Friday, April 11, 2008

How long is forever?

Philosophers may ask the question, 'How long is forever?' Rep. Robert Wexler (D-FL) has provided his own answer to that question: 75 years, but not longer.

The Sun Sentinel reports on the reintroduction of Rep. Wexler's "Social Security Forever Act." To begin, here's how the Congressman's press release describes the bill:

Today, Congressman Robert Wexler (D-FL) reintroduced his plan to save Social Security – the Social Security Forever Act of 2008. Wexler’s legislation closes the Social Security gap, without cutting benefits or raising the retirement age, by imposing a 3 percent hike on payroll taxes for incomes above $102,000 a year. Currently, individuals do not pay any taxes for Social Security purposes on earnings above $102,000. By raising the cap on Social Security taxes, the Social Security Forever Act not only ensures the solvency of this vital program but restores tax fairness in America at a time when income inequality is sharply on the rise.

“Social Security is a fundamentally sound program; however, its future solvency is endangered because not all wages and salaries are subject to Social Security taxes,” said Congressman Wexler. “There is a simple and fair way to solve this problem. By lifting the Social Security earnings cap, Congress can ensure the long term solvency of a program that keeps millions of seniors out of poverty each year. At a time when our economy is struggling, my plan protects Social Security without raising the retirement age or slashing benefits.”
A couple comments:

First, if you go to the actual text of the legislation (available here), it also includes a 3% surtax applied to employers. This seems worth mentioning. Since the employee bears the full burden of the payroll tax, this is effectively a 6% surtax on earnings over the cap, currently $102,000. While not as high as Senator Obama's plan to eliminate the taxable maximum, this would increase the top marginal tax on earned income from 37.9% to 43.9%.

This surtax is equivalent in size (if not incidence) to an increase in the current payroll tax from 12.4% to around 13.7%, an increase of around 1.3% of payroll in the steady state. Since the Social Security actuarial deficit is 1.7% of payroll, and even higher under the 2005 Report when the plan was first constructed, this tells me Wexler's plan would probably not be solvent for 75 years under Trustees' assumptions. (More likely, Wexler constructed his plan around CBO projections, which then showed a much smaller deficit although the current gap between CBO and Trustees projections is fairly small.) This chart shows the annual income and cost rates for the Wexler plan:

Second, the plan wouldn't actually fix Social Security forever. In fact, it actually wouldn't quite make it to 75 years. The chart below shows the trust fund ratio (trust fund assets divided by the annual cost of paying benefits) for the Wexler plan compared to current law.
The Wexler plan is very much like the 1983 reform plan, which changed taxes and benefits only enough to reach 75-year solvency but made no effort to assure solvency thereafter. You can see that the trust fund ratio peaks in 2018 and declines thereafter, a clear sign of unsustainable financing. To achieve sustainable solvency, in which the trust fund ratio is stable or rising at the end of the period, requires that you raise the surtax rate up to around 12%. (This is basically equivalent to eliminating the payroll tax ceiling.)

This highlights why experts have promoted the idea of sustainable solvency. This report from the Social Security Advisory Board's 1999 Technical panel says:
When reformers aim only for 75-year balance, therefore, they usually end up in a situation where their reforms only last a year before being shown out of 75-year balance again. The 1994-96 Advisory Council wisely tried to accept only reforms that produced sustainability over the longer term— sustainability defined in a way that would ensure that taxes and benefits were more or less in line after the 75th year.
75 years is precisely what Rep. Wexler aimed for, and precisely what he got. If your plan is solvent only for the years 2008-2083, once the time period shifts to 2009-2084 you're no longer solvent. Put another way, without the unexpected improvement in solvency in the 2007 Trustees Report, Wexler's "Social Security Forever" plan would already be significantly out of balance since it was constructed to fix only the 2005 actuarial deficit, forgetting that deficits tend to rise as time passes. Some people don't care about this; I do.

Third, the plan would entail a larger build-up of the trust fund followed by a spend-down. If you don't believe the trust fund build-up has improved the unified budget deficit or added to national saving (here's why I don't), then this doesn't make much sense.

For anyone interested, here's the excel file I used in putting these numbers together.

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