Coyote Blog

From Market Watch, but you see the same article everywhere:

This year, like last year, Social Security’s trustees said the program’s two trust funds would be depleted in 2034.

For the first time since 1982, Social Security has to dip into the trust fund to pay for the program this year.

This is like sticking a knitting needle in my eye every time I read it.  Repeat after me:  There is no trust fund.  If it ever existed, it is gone.

OK, I will admit that it does technically exist -- there is a government account for it.  But the trust fund is full of just one asset:  government IOU's to itself.  When Social Security was collecting more money in taxes than it spent on benefits, the extra cash flowed into the trust fund.  Then Congress immediately took the cash out and spent it on... whatever, and left behind an IOU.   I suppose the government pays interest to itself on this debt, but this interest just goes back around in a circle to cover the interest that was just paid out.

Imagine you had a piggy bank where you collected money for a rainy day.  Then one day you wanted a new TV and you took $1000 out of the piggy bank to pay for it, leaving an IOU in the piggy bank for $1000.  I guess you could technically say to yourself that you still had $1000 in assets in the bank, but what good is an IOU to yourself?  I suppose you could even pay yourself interest.  You could take $20 out and then put it back in as interest.  Wouldn't that feel like progress!

This is what the government has done.  You can read numerous articles online that will say that in the case of the trust fund these IOU's are somehow different and really have value.  Here is the simplest way to think about it:  Imagine to cover benefits in a particular year the Social Security Administration needs $1 billion above and beyond Social Security taxes.  If the trust fund exists, the government takes a billion dollars of government bonds out and sells them to private buyers on the open market.  If the trust fund didn't exist, the government would .... issue a billion dollars in bonds and sell them to private buyers on the open market.  In either case, the government's indebtedness to the outside world goes up by a billion dollars.  I will confess there are some technical issues that might differ in the two cases -- perhaps there are different implications for the two approaches on the government debt limit.  But that is just a procedural issue -- in reality there is no economic difference between the two cases.  If there is no economic difference between the trust fund existing and not existing, then in my mind is effectively does not exist.

As much fun as it is to mock the US Postal Service, their inability to restructure their costs is not all their fault. Every time they try to close a facility, they get met by opposition from about everywhere.  Here is an example where Berkely, CA is doing all it can to prevent the USPS from selling a post office building.

The Postal Service over the summer began moving ahead with a plan to sell its 1914 Beaux-Arts post office in the heart of Berkeley near the old city hall and a park named after Martin Luther King Jr. The move drew howls from residents worried that the building would turn into condominiums or office space, even drawing dissidents to camp out for days by the columned building entrance.

Now, opponents are gaining traction with an unorthodox zoning restriction: that the mustard-colored building must remain open to the public

The Berkeley Planning Commission last month approved a measure that would restrict the use of the post office and adjacent government buildings to government agencies or public uses like a theater. Residential use and many other private functions would be banned by the action, which requires City Council approval.

This is simply bizarre.  What, do residents have so many fond memories of their time spent in the line at the post office that they want these golden memories preserved?    The assumptions made by local opponents are just bizarre -- they seem OK if the building is used for offices of the Social Security Administration but not if it is used for private offices.  Why would anyone possibly care.   From my experience, private urban office buildings tend to be cleaner and better maintained than government offices.

A government job can be a great deal.  Likely it pays more than a comparable private job, it's generally impossible to get fired from, and it has outrageously good medical and pension plans.  And, if you don't shy away from a bit of perjury, can be made to pay off spectacularly:

During the workweek, it is not uncommon to find retired L.I.R.R. [Long Island Railroad]
employees, sometimes dozens of them, golfing there. A few even walk the
course. Yet this is not your typical retiree outing.

These
golfers are considered disabled. At an age when most people still work,
they get a pension and tens of thousands of dollars in annual
disability payments "” a sum roughly equal to the base salary of their
old jobs. Even the golf is free, courtesy of New York State taxpayers.

With  incentives like these, occupational disabilities at the L.I.R.R. have become a full-blown epidemic.

Virtually
every career employee "” as many as 97 percent in one recent year "”
applies for and gets disability payments soon after retirement, a
computer analysis of federal records by The New York Times has found.
Since 2000, those records show, about a quarter of a billion dollars in
federal disability money has gone to former L.I.R.R. employees,
including about 2,000 who retired during that time.

97 percent?  Wow!  And just to demonstrate that year was not some kind of outlier:

In each year since 2000, between 93 percent and 97 percent of employees
over 50 who retired with 20 years of service also received disability
payments.

