The Treasury Department released the fifth in its series of issue briefs on Social Security. The latest, entitled "Social Security Reform: Strategies for Progressive Benefit Adjustments," makes the case for progressive price indexing of future benefits, a strategy that combines wage indexing of benefits for lower-earning individuals with price indexing of benefits for individuals earning the maximum taxable wage. Here's how the new brief concludes: There is widespread agreement that any reform to Social Security will involve adjustments to reduce benefits relative to what is currently scheduled but unpayable, and that these adjustments will fall relatively more heavily on high-income workers. There is likewise a consensus that workers with low lifetime earnings will be shielded from the burden of reform. While there are many ways to implement progressive benefit adjustments of this sort, the essential mechanics of any benefit adjustment are the same. In some proposals these mechanics are obvious because they make specific adjustments to the parameters of the benefit formula. It is less obvious—but no less true—for reform proposals such as progressive price indexing, where adjustments to the parameters of the benefit formula are tied changes to to economic variables such as wage and price growth. While progressive benefit adjustments will represent an important component of some future reform plan, they are unlikely to be the entire plan—that is, progressive adjustments to benefits will be combined with other reforms. Because these other reforms can also influence Social Security's overall progressivity, a meaningful assessment of the effect that proposed changes to benefits would have on Social Security's fairness across and within generations will need to specify those additional reforms.
Thursday, June 26, 2008
Treasury Department releases Social Security issue brief
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11 comments:
Once again thanks for the link.
I kind of like the proposal for a couple of reasons. One it pretty much sidelines the whole Intermediate Cost/Low Cost probability debate. If IC happens and real wages come in at 1.1% ultimate we get the result shown in the Issue Brief. On the other hand if we get results closer to LC with its 1.5% real wage number then it seems to me that the gap between the current schedule and the result of this proposal will close precisely to the degree that real wages and CPI behave-or don't. And though I haven't thought it all through, it seems to neatly align with the recommendations of the SSAB Technical Panel's Report, because adjusting your benefit in light of actual real wage and actual price change is pretty much the same thing as adjusting it to income and cost. So at first glance I could well go along with this kind of plan. (As always the devil is in the details.)
The second reason I like it is because if adopted in the broad form it is presented here it kind of guts the political case for a more radical reform in the form of private accounts. That is whether one would prefer to close the gap through taxes (coberly) or my previous preference of combining 'Nothing' with careful monitoring of year over year changes or this proposal, if any one of those is accepted then 'crisis' by definition is 'fixed' leading to a bleeding off of any sense of urgency, an urgency needed to sell something like LMS.
It seems to me that a combination of this Issue Brief plus the recommendations of the SSAB Technical Panel kind of weights the scales towards the 'mend' end of the 'mend it, don't end it' scale. I don't think Peter Ferrara will be pleased.
Bruce,
On your first point, it's true that under price indexing increased wage growth benefits solvency more than it does under the current wage indexed formula, because under pure price indexing benefits won't rise while taxes will. Under progressive indexing, sensitivity to wage growth would be between wage and pure price indexing. Also, different wage growth would affect the progressivity of benefits, since benefits for low earners rise with wages, which vary, while those for high earners remain constant in real terms.
On the second point, you can always ask why personal accounts are needed in addition to progressive indexing. Prior Treasury briefs have made the case for pre-funding, which I basically agree with, but you'd have to tie that together with progressive indexing, which isn't totally straightforward.
Andrew
This confirms my desire to see the annual report contain projections of the level of benefits that could be continued if the trust fund were maintained at 100 percent when it starts dropping.
If no changes are made until 2036 (and IC economic and demographic projections come about) and taxes remain unchanged, it would be necessary to start reducing benefits to maintain the TF at 100. How fast would benefits start dropping?
It's possible to roughly figure out the payable benefit levels post TF-exhaustion by dividing the annual income rate by the annual cost rate. That will give you a decimal percentage. (It will be a little off because of the taxation of benefits, but not enough to matter.)
While you could start reducing benefits in 2036 or so to maintain the 100% TR ratio, I don't believe there's any legal requirement to do so. I'd have to double check, but I'm not sure the 100% TFR has any real legal standing there.
In 2026 SS reaches the point where the 10 year forecast says the TF will drop below 100 percent. If we maintain CPI adjusted benefits and start reducing inital benefits (for 67 year olds) how much does the initial benefit need to drop to maintain a projected TF level at 100 percent.
