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Inflation “Bend” points
One part of the debt ceiling debacle debate that has been agreed to a long time ago is that there will be changes made to inflation calculations. The result will be bracket creep (higher taxes) and a slowing of the rate of benefit payments. I am concerned with this type of thinking. I don’t think it addresses the fundamental problem.
The raging argument in D.C. is about something called Long Term Fiscal Solvency. The apparent goal is to slowly reverse the direction of the big ship and ultimately turn it around. Sounds great. The time frame that is being measured is at least 25 years. (It takes a long time to turn a big ship).
Social Security is a micro component of the budget picture. The “Financial Health” of SS is something that is looked at over a 75-year time period. Some even look at SS based on something called “the Infinite Horizon”.
This is crazy thinking. We have no idea what will happen over this time span. The operating assumptions behind all this long-term thinking are that the economy grows at a steady and predictable rate, inflation will remain modest and well below the growth rate. FOR EVER! Call that economic utopia. It will not happen.
I am much more concerned about the short-term. I think the US has to make very substantial changes over the next ten years. We can’t wait for adjustments to take effect a decade from now. But that is what we are going to get. The following looks at Social Security and what changes to inflation calculations would mean to benefit payouts from 2012-2021. (all data from SSTF Annual Report to Congress, Link)
These charts show the anticipated SS benefit payments (by year and cumulative). This data is from the SSA Intermediate or base case assumption:
Note that benefits rise by 70% over this time frame. That increase is a result of two components; A) Net new beneficiaries and B) Inflation adjustments.
SS has a range of expectations for inflation. They start with the 2011 number and they all increase over the ten-year period. These are the numbers that are built into the SS calculations for inflation. This chart covers the Low Cost, High Cost and Intermediate projections for inflation.
This chart of data looks at what the inflation component is in actual dollars.
Now let’s put our D.C. thinking caps on. If they are going to mess with this inflation adjustment how much can they actually do? They can’t eliminate it. That would be politically impossible. It would also be flat out unfair. So less than 100% is the answer. IMHO it will be impossible to achieve even a 50% claw back in inflation adjustments. If that were to happen the results would look like this:
A more modest (but still significant) result would be a 25% reduction over the next ten years. If that were the case (it’s likely to be less than this) these would be the savings:
Consider the conclusions. Depending on the actual rate of inflation the savings of a 25% cutback plan would result in very small changes to actual payouts. In the SS Intermediate Case the savings would amount to a measly $54 billion over the period. That comes to ½% of total benefits. This is a meaningless result in our big economy.
I’m not going to bore you (further) with more charts. I will just tell you that after ten years or so the miracle of compounding comes into play. With each additional year the difference between actual inflation and the COLA adjustments will widen. When you extend this type of thinking over long periods of time it does make a very big difference. After 25 to 30 years this would be significant.
This type of thinking will be presented to us in the next few days. Leaders on both sides will say that they have set a path toward long-term fiscal solvency. They will show graphs produced by the CBO that support the claim that after fifteen years (or longer) the bend point on benefits is reached. They will be able to show dramatically improved debt to GDP ratios as a result. But all of that “good stuff” will be far into the future.
My concern is that we don’t make it through the first ten years. The absence of any significant improvement in the foreseeable future (versus the infinite future) is going to trip us up. It won’t take all that long for the markets to recognize these implications. Any relief rally in bonds or stocks is likely to be short lived.
The stock market looks out (at best) six months. The bond market looks longer (not of late); two years is as far as the bond boys can see. Macro economic policy starts with ten years and looks beyond that. My point is that the two groups are looking at entirely different playbooks.
It’s quite possible that we will see the D.C. crowd showing one set of graphs and claiming success. At the same time Wall Street will be producing another set numbers on the visible supply of government debt for the next 48 months. D.C. will be crowing about long-term solvency, while the markets will fret about short-term insolvency. Ten-years is forever on Wall Street.
The term “Voodoo Economics” was a popular term that was used to describe "Reaganomics" back in the 80s. I wouldn’t be surprised if that term comes back into vogue.
