Wednesday, December 21, 2016

CBO Projects Larger Social Security Shortfall

The Congressional Budget Office released updated projections of Social Security's long-term financing, finding an even larger long-term deficit than in the Office’s previous calculations.

The new figures, released December 21, find Social Security’s combined retirement and disability trust funds running out in the year 2029, after which benefits would be cut across the board by 29 percent.


Over the full 75-year measurement period, Social Security is projected to run an actuarial deficit of 4.68 percent of taxable payroll, meaning that Social Security is underfunded by 25 percent over the next 75 years. In the CBO’s previous figures, calculated in late 2015, the 75-year shortfall was 4.4 percent of payroll. Social Security’s trustees and actuaries project a smaller 75-year deficit of 2.66 percent of taxable payroll.

One way to think of the actuarial deficit is the size of the payroll tax rate increase – taking place immediately and staying in effect permanently – that would keep Social Security’s trust fund solvent for 75 years. So, if we immediately raised the payroll tax rate from the current 12.4 percent to 17.08 percent, that would be enough to keep the program solvent for 75 years.

Alternately, we could reduce benefits – again, immediately and permanently – by about 25 percent. Or we could rely upon a range of other policy changes, such as raising or eliminating the $127,200 payroll tax ceiling, increasing the retirement age, lowering Cost of Living Adjustments, and so on. The effects of some of these policies are calculated in CBO’s recent publication on options to reduce the federal deficit.

Many reformers have a difficult time fixing Social Security’s funding gap even under the more forgiving projections from Social Security’s trustees. Using CBO numbers, which show a long-term deficit 75 percent higher than the trustees, the challenge is even greater. One strategy: take all reforms you favor and all the reforms you hate, then put them together. Combined they might fix the problem.

CBO’s new Social Security publication also includes updated figures on the replacement rates paid by Social Security, which measure Social Security benefits as a percentage of pre-retirement earnings. The CBO’s figures find that for an average retiree, Social Security benefits replace 40-45 percent of substantial earnings in the years approaching retirement. As I argue in this recent working paper, the CBO’s approach effectively compares Social Security benefits to an “average of above-average earnings” in the years preceding retirement.

A better approach, I argue, compares Social Security benefits to the inflation-adjusted average of career-long earnings. Luckily, CBO publishes a data appendix that includes these figures; they find that Social Security replaces from 55 to 65 percent of real career-average earnings.

However, both approaches find that replacement rates are rising for lower-earning participants and falling for high earners. The reason is that Social Security benefits are indexed to rise along with national average wages. The poor have seen their wages stagnate, meaning that Social Security benefits will be higher relative to their pre-retirement earnings. The rich, by contrast, have seen faster wage growth. But the growth of Social Security benefits has not kept up, lowering the replacement rates the receive from the program. This change in replacement rates shows how Social Security has partially offset the increased inequality of pre-retirement earnings.


WilliamLarsen said...

It does not matter if the SS-OASI benefit is based on inflation adjusted life time earnings or the current wage indexed life time earnings of 35 years.

The problem is that SS-OASI never calculated the payroll tax that was balanced with expenses. There was no effort to balance the life time payroll taxes of a cohort with the life time benefits of that cohort. This is and always has been the root cause behind Social Security's failure.

It does not matter if retirement age, inflation, life span at full retirement age, rate of return or the base on which payroll taxes are paid. An algorithm can be created to calculate the correct tax and make minor adjustments over time (yearly) so that that cohort has sufficient funds to pay its benefits.

Another problem is the 75 year solvency period. This time frame takes includes all revenues and expenses during that 75 years years, yet excluded the beneficiary payments outside that 75 year that were based on wages subjected to the payroll tax (revenues paid) during the 75 years.

Like the SS Titanic that struck an iceberg, only 25% of the iceberg was visible. What was not visible was the 75% of the damaging ice below the surface that ultimately sunk the SS Titanic. Like the SS Social Security, it has been steaming at high speed these past 80 years never caring what lied beneath the surface or in this case what lied out beyond the 75 years.

