Sloppy math.

[futurebird.livejournal.com]

I hate sloppy mathematics. Sloppy mathematics gives good mathematics a bad name. Some of the time people will try to toss out a whole lot of numbers to impress and confuse other people. And that's just what happened on a thread in this forum last night. (Yes I'm going meta.) At the time, I didn't bother to do a good job of responding to the sloppy math. But I woke up this morning thinking "You need to address this."

When someone links to a website like this one: Grandfather Economic Report series and says "the total US debt, (including the debt for states) is 57 trillion dollars" I just look at the website, see all of those questions marks and estimates, note that I have never heard such a high figure before, and then dismiss it as sloppy mathematics. After all, when I ask "do any real economists add things up in that way?" I get no response.

In fact, instead of a response the person I am talking with insists that debt from pension funds is so much bigger than military expenses that there is no point in even considering cutting military expenses to address the problem. This is a really exciting "fact" it since contradicts what we'd expect.  Isn't the military budget in the USA " sooo huge"? Not so, liberals! Let's think outside of the box. In fact, lets think outside of normal accounting and mathematics! Here is his "reckoning":

He adds up the short fall costs of pensions:

• Un-funded Social Security contingent liabilities estimated looking forward * - $13.6 trillion
• Un-funded federal employee pension contingent liabilities (incl. Postal service) - $4 trillion
• Un-funded state & local government employee pension & medical contingent liabilities - $2.7 trillion

Total unfunded government pension liabilities = 23.3 Trillion

Then he says:
"You could cut the US Military Budget by 80% and not make a dent in the underfunded pension problem in this country. The Military budget for 2010, including the cost of operations in Iraq and Afghanistan as 660 Billion. 80% of 660 Billion ~ 525 Billion 18 trillion/525 Billion = 34 years to close the gap."

That's AWFUL! 34 years to close the gap. These pensions are so even more huge than military spending! Please keep in mind folks, I'm getting this lecture on a post where I suggested that controlled cutting of pension isn't such a bad thing. I know pension funds cost a lot. I think that cost must be considered as we plan a route to solvency.  But what we have here with these claims about defense spending is a serious case of distortion. It is even more annoying when you consider the fact that conservatives make a big deal about programs that cost $10,000 or $15,000 dollars that they find "wasteful". Conservatives denigrate scientific research that costs less than a million as "useless." But, cutting any the $660 billion dollar military budget is 'pointless' since GOVERNMENT PENSIONS are costing so much. (Except, Social Security isn't a "government pension" -- but I'll let that technicality slide.)

So, what are some of the things that are wrong with this argument?

First of all, what is the "Un-funded Social Security contingent liabilities estimated looking forward" ($13.6 trillion) it sounds like money we are projected to need to make payments in the future. So, I looked at the source (given on the sloppy website,) a speech given by Richard W. Fisher, President of the Federal Reserve Bank of Dallas. The number comes from this quote:

Now, fast forward 70 or so years and ask this question: What is the mathematical predicament of Social Security today? Answer: The amount of money the Social Security system would need today to cover all unfunded liabilities from now on—what fiscal economists call the “infinite horizon discounted value” of what has already been promised recipients but has no funding mechanism currently in place—is $13.6 trillion, an amount slightly less than the annual gross domestic product of the United States. (Source.)

So, it's not just "Un-funded Social Security contingent liabilities estimated looking forward" It is literally looking in to infinity. In that case, it would seem that 34 years is not so long after all to pay off a debt that extends in to infinity. That we can pay this off in just over a quarter century with 80% of the defense budget means that defense budget... is...well... pretty friggin huge! Next, I decided to research this “infinite horizon discounted value” it sounded fascinating. I love infinite series! I found this on Factcheck.org:

Does Social Security Really Face an $11 Trillion Deficit? (<---That would be 13.6 if readjusted for inflation, I suspect.)

President Bush and Vice President Cheney have told audiences that Social Security faces an $11 trillion shortfall if nothing is done to fix the current system. But they fail to mention that this is over the course of the “infinite future." Over the next 75 years -- still practically a lifetime -- the shortfall is projected to be $3.7 trillion. (source)

So, wait. If we look at the next 75 years instead of "forever" the shortfall is only $3.7 trillion? Not $11 trillion? That makes, kind of, a big difference. 

What about the other numbers?

• Un-funded federal employee pension contingent liabilities (incl. Postal service) - $4 trillion
• Un-funded state & local government employee pension & medical contingent liabilities - $2.7 trillion

The sloppy website offers no source for these figures. They are presented with question marks next to them. I can only assume they are just as inflated and misleading as the first number.

