from old people for whom nothing ever changes

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I recently completed a five-year term as Secretary of the MIT Class of 1982.

Our new Secretary emailed to ask for “tips on extracting information from classmates” and “Did you ever target specific individuals?” Here was my response:

Thanks for stepping up.

A good salesperson doesn’t hear the first three times the prospect says “No.” So I think you may want to send out at least 2-3 emails between issues.

Also, people are much better at reacting than generating content. If you ask someone “What’s new?” the invariable answer is “Not much.” If you tell them about going to see Wonder Woman, though, they start talking about the last time that they went to the movies, what they saw, etc. Or maybe they saw Wonder Woman and had some reactions. You saw that every now that I then I had to bring out the big hammer and mention Trump 🙂 [though I myself am pretty much indifferent to federal politics]

I thought that it helped to have themes for various issues. That way people can pipe up with “Kid X graduated College Y” but others can share life wisdom. Since we’ve reached the age where not too much changes, instead of searching for conventional news of changes think of yourself as a sociologist with a group that you’re following. Can you figure out if it is better to live in the U.S. or a different country. Is it better to live in the country or city? Are people happier if they have kids or don’t have kids? Is it better to be married and divorce than never to have been married at all? What happens when someone tries to get a new job at age 60? What is it like to go back to school at age 60?

I didn’t try the individual email approach, but the group of people who actually care is small enough (e.g., the ones who showed up at the reunion) that yours is probably a good idea. People can’t not respond on the theory that someone else will.

[How have times changed since 1982, other than the Wisconsin glaciation having receded from the MIT campus? Tuition was around $5,000 per year when our class started. The acceptance rate for people who applied to join the Class of 1982 was roughly 50 percent. Freshmen entering this fall will pay $50,000 per year in tuition. They had less than an 8 percent chance of being accepted.]

Related:

9/11 reading list

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Sixteen years after 9/11 and we are still at war. Here are a couple of books that I have read recently that are relevant…

Hue 1968: A Turning Point of the American War in Vietnam, by Mark Bowden. The book is about more than the one battle. There are excellent introductory chapters putting the entire conflict into context. According to the author, we were on the wrong side the whole time, opposing the democratic will of the Vietnamese people. We fooled ourselves with wishful statistics. Our Air Force was plainly useless against an agricultural society. Eventually Robert McNamara figured out that we were losing and, despite having been a primary author of the war under both Kennedy and Johnson, admitted it. He was then fired by Lyndon Johnson for “having gone soft.”

Conquerors: How Portugal Forged the First Global Empire, by Roger Crowley. One of the smallest and poorest European powers blunders around Africa and into the Indian Ocean and Red Sea. This was the first modern conflict between Islam and the West and, thanks mostly to superior skills with artillery, the West came out ahead. The lack of understanding between Western Europeans and the rest of the world was already well-developed. When the Portuguese arrived in India and were taken by a Hindu prince to a Hindu temple, for example, they thought that they were being hosted by a Christian and taken to worship in a variant of Christianity.

Readers: How are you marking this sad anniversary? Or at least what are your thoughts and reflections?

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