How much Social Security will you receive?

Will social security be there for you? It is almost cliche to say "it will be gone by the time I retire".  Yet, almost everyone is relying on it. Are you relying on social-security to be there for you? If you're preparing for the worst, good for you; but, what's the most likely way in which this will unfold?

How are "benefits" calculated?  This a very rough calculation: 

• First, estimate your average annual salary over your lifetime (up to the max. of about $100K, after which payroll taxes are not deducted). 
• You are promised $90 for each $100 of average earning, but only for the first $9000. Then, for the next "slab" you are promised 30%. Finally, for anything over $55K, it is 15%. (Benefits are indexed to CPI. These numbers assume 2010-equivalent dollars.)

Sample calculation: Suppose you just retired, having started working in the late 1960s. Your peak earning years were probably around 1990. Let's say you earned an average of about $ 32,000 per year. Suppose that (adjusting for inflation) it works out to $60,000 per year in 2010 dollars.

Look at the blue line in this graph. For an average of $60,000 after inflation adjustment [x-axis], you are promised a benefit of around $25,000 a year [y-axis]. 

Similarly, someone who earned an average of $100,000 gets just $30,000 in benefits.

(Use the "retirement estimator" at the SSA site, to get a better estimate of your promised benefits.)

So now you know how much you are promised. Next, look at the red line. That is my best guess for what you will actually get. At $60K, you will get $18K a year instead of $25K. And, if you are at $100K, you will get about $21K instead of $30K.

Anybody who is 30 to 50 years old should not expect to receive any more than this. If you are in your 20s, I have no guess for you. Don't bank on much.

(Warning: This is NOT expert advice. Expect real numbers to be quite different. Check everything with your accountant.)

My key assumption is that at some point, when as it becomes increasingly more obvious that Social Security must change, the country will implement some "middle-of-road" plan that uses elements from the various proposals now on the table. I assume it will be close to the "Simpson-Bowles" plan, because that one was bi-partisan. 

Simpson Bowles (Dec 2010): A bi-partisan congressional group proposed changes in social-security, in order to extend its life. The red line in the diagram above shows their proposed benefits. It makes the benefit-schedule more "progressive" (i.e. the richer you are, the less you "get back"). A person with the higher average earnings will "lose" a larger amount. Depending on your level of income, instead of the current promise to pay you 30% - 42% of your average salary, the new promise will be to pay you about 20% - 35%. [Note: These changes are phased in gradually. The promises will be lowered a bit each year.]

Other Simpson-Bowles recommendations: 

• Raise retirement age: under current law, it will rise to 67 year. They propose it keeps rising, linked to life-expectancy. They expect the retirement age to be 68 year in 2050.
•  Raise the maximum salary cap for payroll-tax, from the current $107,000 to the equivalent of about $170,000. This means that people earning above $107,000 in salary will pay a 13% tax when they otherwise would not. Since they only "get back" 5%, this is just a way to tax "the rich" (aka anyone who earns over $110K or so).
• Use a "chained-CPI" cost-of-living formula that increases benefits at a rate that is slightly lower than the standard CPI (Consumer price index). [President Obama actually proposed this if the GOP would give him something he wants in return.]

Paul Ryan's proposal: GOP Congressman Paul Ryan also proposes to raise payroll taxes (without changing the rate) as a side-effect of making employer-provided health-care benefits a part of income for social-security calculations. He will also lower promised benefits for those 55 and below today, particularly higher-earners. He proposes raising the retirement age. In addition, there is a minimum payout for those at the lowest end, somewhat analogous to the minimum wage. 

Free-market proposal: Paul Ryan's proposal also contains something that Republicans might see as a free-market component. It allows retirees under 55 to save one third of their social-security taxes in a savings account. This would be something like an IRA, but Ryan adds a government guarantee that the account will not lose money! The only way the government can make such a guarantee is if it limits the types of investments in such an account. This is definitely not a free-market solution. The government should not be ensuring that people save. Further, the government should not be choosing where we can invest our savings. The danger is that investment vehicles vie for whatever government certification is required. We've seen what a poor job the FDIC has done ensuring the safety of bank deposits. We've also seen how poorly the government-approved credit-rating agencies performed. Given this history, a pseudo free-market system versus a fully and honestly government-run system is a poor  choice of options. 

Rand Paul's proposal: Representative Rand Paul, who positions himself as a libertarian-leaning GOP politician has a proposal too. He would increase the retirement age and means-test the benefits. "Means-testing" is a Republican-approved way of taxing the rich. This tells us that the final law will tax "the rich".

