From left to right, Jack Haley as the Tin Man, Ray Bolger as the Scarecrow, Judy Garland as Dorothy and Bert Lahr as the Cowardly Lion in the MGM film “The Wizard of Oz,” 1939. MGM Studios/Archive Photos/Getty Images.
Given the tidal wave response to Boston University economist Larry Kotlikoff’s “34 Social Security Secrets” post of last Monday, we asked you to send in questions, which Larry kindly agreed to answer. Again, we were inundated. Even our transom is now flooded. A glutton for punishment, “Ask Larry” is bailing us out and the good doctor (of “philosophy”) has promised to keep answering your questions.
One of those answers this past Friday caused me enough concern to respond to it at some length myself. Now I’m not trying to make this into a game of Pong here on Making Sen$e, but Larry certainly has the right and standing to counter-respond. So he has, in Monday’s blast at the complexities of the Social Security system.
As followers of Larry’s know, he has long been a vexed critic of our country’s retirement system, from his 1983 book “Pensions in the American Economy” through “Generational Accounting” (1992) to “The Coming Generational Storm” (2004) to his new “The Clash of Generations” (2012). (A complete list of his works and days can be found at his website, kotlikoff.net.) He originally ended Monday’s post with a further diatribe, which we’ll feature here soon, but with a response from someone a good deal more qualified to rebut him than me. In the meantime, here’s Larry’s riposte to my thrust, or however they would say it in fencing.
Laurence Kotlikoff — Paul: One of your most endearing qualities is your optimism. You see the brilliant light at the end of the tunnel when others see a deep dark ditch. Like other members of the dismal science, I focus on the dark side of economic outcomes, because that’s where the action is. Our five-year-running Great Recession/Awful Malaise has been agony for hundreds of millions around the globe but a God-send for economists, who get to see first-hand how decrepit and dishonest fiscal and financial systems collapse, dragging down their fragile economies. For me, this focus on things-which-should-not-be-named had included investigating the intricacies of the Social Security system on which so many of us so completely depend.
There reaches a point when a spade needs to be called a spade. Our Social Security is a disgrace, not in its objectives or in the tremendous help it’s provided older people over the years, but in the way it’s been designed and the way it’s been financed. Its complexity is virtually beyond description. When the formula for spousal benefits involves 10 discrete and continuous functions, one of which is four-dimensional, we are, let’s put it this way, not in Kansas any more. More like Oz.
Photo courtesy Laurence Kotlikoff.
Our country’s basic retirement saving system is indecipherable. As a result, it’s leading all kinds of people to make all kinds of mistakes in deciding when to take benefits and what benefits to take. You yourself, Paul, were nearly the victim to the system’s caprice to the tune of several tens of thousands of dollars. Had you not accidentally told me over tennis about your plans for taking Social Security, you would have been what, $40,000, poorer? I hear of such mistakes daily. The questions to which I’ve replied here on Making Sen$e provide ample examples of these mistakes.
My company’s patent attorney is as smart as a whip — PhD in engineering from MIT plus a law degree from the University of Pennsylvania. At lunch the other day, he tells me: “Larry, you wouldn’t believe how complicated Social Security is. But I sorted it out. Joan’s taking her spousal benefit now but will get her much higher retirement benefit at 70. And I just stated my benefit.”
“Mark,” I said, “How old are you two?”
“Joan is 65 and I’m 68.”
“How’d you reach this decision?”
“I talked to the people at the local Social Security office.”
“Mark, you blew it. You got bad advice or misheard what they were telling you. You just gave up about $30,000. Let’s see if we can fix this.”
Fortunately, Mark and Joan had two weeks to undo everything they’d done by repaying in full all the benefits they’d received and wiping the slate clean. (There’s a one-year grace period during which you can pay back benefits and start afresh.) They started again from scratch and waited until Joan reached full retirement age, at which point Mark filed for and then suspended his retirement benefit. Joan then filed for her spousal benefit, and bottom line, they’re $30,000 better off while both wait until 70 to file for full benefits. And I got a free dinner from Mark, just as I did from you, Paul.
The effect of this system is little different from Uncle Sam choosing people at random to rob and handing out the proceeds to other people selected at random. You say, “There is a fantasy that laws and policies can be made simple.” It’s not a fantasy. Our Social Security system has 2,728 thousand rules in its Handbook and tens of thousands of rules to explain these rules in its Program Operating Manual. New Zealand’s system has one rule: You reach age 65 and you get a benefit — the same benefit no matter who you are or what you earned.
I’m not advocating New Zealand’s system for the United States. Far from it. But the Purple Social Security Plan, which is my proposed fix for Social Security, is a remarkably simple system that would work just fine in the U.S. and, indeed, become a model for the rest of the world.
The hour is late; the end of the tunnel is near; time is not on our side. Social Security’s internal structure is not just a horror show; the system is desperately broken, as I’ve described in a recent Bloomberg column. Table IVB6 of Social Security’s own Trustees Report shows the system is short $20.5 trillion in present value. This enormous $20.5 trillion ditch is 31 percent of the present value of the system’s taxes, meaning the system is underfunded by 31 percent, meaning the system needs an immediate and permanent 31 percent payroll tax hike, meaning every worker needs to pay four cents more on the dollar up to Social Security’s taxable earnings ceiling.
There are other “fun” policies to keep this train on the tracks. One involves cutting every current and future Social Security beneficiary’s benefit by 23 percent. Tell that to my 92-year-old mom, who is highly dependent on Social Security (ignoring help from me and my sibs), and you’ll find a cane flying in your direction. We could also hit up the rich by eliminating the earnings ceiling. This would eliminate, I believe, only about 40 percent of the 31 percent fiscal gap facing the system.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions