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.

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