## Social Security in COVID – Research and Ideas

Adding to a vast ocean of unrelenting bad news, let’s explore some troubling research into the fine print on Social Security benefits.

Andrew Biggs, a resident scholar of the American Enterprise Institute, has two papers out this Spring with interesting implications on our most important safety net for retirees.

One paper has bad news for a particular cohort of soon-to-be-retirees. The other explores an idea for helping with current financial distress. I personally think his proposal is wrong, but worth discussing.

Biggs wrote in a recent paper that for a group of soon-to-retire folks – specifically those born in the year 1960 – the COVID recession could be very hurtful to their benefits claimed in 2027, at full retirement age.

In his paper, Biggs assumes the 2020 US gross domestic product (GDP) shrinks by 15 percent in 2022, and that average wages also drop by a similar amount. The net effect of this drop in average wages – as a mathematical input into the Social Security benefits calculations for people born in 1960 in particular – will drop benefits by 13 percent overall. If that happens, for a medium-wage worker born in 1960 in particular, Biggs calculates an annual and ongoing hit of \$3,900. For that same medium-wage worker, lifetime social security benefits drop by a present value of \$70,193 due to the 2020 COVID effect.

The math justification behind Biggs’ claim isn’t obvious unless you enjoy building your own Social Security benefits spreadsheet.1

The math trick to know is that before calculating your first benefit check, Social Security indexes your annual earnings to a national wage index – rather than an inflation index, as you might expect.

If the wage index declines by 15 percent in 2020 (Biggs’ assumption), then this national wage indexing of 2020 earnings has a substantial negative impact on your benefit checks starting at age 67. Subsequent retiree benefit checks do increase according to inflation, known as the Cost of Living Adjustment. But if benefits start at a low base, for example, they will remain permanently lowered, even as they move upward with inflation over the years.

An economic recovery may mean later cohorts do not suffer this same temporary drop. Biggs recommends Congress consider interventions to protect this specific born-in-1960 cohort.

The COVID recession – depending on its duration and lasting effects on national wages – may also affect near-retirees born in 1961. So that’s your not-so-great news of the day on COVID.

Biggs also has written another paper in April 2020 which should be filed to the “interesting, but bad idea” pile. In the midst of our national discussions around stimulus payments, Biggs and his co-author Stanford Economist Joshua Rauh propose allowing pre-retirement individuals to take loans from their future Social Security benefits, which could be paid back at retirement age.

For context, private lenders do not make loans specifically collateralized by future social security payments. But Biggs and Rauh propose the federal government become that type of lender.

If a not-yet-retired individual decided to take a \$5,000 check now, the authors suggest, the borrower could pay that loan back at retirement age by simply delaying owed benefits until the loan is repaid.

Part of the benefit to borrowers, Biggs and Rauh argue, is that the federal government could offer extremely low interest rates, knowing that it can recoup the money at the individual’s retirement date. This low interest rate helps the individual who could not otherwise borrow cheaply. In addition, warming the cockles of an economist’s heart, this cash infusion can be made budget neutral. Money paid out today during the crisis will be repaid, with low interest, by the worker at retirement.

In their scenario analysis, they show that most workers 45 or older who borrowed this way would likely only delay taking their social security benefits by three months, based on a \$5,000 loan made today.

In simplest terms, Biggs proposes a mechanism for financially-strapped workers during the COVID recession to access their social security benefits early, with the obvious implication that they will have less later on, in retirement.

If enacted, (Narrator: this won’t be enacted) this form of pre-retirement loan would clearly impact the most vulnerable folks – people who have no other source of savings.

In general, I like considering any so-crazy-it’s-possibly-good wonky financial idea. But this is more like a so-crazy-its-possibly-terrible financial idea. I can’t endorse robbing future Peter to pay present Peter as a humane way to solve a short-term financial crisis.

When I am declared the National Personal Financial Benevolent Dictator (NPFBD) sometime in the future, I have a few different plans for Social Security. Different from both the current plan and Biggs’ suggestions.

My plan eliminates the need for complicated math and indexing as mentioned by the first Biggs paper. In my plan, basically, everyone gets the same amount of money. It doesn’t matter what your average 35 best earning years are, indexed for wages, then further adjusted for cost-of-living, then made progressive by counting different percentages of a specific workers’ earned wages. That’s a description of the current complicated math, simplified.

Instead, in my simple plan you get, say, \$32,000 a year. Or whatever flat amount we choose. Everyone gets the same amount. No math. Congratulations, you’re 67. End of story.

