Friday, June 29, 2012

Social Security Reality: Summary Related to Old Age and Survivor Benefits.

Realities That Have to Be Addressed.

Social Security as enacted in the 1930s is obsolete.  Demographics and technology of the twenty-first century will have to be accommodated.  Planners need to face the facts.   The most important change is a need to address longer life expectancies and the longer work lives they necessitate.  Ten realities that should be addressed are:
(1) Planning for a twenty-first century retirement isn’t easy or fun, and many people don’t bother.  The framers of Social Security never envisioned a broad-based need for such plans.  People didn’t live that long.  There’s a need for financial education.  Not sophisticated stuff.  Just basics like the fact that Social Security isn’t an adequate retirement plan. 

(2) In response to the difficulty of planning a twenty-first century retirement (and politicians’ continual lying to the public about Social Security), most baby boomers are financially unprepared for retirement.  They’re providing for retirement as if their life expectancies are no longer than their grandparents’.  Perhaps things like the “catch-up contributions” to IRAs and 401(k)s should be mandatory.  Even making IRA contributions mandatory should be considered. Something as simple as an “opt-out” tax may be enough.
(3) The best available data indicate other generations aren’t doing any better at providing for their retirement.  Their behavior in terms of financial management resembles their parents’ at the same age.  They too are ignoring their longer life expectancies.  There “opt-out” taxes could be used to fund their longer retirements.

(4) The public is often misled into believing that someone else can fund their retirement.  They choose to ignore the fact that no subset of the public provides a reliable enough potential income stream to justify depending upon it.   Social Security deserves and needs reliable funding.  Everyone needs to contribute.
(5) Much of the population knows it isn’t preparing for retirement and refuses to address the issue.  Thus, whatever incentives and penalties are used, they have to accommodate their choice while ensuring that they experience the full impact of their choice at the time the choice is made.

(6) Many people are planning not to have to retire.  That is true of people approaching what traditionally was a retirement age.  Even those slightly younger or slightly older than a traditional retirement age are deciding whether to retire based on factors other than age. Social Security should accommodate that fact that people make choices based on their needs, not the government’s wishes.
(7) Productivity changes with age and experience.  At some age it begins to decline.  The burden of the wage tax that we call Social Security contributions become harder to absorb as productivity declines. The current outcome, unemployment, is extremely in efficient.  Reduce the tax.

(8) At a national level, retirement is about producing the goods and services that non-working older people consume.  The potential productivity of older worker can’t continue to be ignored.  It is an easy part of the solution.  Accommodate longer work lives.
(9) Retired people are the capitalist class.  They live off of their capital.  Let retirees earn a reasonable return on the capital that they spent a lifetime accumulating.

(10) A society that consumes its capital stock can’t survive.  It is possible that Social Security can't survive as a pure pay-as-you-go system.  Stop draining the trust fund.
When these inconvenient truths are viewed collectively, they tell a story with obvious implications:

It seems obvious that if people aren’t able to plan for twenty-first century retirements, we shouldn’t be surprised that the baby boomers are not prepared.  It’s a bit more surprising that younger generations are witnessing the boomer’s failure, yet they are not preparing any better.  The fiction that someone else can provide for one’s retirement seems to appeal across generations.  
When forced to address the issue, the public acknowledges it hasn’t provided for retirement.  Overwhelmingly people display a preference for adjusting their own individual retirement age rather than providing for retirement.  That’s true of their pre-retirement planning and their actual retirement (labor force) behavior.  Unfortunately, often the decision isn’t left to the individual.
Meanwhile, our politicians seem even less capable of addressing twenty-first century reality than the public.  The Government aggravates the problem by pretending Social Security is a viable retirement option.  It wasn’t envisioned as a retirement plan, and it has never been more than a part of a viable retirement plan.  That would be easy to address.  It would just require some honesty on the part of politicians.  It could be started with accurate disclosures on Social Security statements. 

However, the biggest issue isn’t disclosure.  It’s the failure to recognize that retirement at a national level is an output issue.  It is only aggravated by pretending it is anything else.  The pretense that it can be overcome by making someone else pay (i.e., produce the output) is extremely counterproductive.  Social Security isn’t made more viable by narrowing the funding base or excluding part of the public from benefits.  One of the major problems is that demographics are already narrowing the funding base. We should be trying to expand, not narrow, the part of the population making a contribution to Social Security.
Probably nothing is more important than encouraging and enabling older Americans who can continue to add the goods and services that a growing older population will consume.  Older Americans are a growth sector.  For starters, all Social Security and wage/income tax penalties related to benefits should be eliminated.  That will require recognition that older Americans may contribute by working, or they may choose to contribute by holding/investing in capital.   Further, a realistic approach would recognize that with age the amount a person can produce from one’s labor decreases.