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+1
Shared this the other day:
Forbes on CPI:
"It works like this: If steak gets too expensive and you start buying hamburger instead… well, your price of beef hasn’t really gone up and your cost of living is unchanged. This is one of the reasons official CPI is running 3.6%, but if it were still calculated the way it was before the Greenspan Commission went to work, it would be 11.1%."
"Under “chained CPI,” if your hamburger gets too expensive and you start buying beans instead… well, your price of protein hasn’t really gone up and your cost of living is unchanged."
http://blogs.forbes.com/greatspeculations/2011/07/20/gold-is-truth-uncha...
In StatSpeak what you describe goes by the name "hedonics".
Another thing they do to massage numbers is work off of effective values of things. So if you pay $100 for a computer, and next year a computer twice as powerful is $100, then there has theoretically been negative inflation -- the price per MHz or whatnot has gone down. Of course, never mind that the new computer is, like the old one, just keeping up with the programs of the day.
Whatever can be done to massage the number will be done. I laughed aloud when I saw what inflation rates the SS bureaucrats were using, even in their worst-case scenario. Try 10% base case, and 20+% worst-case. That would be more accurate.
Naturally, this assumes hamburger hasn't gone up in price too.
And if hamburger goes up, try sawdust.
The trickfuck games continue.
Without an engine to the economy, this paper mirage is becoming the only activity.
I did a CTRL-F search on this for the words: population and demographics and found nothing. I see this a lot (everywhere) Of course Bruce's 'next 10 years' concern is probably related to the boomer effect and that is population related. A great source of info on this for me has been Peter G. Peterson's book: "The Gray Dawn" copyright 1999. I seriously have to wonder about inflation in an aging US population. (except in health care) If you compare the US to Japan our population dynamics sortof follow Japan's several years back, but in Japan the elderly live with their children. In the US our culture of independence and mobility predicts less of that. All I can say right now is I would hate to be a member of the next generation. If we could abandon the phrase on the Statue of Liberty "Give me ... huddled masses" for a while and import some younger, educated, professional immigrants that are not in debt and not on the govt teet and might actually start a business and hire someone I'm sure the younger generation would appreciate it. Seems to me that we need a fast track category for immigration that could be adjusted for the needs of the country. We are too idealistically driven and need to start thinking more practically.
http://www.pgpf.org/
Watch...
http://reason.com/blog/2008/10/24/saving-social-security-episode
Then...
http://reason.com/blog/2009/10/15/social-security-chief-says-ins
http://reason.com/archives/2005/05/02/social-securitys-progressive-p
I get the "time frame" thing. The more obscure the data and events, the more imaginative the extrapolations and claims. On a long enough time frame, these liars will be dead and someone else's kids get to pick up the pieces... After they get done with the plowing and milking of their "new" agrarian society. Everyone who wants to live under these assumptions best be getting some good growing land and a background in large scale horticulture if they want to survive.
Huffington's take on the Obama contribution to the mess.
"Obama has shown himself to be a fan of the commission approach to cutting social programs and entitlements. Shortly after taking office, Obama held a major conference on deficit reduction and subsequently created, by executive order, The National Commission on Fiscal Responsibility and Reform. The White House made two telling appointments to chair the commission: The first was former Sen. Alan Simpson (R-Wyo.), a well-known critic of Social Security who earned notoriety by suggesting, among other things, that the American government had become "a milk cow with 310 million tits!" Yet Obama's Democratic appointment was even more indicative of whose interests took priority: former Clinton White House Chief of Staff Erskine Bowles. Bowles is a member of Morgan Stanley's board of directors; an adviser to Carousel Capital, a private equity firm; and a director of Cousins Properties Incorporated, a firm with significant investments in commercial and mixed-use real estate.'