The context of the Federal budget: Entitlements are the really serious threat to the U.S. Federal budget. However, within entitlements -- believe it or not -- Social Security is the easy problem to tackle. Mathematically, Medicare -- with its sky-rocketing costs -- is the bigger problem by far. That'll have to wait for another post.

What will become law? Currently, no concrete plan has substantial support, but the proposals above give us some idea of how things will transpire. Simpson-Bowles was a bi-partisan commission. Paul Ryan and Rand Paul are seen as more pro "free-market" than the average Republican. All three of these proposals have two common themes:

• Cut benefits in some "progressive"/means-tested way
• Raise the retirement age

Also likely:

• High-earners will pay more social-security tax (by raising the cap)
• Slower cost-of-living increases

The ideal: I would like to see Social Security wound up. People can save for themselves, without government "help". Politically, this will not happen in my lifetime. 

Fix social-security today, and forever: If we absolutely must have social security, I propose a simple rule. 

"Every year, the social security administration 
will pay out 

only the amount it takes as payroll tax."

This would solve social security's funding problem overnight and permanently. It is not rocket science to stick to the basic principle of never, ever running a deficit in the social security program.

No more deficits: Such a scheme would be infinitely more honest than what we have today. For example, recently the government has cut payroll tax from 15.3% to 13.3% for two years to "help" get through the recession. Meanwhile, payouts to retirees remained unchanged. Sorry folks, there is no free lunch. Either cut the payouts too, or let the tax be.

Want to pay out more to seniors? I'm not happy about it, but at least do not borrow. Man up...  pay for your desires. Raise the payroll tax if you want to raise the pay-outs.

Want to help the poorer among the retired, particularly when the economy turns down and we started screwing them with minuscule interest rates on the small nest egg they put into CDs? I'm not happy about it, but if you must do not borrow more. Man up... pay for your desires. Or man up and sock it to the richer retirees. Or, raise payroll taxes on people who still have jobs. 

If voters want a statist safety-net with income redistribution, let us at least not have it open-ended and hanging over the heads of our children. Pay up now like honest folk would.

(Published Sept 2012. Updated May 2013.)

How're we doing in the Stock market, May 2013

Is the stock market booming? Few people agree that we're in the middle of a terrific boom. Objectively, an average holder of stock (see SPY chart below) is in a position quite similar to the peak of the dot.net boom or the housing boom.

Yet, even people with their 401(k) fully in stock funds don't feel it emotionally -- we have the same number, but none of the excitement and enthusiasm.

Leading up to the dot.com top, a lot of people were wondering if the ride would end. Yet, the feeling was different from now. Today, it feels like there really has not been that much of a ride.

Is the economy booming? I think the main reason for the lack of enthusiasm is that the economy -- in real terms -- has lagged behind the stock-market.

This chart overlays Real per-capita GDP on top of the SPY chart. Notice the year 2000. You see a pause, and then GDP started to rise far past the previous peak. Meanwhile, today per-capita real-GDP is not yet back to the last (housing-boom) peak.



Total employment tells a similar story. The employment picture is actually worse than this chart shows, because we ought to adjust it downward for the growth of population.

Are we near a peak? The chart above may beguile one into seeing a pattern where we are approaching the peak of a third hill. So, it is only fair to show a longer-term chart of the Dow, reproduced from stockcharts.com

Notice how the stock-market went sidewards between (approx.) 1964 and 1988, and yet shot up right after.

If we're due for a large correction, it is not merely from the repetition of a pattern. It is more likely to come from disappointments in corporate earnings -- as John Hussman has been arguing.

Different motivation: The dot.net boom saw shareholders excited about their companies. The housing boom saw them generally flush with credit and happy about their net worth. This time, resignation seems to be driving people into stocks: because the Fed has lowered rates to a point where nothing else pays. It's not a party: motivation by carrot has been replaced by "motivation" by stick. I may not matter though: either way, if people are driven to do something they would not otherwise do, that sets the stage for mal-investment. The dot.coms have been replaced by "high-yield" stocks.

Parties can last. I'm not calling the death of the market boom though. Consider how long it took for people to lose faith in the equality of all EU sovereign credit. At any rate, if one wants to bet on a central bank's game falling apart, the FED (and the U.S.) seems a poor target. It would all make for an interesting tale, if it wasn't my savings on the line!

Shopping as a Game

JC Penny recently fired its CEO -- Ron Johnson -- because his concept of simplicity was not working. With hindsight, we see that they forgot an important fact: for the typical JC Penny customer -- shopping is a game.

Exploration: Imagine a computer maze game. It has twists and turns. Imagine that you had to discover gold and treasure  hidden along the way, by exploring, discovering, and then learning tell-tale signs -- often coming up empty-handed, but finally hitting pay-dirt.

