Over/underestimation of inflation and US entitlements policy

[wiggin]

In my first post:

(Note that I think this is irrelevant from a monetary policy perspective - IMO core CPI is more than adequate for guiding monetary policy.)

Core CPI is fine without including substitution effects, I think (BTW, core CPI definitely includes healthcare costs). Oh, I could see using a chained CPI ex-food and fuel (a 'core chained CPI?') because it will be less volatile while still keeping track of substitution effects. Yet I doubt monetary policy would be significantly different either way - the differences we're talking about are fractions of a percent. Relevant for indexation, since it accumulates, but monetary policy is such a blunt instrument anyways, they just try to keep inflation within a rough 'target band' rather than a specific number.

[GGT]

But wouldn't it make more sense if all agencies that try to calculate "inflation" use the same metrics?

Seems counter-productive to disconnect policies (whether monetary or fiscal) from people aka consumers, in a predominantly consumer driven economy.

RE SS and entitlement "inflation".....using chained CPI sounds like a fuzzy "new" math, either to justify cutting benefit payments, or make the budget "look" better over the long-term. Adding consumer spending patterns is a good idea, but only if it's comprehensive and connects policies to budgets and taxes.

Seniors using SS benefits have a median income of $22,000/year. I don't know the average, but the point is that millions of retired/elderly are living at or below poverty lines. Instead of cutting their monthly checks, it'd make more sense to keep low costs for the things they USE -- food, housing, energy/fuel, medical care and pharmaceuticals. Medicare premiums, Part D donut hole, OOP expenses, etc.

And for today's workers who are paying into those entitlement programs, with an expectation benefits will be available in their retirement future, it makes sense to (somehow) enact a Living Wage policy. Affordable food, housing, energy/utilities, and healthcare are the main concerns for workers, employers, tax payers, retirees and deficit hawks, budget wonks, policy makers, tax collectors.

[wiggin]

But wouldn't it make more sense if all agencies that try to calculate "inflation" use the same metrics?

Why? It's for different purposes, and the BLS calculates all of the measures anyways.

Anywho, I'm open to using chained CPI for monetary policy, I just don't think it really matters.

RE SS and entitlement "inflation".....using chained CPI sounds like a fuzzy "new" math, either to justify cutting benefit payments, or make the budget "look" better over the long-term. Adding consumer spending patterns is a good idea, but only if it's comprehensive and connects policies to budgets and taxes.

Sounds to me like you just don't like things based on, you know, actual math.

[Hazir]

No, of course not, it's the Social Security Administration. But they already get all of your tax records.

What's the use of that if there is no means testing? How exactly is your SS cheque calculated? I was under the impression that it was a benefit based on the years of Insurance and a federally set basis?

Over here in Holland it works like this; for every year you were insured (basically for every year you were living in Holland since you turned 25) you get 1.75% of the minimum income, so that after 40 years of Insurance you get 70% of the minimum income. It holds no relation to your work status or income during employment. Virtually all pension plans take this basis into account. A typical pensionplan would add to social security so that your fixed income would be 70% or your weighted income over the last 5 years of your work life before 65. This of course is a simplification, but that's roughly how it works for most people overhere.

[Flixy]

Well, that's good to know I have a whopping 30 cents or so per month pension already from my stint as a bartender They actually spend more money on stamps each year than I'd get from them after I retire..

[Hazir]

Well, that's good to know I have a whopping 30 cents or so per month pension already from my stint as a bartender They actually spend more money on stamps each year than I'd get from them after I retire..

Well, that makes you 30 cents a month richer than the social minimum

[GGT]

Why? It's for different purposes, and the BLS calculates all of the measures anyways.
Anywho, I'm open to using chained CPI for monetary policy, I just don't think it really matters.
Sounds to me like you just don't like things based on, you know, actual math.

I like things that have continuity, and use the same 'actual math' to define things like Inflation. Not just to make it simpler for consumers/tax payers to follow, but so everyone from economists to accountants to agencies are working from the same page. Especially since these policies are forward-looking, trying to predict future costs and adjusting current taxes, it seems logical to use the same math formulas.