Inadequate retirement savings, work/employment plans, and actual labor force behavior indicate the importance of employment as a potential and necessary component of how older Americans will secure (both finance and produce) the goods and services that they want to consume.  The government should recognize the fact that at some age workers can no longer produce enough to justify both their wages and the wage tax that we refer to as Social Security contributions.  The narrowing of the funding base that implies can be addressed with a small sales tax on all consumption. 
Social Security taxes paid by employers could phase out on workers age 50 or 55 thus reducing the employer’s cost of continuing to employ the older worker.  The employee’s contribution could phase out at age 55 or 60.  The revenue loss could be replaced by the general sales tax thus allowing the wages to be counted toward benefits.   The tax base for Social Security would be more stable since it would be expanded to include expenditures of “retired” workers and those not in the labor force.   Output and income would be increased by the continued production of the older employees.

More than anything else, the Social Security component that addresses “old age and survivor benefits” has to be reformed in the context of retirement planning.  Reformers who approach it as if Social Security is a standalone approach to retirement system are doomed to failure.  They aren’t protecting Social Security.  They will destroy it.

Friday, June 22, 2012

Reality Ten: It Can Get Worse.

Social Security Reform: Flows Matter.  

The last posting, “Reality Nine: Class and Age: Marxis Dead, Bury Him,” started with the statement:  “A key element of many Marxist’s (and liberal’s) thinking is a conflict between workers and capitalists…. At its extreme (among some Europeans and in Social Security), the pursuit of the conflict has been carried to the point of cutting-off-your-nose-to-spite-your-face.  They treat working as if being employed were antisocial (e.g., the displacing workers nonsense in the last posting).  But, that’s a side issue for another day or a different posting. The point is: anyone who is retired is living off of capital.  This is that “another day.”
There is one of those inconvenient truths haunting the Social Security discussions.  It concerns the interaction between capital and labor.  Interestingly, many social scientists (including, most disgracefully, economists) address the issue with an apparent total ignorance of both the techniques of their discipline and the implications of those techniques. 

If quantitatively inclined, one can easily get lost in issues surrounding multivariate analysis, the aggregate production function, lag structures, multifactor productivity, and complexities surrounding variable interaction.  However, it’s easy to cut through the clutter.  Without getting into the details, it’s a simple concept to understand.  It can be illustrated with a simple saying: “One can’t drive many nails without a hammer, but a hammer doesn’t drive many nails by itself.”
The implications for discussions surrounding Social Security are stark.  To facilitate an appreciation of just how stark, let’s assume away all issues related to the relative effectiveness of public sector investment verses private sector investment.   That should eliminate a lot of the political rhetoric.  Granted, the efficient use of capital is important, but any increase or decrease in the efficiency of capital’s deployment is being overwhelmed by changes in the flow.  Put differently, we are disinvesting (liquidating capital) so fast and at such levels that any change in efficiency doesn’t make that big a difference. 
For example, consumer sector debt has an unsustainable upward trend.  What’s even worse, it has grown most among people least able to manage it.  People get credit cards before they have established a savings account.   They take on mortgages with no equity, basically renting money instead of renting without the long term liability.  They borrow in order to buy depreciating assets.  What’s astounding is that people who have previously displayed the ability to manage debt are imitating this financial mismanagement.
Granted, consumer debt is an asset from the lender’s perspective.  The lender owns a claim on an income stream, usually a bond.  However, as was unavoidably apparent during the financial crisis, the asset was not backed by a reliable claim on equity in an output-producing item.  The loan didn’t contribute to the stream of goods and services available.  In instances were one could argue that there was a real asset, new housing stock for example, the value of the future ability to house people was far less than the amount of the loan.
The US public sector is compounding the problem by pursuing the same strategy.  We’re imitating the Greeks and their fellow Europeans.  Of course, being Americans, we’ll do it bigger and better.  Interestingly, our government has discovered the trick to annuitizing capital thus making the liquidation that much harder to stop.  While the exact numbers are debatable, Dennis Cauchon of USA TODAY provides a telling calculation.  In “Federal Deficit Dwarfs Official Tally” he reports an estimate that the “Federal debt and retiree commitments equal $561,254 per household.”  That’s quite different from the official numbers reported by the government.
He goes on to explain why the half a million plus per household is a more honest estimate:  The big difference between the official deficit and standard accounting: Congress exempts itself from including the cost of promised retirement benefits. Yet companies, states and local governments must include retirement commitments in financial statements, as required by federal law and private boards that set accounting rules.”

“The deficit was $5 trillion last year under those rules. The official number was $1.3 trillion. Liabilities for Social Security, Medicare and other retirement programs rose by $3.7 trillion in 2011, according to government actuaries….”
As if a government annuitizing whatever capital it can get out of the public isn’t bad enough, the rate at which they’re doing it is both astounding and accelerating.  For example, the article notes that under honest accounting practices, “the government ran red ink last year equal to $42,054 per household ….”
Put in plain terms, the government used capital at a rate that darn near equaled all of household income.  Figuring in the tax bite on households, one has to wonder how government officials can fail to understand why households are struggling.

As we deplete our capital stock, the productivity of labor falls.  That lost output is in addition to the direct loss attributable to the smaller capital stock.  It is the reduced labor productivity as workers have fewer “tools” to work with.  With fewer tool, the worker produces less. Since less is produced, incomes fall. In order to protect current consumption levels, which many citizens and politicians confuse with living standards, we consume more of our capital. 