The number of projections becomes unlimited, start sooner, pick the level based on stochastic analyis so that 10 year projections retain TF at 100 percent in 75 percent of simulated runs, allow the TF to drop to 50 percent, etc.
I realize it becomes more complicated, but I still want to see the numbers for benefit reduction in the annual report.
I could do the analysis you suggest, but I believe it suffers from having to reduce retiree benefits. I don't know how to separate out the increase in costs from new beneficiaries (which increases at AWI) from the decrease in costs from beneficiaries who have died (which would have increased at CPI).
To do it you'd need a picture of the retiree population, and I don't believe there's any public SSA data on that. With a stable population it would be easy to figure out, since you'd just reduce your starting population with mortality each year. But we have larger cohorts entering retirement each year, which makes things harder. There would be some work in getting the data together, and then some trial and error in getting the initial benefit reductions right. It's certainly do-able but would take some work.
As I understand it a TF ratio of 100 is not a legal requirement, after all the Trust Funds were under 100 every year from 1971 to 1992. I haven't read the Act but from reading the Reports any failure to meet the test of Short Term Actuarial Balance simply requires the Trustees to highlight same and urge Congress to act. Still it is a reasonable target and does serve to establish a reserve against temporary income fluctuations.
I have a new post up at AB that was originally written for my (hardly ever visited) blog back in April. It takes the same basic targetting approach as Issue Brief no. 5 but flips it. The IB starts from Intermediate Cost and essentially adjusts benefits to match. My proposal instead starts from the assumption that the outcomes are historically and inherently uncertain and that instead of arguing about probability of various projections that we pick a particular benefit mix and target it. The two approaches are in practice consistent, each requires a certain amount of targetting and periodic adjustments, the only difference is that Treasury would adjust benefits in response to actual income outcomes while my proposal would adjust taxes to achieve specific benefit outcomes. Indeed you could devise a blended approach, that is instead of accepting a 78% benefit outcome (however redistributed by this new formula) or insisting on a 100% of schedule outcome, we could agree to split the difference perhaps with a goal of delivering 85% to the higher end earner relative to the current shedule and 95% to the lower end earner.
In any event the important thing for me is not to lock us into a rigid formula of benefit cuts that is not in fact responsive to actual outcomes or contrawise simply radically transform the system in response to models that are in point of fact at this point contingent and not graven in stone.
Year ago, a person by the name of Andrew Biggs contacted me about Social Security. He was curious why I thought economic growth was bad for Social Security.
I discovered back in 1983 when I was modeling SS-OASI that when economic growth assumption increased that the liabilities of SS-OASI increased exponentially.
I have done extensive research on numerous ways to solve SS-OASI's problem. But after millions of different combinations, it is sad to say there are no painless solutions.
As I wrote the Commission on Social Security in 2001 and stated so plainly was that it is very simple to identify the tax rate needed for a pay-as-go program. The targeted benefit rate of 42% of life time indexed wages divided by the numer of average workers paying the average payroll tax yeilds your payable benefit. Now most know tha the benefit formulas from 1977 that indexed past wages by the change in the US Average Wage growth produced a divergent series. For example:
If wage growth were 5% in 2008, it would increase the initial benefit of those who turn 60 this year by 5%. conversly, if the wage growth were -5%, the initial benefit of these people would be exactly 5% less.
What we are dealing with is replacement rates. A replacement rate is any index of assumption you wish some value to increase by. The replacement rate for SS-OASI benefits is COLA (inflation). The replacement rate for workers initial benefit is US Average Wage growth which is generally higher than inflation.
We all know that inflation reduces the net income from investments by reducing its buying power. How many realize that if inflation is 5% and wag growth is 6%, that you do not earn a compounded net rate of 1% a year? The actual compound rate of return is = (1+ rate of return) divided by (1+ replacement rate) -1. This means as the US average Wage increases relative to the US Treasury rate, the ability to pay future SS-OASI decreases. conversly as US wages growth decreases, the ability to pay future SS-OASI benefit increases.
If you are curious as to what combination of tax rates, benefit cuts and rates or return are necessary to solve this problem fell free to check out http://www.justsayno.50megs.com/tables/t-report.html
True worker to beneficiary ratio
http://www.justsayno.50
megs.com/wr_ratio.html
The tax rate needed based on full age of retirement.
http://www.justsayno.50megs.com/pdf/old_age_tax.pdf
Myths the Political tool of Choice
http://www.justsayno.50megs.com/pdf/political-myths.pdf
My proposal for SS-OASI
http://www.justsayno.50megs.com/pdf/larsen_plan.pdf
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