What else is wrong with this picture? The term “unfunded liability” has been used to refer to a gap between a company's projected financial commitments (over a finite period of time) and the revenues that are expected to be available to fund that commitment. The key word here is company. No government obligation can be truly considered “unfunded” because of the U.S. government has the power to tax—which is the ultimate resource to meet its obligations. This is not to say that looking at “unfunded liability” is pointless, but “infinite horizon discounted values” are too easy to fudge to produce terrifying numbers.

Especially when what you compare them to is the defense budget for one year rather than the “infinite horizon discounted value” of military expenditures over the same period of time. It's like comparing apples to air plane hangers. Calculating "infinite horizon discounted value" means evaluating a set of infinite sums under various conditions then taking the maximum of these values. It is useful in a few contexts, but it can be misleading:

In a letter to the Social Security trustees in December 2003, the American Academy of Actuaries, the leading professional organization of actuaries, warned that infinite-horizon projections "provide little if any useful information about the program's long-term finances and indeed are likely to mislead anyone lacking technical expertise in the demographic, economic, and actuarial aspects of the program's finances into believing that the program is in far worse financial shape than is actually indicated"

 

I'm certian that when Republican use these figures to scare the public they are just making and "honest" mistake. It's just a little sloppy math, 75 years, infinity what's the difference?

(The upside of all of this is that now I'm reading a very interesting paper about how these calculations are done. I'll see if I can reconstruct the process by which the 12 trillion figure for SS came in to being. I'm math person not an economics person so this could take some time. No promises.)

Comments

[meus-ovatio.livejournal.com]

I ran into this a couple years back with Glenn Beck's (or somebody) 53 trillion dollar end of the world hooplah. It took me about ten minutes to see through it.

[futurebird.livejournal.com]

It is easy to see through, but it takes some work to *show* why it is wrong. I'm having a hard time getting the source for the infinite horizon number. But, along the way I think I found one more possible problem (with the website) --the website adds the federal debt to the un-funded portion of Social Security-- but at least 4.2 of the 12 trillion dollars in federal debt is money owed by the government to itself.

It's a little confusing. But it works like this: Social security has a separate budget from the federal government. It is its own entity. When social security has too much money coming in the only thing they can legally do with the extra money is loan it to the federal government. (that is, unless the plans to privatize social security come back. Can you imagine what would have happened if we had put the money from SS in to the stock-market 6 years ago? *shudder*) In any case, this means the total is double counting a portion of social security debts and other debts from agencies with the same arrangement.

(Though to be certian of this I need verify how they calculated that infinite horizon number.)

[root-fu.livejournal.com]

53 trillion is projected cost. SS, medicare, etc is funded by current wage earners. A certain number of years into the future, this model becomes unsustainable. 53 trillion is the amount the government would need to sustain the paradigm into 2020 or 2040, something like that.

[htpcl.livejournal.com]

I appreciate how you're not naming the person you were disagreeing with.

[mijopo.livejournal.com]

Why?

[root-fu.livejournal.com]

Yes, that definitely shows a good deal of maturity.

[root-fu.livejournal.com]

If you go back a few decades, social security, medicare, etc account for roughly 20% of the budget. Currently, social security, medicare, etc account for nearly 40% of the budget.

This represents the key aspect of the deficit -- liabilities are growing at a much faster rate than the economy or anything else.

I don't remember where the 54 trillion $ number came from. I think it came from the GAO(government accountability office) and David Walker's little crusade against gov over-spending. In which case, its definitely accurate.

Here, this explains it:

[reflaxion.livejournal.com]

As an accountant, I just want to say that accounting for pensions is a royal bitch.

With that out of the way, I agree.

[futurebird.livejournal.com]

As an accountant, I just want to say that accounting for pensions is a royal bitch.

People in pure math, act like we are so special and like accounting is simple and elementary. All I can say it it is not as simple as it seems. I admire you guys and gals.

[mrbogey.livejournal.com]

How long can a system that pays out more than it takes in survive?

http://money.cnn.com/2010/08/05/news/economy/social_security_trustees_report/index.htm

FWIW, in 2000 this point was predicted to not occur till 2017.

The problem with "well just cut the defense budget" is all you're doing is paying for a program that can't sustain itself which does nothing to make it sustainable. Payouts are certainly going to have to be cut somewhere along the way. And the later changes are made the more expensive they'll be.

I don't know why so many Americans love SS. It's not free money. It's a loan that you give to the gov't with low interest where they dictate the terms of repayment.

[root-fu.livejournal.com]

Yeps. The lets throw more money at everything without understanding issues mindset is definitely out of control.