The fact that the regime is on an unsustainable path is not exactly a revelation. I suggest that it is absurdly niave to think that the powers behind the curtain are not acutely aware of our situation. The question then is what do they intend to do about it? Bear in mind that goal #1 for the regime is to maintain control. 9/11 allowed for the establishment of a police state. If they felt it nessecary to establish a police state prior to the next step, then that next step shouldn't be to hard to perceive. At some point they will pull the plug and in the ensuing chaos formally establish their global government. I personally believe that the plug is scheduled to be pulled sometime shortly after the 2012 elections.
http://thedailybell.com/2720/Anthony-Wile-Edwin-Vieira-Jr-on-the-Power-E...
I suggest that people reflect on what has been done to this nation over the last several decades. Particularly post 9/11. Consider truly how we have been transformed. Look at the macro picture and simply follow the trendline.
Bad things have happened. Worse are not far off.
Obama is everything wrong with government by an elite. Governance by seminar, which had no import in the faculty lounge, but is just dangerous in a world where these conclusions (or failures to draw same) are just plain reckless and deadly.
Wasn't Libya supposed to be easy? But alas, the victim of that scheme didn't fall for Obama's magnificence. The seminar theoriticians were wrong, but real people are dying.
"Wasn't Libya supposed to be easy?"
...and General Shensenki was fired by GW Bush because he said the campaign in Iraq would be far more expensive and last far longer than political projections by neo cons.
Why is a shiny, expenisve military of use to a hollowed out state? Many of our citizens are living in tent cities or worse but this system is being protected by an enormously expensive military? I suspect, if polled, the tent city citizens would like a return to REAL capitalism, with real jobs, in America even if that meant a system reset in DC, Wall St and American Govs at all levels.
SS is not the problem, imo... but Voltaire was right.
Here is what we are currently lacking... "All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership."
John Kenneth Galbraith
Now correlate the defense spending both official and unofficial (private militias) over the next decade. It'll be of the same order of magnitude. There lies the rub....Sophie's choice! Son or daughter????
In all of this discussion, no mention of cuts to the military industial complex, or even a modicum of taxation to multinationals who pay little or no taxes. Hmmm. I guess that destroying the middle class and forcing grandma to eat cat food is more preferable.
As long as we are incrementally detroying the Constitution, why don't we allow voter registration only to that small segment of society that actually pays taxes plus any senior that has contributed over the years? If you have no skin in the game, you'll always vote for the status quo of entitlement enslavement; the marxist/progressive agenda.
The SS questions are basically dishonest finger pointing. SS is fine, Its just that it is owed a very large of amount of money that was used for tax breaks for mainly high end income.
The solution is to lift the cap on high income contributions which currently is around 100K.
So much money was "borrowed" from the fund that if invested, compounded, we would be nearing a point to stop paying into the fund.
The whole debate is dishonest.
I would say your whole reasoning is dishonest, oldmanagain.
SS is in no way fine. The SS fund and the general fund cannot be considered separately. All SS moneys, by law, must be rolled into the general fund. There is nothing in the SS "lock box". There is no money in the general fund. Indeed, the Federal Government is deep in debt (as we all know). The SS fund is drowning in a sea of essentially worthless IOUs.
Further, we cannot tax our way out of this. Putting aside for a minute the historical fact that those targeted with increased taxes adapt (resulting usually in lower revenues), the existing debt and increasing outflows simply cannot be covered by removing the cap.
The situation is dire. I see no way out but through a massive dollar devaluation. The poor SS recipients will be all the more poorer, given how the inflation adjustments hinge on the bogus CPI.
I agree. Dollar devaluation also has the advantage that it is well hidden from common folk, if it is done gradually. The size of their paycheck stays the same or goes up a little, so they feel safe. The rising costs of their purchases is a bit less noticeable, and can be attributed to evil Chinese, evil Walmart, evil Exxon, etc. The trick for Obama and Boehner is to reduce benefits to the public without either party being viewed as responsible. I think that could be orchestrated with a gradual dollar devaluation.
