Lies, Damns Lies, and Herbert London

I am grading the final projects of my class, I am trying the clear the backlog of publishing all the class notes, I am way behind on my STOC reviews, and in two days I am taking off for a complicated two-week trips involving planes, trains and a rented automobile, as well as an ambitious plan of doing no work whatsoever from December 20 to December 31.

So, today I was browsing Facebook, and when I saw a post containing an incredibly blatant arithmetic mistake (which none of the several comments seemed to notice) I spent the rest of the morning looking up where it came from.

The goal of the post was to make the wrong claim that people have been paying more than enough money into social security (through payroll taxes) to support the current level of benefits. Indeed, since the beginning, social security has been paying individuals more than they put in, and now that population and salaries have stop growing, social security is also paying out retired people more than it gets from working people, so that the “trust fund” (whether one believes it is a real thing or an accounting fiction) will run out in the 2030s unless some change is made.

This is a complicated matter, but the post included a sentence to the extent that \$4,500 a year, with an interest of 1% per year “compounded monthly”, would add up to \$1,3 million after 40 years. This is not even in the right order of magnitude (it adds up to about \$220k) and it should be obvious without making the calculation. Who would write such a thing, and why?

My first stop was a July 2012 post on snopes, which commented on a very similar viral email. Snopes points out various mistakes (including the rate of social security payroll taxes), but the calculation in the snopes email, while based on wrong assumptions, has correct arithmetic: it says that \$4,500 a year, with a 5% interest, become about \$890k after 49 years.

So how did the viral email with the wrong assumptions and correct arithmetic morph into the Facebook post with the same wrong assumptions but also the wrong arithmetic?

I don’t know, but here is an August 2012 post on, you can’t make this stuff up, Accuracy in Media, which wikipedia describes as a “media watchdog.”

The post is attributed to Herbert London, who has PhD from Columbia, is a member of the Council on Foreign Relation and used to be the president of a conservative think-tank. Currently, he has an affiliation with King’s College in New York. London’s post has the sentence I saw in the Facebook post:

(…) an employer’s contribution of \$375 per month at a modest one percent rate compounded over a 40 year work experience the total would be \$1.3 million.

The rest of the post is almost identical to the July 2012 message reported by Snopes.

Where did Dr. London get his numbers? Maybe he compounded this hypothetical saving as 1% per month? No, because that would give more than \$4 million. One does get about \$1.3 million if one saves \$375 a month for thirty years with a return of 1% per month, though.

Perhaps a more interesting question is why this “fake math” is coming back after five years. In 2012, Paul Ryan put forward a plan to “privatize” Social Security, and such a plan is now being revived. The only way to sell such a plan is to convince people that if they saved in a private account the amount of payroll taxes that “goes into” Social Security, they would get better benefits. This may be factually wrong, but that’s hardly the point.

11 thoughts on “Lies, Damns Lies, and Herbert London”

1. Come on Luca, you’re being trolled. It’s in the first sentence of London’s article: “In the parlance of Orwellian newspeak words often mean the opposite of their seeming intent.”

2. The numbers still don’t make sense, but I believe the assumption is \$9000/year to SS, \$4500 from the employee and \$4500 from the employer. On the other hand, that’s way too much from the assumed \$30K salary (30%!). I believe that SS taxes are 6.2% from the employer and 6.2% from the employee.

3. On a related note, why are we still using absolute numbers to describe the US federal budget deficit? It really confuses me (and, apparently, Obama back in 2008). People have been saying “The GOP tax bill increases the federal deficit by \$1 trillion over the next decade” and then afterward, interpreting this in at least three different ways. I pretty sure it means that within 10 years, we will be running an additional shortfall of \$1 trillion/year. I have seen people on the news multiply this by 10, divide it by 10, and compare it both to historical debts and historical deficits. No one understands how much \$1 trillion is anyway, so shouldn’t we start reporting the deficit as a percentage of GDP?

4. No, no, it’s definitely \$4,500 a year because the overall payroll tax (which includes contributions for medicare) is 15.3%, when you add up employer and employee contributions, which they round to 15%.

As for your other question, when they say “add 1 trillion dollars to the deficit over ten years” they always mean (as far as I know) that the national debt ten years from now will be \$1 trillion higher than it would have been otherwise. That is, the budget deficit (the difference between revenues and expenses in a given year) is increased roughly by \$100 billion for each of the ten years.

5. I was going by what London said: “At the moment employees pay fifteen percent of their income before taxes to the Social Security agency. If one assumes a \$30K payment per year and an employer’s contribution of \$375 per month at a modest…” I didn’t understand why he would say “employees pay” and then talk about the “employer’s contribution” unless he was counting those separately.

About the debt: I thought that’s not the correct use of the word. The deficit is the annual gap between tax revenue and federal spending. The debt is the accumulated amount of money the federal government owes. It does appear that your number is correct. But then it leads to a simple question: Making a ballpark estimate (crediting 6-10% of the 10% growth since July), it seems that expectation of the tax cuts may have increased the value of the US stock market by \$2-3 trillion dollars, while decreasing government revenue by \$1 trillion. Did we win?

6. (If the employer’s contribution is \$375 month, it stands to reason that the employee’s is \$375 months as well, leading to \$9k/year.)

7. For the tax cut to “pay for itself,” given that it is expected to add \$1.5 trillions to the debt, and that the long-term capital capital gain tax is 15%, it would have to cause an additional \$10 trillion growth to the stock market (over the growth that would have happened without it)

8. I am well aware of the difference between debt and deficit, but the language used to report on the budget and on tax law is hopelessly muddled. This is the New York Times today: “[the tax bill] can add no more than \$1.5 trillion to federal deficits over a decade […]” (reference).

Notice the work done by the “s” in “deficits”. They really mean to say that the bill can add no more than \$1.5 trillion to the debt over a decade.

9. But I really didn’t want to talk about anything more complicated than the fact that if you have passed third grade math, not to mention if you have a PhD from Columbia, it should be pretty clear, without even doing the calculation, that \$375 a month for 40 years with a 1% interest a year does not add up to more than a million.

10. My question was more: What does it mean if \$1T in tax cuts over a decade “creates” \$3T in value now? That seems inefficient (couldn’t we agree that after I give \$1T in cuts, corporations will turn around give the government \$1.5T in stock?)

I guess that since the corporate tax cuts are “permanent,” a \$3T rise in the value of the stock market could be amortized over, say, 20 years instead of 10. And then maybe the entire gain really is really just the cuts themselves.

11. Professor Trevisan, would you call that post “#fakenews”?