[futurebird.livejournal.com]

We need to:

*Cut defense by about 15-25%
*Cut federal pensions by 4-8%
*Let states choose to cut their pensions by up to 12% (on a state by state basis)
*Not touch SS. (too many fixed income people, it would cause too much pain)
*Raise taxes on the rich and close tax loopholes so that everyone who is richer than me pays at least the same (absolute, forget marginal) percentage or more of their income and capital gains ( and anything else ) in taxes as I do.
*Make it so that everyone pays some tax. Even if it is only %0.0125. (1/80th of a percent.) all people should pay taxes so everyone is "invested" in the government and to curb "tax the rich" populism. Replace tax refunds for people who didn't pay taxes with federal jobs programs so as to get capitol investment (building stuff) It's better to fund one job then 100 "tax rebates"
*states can add new sin taxes and legalize various drugs for additional revenue.
*Cut federal admin salaries by 1.5% for people under 100k, 5% for 100-200K and 10% for 200K and up.



I think that would do it.

Well done.

[squidb0i.livejournal.com]

All posts should be this well reasoned and documented.

Re: Well done.

[futurebird.livejournal.com]

Thanks. :)

[pastorlenny.livejournal.com]

There are lies, damned lies, and statistics. What I'm really interested in is an anecdote that will help me understand why you hold to positions that are not supportable by evidence and sober reasoning.

possibly sleep depravtion induced...

[futurebird.livejournal.com]

I don't know the, debt for pensions just feels so big to me. It's just seems like so much more ever since this guy at the DMV was mean to me once and all I can think about is him collecting a $635.12 pension check every month and then, after paying the rent on his studio on the 3rd floor of a old house in Pittsburgh he buys a bottle of Night Train and puts on his crushed green velvet robe and watches Nick-at Night re-runs on CABLE TV all night long laughing really really loud at the kind of sit-coms that I DO NOT LIKE. I bet his neighborhoods can hear him through the wall.UGHHHH. So expensive.

So even, though his whole check is probably covered mostly by his own contributions I FEEL like ~my tax money~ is going to fund amusements for someone, who, after rolling his eyes at me back in 1998 when I ~just~ asked for a 2nd copy of the form dosen't really deserve to be living it up like that.

He buys those VHS tapes that make your TV in to a fish tank-- why do I have to support this??? It may not be a big expenditure. But it FEELS LIKE KA-BILLIONS AND GILLIONS OF DOLLARS.

[rasilio.livejournal.com]

Oh you have no idea how funny you are.

You seem to think that because you understand a little math that you understand how Accounting works.


You really have no clue what an unfunded liability is.

It is the amount of money you'd have to have sitting on hand to pay for currently promised future payments.

Right now today there is a 23.3 trillion shortfall in the funding necessary to cover the promised pension payments for all levels of government.

That means we're short 23 trillion today. The problem is current policy has that number growing every year as every year pensions are funded at less than 100% and every year the Social Security trust fund is raided to pay for current spending.

So not only would you have to cut the military budget by 80% permanently and immediately (and I might add you completely ignored the economic and security problems posed by such an action) to close that gap in 34 years, you would also need to increase the funding levels of all of those government pensions by a rather significant amount (sorry, can't find any figures on the average yearly shortfall, off the top of my head guess would be somewhere between $300 and $600 Billion in additional spending to fully fund the pensions going forward).


Oh and...

"alculating "infinite horizon discounted value" means evaluating a set of infinite sums under various conditions then taking the maximum of these values."

No it doesn't. It means calculating the full likely future value of benefits. For example lets take your pension, how much are you going to cost them? Well there are a finite number of finite variables that could influence this, how long do you live, when do you retire, what is your base benefit amount when you do retire, what happens to interest rates between now and when you die, and so on. That infinite horizon value means taking no set end date, what is the likely full value of all promised future payments. So, whatever year the last person currently part of the pension (and this includes Social Security, and since one is part of Social Security at birth it's "Infinite" horizon is indeed about 75 - 90 years, an employee pension on the other hand would be closer to 40 - 50).


So, you wanna do some sloppy math and explain how you can remove $525 Billion in military spending from the economy overnight and not collapse the economy in the process?

Remember, I used a ridiculously high fraction of military spending cuts to make things balance in your favor. 80%. Make that a more realistic 30 - 40% cut and all of a sudden it is taking you to that 75 year horizon to fill the gap.

"No government obligation can be truly considered “unfunded” because of the U.S. government has the power to tax"

Oh the wonders of sloppy math indeed.

The only way this statement has any basis in reality is to assume that the government has an unlimited power to tax and that rising tax rates do not produce lower gdp effectively throttling how much the government can collect in absolute dollars.

The real reason why government liabilities cannot be considered unfunded is because technically none of them are guaranteed since they can make them go away by simply passing a law. Well at the federal level. State and Local governments are no different than corporations here because they are even more restricted in their ability to raise taxes and cannot eliminate the liability by fiat.


Finally I am calling you out as a bloody liar and demand a retraction and apology.

