Social Security Concern Trolls' Math Problem

Yes, yes, this will be another post on Chained CPI. But a little more dry. This is about the math. Previously, we have discussed why Chained CPI isn't actually a cut in benefits, what different it makes in the calculations of the cost of living adjustments, and why in the context of broader reforms and progressive social investments, it's worth doing. But what we haven't talked about in very explicit terms is what the minor reductions in COLA will end up adding up to. The scaremongerers are very interested in exploiting this. They are very interested in scaring people with numbers about how much they will lose.

Take the AARP's "How much you will lose calculator," for example. Did you know that if you are a retiree with an average $15,190 in benefit today, over the next 30 years you will lose $20,000 in benefits? Wow. Talk about catfood, right? Somebody stop that conniving bastard Obama! I mean, right?

Giving context to scary numbers: Actually, there's a lot of funny math going on here. First, the 30-year math completely ignores that President Obama is proposing to boost benefits for the oldest beneficiaries, at age 85 and that he would create a minimum benefit above the poverty level. But let's play along. $20,000 out of how much? The context is to define this "cut" they are talking about with respect to currently scheduled benefits. We can use total benefits in nominal dollars under current methods of COLA. So let's work out those numbers. Let's use AARP's own calculations.

AARP assumes that chained CPI will result in approximately 0.29% smaller COLA against current schedule.  Taking only the difference into account makes the math easy, because you can hold a constant dollar value. Again, let's use AARP's numbers. In their calculator, they say the average social security benefit is $15,190 - no need to adjust this as we are using current dollar. Use that as a constant dollar value, and over 30 years, there is a total benefit of: $455,700. What AARP is saying is that under Chained CPI, this beneficiary would lose $20,000. That is a loss of approximately 4.4% of cumulative benefits. The same calculations show an approximately 1.5% loss against scheduled benefits over 10 years, and a 3% reduction in cumulative 20 years' benefits.

Of course, much of these calculations even make any sense because of the miracles of modern medicine that is helping people live longer and longer lives. That means people are drawing Social Security for a longer and longer period of time. The thing about cumulative benefits is that they are, well, cumulative. The longer you live, the longer you accumulate the benefits. And when one calculates cumulative benefits, one must take the years into account. For example, if the average person today is expected to live just 2 years longer than let's say a couple of decade ago, then they have an increase of $30,380 in cumulative benefits, well exceeding even the 30 year cumulative loss from Chained CPI.

Actually, we can do those calculations too. I know the whiners are going to scream at me about how I should use life expectancy increases for people who reach retirement age because that is what determines how long they draw benefits. The problem with that logic is that even people who didn't reach retirement age before death paid Social Security taxes. It's a terse reality, but that's why the more accurate measure is to use total life expectancy - or technically, for only working years, we should use life expectancy for people who have already reached working age. But fret not, I will show the calculation both ways.

Using life expectancy at birth: According to the CDC, between 1983 (the year of the last Social Security adjustments) and 2010, a period of 27 years, life expectancy in the US at birth increased 4.1 years (going from 74.6 to 78.7). Using the average benefit that AARP provided us with, that adds a cumulative $62,279 in benefits to the average person, again, dwarfing a $20,000 loss under Chained CPI over 30 years.

Using additional life expectancy at age 65: In 1983, people who turned 65 were expected to live an additional 16.7 years. In 2010, those who turned 65 were expected to live an additional 19.1 years. That's an additional 2.4 years in life expectancy for those who reach that age, resulting in an increase in cumulative benefits by $36,456 in constant dollars. Sure, you can argue that people who turn 65 in 2010 don't actually get full Social Security until age 66, but even taking away a year results in an increased cumulative benefit of $21,266, still above the $20,000 loss on chained CPI in 30 years' time. This is without taking into account that those who turned 65 in 2010 could still retire and take a smaller Social Security payment.

Again, as I said before, neither of the above is the correct life expectancy to use, though the at birth number is better for accounting purposes and for purposes of understanding why Social Security needs adjustments. It is not a "right wing talking point" to say that people are living longer and drawing benefits for a longer period of time. The irony of the Left's prognosticators putting out these "cumulative loss" calculators is that the precise cause that Social Security needs adjustments is because over the course of longer retirement, retirees are drawing cumulatively more sums. That's other side of the coin about "cumulative benefits." It is patently dishonest to talk about cumulative benefits without this context.

Of course, this doesn't mean that we figure out a way for people to live shorter lives. But this does present an imperative for us to act - sooner rather than later - to make modest adjustments to correct this imbalance. If anything, Chained CPI, as we have shown above, is not enough to completely close Social Security's long term funding challenges. A complete solution will likely require raising the cap on Social Security taxes to the level it was at at enactment of Social Security (90% of all income), and chained CPI.

And with respect to chained CPI, it is important to put the scary numbers in context. It's crucial to put the notion of "cumulative benefits" in the context of both benefits and longevity (after all, the very fact that "defenders" are screaming about how much a retiree will lose over 30 years is acknowledgment of the longevity increases). You cannot solve a math problem if you are only looking at cumulative reductions in COLA but not cumulative additions due to higher life expectancy. Just as it can be argued that greater cumulative benefits due to longevity does not help pay continuous costs of living, it needs to also be recognized that a slightly smaller cost of living adjustment will not suddenly make the sky fall down.

The Trustee report is clear. Social Security will only be able to pay 75% of scheduled benefits in 2033 if nothing is done. We can wait until a crisis is months away to act, as our country did in 1983. At that time, we ended up raising the retirement age to add time to the trust fund. I doubt that solution will be more palatable to liberals than chained CPI, and yet crisis government may leave us no other options. We can do that. We can wait till the crisis is upon us to try to solve it. Or we can act now. We can act now with smaller adjustments, greater revenues, and better management. I'd prefer that we didn't wait for the crisis to get here.