If your lifestyle is above that cost, so be it. You should save some money now so you can maintain your lifestyle. If your lifestyle is below that cost, so be it. You’ll feel rich in retirement.

The complicated math we currently do for social security benefits is a very convoluted way to express a couple of wrong ideas. By wrong ideas, I specifically mean the ideas that:

1. We ‘earned’ our social benefits by a lifetime of working, and

2. If we worked more or harder or got paid more, then we should get a bigger chunk of cash in retirement.

I understand the implications of not doing any tailoring of benefits to individual workers and retirees. I understand why the current system feels “fair” to many. But I think the benefits of simplicity outweigh those implications, leading to a fairer outcome overall.

A spokesperson for the Dallas office of Social Security Katrina Bledsoe said they do not comment on projections or proposed policies, so declined to respond to my query about Biggs’ ideas.

Biggs responded to my query that he is very confident about the math behind his warning about the cohort of near-retirees born in 1960. His biggest doubt is whether the national wage index will actually fall by the estimated 15 percent – a sharp decline – or whether that’s too steep an assumption. At this point – not yet halfway through 2020 – we just don’t know yet.

A version of this post ran in the San Antonio Express News.

Running for Personal Financial Benevolent Dictator

1. Whoops, guilty as charged!

## Book Review: All The Math You Need To Get Rich

I learned from my wife the concept of the “feedback sandwich,” by which she means if you want to give someone an important piece of critical advice, it’s often most strategic to cushion the blow with a compliment to start, and a compliment to finish, with the criticism nestled in between.

Michael Scott in Scranton, PA might have given feedback this way.

“Hey, I love your ability to file those papers alphabetically!”

“Everyone here in the office has just one word for you: halitosis.”

“Also, cool green shirt you have on today!”

In reviewing Robert L. Hershey’s All The Math You Need To Get Rich I have had recourse to the feedback sandwich. First, I will list some examples from the book that I quite liked. In the middle, a couple of important concerns. Finally, some kind words about how I would use this book if I taught math to high school kids

What works

Hershey presents basic, essential, practical, financial math and then follows it up with numerous word problems at the end of each chapter to help lock in the knowledge.

Two examples in particular stood out as excellent, and paraphrasing them from Hershey’s book illustrates the importance of Hershey’s project.

Example 1

Two twin brothers, each of whom wants to get rich in 45 years, pursues two different paths toward their goal.

The first brother (aptly named Lucky), in a hurry for wealth, decides to buy lottery tickets. He makes a plan to buy \$10 of lottery tickets every day, six days a week, for the next 45 years.

The second brother (named Tim) decides to invest exactly half of the amount spent by brother Lucky in a balanced portfolio of market securities, such as stocks and mutual funds.

How much does Lucky bet and spend over course of 45 years, and what is the probable outcome? How much does Tim invest over the course of 45 years, and what is the probable outcome?

While results may vary, we can calculate the expected value of each of these brothers’ behaviors.

To calculate Lucky’s results, we need to know that lotteries return an expected value of \$-0.50 per \$1 bet. The point of a lottery, after all, is to raise money for the lottery organizer, and to return about half the money over time to the players.

Lucky bets \$3,120 per year (\$10 x 6 x 52)

And a total of \$140,400 over the 45 years (\$3,120 x 45)

Since he loses an expected amount of \$0.50 per \$1 bet, we can quickly see that Lucky loses \$70,200 over the course of his 45 years of lottery playing. Lucky might win \$10 here, \$100 there, and occasionally \$1,000, but the odds in the long run mean he’ll burn up an estimated \$70,200 over the years, nearly guaranteed.

Tim invests \$5/day, 6 days a week, 52 weeks per year. His annual investment is \$1,560 (\$5 x 6 x 52).

Hershey (the book’s author) assumes a 10% gain on investments[1] to calculate Tim’s results after 45 years. Aggregating the compounded returns of annual \$1,560 investments at 10%, we can see Tim’s net worth climbs to \$1,121,492 after 45 years.

Tim’s a millionaire using just half of the money Lucky ‘invested’ in lottery tickets, while Lucky has a zero net worth.

Now, that’s what I call a useful mathematical comparison.

Example number two that I loved from the book

A recent college graduate named Patience is thinking of taking a trip to Europe, which will require her to max out her \$5,000 credit card and pay the 18% annual interest charges on the card. Realistically she knows she will stay maxed out for 10 years, so she will have to pay that 18% interest all the while for the next ten years. How much is that?

