Wednesday, February 5, 2014

New paper: “Social Security Reform Could Benefit All Workers”

From the National Center for Policy Analysis:

Congress is once again considering changes to Social Security in an attempt to "save" the program. Social Security benefit payments have exceeded tax revenues since 2010; the funding deficit is growing and, barring reform, will continue to grow indefinitely. Higher tax revenues are necessary to fund benefits as they are currently calculated, say Liqun Liu, a research scientist, Andrew J. Rettenmaier, executive associate director, and Thomas R. Saving, director, at the Private Enterprise Research Center at Texas A&M University.

The system is financed on a pay-as-you-go basis where current tax payments are transferred to current retirees. Changing demographics have resulted in a reduction in the number of workers supporting each retiree and a corresponding need for higher tax rates. Retaining the current benefit structure will require an immediate and permanent increase in the Social Security payroll tax of 3.3 percentage points.

In contrast, a long-run balanced budget for Social Security could also be achieved by retaining the current tax rate, but making the following two benefit reforms.

  • Gradually raising the retirement age for workers who become eligible for benefits in 2023 and after.
  • Making the benefit formula less generous for higher earning workers through progressive price indexing.

Both the current program with the taxes necessary to close its financing gap (the baseline) and the reformed program produce comparable net results for workers across birth years and across income classes.

  • With the baseline program, average-earning men born in 1985 will have to pay 13.5 percent of their lifetime income in taxes and receive benefits equal to 9.6 percent of their income.
  • However, the same workers in the reformed program would pay a lower tax rate of 10.2 percent to receive reformed benefits of 8.2 percent.

If the baseline and reformed program are comparable in terms of net lifetime tax rates within income classes and birth years, is there a reason to prefer one to the other? Liu, Rettenmaier and Saving suggest that the smaller reformed program is preferable, primarily for the following reasons:

  • Given current debt levels along with ongoing and forecast budget challenges, reducing the size of federal spending is critical in the long run.
  • Collecting the higher tax revenues necessary to retain the current benefit formula inevitably produces welfare losses.
  • Reducing the scope of a pay-as-you-go financed retirement program will result in the real prepayment of retirement benefits, leading to greater investment and higher national income.
  • The reformed program can be complemented with voluntary, individually directed personal retirement accounts.

Source: Liqun Liu, Andrew J. Rettenmaier and Thomas R. Saving, "Social Security Reform Could Benefit All Workers," National Center for Policy Analysis, February 2014.


JoeTheEconomist said...


I have to question their research with basic math.

CBO projects that the Trust Fund will be exhausted in 2031, or 17 years (that is in an economy which cooperates)

A man 67 today expects to live about 17 years. So we can't promise anyone under 67 today scheduled benefits.

Mind you, just because someone was a high-wage earner in life, does not mean that they aren't in poverty today.

So I question not only the math but the way that the research is presented.

JoeTheEconomist said...

If you can delete the last comment, I would appreciate it. The proposal adds a 'solvency tax'.

I still think that the proposal statement that it is means testing is not accurate.

WilliamLarsen said...

You cannot get something from nothing and there is no free lunch. However, it never ceases to amaze me how many try to perpetuate some fix to save social security. I have seen them all since 1970. I have read about the big fix of 1950 (raise the tax by 50%, base by 50% and enroll the other half of workers who were not covered in 1937). All this did was create a second tier Ponzi scheme to support the first one created in 1937.

But then in 1970 SS-OASI ran out of new workers to enroll and so we saw huge increases in the base and tax.

By 1983 SS-OASI had exhausted it trust fund. Congress authorized borrowing $11 Billion from Medicare and SS-DI trust funds. This was paid back from the increase in payroll tax, base, retirement age and the increase in taxable SS benefits. This "Save Social Security" was projected to work until 2064.

Here we are 2014 and SS is projected to exhaust the trust fund (can't due to 1984 legislation) in 2031. Does anyone really believe this? We have treasury rates at below 3%; we have labor participation rates of 7% below normal.

We now have people saying raise the retirement age. For each year increase in retirement age, the work pays one additional year and delays benefits by 1 year. If you were doing this with you 401K or IRA you would extend your assets by 2.6 years.

The increase in life expectancy is increasing by just 17 days per year at age 67per new cohort. In fact the rate of change in cohort life expectancy at age 67 is slowing, not increasing.

Social Security is imploding; the US Treasury has not balanced a general budget since 1957 and now has $17 trillion in debt. Where on earth do you think these resources will come from to save Social Security? When a person is bleeding to death, you put a tourniquet on and cut your losses.

Adding a solvency tax - what will with do to savings, spending and ultimately jobs? Keep in mind each time the Payroll tax increased, the national savings rate dropped. Is the purpose of social security to enslave workers and make them dependent on government? If so they are doing a fantastic job.