Social Security Reform; an idea for Andymoon's independents

Lockbox.

 

If I were under 30 I would lobby for the social security administration to make one time compensation payments to the survivors of old people who volunteer to die.

Seriously, we baby boomers paid for our parents security in a deal to have our kids pay for ours. But there were more of us per dependent and we can pretty much expect our parents to be gone by 80. My generation may live past 100 thanks to the added health care services the young will be funding through Medicare and Medicaid. Oh yeah, all of us are going to want heart transplants, lung transplants and penile implants. I sure hope medical science finds the cure for aging so I can be 85 forever.

 

haha, the only team I'd want to join is the Rockets....

B-Bob, I have an extra free copy of the book if you're interested. Like I said, it's kind of dry, but very informative.

Glynch, thanks for the kind words.

 

Got to have a military, even though I think that they spend too much and have a tremendous amount of waste and duplication. We could definitely get a better military for less money.

 

For those who don't really want to read the book by Diamond and Orszag

THE GRAPHS ARE COOL

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Budgetary Effects of the Diamond-Orszag Social Security Proposal
Jeff Lemieux
Revised December 31, 2003 to add a new Table 1 and re-number the previous Table 1 as Table 2. (Originally published December 27, 2003.)

Economists Peter have compiled a thoughtful, complete Social Security reform proposal. The Diamond-Orszag proposal would resolve Social Security's funding shortfall directly, mostly by raising taxes. There are no gimmicks or wishful assumptions. The new revenues include both payroll tax rate increases and expansions of the Social Security payroll tax base. The proposal targets some benefit reductions toward higher-wage workers, but most of those savings would be offset by enhancements to benefits for low-income workers.

The proposal does not attempt to "pre-fund" Social Security, either through personal accounts or a trust fund or "lock-box" approach. Instead, it pays for Social Security's rising costs as they are accrued. Therefore, the proposal has none of the transition costs associated with pre-funding -- it would reduce the federal deficit in every year. By adding state and local workers to Social Security, the proposal could also reduce the employee pension costs of state and local governments in the long run.

In essence, the Diamond-Orszag reform proposal shows the extent to which taxes would have to be raised to eliminate Social Security's long-run deficit. The upside compared with proposals that would pre-fund a portion of future benefits is that taxes would have to rise only relatively slowly. The downside is that, unlike pre-funded proposals, the tax increases would be permanent, not temporary. But the authors are to be commended for their honesty -- this is the first Social Security reform proposal that is fully "paid for."


Defining Social Security's Budget Problem: The most helpful way to think about Social Security's future budget problem is to compare the program's benefit obligations with its dedicated tax revenues (mostly payroll taxes). Using forecasts for the next 75 years from the Social Security Administration, Figure 1 shows that Social Security costs will rise from about 4.5 percent of the economy toward 7 percent of gross domestic product (GDP) as the baby boom generation retires. Meanwhile, dedicated tax revenues are projected to remain flat at about 5 percent of GDP.

Figure 1.


The difference between these costs and dedicated revenues is Social Security's effective cash-flow surplus or deficit. Because benefit costs are currently lower than revenues, Social Security is running a surplus. However, Social Security's current surplus is expected to disappear and become a deficit after 2010 as the large baby boom generation starts to retire in large numbers. After 2030, the Social Security deficit is projected to be about 2 percent of GDP (see Figure 2).

Figure 2.


By defining Social Security's surplus or deficit as the gap between direct revenues and costs, the measures used in this analysis get to the core budgetary reality -- in order to pay benefits (or create personal accounts) we must have tax revenues.

This definition of Social Security's budget situation does not consider trust fund balances or intra-governmental interest payments or transfers. That is because Social Security is essentially a pay-as-you-go social insurance program, not an advance-funded retirement plan. Workers pay payroll taxes roughly sufficient to cover Social Security's outlays at the time. Social Security's future budget problem is simple: payroll taxes will not be high enough to cover future benefits.