Now imagine the game developer decided to simplify things  by removing the maze. Instead, he gives you a straight hallway. And, why hide the gold --- such a waste of time? He simply places it on clearly-visible tables along the way. Perhaps the tables are placed so the gold jumps into your hand as you pass by. You start the game, press the forward key for a while, and you're done. You get through at record speed, and with all the gold. Simple and efficient... great if this was something you really wanted to get through as a means to another end.... but a lousy game. That is the story of JC Penny's new store and pricing concept.

The value of junk: You see customers (players?) hunting through a pile of merchandise to find the one thing they really like. There are some things that few people ever buy. Does it make sense to figure out what is junk and stop stocking it? Or, does it make sense always to have some junk, to make the hunt more interesting? A game where all the gold is out in the open is boring.


Texture and complexity can be a good thing. You see customers (players?) checking out your store but resisting temptation because they know a coupon will be out next week. Does it make sense to simplify pricing so that even a dullard can always get your best deal? Or, does it make more sense to keep pricing at a level complexity that require customers to be smart and knowledgeable about how the system works? A game without learning and failure and success is boring.

Shopping as Entertainment: Perhaps the metaphor of a game is exaggeration. There's obviously a utilitarian aspect to shopping. It varies from person to person and by situation. Nevertheless, shopping for clothes -- particularly women shopping from clothes -- is not strictly utilitarian, but a good part fun... entertainment that JC Penny removed from the mix.

Old poems used as songs

Add this:
David Gilmour sings Shakespeare's Sonnet #18 (a post about it)

------------- previously listed ----------------

"Golden Slumbers Kiss your Eyes" by Thomas Dekker sung as Golden slumbers (by the Beatles); [I like K.D. Lang's version]

The ballad "Scarborough Fair"., sung by many (Sarah Brightman, Celtic Woman, Emerson Lake and Palmer, Simon and Garfunkel) .

Words We are the Music Makers, by Arthur O'Shaughnessy (by the Northwest Choral Society) Poem recitation here.

She walks in Beauty (Lord Byron), sung by Sissel, for the movie "Vanity Fair" (Also, a church choir version) [Rehtaeh seems to do the same version.]

Invictus, by "The Peter Ray Band"

The Highwayman by Alfred Noyes, sung by Loreena McKennitt

Food Prices - 30 Years

Curious about food prices, I checked out the 30-year history of prices for Wheat, Rice and a few other such commodities. (From the indexMundi  web-site). This post shares my findings -- with zero commentary.

The top-most chart below is the official CPI-U (from the Federal reserve web-site). Data is shown for 30 years, since 1983. This line is then reproduced as an overlay on each of the other price charts.

Consider the chart for Wheat (top-left). For 20 years the trend was flat, even though the price went up and down.  The last decade has seen a climb. After staying flat, the price of Wheat has made up for lost time.  With the exception of Pork, this theme is repeated across the other food commodities. (Sugar is the worst.)

I do not expect extreme levels of CPI-U in the next 5 years -- but, I promised zero commentary.

How're we doing on Unemployment? (March 2013)

Since my last look in November 2012, the various measures of employment have remained along their recent  trajectories.

A snapshot:

• Unemployment rate slightly better each quarter (largely because so many people have stopped looking for jobs)  [About 200K jobs were created, but this was plus 400K part-time jobs and minus 200K full-time jobs]
• Participation rate (how many want jobs) between flat and slightly worse.
• Employed-to-population ratio, between flat and slightly better

The source of all the graphs below is the excellent gallery at "Calculated Risk".

The unemployment rate has been dropping slowly but steadily for over two years. This "headline number" that is reported the most widely. It is also the one that gives the most positive picture. A "naive linear" projection gets us back to a pre-recession rate by the second half of 2014. 

As the graphs below show, the "quality" of this rate will be much lower than what we had in 2006-07. There will be more part-time jobs, and a huge number of people would have just stopped looking. Nevertheless, this is the most-reported number on unemployment, so it's useful to keep an eye on it.

The Employment-population ratio shows a more dismal picture. Look at the black line above. It is more or less flat -- so much worse than the headline unemployment rate. If we take the most naively optimistic view, and assume this will suddenly turn upward at a pace as fast as we saw after 1975, it would still be 2017 before we get to pre-recession levels. If we assume it will turn upward and grow at a historically-average rate, we're probably talking about 2019. If we look back at the times when the rate flattened out for a few years (mid-1960's and 2003-04), we'll see that it grew slower than normal. 