What's the use of that if there is no means testing? How exactly is your SS cheque calculated? I was under the impression that it was a benefit based on the years of Insurance and a federally set basis?

The monthly SS checks are calculated by lifetime earnings. Not by taxes paid or total number of work credits (but 40 credits or about 10 years is required minimum). The 'actual math' they use has changed over the years, including Inflation and COL, and percentages of lifetime earnings. They use different formulas for widows and surviving children.

Example: Paul Ryan's dad died when he was a teenager; he and his siblings all received monthly checks until they turned 20/21, likely larger than their dad's check would have been in retirement. His mom also receives monthly checks (until the day she dies or remarries), likely smaller than they'd have been if he lived to retirement age.

I have no idea how the 'actual math' is being calculated today, but my impression is that all benefit checks are lower now. Probably because of higher longevity and longer retirement periods.

[wiggin]

What's the use of that if there is no means testing? How exactly is your SS cheque calculated? I was under the impression that it was a benefit based on the years of Insurance and a federally set basis?

SS benefits are actually quite complex, but the basic boils down to this:

To qualify for SS, you need to have paid into the system for a minimum of 40 quarters; this means you worked at a FICA-eligible job (or were self-employed and paid your taxes, including a special self-employment tax which is FICA doubled, roughly) for 10 years. Most jobs are covered by this; notable exceptions are some government (mostly state) employees, which have their own pensions plans, and various special classes (e.g. graduate students). This FICA tax is a payroll tax distinct from normal income taxes which gets paid directly to Social Security (a separate portion goes to Medicare). It is split between employers and employees, and is a flat percentage of income up to ~$110k, indexed to inflation. The Social Security Administration, among its many other duties, keeps track of FICA money and eligibility - this is why they have access to your income and tax records.

The size of your benefit is a much more complicated question. Let's ignore complex questions wrt disability insurance, survivor's insurance, and focus on the two things that really matter: Retirement Insurance Benefits (what most people think of as 'Social Security') and Supplemental Security Income (essentially welfare for the elderly poor). RIB benefits depend on several things. Notably, they depend heavily on when you start collecting benefits (you can start collecting benefits as early as 62, but then your lifetime take will be much lower - you can wait until you're about 70 to get the largest amount of benefits). It also depends a lot on how much you made during your working years - they average your 35 highest earning years up to a maximum of ~$110k (the FICA contribution limit) - earlier salaries are adjusted by average wage increases (not inflation). Essentially, the more you put in, the more you get out. This is the second main reason why the SSA has your tax records. Then they take this average salary and give you a percentage as your benefit. It's a progressive benefit - the first X dollars of average salary are given a higher percentage pension than the next Y dollars, which are in turn higher than the last Z dollars up to ~$110k. The last major decider of how much you get in benefits is whether you have any earned income in retirement. A certain amount is exempt, but over that amount, your benefits are slowly reduced as you earn more in retirement (note this only applies to EARNED income). Yet a third reason why the SSA gets your tax information. It gets more complicated when you add spouses into the mix - especially if said spouse is ALSO eligible for SS benefits. But you get the basic idea.

The fourth reason has to do with the aforementioned Supplemental Security Income, which is also administered from the SSA (though it comes from a different pool of money). SSI eligibility is determined on the basis of income - notably being below a certain threshold, depending on household size/etc.

I hope that makes sense. It's a much more income- and contribution- sensitive system than most European style pensions. Also, private pensions have largely been phased out in the US in favor of tax-protected defined contribution plans, where benefits are subject to market and longevity risk.

[GGT]

Clear as mud, right? Taking a broad view of SS and its viability....one of the best "fixes" would be ending state and federal employee pension plans, and transition them to SS like every other worker in the private sector. If legislators had to use the same retirement plan as everyone else, perhaps they'd do more to make it better.