To fully solve Social Security's budget problem, a reform proposal must close the 2 percent of GDP gap between revenues and costs in the long run, without (1) creating overly high or unmanageable transition costs over the next 20 years, or (2) relying on financing gimmicks or "one-sided bets," such as overly optimistic assumptions about investment returns in personal accounts or absolute guarantees that Social Security benefits would never be reduced.

Pre-Funding vs. Pay-As-You-Go. Most Social Security reform proposals seek to partially pre-fund the program, so that Social Security would be less of a pay-as-you-go system and more like an advance-funded system. Pre-funding effectively requires higher government spending now so that future spending obligations can be reduced.

Any proposal that would pre-fund Social Security costs would incur transition costs over the next several decades. Following the transition period, however, pre-funded proposals would achieve "transition benefits," when the up-front investment paid off in lowered spending and tax burdens in later years.

There are two ways to pre-fund Social Security:

1. Trust fund or "lock-box" approaches, where the government would attempt to set aside funds from the rest of the budget that could be used to pay benefits in the future.

2. Personal accounts owned by workers, whose accumulated balances would provide investment income to compensate for future reductions in traditional Social Security benefits.

Lock-box approaches were always dubious, but they have been completely discredited over the last several years. Although there was a flurry of interest in the lock-box idea in the late 1990s, it is now again obvious that Congress does not have the political will to "save" the Social Security surplus in any tangible sense within the federal budget. The government makes spending decisions based on the deficit in its "unified" budget, including Social Security. Financial markets also focus on the unified budget deficit -- the amount by which the government has to borrow from the public -- as the measure of "deficit spending."

Therefore, the Social Security trust fund has proven to be an inadequate storage location for any sort of surplus funds or pre-funding scheme.

By contrast, personal accounts probably would be a more reliable storage location for attempts to pre-fund Social Security costs, because the balances in the accounts would be owned and controlled by workers. Outlays to add funds to the accounts would be gone forever -- they would not be part of legislators' subsequent budget calculations, either directly or indirectly.

The main problem with personal accounts as a storage location would be the temptation for future governments to allow workers to make pre-retirement withdrawals from the accounts -- perhaps for hardship reasons. That would dilute the accounts' ability to supplement workers' retirement income as intended. Account systems used in other countries generally do not allow pre-retirement withdrawals.

The Diamond-Orszag proposal does not attempt to pre-fund Social Security's future costs, either through a lock-box or a personal account approach. Instead, it is a pay-as-you-go proposal, which adds revenues as needed to cover benefit costs as the baby boomers retire.

A Fully "Paid For" Proposal: Social Security reform proposals can be grouped into three categories:

1. "Paid for" proposals, where the transition costs of reform are offset by tangible tax increases or spending cuts. These "pay-fors" can be within the Social Security system, such as payroll tax increases or benefit cuts, or they can be outside the system.

2. Partially funded proposals whose transition costs would be large, but not economically unmanageable. This type of proposal usually contains offsetting benefit reductions or other tangible or "scorable" provisions to at least partially pay for the transition costs of reform.

3. Unfunded "free lunch" proposals whose transition costs would be huge. These proposals make no tangible or score-able efforts to reduce or pay for the transition costs, and generally guarantee that no Social Security beneficiary could possibly lose money on reform (compared with the current benefits promised in the law).

The Diamond-Orszag proposal is fully paid for within the Social Security system. Because the proposal does not pre-fund Social Security's future spending, it has no transition costs. It would increase the Social Security surplus (or reduce the deficit) in every year. Likewise, the overall federal deficit would be reduced in every year.

The main tax increases in the proposal include a very gradual increase in the tax cap (currently $87,000) and a new tax of 3 percent on wage and salary income above the cap. Benefit cuts consist mostly of reductions in benefit "replacement rates" for high-wage workers. However, benefit enhancements of roughly an equal magnitude would apply to workers with low incomes, widows or widowers, and workers qualifying for disability benefits.