The article goes on to demonstrate that this is occurring at what appears, from the injury statistics, to be one of the safest railroads in the area.  Say what you will about the NY Times, but when they get their teeth into local corruption they can still do a masterful job, as evidenced by this long article discussing many apparently ridiculous payroll situations at the LIRR.

I can say from experience that there is a group of people in this country for whom getting a lifetime disability payment (e.g. from the Social Security Administration) is as good as hitting the lottery.  I remember one time I got a survey form from the SSA asking about a former employee.  I didn't pay much attention to the form's purpose as I filled it out -- I get all kinds of such government wastepaper with breathless admonishments about the urgency of my reply.  Anyway, about 2 weeks later I got a very threatening letter from the attorney for this former employee, threatening me with all kinds of dire consequences if I did not immediately retract my (honest) answers to the SSA inquiry.  Apparently, I was endangering a lifetime disability determination that this person had been working on obtaining for years. 

Every day, in fact, I get job applicants who try to cut deals with me of one sort or another (e.g. can you pay me under the table in cash?) because they say they are fully able to do outdoor maintenance work but they can't show any income because it might endanger their lifetime disability payments.  In a similar vein, I have three cases I know of in my company today where workers filed workman's compensation claims of injury several days after they were terminated.

I've said it before, but the reckoning is coming on state and local government pensions, which in most cases are unfunded, undisclosed liabilities of startling magnitude.  The disaster that is fast approaching in these state and local government finances will make Social Security's problems look pitiful by comparison.

Postscript:  Railroad labor law is just weird and a total mess.  Being the first major industry, and the first major industry that was regulated, a whole regulatory structure was put in place for railroads that (fortunately) has been applied to few other industries.  Whatever the problems we have with state workman's comp programs, they are models of governance compared to how things work in the railroad industry.

For example, I remember when I worked for a railroad in the 1990's, carpel tunnel claims were common.  By the nature of the comp system, workers got cash payments for injuries in addition to medical treatment (I recall a figure at the time of $7500 per wrist for carpel tunnel, but that may be off).  It was a common piece of advice among railroad workers that if one wanted to get the money together for a down-payment on a new pickup truck, one only had to go to Dr. X or Y and get a carpel tunnel diagnosis.

A few weeks ago I got my annual "Your Social Security Statement" from the government.  This is a statement carefully crafted to look like it's telling you a lot while at the same time covering up Social Security's dirty little secret.  But with a spreadsheet and 5 minutes of work, one can figure out what is really going on.

The statement shows the total of my social security taxes paid into the system, including the employer share.  It also shows my taxed earnings per year, and my "benefits."  The main benefit is the monthly annuity payment Social Security will make to me after I retire.  My statement shows that $140,139 total taxes have been paid into the system on my behalf over the last 25 years.  Based on these taxes and (this is important) the assumption I and my employer will continue to pay in at least $7440 per year until I retire, I can expect an annuity at retirement age of 67 (under current law, which the statement makes clear can be changed at any time) of $1,985 per month.

So I built a spreadsheet (click to download excel file), going back to my first year of employment.  Each year, I added the social security taxes to savings, and grew the accumulated balance by some interest rate.  For past years I used actuals from the report, for future years I used the $7440 tax number the report uses to calculate the social security payout. 

This allowed me to answer a question:  If I had been able to take these social security taxes and instead put them in a savings plan, and then took the accumulated balance out at age 67 and bought an annuity (at current rates), what would be my monthly payment?  Well, assuming a very conservative after-tax rate of return of 5%, I would have $1,077,790 at age 67 to buy an annuity, which at current rates quoted on the Vanguard site, would give me $7,789 a month until I die.  This return is just about four times the amount I get from having the Social Security Administration manage the money for me instead. Ugh.  Also note that I did not assume "risky" equity investments or whatever straw man anti-reformers are using nowadays.    If I assume a higher return of 8%  (the stock market in the 90's returned something like 18%) then my annuity will be $17,860 per month, or 9 times the Social Security payout.  Double ugh.

In fact, this all opens up the obvious question, what actual rate of return is Social Security paying out on your "premiums?"  Well, in fact we can calculate this with the same spreadsheet.  I plugged in 2% for the interest rate.  No go -- resulting annuity is to high.  Then I plugged in 1%.  Still too high.  Could the government be paying you 0% on your money?  I plugged that in.  Still too high.  In fact, the implied rate of return on my money in the Social Security system is -0.8% a year.  In other words, not only is the government not paying me any interest, they are charging me to hold my money.