Alternatively, Patience considers not making the trip to Europe, and instead may invest the amount of the unspent interest in an S&P500 index fund. Hershey assumes a 15% annual return[2] on that investment. How much money would she have then at the end of 10 years?

The annual finance charge, following the trip to Europe, would be \$900 (\$5,000 x 18%). Over ten years Patience would end up paying \$9,000 in interest charges, and still owe \$5,000 at the end of ten years.

If, instead, she invested \$900 per year in the mutual fund that earns 15% per year, we can calculate – using the magic of compound interest – that she would have \$18,274 in her fund.[3] Her positive net worth from investing beats the \$5,000 deficit by a long shot. And just as importantly, the interest charge on the credit card ends up costing more than the original trip itself.

My critical thoughts – the bologna in the feedback sandwich

First concern – Who reads this?

One concern I maintain with a book like this – which I fretted about earlier in a review of another math-book-for-non-math-types Innumeracy – is who, honestly, will ever pick up this book? Will people who already feel uncertain about their math skills, however theoretically eager to learn the mysteries of numbers or tempted by the chance to “Get Rich,” actually dig past the first few paragraphs to learn what they do not know?

I don’t know. I doubt it. Math-oriented people enjoy confirming their own math aptitude with a book like this, and they may be able to expand their skills into useful finance applications with this book. I have a harder time picturing non-math folks picking up and actually working their way through the instructions and sample problems, however accessible this book may be. I think Hershey has made this as approachable as possible, but I still question the draw of those who are the intended audience.

Second concern – No way to teach compound interest (my pet peeve)

Every finance-math for non-experts book that I’ve ever read relies on a terrible crutch when it comes to teaching compound interest: The table in the Appendix with compound interest multiplication “factors.” I hate this.

What a proper book on compound interest should teach is the formula FV = PV * (1+Y/p)^N, with definitions of each variable and multiple examples to shows its application. That formula, once understand, can solve any compound interest problem flexibly, and precisely.

This book’s appendix features a y-axis listing the number of compounding terms from 1 to 100, for example (the N in the formula), while the x-axis shows ascending percentages of yield (the Y in the formula). At the end of every example in the book that references these tables, Hershey is forced to say: “That’s not exactly the answer, but it’s close enough.”

I can’t endorse this. I refuse.

All The Math You Need to Get Rich was first published in 1982, the same year in which my fifth grade teacher introduced us to the Timex Sinclair 2000.

[10: Print “Mike” ; 20: Goto 10 ; Run]

At that point in 1982, text appendices of compound interest tables made perfect sense.

Not in 2014, though.

Any reader of a book in 2014 also has use of an Excel spreadsheet program that sits on their desktop or laptop, and can be used to good effect with the formula above.

The text-based, imprecise, crutch of an Appendix table, which no person will carry with them, ever, gets in the way of anyone who ever wanted to actually learn how the compound interest formula really works, in real life.

Phew, got that off my chest.

Back to the complimentary thoughts

If I was assigned a high school math class as a substitute teacher and given 1 month to teach the kids something useful, I would pick a book like All The Math You Need To Get Rich as a textbook. Here are real-life skills for understanding interest rates, percentages, probabilities, and dealing with orders of magnitude – in short most of the things households, investors and citizens need to use on a daily basis to get by. Certainly these help most of us think much more, and much more often, about useful math applications, than the traditional courses – Geometry, Trigonometry, quadratic equations, and Calculus – that make up the majority of traditional high school math curricula.

Not only do these relatively accessible concepts come in handy more often, I would hope – as their substitute teacher – that I could impress upon the unruly high schoolers their own self-interest.

“Deeply understand interest rates and percentages,” I would urge, “and use your powers for good (getting wealthy) instead of evil (making credit card companies richer).”

This is a fine book and I may use it for teaching my girls what they need to know in the future.

See related book reviews:

Innumeracy by John Allen Paulos

Master Math: Business and Personal Finance Math by Mary Hansen

[1] Astute readers will argue that 10% is too high an assumed return from a portfolio of stocks for 45 years, and I agree. Using a 6% return, Tim’s net worth at the end of 45 years climbs to \$331,880. This doesn’t have quite the ring of ‘millionaire’ that the author Hershey probably wanted, but it still isn’t anything to sneeze at, for the cost of a daily Starbucks addiction.

[2] I know I know, too high, but still, work with me here a little bit.

[3] If we assume a more modest 6% return, she would have \$11,863.