So far, however, the focus has been on financial indicators of physical capital.  Yet, we know output is the result of multiple factors, not just physical capital.  Human capital is one of the terms used to refer to the skills and education.  It’s convenient since it conveys the idea that human capital is created as the result of purposeful effort.   However, the notion that education measures human capital is suspiciously self-serving when advanced by educators.  It’s particularly suspect when viewed against a longer history.  Yet, it could well be true of modern economies.  So, let’s consider it a viable issue.

Historically education made a major contribution to creating some basic social norms that represent major forms of human capital.  In development economics, there is a greater appreciation for things like regularly showing up, developing self-control, sticking to purposeful activities, listening to instructions, measuring performance based on criteria other than one’s own personal whim, recognizing the future consequences of actions and decisions, and accepting classroom/community standards for behavior.  When those “skills” are absent, the quality of human capital suffers. 
Despite the role education can play, education is far too broad a topic to treat as a uniform ingredient.  One doesn’t have to look beyond the occupants of some of the tents of the “occupy” movement to sense that we’ve educated some people in the fine art of contributing less to society then if they never went to school.  The truth is education contains a large component of consumption as well as investment.  Learning can be, and often is, great fun. 
In response, some observers focus on disciplines, as in the frequent lament that the US graduates too few scientists, mathematicians, and engineers.  Others focus on some other pet topics: prayer, classroom size, military training (ROTC for example), research, or the silliest of all, funding levels.  Depending on what ax one wants to grind, it’s always possible to find some spurious correlation to support one’s position.  Without agreement on what education is supposed to accomplish, the debate goes nowhere.
Fortunately, when the issue is human capital as a factor of production (i.e., something that contributes to the ability to feed, clothe, and house oneself; basically support one’s own consumption) the issue is simpler.  Once the criterion is clear, it is possible to establish clear measurement of results. For example, Chinese government funds for education are expected to improve employability.   If the education doesn’t result in a target level of employment upon graduation, government funding is reallocated to different programs.
For better or worse, we seem to have decided that preparing people to provide for themselves isn’t the role of education.  It’s as if we are afraid that preparing people to provide for themselves implies a value judgment we aren’t willing to make.  Understand this is a very different issue from the “scientist, engineer, prayer, classroom size, military training (ROTC for example), research and funding levels debate.”  It’s very fundamental.  More oriented toward whether we are teaching basics like “regularly showing up, developing self-control, sticking to purposeful activities, listening to instructions, measuring performance based on criteria other than one’s own personal whim, recognizing the future consequences of actions and decisions, and accepting classroom/community standard for behavior.”
If you think it is phony issue, a red herring, consider these facts.   A person can virtually assure that they and their family will avoid poverty by accomplishing three simple goals.  The goals are (1) complete at least a high school education, (2) work full time, and (3) wait until age 21 before getting married and having a baby.  Census data shows that people who followed all three of these rules had only a 2% chance of being in poverty and a 72% chance of joining the middle class (defined as above $55,000 in 2010). These numbers were almost precisely reversed for people who violated all three rules.  Ignorance of these basic principles (or ignoring them) raised the chance of being poor to 77% and reduced their chance of making the middle class to 4%. 
This simple recital of Census data is confirmed by extensive social science research.   It isn’t ideological.  One can find serious social scientists from libertarians to liberals who only differ in interpretation and prescribed responses, although each will add his or her pet items to the list.  From the perspective of human capital, the facts leave little doubt that continued poverty in the US is the result of a failure to teach some basic life skills.  
So, neither human capital nor physical capital is being added at a pace that can support Social Security through the twenty-first century.  By contrast, it is very reasonable to argue that historically Social Security succeeded during a period when the US was expanding both its human and physical capital.  The issue isn’t really whether the capital stock is large enough.  The issue is whether Social Security can succeed when the capital stock is shrinking.  The unfortunate answer is: Yes, if your time horizon is an election cycle, and no, if your time horizon is the life expectance of an average American.

Wednesday, June 20, 2012

Reality Nine: Class and Age: Marx is Dead, Bury Him.

Social Security Reform: If twentieth century thinking is obsolete, try nineteenth.

A key element of many Marxist’s (and liberal’s) thinking is a conflict between workers and capitalists.  It ignores their common interest (and society’s interest) in having the worker working (i.e., employed).  At its extreme (among some Europeans and in Social Security), the pursuit of the conflict has been carried to the point of cutting-off-your-nose-to-spite-your-face.  They treat working as if being employed were antisocial (e.g., the displacing workers nonsense in the last posting).  But, that’s a side issue for another day or a different posting. The point is: anyone who is retired is living off of capital.  They’re capitalists.
Once life expectancies grew longer than most peoples’ working lives, it guaranteed that most people would spend part of their lives largely in each class.  Part of their life, they will be labor, the proletariat. Part of their life, they will be capitalists, living off of their capital, be it a pension, IRA, 401(k) or whatever. 
One needs to remember that the issue is how to produce goods the elderly want to consume.  Transporting productive capability from one period to another isn’t done by saving as such.  It is the use of the resources to produce in the future that allow retirement. That is capital formation.  It’s funneling production that isn’t being consumed currently into things that enhance production in the future.  It is only in that sense that future consumption becomes possible.
For an individual, the funnel that directs production into capital may be contributions to a well-run pension, an IRA, a defined contribution plan like a 401(k), an annuity, and stock, bonds, mutual funds, a business, real estate, etc..  For Social Security, the capital is all government debt. The interest and principal fund benefits to the extent benefits are paid from the trust fund. 
Clearly during the twentieth century anyone who was retired was living off of capital.  Most people were living off capital they created.  Granted, we have always structured Social Security such that there was an element of transfer payment from those best able to fund their Social Security retirement benefits to those less capable of funding their Social Security benefits.  The subsidy to those unable to fund their retirement was from a capital base that was increasing (i.e., a trust fund that was growing). However, benefits began being funded from current contributions as the trust fund growth stopped, and once the trust fund (i.e., the capital) is all sold off, Social Security will become nothing but a transfer from younger working Americans to older Americans.
The definition of capital as used above is very broad.  The traditional things people think of as capital are very important.   The total stock of things like tools; plants like factories, refineries, etc.; transportation equipment and infrastructure like pipelines, the power transmission grid, trucks, ships, roads, bridges, etc. is staggering.  Capital also includes long-lived assets like wells, mines, commercial structure, canals, dams, etc.. 
Agricultural land is one of my favorite examples. In agricultural areas it’s amazing how much effort has been put into making American agriculture as productive as it is. In some areas, there are huge piles of rocks or stone fences at the edge of fields.  Those fields have been producing for hundreds of years. Every one of those rocks was removed from the field.  Most were removed before much more than human muscle and a team of draft animals were available to do the task. In still other areas, one sees wells, diverted and dammed streams, or drained swamps.  Often trees at the boarder of the field tell of the effort to clear the land and remove the stumps.   The history of the effort to bring the prairies “under the plow” is probably the source of more myths, legends, and tales of heroes, villains and adventure than any other aspect of American development.
Long-lived consumer goods that are consumed over time, with housing being the leading example, are also capital.  However, from an individual’s perspective, they only allow retirement to the extent they are owned by the individual.   It’s the ownership, not the existence or occupancy that are relevant to retirement.  It’s the ability to consume the benefits the goods provide, not price change that creates the capital.
Since the passage of Social Security in 1935, the investment in human capital that allows generations to be more productive than their predecessors has been massive.  Prime examples are near universal k through 12 education, and, with the GI bill, greatly expanded access to college.  The elimination of historical patterns of excluding selected qualified students has continued the process.  The investment is substantial.  It includes the expense of the education, but also the forgone consumption implied by not spending the income the student could be earning from fulltime employment.    
From a society’s (or nation’s) perspective, human capital creation may be the most important capital formation.  However, from an individual’s perspective, it doesn’t facilitate retirement since the product it facilitates ends with retirement. When discussing Social Security it has to be mentioned.  It was vital to making Social Security viable. 
The issue we are facing is often seen as whether we, as a nation, have enough capital.  An individual facing the issue has two options: consume the income the capital produces or consume the capital by selling it off.  The individual’s task is simplified by the ability to assume that whether they provide capital for future generations can be ignored.  Consequently, many individuals ignore any responsibility for whether future generations are left better off than they were.  The financial service industry has developed products to accommodate the individual’s freedom from such concerns.  Most annuities are good illustrations, but many pensions actually fall under the umbrella of products designed to avoid leaving anything for future generations.
For a nation or a society the issue is a bit more complicated.  For starters, it shouldn’t, and in the long run can’t, ignore the impact of how it manages its capital.  Future generations count.  The scorched earth, “I’ll-spend-every-cent” philosophy many individuals display won’t work for a society.   
More importantly, compared to an individual, a nation’s choices are severely constrained.  It is not as free to choose between restricting consumption to the production generated by its assets verses selling off the capital. 
Nations do sell off private capital to foreigners, letting them buy companies, real estate, their debts, etc..  In the past, they generally restricted it to capital held by the people rather than common assets like roads.  Currently, some developed nations, with the US as a prime example, have found a way to relax the constraint.  They simply sell foreigners a general claim on future production in the form of government debt.  Technical knowledge is harder to sell.  Anyone who had American history knows how easily the US learned the industrial secrets of Europe’s industrial revolution.  Finally, human capital is so important, and it gets awkward when a nation tries to liquidate its human capital. 
The biggest stumbling block for those who try to hang on to this outdated, labor-verses-capital rhetoric is life itself as most people will experience it in the twenty-first century.  Social Security needs to address the role of capital as the only way retirement is possible.

Monday, June 18, 2012

Reality Eight: It Isn’t About the Money.

Social Security Reform: Money Is the Easy Good To Produce.

At a personal level, Social Security is about money.  However, at the level of a society, it isn’t about money at all.  It’s about producing the goods and services older Americans want to consume.  To do that, we need the output older workers can generate. 

The reality is that the Social Security issue isn’t a financial issue, a budget issue, or a deficit issue.  It’s an output issue.  In “Oldest Baby Boomers Face Jobs Bust,” E. S. Browning gets awful close to the issue.  But, the focus on jobs and personal finance keep Browning from directly addressing output.