Social Security defenders insist that it is not a welfare program.  For example, Kevin Drum quotes this with approval:

The men in my family of my father's generation returned home after serving
their country and got jobs in the local steel mills, as had their fathers and
their grandfathers. In exchange for their brawn, sweat, and expertise, the steel
mills promised these men certain benefits. In exchange for Social Security taxes
withheld from their already modest paychecks, the government promised these men
certain benefits as well.

....These were church-attending, flag-waving, football-loving, honest family
men. They are rightfully proud of providing homes and educations for their
children and instilling the sorts of values and manners that serve them well as
adults. And if I have to move heaven and earth, now that they've retired, the
Republican party is NOT going to redefine them as welfare
recipients.

Fine, let's call it a retirement program.  Well, as a retirement program, it is a really, really big RIPOFF.  Ever worker in this country is being raped by this retirement plan.  In fact, it is the worst retirement program in the whole country:

• As we see above, it pays a negative rate of return
• It is not optional - you go to prison if you choose not to participate
• Unlike a private annuity contract, the government can rewrite your benefits level any time, and you have to take it.  In fact, my statement says "Your estimated benefits are based on current law.  Congress has made changes to the law in the past and can do so at any time.  The law governing benefit amounts may change because, by 2040, the payroll taxes collected will be enough to pay only about 74 percent of scheduled benefits."
• There are no assets backing this annuity!!  An insurance company that wrote annuities without any invested assets backing them would be thrown in jail faster than Jeff Skilling.  The government has been doing it for decades.

A couple of months ago, news-hog Eliot Spitzer had a well-publicized (what else?) suit against H&R Block for not providing high enough returns in its low-income retirement savings accounts.

New York Attorney General Elliot Spitzer [official website] Wednesday launched a $250 million lawsuit [complaint, PDF] against H&R Block
[corporate website], the largest tax preparation service in the US, for
fraudulently coaxing its customers into a retirement account plan that
lost them money. Spitzer said that money in the retirement accounts
decreased over time because the low interest rate did not cover the
fees associated with the account.

Doesn't this exactly match the situation in my social security spreadsheet?  At least H&R Block's customers had a choice whether or not to sign up.

Postscript: As is usual with retirement issues, tax is a messy topic, so I mostly left it out.  My spreadsheet is correct if you call it an "after-tax" rate of return.  This may mean the nominal rate is higher, but it got taxed, or it could posit some tax-free savings alternative to social security.  Note also that we pay income taxes on the amount that gets taxed by Social Security (at least our employee portion).  This means an IRA type replacement for social security would actually have higher returns and dollars at retirement than those in my spreadsheet, because it would eliminate or at least defer income taxes on the premium.

Also note that the analysis is all in nominal dollars, because that is the way the dollars are on my SS statement - there are not inflation escalators in the program.

Postscript #2:  When last social security was a national topic, opponents of reform got a lot of mileage out of the 2001-2002 bear market in stocks.  They would ask, what if people had invested in stocks, they would have lost their money.  Well, as of today, if you had invested every dollar of your retirement savings on the worst possible day, the 2000 peak in the Dow, you would still be up 5% today.  This is a disappointing  return of less than 1% annually, but is STILL higher than the negative return in social security.  And remember, we are using nearly the worst five year before and after dates in this generation.  A real-world steady investment in stocks over the last 20 years, with equal amounts each year, would be way up  (anyone with an exact number is welcome to post it in the comments).

Postscript #3:  In an earlier post, I took on Social Security as intellectual welfare:

Advocates for keeping forced savings programs like Social Security in
place as-is by necesity argue that the average American is too stupid,
too short-sighted, and/or too lazy to save for retirement without the
government forcing them.  Basically the argument is that we
are smarter than you, and we are going to take control of aspects of
your life that we think we can manage better than you can.  You are
too stupid to save for retirement, too stupid to stop eating fatty
foods, too stupid to wear a seat belt, and/or too stupid to accept
employment on the right terms -- so we will take control of these
decisions for you, whether you like it or not.  For lack of a better
word, I call this intellectual welfare.

Update #1:  In response to some comments, the spreadsheet does work right, it is just labeled wrong.  The column that is labeled "investment income" is actually the saved balance to date plus the investment income.  The "End of Year" column is the correct balance at the end of year after investment income and new contributions.