After 2023, the proposal requires increases in the regular payroll tax rate (currently 12.4 percent), increases in the new (3 percent) tax rate on wages above the cap, and further reductions in benefit replacement rates to keep Social Security on a sustainable path, with its deficit shrinking closer to zero toward the end of the 75-year estimating period.

Costs of the Diamond-Orszag Proposal: Between 2005 and 2050, the Diamond-Orszag proposal would not reduce Social Security costs, because reductions in benefits for some workers would be offset by the cost of benefit enhancements for others. After 2050, however, the proposal would reduce Social Security costs by about one-half of 1 percent of GDP, from about 7 percent of GDP to 6.5 percent (see Figure 3).

Figure 3.


The Diamond-Orszag Proposal would increase Social Security revenues gradually over time, from about 5 percent of GDP currently to about 6 percent of GDP by 2050, and about 6.3 percent of GDP by 2075 (see Figure 4.)

Figure 4.


Combining the changes in benefits and revenues, the Diamond-Orszag proposal would improve the Social Security cash-flow surplus through 2020, and reduce its deficit thereafter. The deficit would gradually shrink back toward zero after 2030, when most of the baby boomers were retired (see Figure 5.)

Figure 5.


By these measures, it is clear that the Diamond-Orszag proposal meets the criteria for solving Social Security's budget problem. It eliminates the long-run deficit without implausible transition costs and without financing or benefit gimmicks.

The downside is that the benefit reductions and tax increases are permanent and ongoing. Therefore, the Diamond-Orszag proposal illustrates the eventual cost of not pre-funding Social Security's future benefit obligations.

Long-Run Costs and Savings of Diamond-Orszag and Other Proposals: There are many ways to compute Social Security's unfunded obligations. Figure 6 below, uses a very simple calculation: the net present value of Social Security's cash-flow surplus or deficit (as defined above) between 2003 and 2075 using a nominal discount rate 6 percent. This measure does not credit Social Security for the current balance in its trust fund -- the calculation is completely forward looking.

Under current law, the present value of Social Security's projected surplus of deficit in those years amounts to a net or unfunded deficit of about $5.1 trillion. By comparison, the proposal by anti-tax activist Peter Ferrara actually increases Social Security's deficit (in present value terms) to about $7.6 trillion. The proposal by Senator Lindsey Graham would reduce Social Security's unfunded obligations to about $3.5 trillion.

Of the three proposals we have studied so far, the Diamond-Orszag plan performs best by this measure, reducing Social Security's unfunded obligation to only $1 trillion between 2003 and 2075.

Figure 6.



The reason the Graham and Ferrara proposals have higher long-term liabilities is that their transition costs are not paid for. The Ferrara proposal has huge transition costs, which would actually increase the federal deficit by over 2 percent of GDP for decades (see Table 1). Interestingly, the Ferrara plan would raise Social Security costs to almost 8 percent of GDP, higher than the projected maximum cost of 7 percent under current law, before costs started to fall in later years.

The Graham proposal has much more modest transition costs, but they would still amount to about 1 percent of GDP for almost 2 decades. In budgetary terms, the transition costs of the Graham bill would be about $1.6 trillion between 2005 and 2014 (the 10-year budget period that begins Jan 1, 2004) and another $2.2 trillion in the following decade (see Table 2.)


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This is dealt with by indexing the retirement age to life expectancy (something that the Peters advocate somewhat, and I feel very strongly in favor of).

Getting the government to not dip from the SS trust fund is largely a political matter, and one that no politicians want to address with any fervor. Third rail politics...

 

I love how some of you "guys" are hot for raising the age for Social Security eligibilty. Trust me, if you were on the "cutting edge" of the Baby Boomers and had only about a decade, maybe less (I ain't tellin' ), before you could draw it, you'd look at this a hell of a lot differently.

