Heard an Interesting Interview on SS today........

Pete Peterson has witten a book that is endorsed by Alan Greenspan on the coming crunch of Retirement Benefits in the U.S.

I heard an Interview with the man on Public Radio this morning. The amazing thing to me was that he explained that there was 2 *parts to the Social Security COLA. 1.) the Inflation portion and 2.) The wage increase portion.

I did not finish the interview, so I'm not sure exactly what this means. But he claimed that if you took away the Wage Increase portion of SS, it would basically go a long way to repair the system. He also believed that removing the Wage Adjustment was politically viable.

I had always thought that there was only an inflation adjustment to SS and have never heard of this Wage Increase Adjustment.
He also claimed that Britain fixed their retirement program this way about 20 years ago. The thing that confuses me is that I have heard that real wages have actually shrunk in the last 20 years. Or maybe it just feels like it

Can anyone explain this 'Wage Adjustment' portion of the SS COLA?

[haha]

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The amazing thing to me was that he explained that there was 2 *parts to the Social Security COLA. 1.) the Inflation portion and 2.) The wage increase portion.

I think I can explain this. Prior to age 62, your contributions to SS for a given past year are indexed by being multiplied by a ratio that is based on wages in the US. Since over time real wages have increased, this has historically given a more generous adjustment than a pure CPI indexing would give. It is also less easily fudged by the government.

Once you have reached age 62, if you are no longer working, your basic benefit is fixed. This basic benefit, or full retirement benefit is then increased by CPI inflation going forward.

Anyone over 62 would thus have nothing whatsoever to fear from this change, so seniors would be fairly easy to bring onboard. I think it would likely fly under the radar of most others, becasue it is a somewhat subtle point.

Mikey

[unclemick]

I believe it was Thatcher who got the adjustment passed in Britain - probably what Pete was referring to.

I listened/watched Pete tell Charlie Rose that British also don't waste medical money on the last months of life in their system like we do.

[cute fuzzy bunny]

We debated this in another thread where it was questioned whether your SS contributions were indexed before distributions, with the ultimate answer being that they are. This is the 'wage adjustment' thing. In essence, its the inflation adjustment before you retire, with the inflation/cola adjustment happening afterwards.

Its simply a clever way to screw the younger folks without them (probably) realizing it.

[ESRBob]

Is it possible that this would hit early retirees especially hard since we earn our wages early and then have nothing added into the system for the last 20 years or so prior to collecting benefits, which could allow our benefit to somehow be frozen in time and miss those 20 years of inflation adjustment, (then be inflation adjusted again once benefits begin, but always at a lower level than those who worked lthroughout their careers?)

Not given to paranoia and don't spend a lot of time thinking about SS in any case, but if TH or others is more conversant on this, could this 'subtle' adjustment for most workers be one that could nail us ER folks?

thx
ESRBob

[unclemick]

Yep

If what Thatcher did in Britain happens here (don't know the details) then ER's to be - end up on the losing side of the ledger.

Note - I could be wrong on this.

[haha]

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Not given to paranoia and don't spend a lot of time thinking about SS in any case, but if TH or others is more conversant on this, could this 'subtle' adjustment for most workers be one that could nail us ER folks?thx ESRBob

As TH mentioned, there is a long, exhaustive, and exhausting thread on this topic somewhere on this board.

The SS site clearly explains the current algorithm. It only takes 10 minutes to understand, and it seems that explaining it isn't much help. So why not go to the SS site, and read just exactly how it is now done? Then you can compare what would happen with the proposed system, and decide for your self whether you would feel "nailed" or not.

The short answer, is no, ERs would not be nailed. Although if real wages continue to increase in the future, there would be some marginal reduction in everyone’s benefits, and it probably would fall somewhat more heavily on those whose contributions were front-loaded. In any case, it would not be a major factor in any likely scenario. But again, this is a good one to make up your own mind about.

Incidentally, to address Unclemick's point, Margaret Thatcher in Britain made much more thoroughgoing changes to their public pension scheme than what is being discussed here. I am only starting to research this, but it seems that Britain has a funded plan, as opposed to our (US) current pay-as-you-go plan.

[sgeeeee]

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Is it possible that this would hit early retirees especially hard since we earn our wages early and then have nothing added into the system for the last 20 years or so prior to collecting benefits, which could allow our benefit to somehow be frozen in time and miss those 20 years of inflation adjustment, (then be inflation adjusted again once benefits begin, but always at a lower level than those who worked lthroughout their careers?) . . .

I'm not sure anyone can answer that question till we really know what this is. *

[jarrob]

Incidentally, to address Unclemick's point, Margaret Thatcher in Britain made much more thoroughgoing changes to their public pension scheme than what is being discussed here. I am only starting to research this, but it seems that Britain has a funded plan, as opposed to our (US) current pay-as-you-go plan.


The UK has a complex state pension system - it is NOT funded but paid from current government revenue (i.e. taxation). Employees (and employers) pay a three part 'tax' called social security. The first part is paid by the employer as a fixed percentage of each employees salary, the second part (also a precentage of salary) is paid by the employee and goes towards the basic state pension, the third part can be optionally paid by the employee towards their state second pension. The employee can elect to have this third part paid into a third party private pension scheme (called contracting-out).

The basic pension is not indexed in any way - the government removed the indexation link some years ago. Increases are purely at the discretion of the current government - much to the chagrin of pensioners! The basic pension paid is a the same for everyone at retirement age.

The state second pension paid is calculated from the number of years the employee has paid and is NOT connected to how much they have actually paid into it. The amount paid can also be 'adjusted' by government. It looks like a funded system from the employers point of view but the return is controlled by government.

The big problem in the UK is that the pension system has been shifting away from the basic state pension into this two part system as well as means-testing (if you have savings or other assets you get a reduced state pension). It is fairly obvious government are trying to modify the pension system in the hope they can meet future pension needs. They are already moving towards a retirement age of 70 instead of 65 (they currently offer a lump sum to anyone who delays retiring until 70). They are also moving the minimum retirement age from 50 to 55 (this is the minimum age at which you can draw from a private pension scheme - you don't get the state pension until you are 65). The means testing system is also bein extended as the state paid pension is left to shrink (no indexation). The problem with means testing is that it penalises people (like REs) who have saved to provide for themselves - they will probably not get the pension they have been paying the government for.

And you thought the US system was complicated

[cute fuzzy bunny]

I disagree Mikey, I think it would be seriously damaging, especially to ER's or people who earn their money early in life and then stop making money, such as disabled people, house wives/husbands, etc.

I think we DO know what 'this' is...its removing the wage/inflation adjustment of the assets prior to retirement.

When I was 20, if you were making 20 grand a year you were doing pretty darn good and could afford a house. Now its 75-80 grand 23 years later. Thats the sort of pain infliction we're looking at.

In particular for people like me who ER'ed really early, I have another 20 years before I get close to taking benefits.

To cut to the chase, instead of seeing $12-15k in todays dollars, I might be seeing 12-15k in 2025 dollars.

I'll be lucky to be able to feed my dogs on that.

But as a politician, I can see the appeal. Save social security, provide for the people close to retirement and those who work longer and later in life, subtley screw the young and the early retired who largely wouldnt understand this legislation unless someone explained it to them, and dramatically reduce benefits on a logarithmic scale...quite simply the less you work and the earlier you stop the lower your benefits.

Not that I think theres anything wrong with that line of thinking...except as it is nobody can live on social security, with this change, it'll barely be more than pocket change unless you're making big bucks and work until you're 70 before taking benefits.

Fortunately I dont count SS as being there, and the only hommage I pay to it is a casual glance at the current statement when I'm through figuring out my 'true' retirement income and say "well that'll be a nice cherry on top if it happens". Unfortunately most people are counting on it to support their retirement spending.

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To cut to the chase, instead of seeing $12-15k in todays dollars, I might be seeing 12-15k in 2025 dollars.

TH,

I asked the question and I am still confused. What you are aluding to is the Inflation part of the COLA. This was not what I was talking about.

There is a wage increase portion that I know that I don't fully understand. But your example addresses more the inflation portion that was not the issue.

[cute fuzzy bunny]

I thought I did, but let me try again.

They're both about the same thing. One 'adjusts' your contributions to equivalent wage increases before you retire, and one adjusts your social security payments after you retire by whatever the CPI/cost of living numbers are.

For the first one, if they didnt make wage increase adjustments to your contributions, your early payments into the system wouldnt be worth diddly because inflation/wage increases would stomp them out. Hence my $20k a year being worth a lot 25 years ago comment. The wage adjustment is simply 'inflating' your earlier contributions to equalize with current pay rates.

The first one is what they're planning on removing. So people who stop working or make most of their money earlier in life or people who dont make much in the first place are going to get paid less when they retire than under the current system.

Lets look at an example: guy gets out of school, gets a job, makes $30k a year (today). Contributes the usual amount to SS. Five years from now, he's making $38k. However as things are, his take home still barely pays the same bills on the same expenses he was paying five years earlier. But because his wages are up, he's contributing more to social security in dollars. Simple effects of inflation with wages being adjusted to compensate. What the current system does is annually adjusts your prior contributions to make them equal to what they'd be worth in todays wages. Simple retroactive inflation adjustment of prior contributions.

Otherwise, looking at todays 67 year old, his first few years of contributions were probably fifty to a hundred bucks a year. A lot of money 50 years ago but a nice dinner out today.

Not to mention, as I've railed on a few times before, I think CPI sucks as an inflation measurement tool, so your post retirement social security dollars will (in my opinion) buy less over time.

In short: as the system exists, social security barely pays barebones expenses for a retiree. Under this proposed system, if you're under 40 and dont plan on working and making big bucks until you're 70, dont even count on social security to give you even barebones expenses.

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When I was 20, if you were making 20 grand a year you were doing pretty darn good and could afford a house. Now its 75-80 grand 23 years later. Thats the sort of pain infliction we're looking at.

Forgive me if I am an idiot, but the above statement looks like a pure inflation play to me. So I know I don't 'get it' -

From experience I know that I am not in the dumbest 10 percentile of folks, so I am guessing that some others might be confused as well.

[cute fuzzy bunny]

You're thinking too hard, but you're right, its an inflation play but a different one.

CPI and PPI try to determine the cost of goods and the cost of production of goods.

Theres another index that tracks 'wage inflation'...what jobs pay. CPI and 'wage inflation' are somewhat related but not in sync. For example right now CPI is trending up around 2-3% while wages are actually down slightly every year for the past 3 years. But wages do tend to track inflation somewhat, simply because they have to. If people keep working and cant pay their bills, they'll demand higher pay or change jobs. The market pays what it has to.

So all SS has been trying to do is make sure your contributions are indexed against real wage increases (or decreases) so that the 'buying power' (or i guess its 'benefits power') is equalized between your earlier contributions and your later contributions.

Since they're paying out benefits from current contributions, that makes some sense all around...people get benefits paid as a result of their money put in, adjusted to what wages roughly are today.

Until the money coming in is outweighed by the benefits getting paid out.

Now we're to the crux of it though...if a smart guy like you cant easily grasp the implications of losing that wage adjustment, how is the average 25 year old voter with a family and a full time job soaking up his time going to 'get it'? He wont. Thats the point.

And even if a talking head on tv explains it to him, its wayyy out there 40-50 years from now and well out of his area of immediate concern.

Its also a great incentive to keep working: because your later contributions will be more substantial because they're closer to current wage conditions and because your SS benefits wont be big enough to incent you to quit.

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So all SS has been trying to do is make sure your contributions are indexed against real wage increases (or decreases) so that the 'buying power' (or i guess its 'benefits power') is equalized between your earlier contributions and your later contributions.

I'm not there yet, but I'd really like to understand this.

If I am on SS and bought a tomato in 1985 for 50 cents and today that tomato costs 70 cents I guessing that the appropiate SS COLA would have been increased to afford the tomato at 50 cents.

That would be the inflation portion of the COLA. - So I am gonna ask again - What would be the Wage inflation portion in this example?

One more try and if don't get this, I'm going to have to join the Republican Party because the Democrats will excommunicate me

[cute fuzzy bunny]

It'd probably help if we both forgot about any acronyms like 'cola', unless its like pepsi, but then its still coffee time for me as I just got up about an hour and a half ago.

But just before we depart from that, the cola piece is the adjustment AFTER you retire. The wage adjustment is to your contributions BEFORE you retire.

Suffice it to say that like most thing the government creates and 'fine tunes', its far more complicated than it needs to be. Its that way because we have tens of thousands of people who have nothing to do with their lives other than to create and modify and add complexity to legislation. One of Schwarzenneggers drilling points is making californias legislators part time from full time with the key benefit of them not having as much time to screw around with nanny legislation and 'revisiting' old legislation. But I digress, as usual.

Social security is not like an investment. You dont put money in, watch it grow, and then take it out.

You contribute as a percentage of your income over your lifetime. Those contributions go towards paying current retirees benefits. Your benefits are a function of how much you contributed over how many years.

But you're contributing for 40-50 years (usually). So unless you adjust those old contributions (which were a percentage of your wage income), they wont 'weigh' as much as current ones. So they are 'adjusted' by whatever rate wage increases have occurred since you contributed them.

