Tag Archives: social security

04.27.2013 | The Underground Economy: How Much Did the GDP Really Grow?

Having reported yesterday that the GDP grew 2.5%, the Bureau of Economic Analysis (BEA) reminded us that their data “are incomplete or subject to further revision.” They meant that businesses and individuals still have more information to gather and submit about US goods and services production for the first quarter of 2013.

But what about the nannies, tutors, housecleaners and cupcake bakers who never reported their income? For nannies alone, in 1994, there were 500,000 tax filings; by 2008, the number dropped to 219,000. Fewer nannies? Probably not.

Some data, the BEA will never find out.

Researchers estimate that the size of the underground economy–the goods and services we produce that do not get counted–totals $2 trillion, close to 8% of US production. You can translate $2 trillion into $500 billion in unpaid taxes. In advanced economies, maybe 14-16% of all production is underground while in the developing world, 30%-40%. Predictably, for the euro zone’s strugglers like Greece, the underground economy might occupy one quarter or more of all production.

If we eliminate illegal goods and services like drugs, we can define the underground economy as all legal goods and services that are intentionally concealed from government to avoid taxes and/or other regulations. As a result, participants receive lower wages, they work longer hours. Businesses do not comply with quality standards; they are more susceptible to corruption. Correspondingly, the taxes to support government programs never materialize and the nannies who never paid their social security will never receive it.

But still, if the reason is a complex tax system with lots of forms–a system that has a high transaction cost, for some noncompliance is productive. Also, with the underground economy having increased during the great recession, it could have been a lifesaver for the unemployed.

Perhaps, an increasing underground economy means that first quarter GDP growth is more than 2.5%?

Your opinion?

Sources and Resources: Having read the BEA first quarter GDP news release, I recalled James Surowiecki’s New Yorker article on the underground economy. Surowiecki and a subsequent CNBC article lead me to a wealth of research. One solid discussion, here, presents the academic perspective and research and this briefer note focuses on nannies.

Posted by: adminEcon
Tags: GDP, nanny tax, social security, underground economy
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04.11.2013 | The CPI: Social Security COLAs

Our story starts with Ida Mae Fuller.

At 65, in 1940, Ms. Fuller got the first US monthly Social Security retirement check for $22.54. In 1941, she got $22.54 each month. In 1942, 1943, and 1944 she still got her $22.54. Until 1950, she received $22.54 a month.

You can see that Ida May Fuller had a problem. Each year, her check bought less. In 1949, she needed a monthly check for $38.32 to have the same buying power.

Realizing that beneficiaries’ purchasing power was plunging, in 1950 Congress gave Social Security its first taste of a COLA, a Cost-Of-Living-Adjustment. Since then, at first through special legislation and then automatically based on the CPI, Social Security check amounts have usually risen.

And that takes us to Social Security’s problem. A pay-as-you-go system, current workers pay current beneficiaries. With the baby boomer population bulge, today’s wage earners just won’t provide enough money. Add to that the pressures of a ballooning national debt and you get the need to control the future cost of Social Security.

One way is through COLAs. Just diminish any cost of living increase and the checks can be smaller. Proposed by President Obama, a chained CPI is one way to create these lower COLAs. For the regular CPI, the prices of close to 80,000 goods and services ranging from hockey gloves, to navel organges to hotel rooms are checked regularly. Month to month, exactly the same item is monitored. With a chained CPI, the approach recognizes more realistic buying habits. For example, by recording discount buying, it inputs lower prices. (Please see AARP graph, below.)

Opposing the chained CPI proposal, elderly beneficiaries point out that it does not reflect how they spend. Living in smaller apartments, they do not buy in bulk from a Costco. Unable to drive, they do not search for discounts. Older, they are uneasy with new technology. And finally, unlike a typical market basket, medical spending is a sizable chunk of their spending.

This PBS Paul Solman video provides an excellent explanation.

Just like Mayor Bloomberg has had difficulty downsizing COLAs, so too might President Obama. The Mayor is talking about sugary drinks and the President about Social Security. Both though are talking about what government can give us and what it can take away.

Sources and Resources: For the complete picture, combining an excellent Bloomberg article with the PBS Paul Solman video, you can grasp the whole chained CPI issue. Then you can add this Social Security Administration site for historical facts and COLA stats. For example, during 1980, the COLA was 14.3%. For 2010 it was 0.0%. This year, the COLA will be 1.7%. Finally, for the specific impact of a chained CPI, you might also look at the AARP (American Association of Retired Persons) report that is the source of the following graph:

CPI-E is a market basket based on typical elderly purchases. C-CPI-U is chained CPI. CPI-W is the current CPI market basket used to calculate Social Security COLAs.

Posted by: adminEcon
Tags: COLAs, CPI, deficit, federal budget, social security
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01.25.2013 | The Debt Ceiling: A “Choose Your Own Adventure” Story

Have you ever read a “Choose Your Own Adventure” book? Letting the reader select a plot path, the series had multiple endings. Now, a Quartz reporter very cleverly has suggested alternative endings for the “plot path” of the Congressional debt ceiling discussion.

Proposed less than 2 weeks ago, the “Choose Your Own Adventure” debt ceiling story, however, needs to include an unforeseen twist. The House just passed new legislation for a debt ceiling hike to last until mid-May with a Congressional salary clause. The clause? If a “chamber of Congress” does not agree on a budget then its members don’t get paid until one develops or until their terms end.