Those older Americans want to consume.  Unfortunately there are fewer and fewer young workers to generate the output for them to consume.  The sheer size of the boomer generation is highlighting the issue, but smaller families and longer life expectancies are the cause.  Neither of those will change quickly.  As currently constituted, Social Security has been made obsolete by the demographic trends toward smaller families and longer lives.
The article notes, “The problem of older, out-of-work Americans extends beyond individuals to the U.S. economy. Among jobless people aged 55 to 64 who want to work, lost annual wages exceed an estimated $100 billion, based on the median income of this age group….Retirement savings losses exceed $10 billion a year, assuming contribution rates of 8% for employees and 2% for employers. Even if only half the people were working, the economy would gain $50 billion a year in income and another $5 billion in retirement savings.”

The key phrase is, “the economy would gain $50 billion a year in income.”  The exact number is irrelevant.  Income is either real or nominal.  It’s either output or inflation.  Here the writer is acknowledging the fact that employment and savings generate output and income.  Unfortunately, he or she doesn’t seem to fully recognize the significance of the relationship.  At another point the article loses its way.   It’s as if the author went bonkers.  The article states, “The trouble spreads across generations. Older people hang on to jobs…. they displace younger workers.” 

Suddenly it’s a zero sum game where the number of jobs is fixed. What happened to the income the older workers generate and the consumption it implies?  Wouldn’t that create more demand which would generate more jobs to satisfy the demand which would generate more income?  Where’s the consumption multiplier?  People working has never been responsible for other people being unemployed.  It just doesn’t work that way. One needs to remember that the same displacement nonsense cropped up in connection with women working and equality of employment opportunities for other minorities as far back as the first waves of immigrants.  It’s nonsense. 
What is particularly odd about much of the discussion of Social Security is that it ignores the output post- 65 year olds can and do generate.  Browning focuses on 55 to 64 year olds. He or she isn’t alone in ignoring the income that post-65 year olds could and often do generate.   In a curious twist to logic, we’ve set up Social Security in a way that penalizes the very workers that would contribute the most to income and output, and who would thereby make the largest contribution to the viability of the program.

Saturday, June 16, 2012

Reality Seven: Becoming an Older American Involves Getting Old.

Social Security Reform: Peter Pan grew up anyway

Somehow we have let governments all over the world divide our lives into discrete segments that are convenient for governments to administer.  Never mind if they have nothing to do with the real world.  Nowhere is this more apparent than with retirement.  To governments, life seems divided into: work, work, work, then don’t work, don’t work, don’t work.   Allow minor adjustments for education if done early on, and of course weekends, holidays, and vacations in order to accommodate the insanity of the ridged segmentation.  Even allow early Social Security enrollment for individuals where the phony segmenting does a "crash and burn."  If you really screw up, try to bridge the gap with unemployment insurance and lax administration of other social safety net programs.  Of course amply provide resources to make the segmentation work for government employees. 
The truth is aging is a continuous process.  It happens one day at a time.  From the perspective of twenty-first century life expectancies, someone who is 64 years and 364 days old is the same age as someone 65 years old. In fact, the life expectancy of the 64 plus individual isn’t that different from that of a 69 year old.

There is an inconvenient truth about a realistic view of aging.  It devastates a lot of fictions that have grown up around the work, work, work, don’t work nonsense.  That is the notion that in 1935 Social Security was set up so that people could retire.  The truth is poverty among older Americans was the problem.  The combination of a stock market crash, an agriculture depression, and bank failures had wiped out most peoples’ savings.  It was disgraceful that people who had worked and saved all their life were left destitute. 
Many older Americans would have continued to work if they could find employment.  Stories of “retirees” coming back to work to support the war effort illustrate the point.  If there was a job older Americans could do, we as a nation welcomed their contribution.  It is no accident that it is an “old age and disability” program.  In 1935 old age and disability meant reduced productivity; a reduction that, in 1935, precluded the person from completing in the labor market. 

To illustrate how much the fictions confuse people, consider this quote from the Browning article.  When talking about 55 to 64 year olds it states: “At an age when they should be generating peak incomes and savings, many unemployed and underemployed Americans are applying for early Social Security benefits and spending what's left in their retirement accounts.”  Note the ridiculous assumption that productivity, the basis for wages, increases throughout the pre-65 magic age.  Then at 65 it disappears.   The productivity of post-65 workers is ignored.
Now it may seem like these postings are picking on Browning.  That’s not the case.  Browning addresses the issue so much better and thoroughly than most reports.  It covers more aspects of the issue and thus better illustrates the realities even when focusing on other issues.  Thus, this posting draws heavily on it even when highlighting issues the article ignores.