[Hazir]

Sounds like one of those instances where politicians took what could have been a simple system into a convoluted mess that nobody can make sense of. In Holland the system was set up so that you're basically guaranteed a social minimum by the state, but everything above that is something of either your employer(s) or yourself. The only thing the state does is allowing you to defer the income that goes into your pension untill after your retirement (thus being subject to lower taxes).

[wiggin]

Sounds like one of those instances where politicians took what could have been a simple system into a convoluted mess that nobody can make sense of. In Holland the system was set up so that you're basically guaranteed a social minimum by the state, but everything above that is something of either your employer(s) or yourself. The only thing the state does is allowing you to defer the income that goes into your pension untill after your retirement (thus being subject to lower taxes).

Social Security was founded with a different philosophy, which has resulted in the current mess. The basic idea is not THAT different, but the argument is it's more 'fair' for RIB since as you put more in, you get more out. The sliding scale of benefits as based on income/contributions is intended both to compensate those who contributed more to the program (though not in a proportional fashion) as well as minimum retirement income fits a sliding scale depending on your expenditures in life (which, again, is roughly tied to earnings history). There's also a sense (probably unsubstantiated) that flat pensions to everyone disincentivizes work.

I agree it's a mess, though, and would prefer a simpler system that treats it more as a progressive 'safety net' rather than anything else.

FYI there are a lot of other pension/retirement related tax issues which are entirely separate from SS as well - three major forms of tax shelter for DC plans, extensive protections for DB plans, etc. I ignored those since they're tax policy and not related to Social Security.

[Lebanese Dragon]

Uh, what? If I understand what you're saying, I'm pretty sure you're wrong. The CPI is a fixed basket of goods that doesn't check every price in the US. If people are substituting other items into that basket, there's a definite shift between chained CPI and CPI. The BLS calculates both and there's a clear difference.

The % change from from CPI taken in 2011 to that of 2012 is a standard measure of general inflation, an implication of all prices having gone up.



Edit: After some reflection.

On Chained-CPI you should account for a spread of people. A % who have not changed their buying habits since (for example) the 2011 CPI, and a % who have substituted for generic brand since the 2011 CPI was taken.

This will give a better sense of the average consumer. If your looking for what does a random person in the US CPI change look like, then you'd want this Chained-CPI (with weighted percentages).

An alternative would be to do two seperate CPIs one chained, one not. Then identify statistically where your employees fall for determining COLA.

[Hazir]

Social Security was founded with a different philosophy, which has resulted in the current mess. The basic idea is not THAT different, but the argument is it's more 'fair' for RIB since as you put more in, you get more out. The sliding scale of benefits as based on income/contributions is intended both to compensate those who contributed more to the program (though not in a proportional fashion) as well as minimum retirement income fits a sliding scale depending on your expenditures in life (which, again, is roughly tied to earnings history). There's also a sense (probably unsubstantiated) that flat pensions to everyone disincentivizes work.

I agree it's a mess, though, and would prefer a simpler system that treats it more as a progressive 'safety net' rather than anything else.

FYI there are a lot of other pension/retirement related tax issues which are entirely separate from SS as well - three major forms of tax shelter for DC plans, extensive protections for DB plans, etc. I ignored those since they're tax policy and not related to Social Security.

You guys really took the hard way straight into the quagmire. The priciple of SS acting as social security can be upheld much easier by capping contibutions. You never pay more into the system than is reasonable wrt what you can get out of it and for the rest your pension is no business of the state.

It also eludes me as to why a retired person should get incentives to work.

[Dreadnaught]

Capping contributions or capping payments?

[wiggin]

You guys really took the hard way straight into the quagmire. The priciple of SS acting as social security can be upheld much easier by capping contibutions. You never pay more into the system than is reasonable wrt what you can get out of it and for the rest your pension is no business of the state.

It also eludes me as to why a retired person should get incentives to work.

There is a cap on contributions - you only pay FICA on the first ~$110k of earnings each year, a (larger) chunk of which you can reasonably expect to get back in retirement.

The incentive isn't for the retired, it's for people before retirement.

[Hazir]

There is a cap on contributions - you only pay FICA on the first ~$110k of earnings each year, a (larger) chunk of which you can reasonably expect to get back in retirement.