I DID NOT EVER COMPARE 1 YEARS DEFENSE SPENDING TO THE TOTAL UNFUNDED GOVERNMENT PENSION LIABILITIES

And you are blatantly lying by stating that I did.

Were I to have done so I could never have mentioned 34 years to close the gap. At no point did I say or imply that military spending was a tiny fraction of the unfunded liabilities because the annual amount was so much smaller than the total. I quite clearly and explicitly showed that even using an impossibly unrealistic projection of cuts to military spending it would take multiple decades to catch up on the backlog in funding, forget keep up funding to necessary levels going forward.

I did not compare 1 years military spending, I compared 34 years military spending and you know it.

Calm down.

[futurebird.livejournal.com]

I did not compare 1 years military spending, I compared 34 years military spending and you know it.

Oh boy. You still don't see the giant error you made. You can't just take 80% of the military budget from one year then multiply it by 34 and subtract it that from the infinite horizon discounted value for the SS. debt (plus those two un-sourced estimates you gave).

Doing that is "comparing apples to airplane hangers". The infinite horizon discounted value of the Social Security short fall is not just a debt, like a bill that you need to pay it is an infinite sum that encompasses all of the costs incurred by having the debt over an infinite period of time. (Interest, the interest on interest, the fact that money in the future is not worth the same as money today, inflation etc.) To work with it like a regular bill you would first need to calculate the infinite horizon discounted value of the military budget. Having payments yearly for the next 34 years of 80% of the US defense budget is worth a whole lot more than just 80% of this years budget times 34. One would need to find out how much that set of payments is worth and then compare.

Otherwise, it really makes no sense.

[root-fu.livejournal.com]

This is the link you're looking for, btw:

http://en.wikipedia.org/wiki/United_States_federal_budget#Mandatory_spending_and_entitlements (http://en.wikipedia.org/wiki/United_States_federal_budget#Mandatory_spending_and_entitlements)

[404.livejournal.com]

Easiest way to take care of the unfunded debt: fire up the printers and churn out enough money to cover all the liabilities. Problem solved! Shame that a loaf of bread will probably cost a thousand dollars, but hey, the debt is paid!

[enders-shadow.livejournal.com]

out of the frying pan, into the fire

not a wise strategy

[ofbg.livejournal.com]

These estimates are from folks that are underestimating by a bunch.

The President of the Dallas Federal Reserve, Richard W. Fisher, in the speech linked to below, called it closer to 100 trillion.

http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm

Seems to me that this is a guy with pretty good credibility plus I haven't heard a rebuttal from a credible, intelligent and non-emotional source.(I threw in intell & emo to rule out Chris Mathews)

[rasilio.livejournal.com]

Best quote in that speech...


"Suppose we decided to tackle the issue solely on the spending side. It turns out that total discretionary spending in the federal budget, if maintained at its current share of GDP in perpetuity, is 3 percent larger than the entitlement shortfall. So all we would have to do to fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. But hold on. That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut—almost eliminated, really—to tackle this problem through discretionary spending."

So we can solve the problem just by cutting the Defense Budget my ass.

[reality-hammer.livejournal.com]

I can't believe you're using the "I don't understand what's going on so people who disagree with me must be wrong" line of reasoning.

There are so many things wrong with what you posted it's hard to figure out where to begin!

Let's start with "debt". You're arguing that since the government has the power to tax that it's unfunded liabilities are not "debt".

Hell, you've just solved any and all deficit and debt problems facing any country, ever! Since all countries are using taxes to pay their bills they don't really have any!

Then there's the inability to understand the concept of the current value of money. The $13.6 trillion figure means that is how much money it would take, deposited into an account (no IOUs!), to ensure that the system had enough money to pay all of its bills now and into the foreseeable future. (That "infinite horizon" thing.) If you wait 70 years it will take considerably more than $13.6 trillion because you don't have any money in the account now, either earning a return on investment or preventing further debt from being accumulated. It's like that chart on a credit card statement: minimum payments means 30 year and $$$$$ in interest. That $$$$$ really is a debt that you will have to pay in the future by not making a payment now for the present value of that credit card debt. And no, you can't make it magically go away by claiming "I'll just ask for a raise because my employer essentially pays all my bills".

Every federal program can be cut. Any program not mandated by the Constitution should be done away with altogether.

However, we have a Congress that knows it can continue to spend more than the government receives in tax revenues because voters will never hold them responsible. It's always someone else's fault and some other program that is the problem.

Just look at how certain people demonize the Tea Party because it is drawing attention to all this debt and the tax increases that will be called for to "fix" the problem.

People don't like being told it's their fault and they'll have to make some sacrifices to solve the problem. They'll always vote for the candidate that claims the opposite is true.

[badlydrawnjeff.livejournal.com]

The war costs $3 trillion!