The article screams for the realization that productivity grows with age and experience for some period of time, then it declines.  There is no magic age where this happens.  Both the increased productivity and the decline happen one day at a time.  But, at some point, the reality is productivity drops with age. One isn’t as strong.  Ones skills become old, perhaps obsolete.  Ones interest in acquiring new skills or knowledge may shift from job related to a personal passion.  Ones command of “modern technology” requires larger investments as more and more of ones accumulated technical skills age.  Ones increased skills become more and more tailored to a specific employer and thus increasing vulnerable to changes at a specific employer or in a specific industry.  This happens at different rates for different occupation and even for different people in the same occupation, but it happens.
All of these factors contribute to a massive misunderstanding of the realities Social Security must address.  For example, from the Browning article addressing 55 to 64 year olds, “That doesn't count the lost wages of people who have taken salary cuts to get new jobs.”  The pay cuts reflect the abandonment or obsolescing of skills tailored to a specific employer. Consider this quote from a discussion of one individual’s situation: “The older he gets, the more trouble he has finding jobs in computer mainframes, his specialty, amid changing technologies.”   One wonders how Browning, sitting there writing on his or her PC, missed the point.

Interpretations can get totally turned around by ignoring reality.  Consider this quote cited in part in another context: “Older people hang on to jobs or, out of desperation, take lower-level jobs for which they are over-qualified. Either way, they displace younger workers.”  Older workers “hang on to their jobs” because they’re productive in those specific jobs at that employer.  If so, younger workers couldn’t possibly be displaced unless they too have acquired the employer-specific skills and knowledge that allow the older worker to keep the job.  That will happen eventually as the relative importance of old skills and newer skills shifts.  But displacement? What nonsense. 
As to older workers taking jobs “for which they are over-qualified,” one is always best qualified for one’s last job. After all, one has done it.  In that sense we are all over qualified for any new job.  Every new job requires the acquisition of new skills and knowledge.  Who gets a job depends on who has less to learn and looks most interested in acquiring the new skills and knowledge required. 

To me, nothing makes the point more clearly than this quote: “Older people have more trouble finding new jobs. Among unemployed workers older than 55, more than half have been looking for more than two years, compared with 31% of younger workers, according to the Heldrich Center. Among older workers who found a new job, 72% took a pay cut, often a big one, the Rutgers data show.”  The obvious explanation is skills have become specialized.  Thus, it takes longer to find an employer where they are relevant.  Since the general productivity drop is accompanied by a move that makes many employer-specific skills irrelevant, the wage income implications can be dramatic. The chances of finding a job where the value of the new skills is larger than that of the obsolete or abandoned skills decrease with age.
It’s only in government that the idea of a new program to address these realities would seem more reasonable than fixing the existing programs for older workers. Why not reforming Social Security to address the reality that at some point productivity declines with age?   We don’t need a new program.  Fix Social Security.

Thursday, June 14, 2012

Reality Six: There Will Be Choices.

Social Security Reform: Surprise! People do what they want/need to do

The hubris of the government seems to drive them to imagine that they, and only they, have to make decisions for people.  People respond, “You can’t make me.”  It’s true of retirement planning and retirement age.  Unless flexibility is accommodated and encouraged, it will show up in other places that have major social implications.  The flexibility has to extend to both employees and employers.
To illustrate using research discussed in a previous posting, first data from Life Spans, Health Care Costs and Rethinking Retirement” in the April 2012 AAII JOURNAL.  It reported that the Merrill Lynch survey found that, if respondents knew they would live to be 100, they would redefine traditional retirement. “Nearly four in 10 would continue to work at least part-time in retirement….  It goes on to note that,  “More than 50% of respondents who had yet to retire planned on either cycling between work and leisure or working in a job they enjoy more (part- or full-time). Just 14% of respondents over the age 50 said they would retire once they hit a certain age.”

The findings of the Merrill Lynch survey on plans are consistent with the MetLife data reported byBankRate.  That data reported on what people are actually doing.  It found that among those 65 and over, 55% hadn’t retired and an additional 14% who “retire” were working part time or seasonally.  Based on this survey, 69% of respondents are demanding choice regardless of the government’s attempt to ignore their need/desire for options.

As noted in a previous posting, even using the Labor Department’s ridged definition of labor force participation, 31.5 % of Americans aged 65-69 were still in the workforce in 2010.  It isn’t hard to explain the differences between the Labor Department data and the MetLife survey, and the differences highlight the difficulty the government has when people make choices. 
Three factors go a long way to explain the differences.  First, the Labor Department probably doesn’t count a lot of the people as “in the labor force” if they are “retired” but chose to work part time or seasonally.    Second, as is discussed every time unemployment rates are quoted, discouraged workers (those out of work but who have chosen to stop actively looking for a job) aren’t counted as in the labor force.  Third, the surveys tend to focus on people who are planning to retire.  They want retirement to be a choice.  It’s likely that people who plan retirement (as opposed to those who “just do it”) are more likely to work longer.  There’s also a fourth possibility.  The government may be pushing some older workers into a life of crime working “off the books.”  The fourth possibility seems minor, but it certainly happens.
The exact extent people are choosing flexibility is less important than the fact that more than half of older Americans are indicating that the government’s obsession with choosing a retirement age is a disservice.  The older Americans’ behavior reveals a determination to make their own choice. 