You want Americans to burn less gas? Devalue the dollar. Americans consume like swine anyway, right? Devaluing the dollar puts the brakes on that. Unless the yuan follows the dollar down. Even if that happens, the price of energy and metals will inevitably rise in dollars.
I'm thinking even better would be to get real and establish that for those aged 25 and younger, the program be altered to become true insurance, means tested, and payable at just enough to get by (about where it is in $$ terms now). I also believe that the rate of confiscation should be lowered, but apply to ALL income. We can't just have a bunch of old people starving in the streets, but nor should we encourage/reward failure to be responsible and save for your 'golden' years.
SS is fine? They are running a perpetual deficit.
Solution is to raise the cap? Wrong. For every dollar SS takes in they have an obligation to pay $3. There is a formula on these benefits. All you are doing is increasing future liabilities.
If invested/compounded we would be nearing a point (of solvency) Totally wrong. SS has had a yield that is substantially above market rates for the past 28 years!! The income of SS has been subsidized by a (stupid) formula since 1960.
More than half of the "trust fund" balance is interest from prior years.
May I remind you that the 2011 Social Security Trust Fund anual report to Congress established the UNFUNDED liability at SS is $11.9 TRILLION!!!
You make not like these results. But those are the facts. I think it is you that is being dishonest. You are being dishonest to yourself.
bk
a) What is the net effect if that cap is removed AND means-testing is applied at the back-end?
b) Why do you ask us to believe projected liabilities (because the numbers are great for fear-mongering) while also stating "We have no idea what will happen over this time span."?
I like your (a) well enough that I've been screaming for it for a few decades now -- back when I started, it would have helped a lot and we'd be in better shape.
Except congress would still have stolen the money, as my grandma predicted way back before I was born, which itself was awhile back.
Where I live many are retired. Something over half actually need their SS to get by, barely, and with other help from the neighbors. the rest? All brand new cars, paid for with cash, mansions and so on -- but they still get SS checks and cash them. Pretty sick. And they're the ones who will whine the hardest and most effectively for the obvious reason that they didn't get well off by NOT knowing how to play the system.
I have a vivid memory from when I was a pre-teen of a woman in line at the base commisary with a fur coat taking forever to make her purchase with foodstamps because she wanted to debate whether or not she could buy booze with them; it sticks with me.
You're absolutely right about the poverty levels among seniors. Some certainly dug that hole with their own hands, but it's a disgrace that our elderly are often resigned to squalor.
The SS system was sold as an insurance. I'm paying ~12% into it. Wanting a return on my "investment" is in no way sick. Sure, one can introduce means tests and all the rest. But then the game is changed and the original promise reneged.
But given how rapidly things are deteriorating, even at this relatively late working stage of my life I'd be satisfied if I could withdraw from paying now - at the price of receiving no return at retirment. I'd consider it cutting my losses. Sadly, there's no chance of that happening.
come on Bruce, we already max out Soc Sect benes at some basic level, and people that have contributed whole life don't get much more than people contributing for a decade, so it's already not a one to one pay out. We simply could change the current rule you cite,and max out benes at some basic level regardless of contribution, that is not big difference from how it already works. It is not that each indivdual gets exactly what they put in, it is a pooled insurance and pension fund...shoot some people die before retirement age and get nothing if not married to someone. Some big income earners that if healthy, would have gotten screwed by what they got from SOc Sec, instead can get a severe illness/have a big accident in middle age, and end up on SDI and Medicaid the rest of their life, thus end up taking out way more benes than they put in.
Shoot my 70+ dad pays FICA tax on part time income as he also takes Soc Sec, his Soc Sec benes do not increase with his increasing contributions
"when Ten years have gone by and we owe 25 Trillion"
I agree with what you say, however if you take the present 14.5 Trillion dollar debt and add in the GSE's and then take a few other current liabilities on the books such as Federal pension funds then we are very close to 25 Trillion today.
We always use these "official" inflation numbers.
Does anybody have a link or so to see product related inflation numbers?
Can't ZH create a inflation indicator that makes sence and isn't bound to constant adjustments by the state?
