Friday, October 24, 2014

CRFB: Social Security Getting Harder to Fix

The Committee for a Responsible Federal Budget blogs that the tax of fixing Social Security solvency is getting tougher:

A hypothetical solution that would have closed the shortfall last year now only closes about 95 percent of the shortfall. Previously, a 2.9 percentage point tax increase (raising the combined payroll tax from 12.4% to 15.3%) would be enough to solve the shortfall. Now, that increase would need to be 3.1 percent. Similarly, a 17.5 percent reduction in all benefits would have addressed the shortfall last year, but it would need to be 18.4 percent this year. Furthermore, these options assume the changes are made immediately. Waiting 20 years requires changes to be 50 percent larger.

Check out their full blog here.


Arne said...

A change of one year means that the fix is now 0.2 percent larger. The piece allows the reader to believe that the 0.2 percent would not be there if we had already accepted a fix, but that is not true. Because demographics (particularly life expectancy) continue to change, SS must continue to change. One of the worst things about the 1983 fixes is that it allowed a generation to believe that SS can be static and just forget about it.

WilliamLarsen said...

Arne, is correct in a sense when he refers Social Security 1983 changes to being static. However, the 1983 changes were projected pay scheduled benefits until 2064.

It is clear that projection was incorrect. Mostly because SSA failed to appreciate the 1977 OASI Benefit formula. This formula did not rectify the legacy debt. In fact unlike in 1937 when OASI was enacted, there were no beneficiaries, only workers. It would not be until 1941 when the first benefits would be paid, but congress decided to legislate the 1941 date forward to 1940 while at the same time delay the scheduled increase in the OASI tax from 2% to 6%.

OASI has been basically a static program with large changes periodically to keep it afloat.

Had OASI begun with an actuarial requirement it may have never past muster with the US Supreme Court. However, an actuarial approach that takes into account cohort life tables, US Treasury Rates, working years and tax rates would certainly have been the better approach.

What we have is an imploding program that consumes an ever growing portion of workers wages. This definitely leads to income and wealth inequality.

"fixing Social Security solvency is getting tougher" If there was a fix, it would have been implemented by now. could it be there is no "painless" solution? Supporters and politicians just do not want to admit SS is a failure.

The 1983 "FIX" was like an addict taking another hit saying this will be the last time or they have it under control.

As I have said many times; Social Security and Medicare are addictive. They are no different than drugs, tobacco, alcohol or gambling to name a few. Kick the habit and Just Say No To Social Security!

JoeTheEconomist said...

The odd thing is that as the solution becomes more costly, the politicians become more stubborn about holding on to the past.