|Federal Information & News Dispatch, Inc.|
Chairman Johnson and Other Distinguished Members of the Ways and Means Subcommittee on
It is an honor to testify to you today about
This is not my opinion. This is only conclusion one can draw from Table IVB6 of the 2013 Social Security Trustee's Report. This table reports that
Economics Doesn't Let Us Pick Which Debts to Count and Which to Ignore
The value of a government I.O.U., whether
Some payments the government will make in the future will occur with more or less certainty. But this uncertainty doesn't make the obligation go away or imply that the obligation's value has no present value. It simply means that, in forming the appropriate present value of the obligation one needs to adjust for its risk.
But economics doesn't let us pick and choose which debts to include and which to exclude in properly present valuing the government's future liabilities. Nor does it let us pick and choose which assets, including which future revenue streams, to include in properly present valuing the government's ability to meet it's future liabilities. Economics tells us that we need to consider the present value all future government spending obligations, no matter their risk or timing, and net them against the properly formed present value of all future government revenues, no matter their risk and timing.
In the context of
The Inform Act - H.R. 2967 and S. 1351 -- is a bipartisan bill that requires the CBO, GAO, and OMB to do infinite horizon fiscal gap and generational accounting on an ongoing basis and for every major fiscal bill introduced in
Economic theory doesn't wear blinders and doesn't endorse blinders. It doesn't tell us to look at obligations only over the next year, or only over the next 10 years, or only over the next 75 years. It tells us to properly present value all future government obligations net of receipts over the infinite horizon.
It is now 31 years since the
To their great credit,
Instead, the Trustees have been focusing on the system's 75-year fiscal gap. Unfortunately, the 75-year fiscal gap captures only 42 percent of the system's true shortfall. Hence, the Trustees have been warning us only about two fifths of
How Broke Is Social Security?
To pay its scheduled benefits in full through time, the
Alternatively, to prevent having to raise its FICA payroll tax rate, the system needs to immediately and permanently cut all benefits payments by 22 percent. Delay in raising the OASDI tax rate or cutting OASDI benefits will require even larger percentage adjustments in the future.
The bottom line is that
Chairman Johnson and other Subcommitee Members, I invite you to visit www.thepurplesocialsecurityplan.org. This website lays out a very simple (postcard length), but fundamental reform of
One final point about
Unfortunately, those who proclaim the strongest desire to preserve and protect
With these financial facts of life, let me now turn to
I know a lot about
In addition to developing this program in conjunction with my software engineers and in consultation with technical experts from
To give you a sense of
B(a)=PIA(a)x(1-e(n))x(1 + d(n))xZ(a)+max((.5xPIA*(a)-PIA(a)x(1+d(n)))xE(a),0)x(1-u(a,q,n,m))xD(a)
The formula has 10 mathematical functions on the right hand side. One of these is in four dimensions. One is a maximum function. What's not shown here is that there are addition complex mathematical functions, one of which - my favorite - involves a maximum function defined over a minimum function, that restrict the values of the variables that can enter these 10 functions.
Some people looking at this formula would say, "Well, democracy is messy. And this is the price of democracy." This, frankly, is hogwash.
I'm advocating the Purple Social Security Plan, not the
The Implications of
We have 10,000 Baby Boomers retiring every day. I wish I could say all 10,000 were using my company's software to make appropriate claiming decisions. They aren't. We have the top ranked, least expensive, and best-known software. But if 20 people buy it on a given day, that's a lot.
What most people are doing is relying on
The combination of a fantastically complex set of benefit provisions,
Let me illustrate the dollars at stake in making the right decisions by using my company's software.
The Importance of How and When Someone Chooses to Claim Benefits
Consider a 62 year-old couple that's contributed the maximum amount to the system each year they worked. If they do what far too many people do, namely take their retirement benefits at the earliest possible date (age 62), their lifetime benefits will total
Where are the gains coming from? In the main, the gains are coming from waiting a relatively small number of years to collect much higher benefits for potentially a very long number of years.
Economic research on this valuation problem dates back 60 years. This research tells us to value a household's
Valuing insurance products in a special manner is not restricted to longevity insurance. To see this, consider valuing homeowners insurance. No one values homeowners insurance simply as an investment. Were we to do so, we'd apply actuarial/break-even analysis and conclude that buying homeowners insurance doesn't pay.