The surveys reveal an additional piece of information: why people make the choices they do.  For that the Bankrate report on the MetLife survey is revealing.  The chart below is quoted in its entirety.
The report states: “The chart below explains people's reasons for the decision they made to retire early or late. It doesn't reflect the biggest reason people cited for retiring no matter when they did it -- 36 percent said they'd reached retirement age, and they wanted to quit. Another 18 percent said they hung up their work boots for health reasons. Only 6 percent said they'd lost their jobs and couldn't find another. Fewer than 2 percent are job hunting.”  Again only 36% are letting someone else dictate their retirement age.  The fewer than 2% looking for work confirms the importance of the second explanation for the Labor Departments under-reporting the phenomena.

What jumps out from the chart is the involuntary nature of retiring ahead of plan.  Health and job loss make up 53% of those who left work earlier than planned.  By contrast, staying employed was voluntary: for job satisfaction or economic benefit.  The wording is interesting: “need.”  Substitute the word “want” and it gives a different picture. One can legitimately wonder whether the word choice reflects the writer’s assumption.  Many people of all ages need/want to work because the need/want the salary or benefits because they need/want to save more.

It is unfortunate that the “other” categories are as large as they are, but, none the less, the chart tells a story.  Adjusting the retirement age in Social Security and imposing tax penalties on those who chose to work don’t address the need for flexibility. 
People will make choices.  Social Security needs to embrace the fact that people want to make their own choices.  Rather than try to force life-changing choices, the government needs to enable people to choose and encourage choices that benefit older Americans and society in general.

Tuesday, June 12, 2012

Reality Five: Kids Aren’t the Only Ones Who Say “You Can’t Make Me.”

Social Security Reform: Santa Clause Isn’t the Only Childhood Belief We Retain.

It seems positive incentives like an immediate boost to income and tax deferrals are not enough to induce widespread planning.  Nor is the prospect of having to give up some consumption in the future, even if the consumption one has to give up is health care.  Not planning is just too easy.

It’s worth noting that Brown’s article on YAHOO stated:  “EBRI, a Washington-based nonprofit that studies benefit plans for U.S. workers, says confidence about being able to reach a comfortable retirement has reached the lowest level in more than 20 years….”  It seems people recognize they aren’t planning for retirement. 
It concludes: “That pessimism may be a healthy sign, since it means that Americans are losing a false sense of confidence and learning the virtues of savings and thrift.”  That’s one possibility.  Another, probably more realistic, interpretation is they are acknowledging that they know what they have to do and are saying “you can’t make me.”  They don’t think they will plan and follow through.  Instead they just plan not to plan.

They don’t plan to provide for retirement and, in that sense, plan not to retire.  One can call it a default plan or a non-plan.  In short, they are saying: “Plan for retirement?  You can’t make me.  Retire.  You can’t make me.”  Social Security reform needs to acknowledge that the problem isn’t that the retirement age is wrong.  The problem is that there isn’t an age when people will magically all retire.  If reformers aren’t hearing it, someone needs to force them to acknowledge that people are saying, “you can’t make me.” 

Sunday, June 10, 2012

Reality Four: No One Else Can Do It for You, So Don’t Count on Santa.

Social Security Reform: It is your problem.

To the frustration of the 99%ers, the darn 1% are a moving target.  An article entitled “The Truth About Wealth” by Robert Frank (WALL STREET JOURNAL, 12/17/11) provides some data relevant to income and wealth.  It illustrates a point this blog has made in connection with a number of issues: One can’t treat distributions from different time periods as if they represent the same information.  
The 99%ers: Part 2” mentioned that fact as it relates to income distributions.  For example, it stated:  “although often described as a permanent plutocracy, the Forbes 400, the richest of the rich, is actually quite unstable.”  It concluded with the obvious statement: “…like the poor, the rich will always be with us; they just won’t be the same people.”  Someone is always at the top of the distribution. However, the relevant question is: "How big is the top?"
The 99%ers: Part 3,” “The99%ers: Part 4and “The 99%ers: Part 5” illustrated some of the problems interpreting even a single year’s data.  It gets even more questionable when multiple years are involved.  There are so many shortcomings of most of the conclusions people try to support using comparisons of static distributions that only those highlighted by the article will be addressed.  But, there are quite a few of them.  They are extremely relevant to Social Security funding.  They illustrate why the current administration’s efforts to pretend taxing the rich is a solution is dumb (if they believe it).  It is destructive and counterproductive.

The instability doesn’t end with the Forbes 400.  For example, the article notes that a Federal Reserve study found that a third of the people in the top 1% in 2007, as measured by wealth, were no longer in the top 1% in 2009.  It discusses an interesting concept: “… the latest wave of data points to an indisputable trend—we have entered the age of ‘High-Beta Wealth.’  (On Wall Street, "beta" measures volatility relative to the overall market; a beta of 1.0 signals alignment with the market. Technology and gambling stocks can have betas of 1.5 or more, since they tend to overshoot the market in cyclical ups and downs. Utilities, by contrast, both rise less and fall less than the overall market and usually have betas below 1.0.) … the top 1% have income swings that now are more than twice as high as those of the rest of the population.”
The volatility of the incomes of the wealthy has probably increased.  The article notes that “A study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University found that the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96…”

To see why all this is important, remember that comparing distribution says nothing about levels.  Whenever politicians start talking about distributions, one should suspect they are doing it to avoid the actual numbers behind the distribution.  Usually they’re hiding behind a deceptive use of percentages in order to conceal the fact that the actual numbers don’t support their position.  Sure there’s always a richest 400, and sure there’s always a 1% (or 4% or 5% by the math- challenged administration’s definition of 1%).  That says nothing about the amount of money, and in this posting, it’s all about money to fund Social Security. 