I'll second SD's request for an inflation index and other key indicator in a seperate section.
There is absolutely an audience for these numbers, especially since they charge over at shadowstats
guess someone could use the inflation stats from shadowstats
At the rate we are creating money, they need to triple those inflation numbers, at a bear minimum.
Even tripple those numbers won't do it. I see stuff go up every week now.
This weekend I filled up a full cart at the warehouse and at the registry it was 272€!
I was fucking amazed!
I used to pay 150 for a full cart and 5 years ago it wasn't even 100€ for the same kind of stuff.
You must be drinking more
Same in US, SD. I've been touting keeping about a year's worth of long-keeping (but stuff you like) food rotating through your pantry as an *investment*. No tin foil hat or prediction of doom required -- basics are going up even quicker than momo stocks and PMs at times. It makes for a pretty decent "core holding", and at least slows the rate at which all this affects you personally. AND you can eat it!
Stumbled on this naturally, as I own a "hobby farm" and homestead -- we put up excess produce, and run off solar power, where at first refrigeration was a limiting factor (not any more, I've invested in more panels and batteries -- so my neighbors can come over when their power goes out to watch their TV, or store the content of their freezers). So, we learned how to store food other ways and enjoy things that just happen to keep for long times.
And in food, there's stealth inflation too. I remember a time when cans of soup had more ounces and the prices were also lower. Even a can of Beef Consume or French onion soup -- not very nutritional, but good for cooking -- now are 10 oz and cost $1.50 -- what a joke!
And in an emergency, a can of say, Chunky soup poured over a big batch of rice will feed a lotta people a decent meal for not much money.
Man, I wish I could vote you up.
Me too. Please do share some of what you are doing, DC.
"we learned how to store food other ways"
hey DC, any practical ideas to share?
Well, we have MIT's "billion prices project". Not sure how accurate it is, but it has to be better than the substitutionized, hedonicized CPI-U:
http://bpp.mit.edu/usa/
Edit: this thing signed my name for me. That's forgery. Or robosigning.
The politicos have more of a problem than "main street" knowing that they want to get rid of the debt. It is that "main street" and the majority of Americans "that are paying attention" know a hell of a lot more about the economy than the politicians that are pulling the voting levers in CONgress. We can research things directly and prove they are lying about 5 minutes after their little press briefings. How these idiotic congresscritters do not recognize the fact we can find out if they are lying immediately is beyond me.
On top of that, THANK YOU BRUCE for putting up the "real debt". These idiots in congress are arguing over a $4 trillion cut over 10 years and you show directly that it is HUNDREDS OF TRILLIONS, and these pricks have the audacity to come to the mic and jus t lie. AND they extend their pathetic little arguments for thie putrid small and ineffectual "cuts" which are not spending cuts but cuts in growth.
It is truly amazing, these idiots would be in a sinking ship and argue about the color of the lifeboat.
Oh but the politicos have a dillema. The folks in the street mostly want to get debt under control and limit the increasing obligations we have. The politicos know they have to listen at least a little bit to the riff raff if they are going to keep their jobs. On the other hand, they know if they really work on the deficit, especially by cutting spending, the result would be a rather severe contraction in the economy.
If they continue to kick the can down the road with the big overall deficits, inflation and interest rate hikes and credit rating issues will plague us. So, of course they want to take the middle road. It gives them the ability to say they are working on the problem without making any meaningful changes. I don't think you can really talk about social security in a vacuum. I think it needs to be addressed with all of the other spending programs. Putting it as part of a package solution might defuse the emotional outbursts from those naive enough to still call it "insurance". When ten years have gone by and we owe over 25 trillion will the real economy have grown enough to sustain that debt?
LOL
Guess the politicos shouldn't have promised everything to every body. Gonna get tough. Lotta new faces gonna be in DC as this progresses. After all, same folks who got us here ain't gonna be the ones with any excuses or believeable new promises.
The whole charade has permanently damaged credibility.
Wanted the $US to slide?
Come and get it!