The problem now is that simple. How do you remove 160 million workers and future workers who are booked on the SS Social Security? Increasing the payroll tax will reduce take home pay, further making it more difficult to save, pay for college, home, raise a family and pay for healthcare. Cutting benefits by the 29% now reduces spending by seniors which affect the economy since 73% f the economy is based on spending. In essence the SS Social Security has sucked 45 years worth of savings from workers, paying benefits to earlier beneficiaries far in excess of what those beneficiaries paid while working.

How many Ida May Fullers were there?

"Ida May Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits."

"Social Security is projected to run an actuarial deficit of 4.68 percent of taxable payroll, meaning that Social Security is underfunded by 25 percent over the next 75 years." It was not long ago this value was 1.4%. The Congress has known about this for decades, yet has failed to act. Now the initial cut is looking more like 29%. In another ten years, 2026, how much of an initial cut will it be? It certainly is not decreasing.

4.68% divided by 12.4% now is 37.7% increase in the single largest tax paid by the majority of workers. Another way to look at it is SS needs a payroll tax of 17.08% but only has 12.4% which requires a 28% cut in benefits across the board.

When are workers going to wake up? SS is the definition of a ponzi scheme.

Andrew G. Biggs said...

You're talking about system financing, solvency, intergenerational equity and so forth. What I'm referring to is individual-level retirement income adquacy, and for replacement rates that measure income adequacy it matters a lot what you compare benefits to. If you think, as financial advisors do, that a roughly 70% replacement rate is adequate, then a Social Security replacement rate measured relative to real average pre-retirement earnings gets you to about 60%. If measured relative to wage-indexed earnings, the average replacement rate is about 40%. That's a big difference. The key is that benefit adequacy has nothing to do with system financing, because at the individual level people don't care about that. They care whether their retirement income will allow them to maintain their pre-retirement standard of living. Yes, system financing and solvency matter a lot in the big picture, but not for measuring benefit adequacy.

WilliamLarsen said...

Andrew, everything has a cost associated with it. The cost of this "individual-level retirement income adquacy" is too costly. Greenspan now has come out and stated that the purpose of "their" proposal for SS in 1983 was for the surplus to be saved, not spent or loaned to the Treasury. IT was meant to be saved by not running continual deficits. All this did was crowed out saving by lower wage earners.

As for the 70% value, I know people who live very comfortable on less then 50% of their income and they did not make much more than the average household. As my father used to say often, it is not how much you make, but how you spend it.

This sacred cow has been dying for decades, yet no one seems to want to speak honestly about it. Many like yourself compare adequacy as the goal, when in reality the goal is independent living from having to rely on others.

The SSA knew as early as 1961 that birth rates were declining, they had been for 200 years. A boom begets a boom and a bust begets a bust. It was clear in great immigration from Europe just before and after WWI that most of the immigrants were young and would start families. This was an artificial bump up in the fertility rate of America. Instead of accepting it for what it was, they looked at it as a never ending rate for supporting Social Security.

Income adequacy goes out the window when cuts to Social Security take place. We need to stop looking at income adequacy and look at saving individuals from a program that perpetuates dependency. It is a given that cuts will take place in the future. The longer they wait, the far more painful those cuts will be.

1983, some 33 years ago, we as a country had a choice to make about SS. We could begin to faze it out or as many wanted save it. Who did they save it for? Certainly not the boomers. My wife who is the last of the boomers now falls in the age group that will not be spared. In fact those coming after her will see lower benefits and higher taxes. Adequacy in terms of fairness is a farce.

Is to have a adequacy value that cannot be achieved or focus on real solutions?
My computer program of 1983 is showing the first cuts will be in the next decade. Will 165 million workers in 2027 say no to tax increases? Will beneficiaries say no to cuts? I was hoping my math and algorithm was wrong. I knew it was best case, but it is even worse than I thought.

In many ways I wish I never asked that silly question in 1972? What will my benefit be when I reach 65? I wish I was ignorant like the 95% who still believes in SS.