Thursday, December 21, 2017

New article: “How to Pay for Social Security’s Missing Trust Fund?”

How to Pay for Social Security’s Missing Trust Fund?

by Alicia H. Munnell,Wenliang Hou and Geoffrey T. Sanzenbacher

Social Security’s Trust Fund is projected to run out in 2034.  As policymakers consider restoring financial balance to the program, one topic that may be discussed is how to structure any tax increases.  Understanding why Social Security requires a higher payroll tax than a funded retirement program for a given level of benefits is a crucial first step in informing this discussion.  The current “pay-as-you-go” approach is the result of the policy decision made decades ago to pay benefits far in excess of contributions for early cohorts of workers.  By paying benefits in excess of contributions to early cohorts, the nation essentially gave away the Trust Fund that would have accumulated and, importantly, gave away the interest on those contributions.  Thus, the payroll tax must cover not only the required contribution but also the missing interest.  This paper addresses alternative ways to pay for this Missing Trust Fund, including a comparison of the size of the required changes and their distributional implications.

This paper found that:

  • The size of the OASI Missing Trust Fund is $27 trillion dollars.
  • The so-called Legacy Debt – i.e., the $29.3 trillion dollar net transfer to pre-1932 birth cohorts – is the driver of this Missing Trust Fund.
  • Paying for the missing interest on this Missing Trust Fund could be accomplished with a permanent increase in the capped payroll tax of 3.7 percentage points, in an uncapped payroll tax of 3.0 percentage points, or in the income tax of 2.3 percentage points.
  • Accumulating assets to replace the Missing Trust Fund over 75 years requires larger, temporary increases in those taxes of 6.5 percentage points, 5.3 percentage points, and 4.1 percentage points, respectively.
  • The burden of a payroll tax increase tends to fall more on households in the middle two income quartiles, whereas the income tax burden falls more on the top quartile.

The policy implications of this paper are:

  • The fact that the primary cause of the Missing Trust Fund is the Legacy Debt suggests that increasing the income tax merits consideration, since paying benefits to early program participants benefited all of society.
  • While replacing the Missing Trust Fund would ultimately create a fully-funded system with a large, interest-generating Trust Fund, such a move raises macroeconomic issues and questions of intergenerational equity.
  • Finding the right approach merits society-wide discussion.


WilliamLarsen said...

"The fact that the primary cause of the Missing Trust Fund is the Legacy Debt suggests that increasing the income tax merits consideration, since paying benefits to early program participants benefited all of society.

How has it benefited all society? They took current workers payroll dollars, paid out current benefits with them, reducing take home pay. The worker then has less take home pay to pay bills such as a mortgage, healthcare, schooling and turns to taking on more debt on which they have to pay interest.

If a person took their payroll tax (employer/employee) share, they could pay off a 30 year mortgage in 14 years seven months. This wealth creation that Social Security has destroyed.

Social Security disenfranchised the workers from participating in the economy. One could also make a strong argument for our political climate when it comes to dollars and cents.

Social Security prolonged the great depression and now this writer/report attempts to sugar coat Social Security by saying "since paying benefits to early program participants benefited all of society."

If ithas benefited society then why do we have a problem?

WilliamLarsen said...

"2 The story of Ida Mae Fuller is an extreme example. Ms. Fuller had worked under Social Security for less than three years when she became the first person to claim monthly benefits. She died at age 100, after receiving benefits for 35 years. She clearly enjoyed an extraordinary rate of return on her contributions to the system."

Yes, Ida lived to 100 and her annual compound rate of return was 88.49%. However, had she lived the life expectancy of her cohort and was paid the what Social Security was paid 3% annually, she still would ran out of money in 2.05 months. Her life expectancy would have had her collecting benefits until December 1954 at which time she would have been paid $6,674.59 more than her employer/employee payroll tax would have supported.

Now Ida was not alone, There were millions of Ida who collectively each took easily $6,000 more out than they paid in.

The birth cohort 1932 is not the last cohort that took more out than they paid in, but continues to 1944 for married non working spouses.

?The simplest way to see the implications of Social Security’s Missing Trust Fund is to consider the contribution rate required to finance Social Security retirement benefits under a funded retirement plan compared to a pay-as-you-go system (this paper excludes discussion of Disability Insurance). Under a stylized model of a funded retirement system, with the Social Security Trustees’ intermediate assumptions on mortality and on the real interest rate (2.7 percent), to achieve a replacement rate of approximately 36 percent (the projected Social Security replacement rate for the average earner once the Full Retirement Age equals age 67) ...."

What utter BS!!! The easiest approach is to use the actual numbers as they are, no adjustment to (real interest rate), but use the actual Treasury Rate for each and every year. Computers make repetitive calculations simple so why approximate?

Use the actual cpi that was used to adjust COLA's.

Use the actual population that paid the payroll tax!

Use the actual bend points and determine the actual unique indexing for each cohort - why assume 36% to be the value to replace - calculate the cohorts value using a computer simple mathematics, but there are a lot of repetitive calculations.

Use the the SSA cohort life expectencies or SSA actual numbers in a cohort.

Arne said...

William: "How has it benefited all society?"

They "took current workers payroll dollars" and reduced the amount needed for taking care of those workers parents.

The concepts of "Missing Trust Fund" and "Legacy Debt" ignore the fact that there is value in providing for seniors who live longer than their savings will last and value in providing insurance of that benefit to yourself as a payroll tax payer.

Calculating the net preset value requires setting a discount rate. Since the true value is NOT as an investment account, there is no reason why the rate on treasuries should be preferred. It is just an easy to come by number - not a meaningful one. In fact, if the trust fund were 6 or 7 times as large, there is every reason to believe that the interest rates would be lower.

Munnell: "Finding the right approach merits society-wide discussion". But getting a meaningful discussion requires getting people to read what Munnell and William have to say as well as many others and also to understand the math used by those multiple viewpoints.