It should be put in a "lockbox", as has been promised many times and not delivered on, so that the poorest of our people and the most helpless... the senior citizens of this country of all races and economic classes, can have something to live on if life deals them a tough hand. Even those of good economic circumstances can have things happen to them they didn't plan on. Enron. A catastrophic illness to a family member. Things that suck up that comfortable cushion you had and spits it out. If many of you were younger, you would give some of these ideas more thought.

Such is life. And we all get old someday, believe it or not. Unless you die first.

 

I think most people don't expect SS to give them a living wage, and medical expenses can be covered by other ways... after you've spent your life savings, if you have no insurance. And many middle class people today don't have health insurance, including millions of children. But they use that income to supplement other income... whether it's a stock portfolio or a job bagging groceries. And there are people who are no doubt drawing SS now who bag groceries at the supermarket where I shop.

As for your "UFO" comment, I think it's misguided. Some studies, quoted in this thread, have SS solvent well into the possible eligibility years of the 20-somethings that think it's a bankrupt system. And there is no reason we couldn't do more to shore it up. I'm not against raising the retirement age, for example, but I am disturbed by the cavalier attitude many have towards doing that. What until you are faced with having to help pay to keep a parent in a decent (are any of them really "decent"?) nursing home. They are amazingly expensive. Any income those people are getting is a godsend.


edit: I wanted to add that one of the best reforms, and one of the least "painless", would be to remove the cap on income for those paying into the system. It's ludicrous that it still exists. It is something the well-to-do should be happy to pay.

 

I am about 40 years old, and I am planning for SS to be completely GONE by the time I qualify.

My dad gets it, and he worked for 40+ years for Ma Bell.

He deserves what he gets, but he also saved for his retirement.

I am saving like a madman....Now if I can just get my wife to stop buying stuff, and my 2 boys to like used sneakers, then I would be in like Flynne.



DD

 

From W's 2001 Budget proposal... 9-11 changed everything.
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Over the next 10 years, the Federal Government is projected to collect $28 trillion in revenues from American taxpayers. The President's Budget devotes roughly $22.4 trillion to extend the Government we have today, including the President's new initiatives.

This leaves a $5.6 trillion surplus. The President's Budget takes a cautious approach to allocating this staggering sum, starting by saving the entire Social Security surplus--nearly 50 percent of the total surplus--for Social Security and debt retirement. None of the Social Security surplus will be used to fund other spending initiatives or tax relief.

By devoting these revenues to debt retirement, the Nation will be able to pay off all the debt that can be redeemed--an historic $2 trillion reduction in debt over the next 10 years. The only remaining debt will be those securities with maturity dates beyond 2011. In all likelihood, American taxpayers would have to spend an additional $50 to $150 billion in bonus payments to bond holders to accelerate the repayment of those notes, a wasteful and senseless transaction. It makes more sense to allow the securities to mature naturally, leaving the Nation on a glide path to zero debt post 2011. (See Chart III–3.)

By 2011, Federal debt will have fallen to only seven percent of GDP--its lowest level in more than 80 years. Net interest payments on this debt will be less than 0.5 percent of GDP, less than one quarter of today's share and only three percent of the budget. This represents a great national achievement.

Even after setting aside Social Security and paying off the debt at these unprecedented rates, $3.0 trillion of the expected surplus remains.

 

I've put as much money as I could possibly squirrel away in Roth IRA's and mutual funds. SS will not be there and I'm planning that way as well.

 

SS will not be there and I'm planning that way as well.

As has been shown, social security will be there unless the public decides they don't want it. It is a political decision. Dubya just blew several trillion by rebating it to the rich, enough to make it solvent for at least 75 years into the future.

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I am counting on social security to be there. I know it will unless Dakota and Bama and Bush can convince people to not support it.

I'm betting that if push comes to shove most people want it and despite the spin believed (and I believe sincerely) by Dakota and Bama that the average person will ignore their beliefs and support the system.

The Social Security "Crisis" is one of the ways in which the otherwordly assumptions of econ 101 (perect info, unlimited buers and sellers, no one will exert poltical influence government doesn't exist etc.) bumps up against reality.