Still relevant, the “Choose Your Own Adventure” starting scenarios, each with its own series of results, were:

“A fiscal consolidation bargain”
“A concession to Republican demands”
No agreement and the Treasury has insufficient funds to cover its obligations.

Now we can add a fourth initial scenario:

The House passes legislation to raise the debt ceiling for a limited time period.

Discussing the debt ceiling, we should take a look at the debt. Whenever the US borrows, someone, somewhere buys a Treasury security such as a bond. So who has more than $16 trillion in government securities?

Actually, we do.

We owe 2/3 of the debt to ourselves. The US government lends to itself by using, for example, Medicare trust fund cash it does not need. Meanwhile, individuals, businesses, state governments, local governments, pension funds–the list is long– also buy US Treasury securities.

Washington Post data from 2011. Now the total would be over $16 trillions but the holders remain very similar.

Washington Post data from 2011. Now the debt total would be over $16 trillion but the proportions for debt holder categories are similar.

The rest of the US debt is held by foreign governments, businesses, citizens, etc., with China and then Japan at the top of the list. Next are Caribbean Banking Centers, Oil Exporters, Brazil and then still, a long list with South Africa at the bottom.

Sources and Resources: Here, at Quartz, you can see the entire debt ceiling ”Choose Your Own Adventure” while for the debt, my information came from the US Treasury and Fox News and graphs are from the NY Times and the Washington Post. Finally, you can read more here in the Huffington Post about the debt ceiling legislation that just passed in the House. In addition, here and here econlife has debt ceiling facts and history.

Posted by: adminEcon
Tags: China, debt ceiling, Medicare, social security
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11.24.2012 | Tax Code Untouchables

Just eliminate deductions and exclusions to cure our budget problems. Yes? Not so easy.

Here is a list of the 20 largest “Tax Expenditures” for 2012 from Credit Suisse. As you can see, each provision connects to an incentive that makes it desirable. The employer-sponsored exclusion that involves $171 billion? But we want to encourage employer provided health insurance. Pension contribution? But we should push people to save. Charitable contributions? Yes, people should get an additional perk from doing good. Mortgage interest deduction? Let’s continue to facilitate home ownership.

And maybe the biggest incentive of all? It would be political suicide for lawmakers to touch many of these provisions.

On the other hand, we should remember the opportunity cost of the $900 billion cost of these 20 provisions. It is a healthier federal budget.

A final fact: Looking at the federal budget, how big is $900 billion? This NY Times bubble interactive perfectly conveys the numbers. In President Obama’s 2013 budget proposal, Social Security is allocated $895 billion while the Centers for Medicare and Medicaid Services get $1.18 trillion.

Sources and Resources: The chart is from a Business Insider article.

Posted by: adminEcon
Tags: 2013 federal budget, capital gains, Centers for Medicare and Medicaid Services, Credit Suisse, dividends, employer health insurance deduction, Mortgage interest deduction, President Obama, social security, tax deductions, tax exclusions
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11.05.2012 | Election Economics: Looking at the Millennials, Xers, Boomers, and Silents

Before tomorrow’s election, let’s take a look at the voting age gap. Absent since 1972, the young and the old again are voting differently.

The Silent Generation: The oldest slice of the population, the Silent Generation was born between 1928 and 1945. Representing 17% of all registered voters at the end of 2011, they tend toward conservative views, support less government, and are politically engaged. One of their top issues, Social Security, reflects a contradiction. The Silents tend to be Republican but favor the Democrats’ position on Social Security.

The Baby Boomers: Currently 47-65, the Baby Boomers are a potent political cohort. Numbering 37% of all registered voters, the older Boomers tend to be more Democratic than their younger peers. The concern, though, that resounds for many is uncertainty about their financial future and retirement security.

Generation X: Born between 1965 and 1980, Xers make up 26% of all registered voters. Politically, they tend to split by age. Older Xers sympathize with Republicans while those closer to 30 are more likely to vote Democratic. As for the issue they most care about, it appears to be financial health.

The Millennials: The youngest population group that votes, Millennials are currently 18 to 30 years old. relatively unengaged politically, and 17% of the electorate. 41 percent nonwhite or Hispanic, they are diverse, vote Democratic, and are almost evenly split on whether we have too much or too little government. According to a July 2012 USA TODAY/Gallup Poll, creating good jobs was the key issue for those under 30.

How to summarize the similarities and differences? I suggest looking at the table below. Although it is based on data from October 2011, still the priorities remain similar according to the more recent Gallup poll. And, for more background data, the graphs that follow it are fascinating.

Election Economics Topics:

Sources and Resources: The surveys on which I based my facts were from Pew (Nov. 2011) and USA TODAY Gallup (July 2012). Also, you might have some fun with this USA TODAY candidate match game. All graphs and tables are from Pew.

Posted by: adminEcon
Tags: 1972 election, baby boomers, campaign issues, deficit, Democrats, financial security, Generation Xers, George McGovern, jobs, Medicare, millennials, Mitt Romney, President Obama, presidential election, Republicans, Richard Nixon, Silent Generation, social security, voting generation gap
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