Lets go back to my old example. Lets say a good middle class wage was $30k in 1984. I would have contributed 6.2% of that pay, or $1860, for that year. Lets say a good middle class wage is $60k in 2004. I'm paying $3720 in SS contributions this year on that salary. But those two salaries had the same buying power in 1984 and 2004. Unless I adjust the contributions made in 1984 into 2004 wages, I'm underweighting the earlier contributions and overweighting the later ones. The intent of the wage adjustment was to maintain the weighting of early contributions so they were worth as much as newer ones.

If you went on fixed weightings, a guy who worked his butt off and made great money in his 20's, 30's and 40's would get a smaller benefit than a guy who slacked off until he was 50 and then made a lot of money in his 50's and 60's.

But the way most peoples incomes work is they keep increasing their wage buying power through their lifetimes until sometime in their mid to late 50's when they start to flatten out. So theres usually very little disparity from one wage earner to another.

Unless you're an ER, you burn out, or you're a late bloomer.

By removing this 'weighting adjustment', they're effectively reducing peoples benefits on a sliding scale. Your early contributions will lose weight. With all the other formulas left intact, you will simply get a lower benefit paid.

Which brings us back to the political aspect of it. Its well established that if the politicos simply say "we're cutting all social security benefits by 30% to keep the system solvent", the current retirees and baby boomers will have their head on a stick. Similarly, saying "if you're over 40, you'll have most of your benefits but if you're under 40, dont expect much if anything" will result in younger, faster people wanting their heads on a stick.

But how about we say "we're going to remove the wage adjustment calculation from social security wage contributions to keep the system solvent, which may reduce benefits for some people, predominately those who slow or stop working at middle age, who reduce their earnings voluntarily (or not), or who elect to take an early retirement (before 67)".

Well! You just flew under 90% of the populations radar and for those who were paying attention, you made it sound like it really wont have much of an effect on them.

But wait until todays 20 year olds are 62 and want to retire, to see that they'll be getting half of what they would have had under the old system, and at 67 when they see that they'll only be getting 70% (surprise! And you're too old to go headhunting!).

Of course, you keep the adjustments in you've already made, so the effect is small up front to people close to retirement age and it has a magnifying effect as you towards younger groups. So it'll be a long time before it really starts to show. And the people responsible will be out of office and long dead. Its a win/win!

Of course the next step is to adjust the standard retirement age from 67 to 70 and tweak the benefits downward, for those under 45 or so. But that can wait a couple of years so the blows are well paced out.

With me now?

I'm kinda with you, but I believe this ER thing has caused my brain to atrophy.

It's either that or it's too much work to understand it.

And the way I feel today, is that I won't live long enough to make it matter

[cute fuzzy bunny]

I think you're thinking too hard.

Let me try a simpler example. Because I'm bored and have nothing else to do.

You go to work for a company as a 20 year old. They tell you that if you work for them for 50 years, they'll pay you 6% of your annual salary after you retire in perpetuity.

You work for them for 50 years. Go to collect your first check.

The nice lady in payroll looks at your work history and says:

"Ok good...your first year here you made $1000, so six percent of that is $60, divided by the 50 years you worked here thats $1.20. THe second year you made $1200 so six percent of that is $72 divided by 50 is $1.44..."

About the time she gets to year 5 its going to occur to you that you arent going to get much money because they're giving you an aggregated average six percent of each years pay. About the time she gets to year 10 you're going to be pretty pissed. But you did keep working and making money for the company and paying the executives salaries all those years.

This is a scenario without wage adjustments.

With wage adjustments, the conversation would go "year 1 you made 1000...in todays wages that would be 20000, six percent of that is $1200..."

Well I'm bored too, so I might as well pursure this.

OK, the wage deal _ This would only affect people that were still working right? -

So in other words if you retired today and this thing went through 5 years from now it would have no effect? Or Not?

[cute fuzzy bunny]

I'm presuming they'd make it effective as of when they passed it. So if you were a year away from retirement, you'd lose the wage adjustment for that one year. No big deal. If you're 40 years away, you'd lose 40 years worth. Very big deal.

It does make sense for most people. A graduation reduction in benefits that gets larger as your audience gets younger, encouragement to work longer in life and make more in your later years, an encouragement to not retire and take benefits earlier, and its all completely incomprehensible to most voters!

It just sounds lousy for ER's. But like I said, SS is a magic cherry on top if I get it. Mad money.