Does that mean it will be the mid 2020's before we can be back to pre-recession levels? My best guess is that we're "never" getting back to those levels. The biggest change we have seen is that many fewer 16-19 years olds are working. This aspect might be here to stay. We are probably talking about a "new normal" where we get back to a little below the pre-recession levels over the next 5 or 6 years, and stay there.

a

Core age-group, Employment-population ratio: If we leave out those below 25 (yes, I know 25 is pretty old), and leave out those above 54 (yes, I know that's just a few years away for me, and I don't feel old), we get an age group (25-54) which is in its core working years. Mostly, these people cannot delay looking for work while they do still more college, nor can they retire yet.

Most optimistically, it will be 2016 for this group to reach its pre-recession level of employment. A more reasonable assumption would put it around 2019 or 2020.


Summary of projections: 

If we do not have a new recession, various measures of unemployment are likely to improve. However, some measures appear to be headed for a "new normal", never returning to pre-recession levels. Except for the "headline rate", they will take well into the next presidential term to return to "good times". The headline unemployment rate should be back in about 2 years, barring a new recession.

No new recession? With a booming stock market, a recession appears a distant idea; but that's how it always feels as we head to a "top". Some commentators think we might be seeing early signs of a recession (Europe is already in recession, China is faltering, and India too.)  Forget all that, and simply look at the frequency of recessions in the chart above. A "naive-projection" would say that there's a pretty good chance we will have another recession in the next 4 or 5 years. If that happens, the linear projections for unemployment can be thrown away, since we'll start another downturn.


Previous, related posts:

• How're we doing on Unemployment and GDP? (Sept 2012)
• How're we doing on CPI Levels?  (April 2012)
• How're we doing on home prices? (April 2012)

Bar charts on Chris Matthews show

I'm not a grammar nazi, nor a stats nazi, but I'm going to rant anyhow...

The Chris Matthews show (on MS-NBC) routinely shows statistics in a form that looks like a horizontal bar-chart. The only problem is that the "bars" are always the same length, regardless of the stats. I've noticed this for many months.

Don't those look like horizontal bars? The rounding does it for me.



The example below is how it should be fixed.


Is this illiteracy from MS-NBC, or do they have some strange intent?

Here's another example. Why are all the reds, whites and blues the same size?

History of the U.S. debt

My intent in this post is to question if the U.S. really has a large amount of debt. Some people think we are just a years away from a breakdown in the credit of the government. Others think we've gone through bad times in the past and will "grow out of" our problems again.

To keep this post simple, all debt figures are "gross". "Gross debt" includes the amounts owed by the government to the Fed and to the Social Security "trust funds". Also, all figures are nominal dollars (i.e. no adjustments have been made for price-increases). [Other, better, measures will have to wait till a future post.]


Scary chart: This chart of the "gross" U.S. government debt since   looks scary in the way the amount of debt seems to be shooting up exponentially.

Remember the number $16 Trillion dollars. That is the approximate level of gross federal government debt. The total GDP of the U.S., is also about $16 trillion.

Has been scary for decades: In the chart above, you can see the debt start to rise in the 1970's and quicken in the 1980s. This second chart uses the same data as the first, but stops at 1985. Look at the left-hand scale: the gross debt was just 1.6 Trillion ( a tenth of today).

Yet, the chart, drawn the same height as the first, looks almost as scary. Just because this has appeared scary for decades, we should not be lulled into complacency. Things often worsen over a long time before they become too hard to undo.

Charts with a linear scale on the Y-axis show absolute growth; they obscure growth rates. Going from 1 trillion to 2 trillion shows up as just as big an increase as going from 15 trillion to 16 trillion.

(Also notice, at this scale, the jump in debt to fight WW-II is clearly visible. )

Re-drawing the chart, using a log scale on the Y-axis, allows us to see where the growth rates were steepest.

The rate is fairly steady: Suddenly, the chart looks far less scary. The steepest jump was in WW-II, and subsequent rises have not come anywhere close to that rate of growth.

We see three major periods in this chart: a steep rise in WW-II, followed by 15 years of very slow growth (almost flat by comparison), and, finally, a clear rise in the rate from 1970 to today, with a brief pause during the dot.net boom.

A steady rate is not necessarily good news. If someone is digging themselves into a deep hole, it is little consolation that they increased the depth just as much yesterday, and the day before. In fact, a steady rate means that they were digging a larger amount every day. If nothing changes, there will come a point where they're trapped.

Debt-to-GDP ratio: A common way to measure the seriousness of government debt is to compare it to GDP. How much is the debt, relative to the total annual production of all the citizens -- who, in their role as taxpayers -- are the underlying debtors shouldering the burden?

We can take two very different messages from this chart.
The scary message: On the one hand: the debt is clearly getting increasingly burdensome since 1980.