The Truth About Wealth” points out an inconvenient truth people like to ignore: “Despite heated rhetoric emanating from politicians and pundits, the top 1% is hardly a fixed group that enjoys consistent income gains. To the contrary, the wealthiest have become the most crash-prone group in our economy.”
“The total income of the top 1%—or those earning more than $343,000 in 2009—fell by more than 30% from 2007, according to the most recent Internal Revenue Service data. By contrast, the average income of the bottom 90% fell less than 3% during the same period.”
An obvious implication is that whatever is being funded by targeting the rich does NOT have a reliable income stream.  Expenses like food for an individual and entitlements for a society are very predictable and viewed as essential.  They deserve reliable income streams.  If one wants stable funding, relying on a large percentage from just a part of the distribution is foolish. It’s doomed to failure and periodic crises.  The equivalent investment mistake is not diversifying (e.g., owning a lot of just one stock).  A logical response would be to avoid overly relying on taxes on the rich to fund nondiscretionary spending. 

The narrowly-focused approach of relying on one small group for funding gets more risky when the group’s fortunes are unstable.   It is even worse since the income of the rich is probably inversely correlated with the need: the social safety net becomes more important and requires more funds during hard times.  That is exactly when the fortunes of the rich are hard hit.  To illustrate, using a different social safety net program, the Medicare administrator has already pointed out that the surtax on high incomes is a failed approach to funding. 

It’s fiction for Americans to believe anyone else can plan retirement for them and folly to think there is someone else who will fund it.  Reforming Social Security shouldn’t narrow the funding source in a foolish search for Santa.  If anything, reform should widen it to the extent consistent with reality.  It isn’t an equity issue: it good financial planning not to use unstable income sources to finance continuous and growing needs.

Friday, June 8, 2012

Reality Three: It Isn’t Going Away.

Social Security Reform: Social Security may die, but retirement won’t

Boomers aren’t unique.  It would be nice to think the retirement planning problem is just an irresponsible generation.  In fact, another article “WhyBoomers Need Bigger Nest Eggs Than Their Parents” starts out looking like it will just rehash that issue.  Certainly the title would lead one to believe the focus is on boomers.

But it broadens the focus: “From 1983 through 2007, the period during which the surveys (Fed’s Survey of Consumer Finance) were conducted, the ratio of wealth to income has remained virtually unchanged at any given age.”  Note the phase “at any given age.”  They aren’t just talking about boomers. 

The broader focus is also explicit in the next statement: “At first glance, this regularity seems comforting, suggesting that the boomers and the cohorts that follow are as well prepared for retirement as their parents. But that conclusion is wrong.”  Again note the phrase “and the cohorts that follow.” 

The article first uses the conventional measure of the extent one is prepared for retirement: “The easiest way to answer that question is to look at the ratio of wealth to income from the Survey of Consumer Finances (SCF), the Federal Reserve’s comprehensive survey of household wealth in the United States. The notion is that the wealth-to-income ratio is a good proxy for the extent to which people can replace their pre-retirement earnings in retirement.”

Then the article goes on to list reasons why current and future retirees need to have more savings than previous generations.  What the article fails to note is that some of the reasons why current retirees need to have saved more (e.g., decline in pensions and increased life expectancies) are going to stress “…the cohorts that follow” more than boomers.  In short, for retirement planning, the wealth-to-income ratio has to be updated.  It has to be supplemented with as follows: “AND the number of years over which it has to be replaced.”

An article entitled “Life Spans, Health Care Costs and Rethinking Retirement” in the April 2012 AAII JOURNAL notes some relevant survey results.  The respondents were asked how they would “change how they approach money management if they knew they would live to be 100.”  The respondents weren’t non-planners.  It was a Merrill Lynch survey of 1,000 individuals with investable assets of $250,000 or more.  “Respondents said they would continue working at least part-time and/or re-evaluate their saving and investment strategies if they knew they would become centenarians.”  Fully three quarters would change how they planned for retirement.  The fact is living to be 100 is going to be more common among the post boomer generations. 

Unfortunately, boomers aren’t the only ones that enjoy the freedom of avoiding responsibility for planning.  Remember The 99%ers: Part 7” cited some articles (e.g., “US wealth gap between young and old is widest ever”) that indicated some encouraging information: boomers have saved more than younger people. Reality three:  It isn’t going away reflects the fact that freedom from the responsibility for planning appeals to many: young and old alike. 

The reforms needed in order to accommodate the size and longevity of the baby boomers are going to be essential in the future.  It is absurd to ignore the fact that medical science is going to continue to find treatments that increase longevity.   The shortcomings will be worse for post boomers because they will live even longer.