Update #2:  A commenter reasonably points out that investment at the top of the market in the Nasdaq would still be way underwater.  However, I took this point investment on the worst day as an extreme example.  Even in the Nasdaq, which is still off 50% from its peaks, a steady monthly investment from 1997 or 1998 to date would be above water in total.  Leftists do a lot of bad things for the country, but trying to scare average workers away from equity investments for the long-term is certainly on of the most hypocritical.  I guarantee that every liberal politician has a big fat chunk of their savings in equities, because they know that is the way to create wealth over the long haul.

Update #3:  In a follow-up post, using this same spreadsheet, I conclude that only 17% of my Social Security taxes are going to my retirement while 83% are welfare for someone else.

Today, the town of Sedona, Arizona joined the ranks of government organizations trying to make business incrementally more difficult.  I operate campgrounds in the Sedona area, and as such I have already registered my business there with:

• The federal government for social security and medicare taxes
• The federal government for employee payroll withholding
• The federal government for income taxes
• The federal government for federal unemployment insurance
• The State of Arizona secretary of state and corporation commission
• The State of Arizona department for unemployment insurance
• The State of Arizona department of revenue for sales taxes
• The State of Arizona department of revenue (second time) for corporate income taxes
• The State of Arizona department of liquor, for liquor license
• Coconino County tax collector, for property taxes
• Coconino County health department, for health inspection and certificate

I am sure this list is incomplete, but you get the idea.  I know for a fact that the town already has access to my business information, because they have access to the state department of revenue sales tax database that has all the data they want.  However, I guess so they can feel important -- they want to make sure I have THEIR approval to exist and conduct private transactions with the public as well.  Here is the only rational offered in their letter:

To those businesses operating in the City limits of Sedona:

Help Create Our Economic Future

To Create a viable economic future for Sedona, it is important to know what types of businesses currently exist within the community.  As of January 31, 2006, in order to create a database, all businesses operating in Sedona, or headquartered elsewhere and doing business in Sedona, will need to apply for a business registration.

First, we businesses are already creating Sedona's economic future, and this notion that a couple of people in a small town city clerks office can do anything to add to productivity and economic growth is the worst form of governmental hubris.  Second, though filling out a couple of pages may seem  too small to complain about, we operate in over 200 locations.  Thank God that most of them are in unincorporated area, or we would be filling out hundreds or thousands of pages a year just to help some city clerks with their "database". 

Third, it is interesting to note that Sedona is starting is campaign for their economic future by making doing business there harder.  Sedona reminds me a lot of Boulder, Colorado, where I used to live.  In Boulder, this kind of data request would be the harbinger of some massive new regulation program.  My best guess is that this will be the case in Sedona as well -- this database will be used to justify new regulations and taxes, not less.

I ran corporate planning staff groups at several large corporations.  Every time my staff guys had a new analysis they wanted to do, they often wanted to send out a new requirement to all of our operations managers to report some new data they needed for their project.  As their manager, I tried to be ruthless in defending our operating people, pushing back on my staff guys to find any other way to get the data they need, or to justify strongly the need to ask our folks to report yet another bit of data.  In most cases, the analysis did not justify the work or the data could be acquired some other way, a way that required more work of my staff guys but a lot less from the operating guys who really mattered.  This requests smacks of the exact same thing, except without the adult supervision to push back on their endless data requests.  (Other example here).

This all made me think of this, maybe because my mind works in strange ways. 

The Senate has introduced the "Digital Content Protection Act of 2006,"
a bill that will create "Broadcast Flags" for all digital radio and
television, leading to FCC oversight of all new digital media
technologies from iPods and PSPs to TVs and DVD recorders.

Under the DCPA proposal, digital media technologies would be
restricted to using technologies that had been certified by the FCC as
being not unduly disruptive to entertainment industry business-models.

Beyond my irritation at this whole broadcast-flag-FCC-power-grab raising its head again, it made me think about people's reaction to regulation.  In general, when people actually run into government regulation face to face, they hate it.  That's why with this broadcast flag issue you tend to see a lot of people who generally profess to be comfortable with big government suddenly freaking out, perhaps because this is the first time, beyond the drivers license office or trying to mail a package at Christmas, they every run into the true face of government.  Most corporations today are pretty good at sheltering customers and employees from the mind-numbing regulation they face. 

To all you guys who are fed up with the FCC, let me assure you as a small business owner:  The Department of Labor, Federal Trade Commission, Social Security Administration, Department of Commerce, and every state, county, and city agency you can think of is at least as overreaching and destructive.

The government:  Not to know it is to love it.

Update:  In the past, I have had a field day laughing at left-of-center groups who scream privacy rights at every occasion but support all the intrusion above.  Most recently, I have taken on NOW and the ACLU over this issue.