The positive message: Or, we can see the glass half-full by noticing that the debt was even more burdensome after WW-II. If the post-WWII generation brought the ratio down to 30% of GDP, then why can't we follow their example and do the same. There may be hope yet: we just have to do what they did!

Debt and GDP Compared: This chart expands on the Debt/GDP ratio, by showing the two components (Debt and GDP) separately. Notice how GDP grew faster that gross debt until recently.

Also notice, for instance, how the increase in gross-debt slowed slightly in the years before 2000, while GDP kept growing. This explains the dip in the Debt-to-GDP ratio seen on the previous chart during the same years.

Notice that the latest recession has seen a significant shift. Since 2008, debt started to climb much more steeply, until it is now almost equal to GDP.

1950's and 1960's: The scale in the chart above makes it appear that debt and GDP were very close during the 1950s. Scaling up and looking just at those years, we see the true picture.

Now we see the explanation for the rapid fall in the post WW-II Debt-to-GDP ratio. After WW-II, gross debt increased from about $ 275 billion to $400 billion up to 1969. Meanwhile, GDP went from $200 billion to $1000 billion!


The future: If we do nothing about the growth in government debt, and if GDP does not speed up, we face Scenario A in the chart below: the problem gets ever more out of control. If we bring the growth in debt back in line with the growth in GDP, we face scenario B. While better than "A", this is a high-risk scenario that holds the poor status quo. Predictably, a recession will come along, taxes will fall, and stimulus will rise, and we will shift into Scenario A.

Today, in summary: Based on historical norms, the gross-debt of the U.S. is too high, matched only during WW-II. In theory, we should be able to do what the post-WW-II generation did: grow the debt very slowly while growing GDP much faster ("Scenario C" above). Unfortunately, considering today's politics, both those seem improbable propositions. So, in summary, we're justified in worrying.

U.S. Congressional Majorities

The chart below shows the number of seats in the House of Representatives held by the Democratic party and by the GOP, since the early 1900's. For most of this century, the Democratic party has had a majority of seats in the House (out of a total of about 435 seats).

The chart starts with a GOP majority, which changes after the stock market crash. During Roosevelt's term the Democrats take a huge lead, and they keep this lead (with two exceptions) all the way to 1994, even through Reagan's presidency. Finally, during Bill Clinton's time -- in 1994 -- the GOP gets the majority back and has held it except for two terms after the recent market crash. [Source: Numbers come from various articles on the Wikipedia.]

I also wanted to understand what would happen if the house had something similar to the filibuster rules of the Senate. About 260 seats is 60% of the total -- see the grey shaded area running across the top. A lot of the time, the majority is below 60%. So, if 40% of Representatives could stop passage of a bill, we would have had many House terms where the minority party could have threatened a "veto". This likely would have been a good thing.

Liberals, Moderates and Conservative: Self-reporting

Every year, Gallup conducts a poll where they ask people across the U.S. whether they would call themselves "Liberal", "Moderate" or "Conservative". For the last 5 years, percentages have been fairly stable. Without reading further, can you guess what percentage would call themselves "moderate", and how conservative/liberal would be split?
Here is a link to the latest results. 

About 37% say they're moderate, about 39% say they're conservative, and about 22% say they're liberal. Since the country's voters divide about 50:50 when it comes to voting for Republicans and for Democrats, it's safe to conclude that moderates lean democrat. If we were to make some rough assumptions and say that voter turnout is equal among the groups and and that "conservatives" vote GOP and "liberals" vote Dem, then a 50:50 vote result would imply that the 37% who call themselves moderate break down into: 10% moderate but leaning GOP and 27% moderate leaning Dem. Even if there is leeway in the assumptions, I think it is a reasonable guess that people who call themselves moderate are at least twice as likely to vote Democrat than Republican.

Democrats are more mainstream: I think this fits with anecdotal evidence. Viewpoints propounded by the Democratic party more closely reflect the mainstream views taught in schools and colleges and via movies etc. So, very broadly, the stance of the Democratic party is seen as being more moderate than the stance of the GOP. Under this understanding, people who support some of those mainstream views and think of themselves as moderates, also see the Democratic party as being closer to their position.

There are no liberal states! I found it interesting that when one looks at state level data (see page 2 at that link), there is no state of significant size where more people call themselves liberal than conservative. (Mass., Rhode Island and D.C. are the only ones, and there two only D.C. has a clear majority of self-reported "liberals"). Meanwhile, in states like New York and California, self-reported conservatives are more than self-reported liberals (by slim margins).

Just some food for thought -- or perhaps a poll confirming what you already knew!