What Factors Does a Worker Need to Consider in Determining When to Claim Social Security Benefits?
This is another important question. The answer is multifaceted. There are so many different and major factors that come into play that I would take a book to fully respond. Instead, let me illustrate, via examples, three of the many factors workers need to consider.
The first factor is that workers need to understand the benefits for which they may be eligible. Take my friend Jerry who is 65 years old and a high earner. His wife recently passed away. When we were having dinner in January he told me he planned to retire at 70 and take his
Now why should my friend, who by chance learned about his rights to collect widower benefits, receive an extra
My second example involves a marvelous doctor, who I just met by shear accident. The example illustrates the need to know how benefits are calculated. The doctor is age 68. One month ago he was diagnosed with pancreatic cancer. He figures he has two years left to live. He's married, his wife is 64, and she had a very limited earnings history. Upon learning his diagnosis, the doctor went to the local
The doctor followed this advice and signed up for his retirement benefit. It was the wrong advice. In taking his retirement benefit before age 70, the doctor reduced his wife's future widow's benefit by 16 percent. Neither the doctor nor the
A third thing that workers need to know in collecting benefits is that they can't trust much of anything they read online from
"Larry, I'm currently 63. My ex is older than me and has earned much more. Over the past year, I tried to determine what benefits I could collect. I spoke with three different
I just learned about deeming and that I was, without my knowledge, forced to take my divorcee spousal benefit early. Had I been made aware that I would be deemed and be forced to take a permanently reduced spousal benefit, I would never have applied for an early retirement benefit. People really shouldn't have to deal with this kind of stress to receive a benefit for their retirement. I do also acknowledge that with
Let me conclude my testimony by answering several questions either raised by Subcommittee staff or posed by me.
File and suspend can be used by one spouse to help another spouse file exclusively for a spousal benefit once that other spouse reaches full retirement age. But it can also be used by workers to accrued Delayed Retirement Credits while leaving open the option of taking one's suspended benefits as a lump sum if there is a sudden need for a large infusion of cash. File and suspend is not the only way that a spouse can receive a full spousal benefit at full retirement age while letting his/her own retirement benefit continue to grow via the accumulation of Delayed Retirement Credits. If one's spouse has filed for, but not suspended his/her retirement benefit, one can collect a full spousal benefit at full retirement age. Also, divorced spouses can collect full divorcee spousal benefits starting at full retirement age without anyone having filed for and suspended a retirement benefit.
Deemed filing can force spouses and divorced spouses to file for their spousal benefits early if they file for their retirement benefits early and force them to file for their retirement benefit early if they file for their spousal benefit early. This provisions keeps people who file early from being able to collect one benefit first while letting the other benefit grow.
Most people appear not to know about these and many other
What are common questions workers ask when they are trying to decide when to apply for benefits?
The most common question that workers appear to ask is no question. Instead, they figure out when is the earliest date they can take their retirement benefit and apply at that date. They appear to have little or no idea about their eligibility for spousal, widow(er), divorcee spousal, and divorced widow(er) benefits, little or no idea about deeming provisions, little or no idea about Delayed Retirement Credits, file and suspend options, start-stop-start strategies, family benefit maximums, the Adjustment of the Reduction Factor that can mitigate the Earnings Test, and the list goes on.
Should We Eliminate the Option to File and Suspend?
Certainly, restricting File and Suspend for high-income households, as the President proposed in his budget, will save the system money. But the system is so broke and so poorly structured that only a truly radical reform will cure what really ails it.
Should We Eliminate Deeming?
Deeming is a particularly nasty gotcha that differentially harms lower-earning households who can't afford to wait until full retirement age to collect a full spousal benefit while letting their own retirement benefit accrue Delayed Retirement Credits. Presumably those who thought up deeming had their reasons. But at least to me, Deeming is just another crazy
Read this original document at: http://waysandmeans.house.gov/UploadedFiles/7_29_14_SS_Testimony_Laurence_Kotlikoff.pdf
|Copyright:||(c) 2010 Federal Information & News Dispatch, Inc.|