The incentive isn't for the retired, it's for people before retirement.

That is a way too high cut-off point and a way too high basis for social security. There is - in my eyes - no justification for government digging itself so deeply into people's pension planning. SS should do what it name says; give people a basic income after they retire. İt should not be a pretext to turn government into a pensionfund.

[wiggin]

The maximum benefit is only about $30k/year, I believe. Not much more than basic income in my book.

[Hazir]

The maximum benefit is only about $30k/year, I believe. Not much more than basic income in my book.

That is much to close to an income out of work. Here in Holland you get about 12,000 euros a year as a single person and 8,400 a year if you are living together with a spouse/domestic partner. If you want anything more - and most people want that - that's not something the state burdens itself with. For that amount you can live in cheap accomodation, feed yourself, pay utilities and if you are very careful you can buy things like clothes, furniture and appliances. No luxuries of any kind. I see no reason why the US should give a maximum at least twice as high as The Netherlands which is not only a Rhineland type social democracy but which also has a higher per capita GNP than the US.

So far everything I have seen in this thread makes me believe your SS is totally out of control.

[wiggin]

That is much to close to an income out of work. Here in Holland you get about 12,000 euros a year as a single person and 8,400 a year if you are living together with a spouse/domestic partner. If you want anything more - and most people want that - that's not something the state burdens itself with. For that amount you can live in cheap accomodation, feed yourself, pay utilities and if you are very careful you can buy things like clothes, furniture and appliances. No luxuries of any kind. I see no reason why the US should give a maximum at least twice as high as The Netherlands which is not only a Rhineland type social democracy but which also has a higher per capita GNP than the US.

So far everything I have seen in this thread makes me believe your SS is totally out of control.

The vast majority of people don't get even close to that maximum, and a portion of that tends to be taxable income. *shrugs* I don't disagree with you that the top tier of people get too much benefits (hence my call for means testing), but for your average joe schmoe they aren't actually making that much - probably less than the Dutch equivalent.

Also, in PPP, Dutch GDP per capita is far lower than the US. But that's largely irrelevant.

[Hazir]

The vast majority of people don't get even close to that maximum, and a portion of that tends to be taxable income. *shrugs* I don't disagree with you that the top tier of people get too much benefits (hence my call for means testing), but for your average joe schmoe they aren't actually making that much - probably less than the Dutch equivalent.

Also, in PPP, Dutch GDP per capita is far lower than the US. But that's largely irrelevant.

Still if I were in charge of finding a solution for your problem I'd try to get rid of all the parts of social security that consist of more than providing a bare minimum. Not only is that more sustainable, it also means that the government keeps it paws off people' s pensions above the social minimum.

Your Social Security seems to have morphed into socialist security over time.

[Veldan Rath]

Shocker eh?

[Hazir]

Shocker eh?

It' s not something you expect in a country that is supposed to be a beacon for capitalism.

[Veldan Rath]

It' s not something you expect in a country that is supposed to be a beacon for capitalism.

Oh gods...stop!...laughing so hard....the PAIN!

[GGT]

Still if I were in charge of finding a solution for your problem I'd try to get rid of all the parts of social security that consist of more than providing a bare minimum. Not only is that more sustainable, it also means that the government keeps it paws off people' s pensions above the social minimum.

Retirees who live on SS alone are pretty much living on bare minimum. Average is ~$22,000/year, and that's at or below poverty level (depending on state COL). If you got rid of providing more than "bare minimum", would that mean no payments to retirees with other pensions or savings income above $22K/year....as part of means-testing?

Your Social Security seems to have morphed into socialist security over time.

It's like talking about healthcare with those who have Universal Healthcare or a NHS....Pretty hard to explain the US systems that are combos of public/private.

Suffice to say that anything "Public" means a "tax" and some "government" involvement. Since our two political parties are split on ideology, with (R) having their own identity crisis, we can't even agree on what's smart taxation, necessary gov't spending, a minimum safety net, or a Welfare program.