Today, Florida Sen. Marco Rubio unveiled his ideas to improve retirement security, including plans to make Social Security solvent, and encourage delayed retirement and increased retirement saving. (Full disclosure: I advised his staff on the plan and have written in favor of some of the provisions.)
Included in Sen. Rubio’s ideas are:
· Social Security solvency: Rubio would gradually increase the retirement age in line with life expectancies and reduce the growth of benefits for higher-earning individuals. In addition, Rubio favors strengthening the safety net for lower-income retirees.
· Delayed retirement: Rubio would eliminate the 12.4 percent payroll tax for retirement-age individuals to encourage them to stay in the work force. I really like this idea and wrote on it for the Wall Street Journal.
· Open the TSP: Rubio would allow workers who are not offered retirement plans by their employers to participate in the federal government’s Thrift Savings Plan, the DC pension for government employees. In a way, this builds upon the President’s MyRA proposal, but allows for greater choice in investments.
Agree or disagree, we need more people putting ideas on the table. Click here to read my National Affairs article on how to fix Social Security and improve retirements.
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3 comments:
"Social Security solvency: Rubio would gradually increase the retirement age in line with life expectancies and reduce the growth of benefits for higher-earning individuals
""These seniors have already paid their fair share, and we shouldn't punish them for choosing to keep working rather than immediately cashing in,"
Few have paid their fair share and that is why we have a legacy debt.
Again an individual has no idea what it takes to make social security solvent. Simply saying reduce the growth is a catch all. there are two types of growth in benefits; Wage growth used in the calculating the initial OASI benefit and COLA which is base don the change in CPI.
COLA is not a problem in making OASI solvent since its 75year solvency uses current law and under current law when the trust fund to OASI expenses is less than 20%, COLA is ZERO!
Wage growth which I have written about for decades is a different matter. The change in the OASI benefit formula took place in 1977. Benefits were basically dictated by congress and were a political football. As one of the ways to curb growth in benefits, the OASI benefit formula of 1977 was enacted. Benefits were based off wages subjected to the OASI tax. Past wages are indexed by the change in the SSA wage index between the year you turn 60 and each year you worked. This is called the index factor. It is this method that makes Social Security and mathematical divergent series. My paper was submitted to the Commission in Social Security in 2001 and I saw that is was presented in layman's manner in the interim report.
The wage index method is a sound method with one exception. The benefits paid do not have any bearing on taxes paid. As wage growth increases, it is necessary to increase the payroll tax in order to pay higher future OASI benefits.
Reducing benefits for higher income individuals will do little since the gap between revenues and benefits exceed what reduction in benefits paid to higher income individuals.
I would love to see the assumptions and the plan, but they do not exist. I would bet they do not even have a model that would analyze this. In my years I have found very few models of social security.
What I have found are groups/organizations that take the output from Social Security and make assumptions that if these changes would take place, then this result would happen.
The problem is that under current benefit structure, there are many defined assumptions: Cola affects benefits paid this year next year. Wage growth increases the benefits paid in the future directly. People born this year will begin to work in ~20 years. In simple terms a boom begets a boom and a bust begets a bust. We know the potential number of beneficiaries for the next 100 yeas since they have already been born. We also know the number of workers for the next 20 year since they have already been born.
There is no painless solution to Social Security. Anyone who says they have one is selling snake oil.
"under current law when the trust fund to OASI expenses is less than 20%, COLA is ZERO!"
This is not true.
"As wage growth increases, it is necessary to increase the payroll tax in order to pay higher future OASI benefits."
If people did not live longer, this would not be true, either.
"There is no painless solution to Social Security."
Any increase in SS pains people like William, but CBO and SSA both project that our incomes after inflation will rise faster than needed to cover scheduled SS benefits. Those of us who don't choose employment over retirement will find it pretty painless.
"As wage growth increases, it is necessary to increase the payroll tax in order to pay higher future OASI benefits."
No, constant wage growth does not require a higher payroll tax. Changes in wage growth will change future benefits of future beneficiaries. The OASI benefit formula of 1977 is a compound gradient. For each wage growth value, there is a mathematical precise tax rate that is required to meet future benefits. If wage growth falls, then the OASI tax would fall as well. In more technical terms each cohort would have different payroll taxes based on the change in wage growth during their working years.
I just got a call from a congressman's office in DC about life expectancy. I took a congressman to task so to speak when they made what I considered a decision made based on poor information. Life expectancy is increasing extremely slowly. Next year's birth cohort at age 67 will live about 0.25% longer than the birth cohort born this year at age 67. In fact the rate of change is SLOWING! If you think a change of 0.25% is a major factor in social security's finances, then you should take a good look at SSA's cohort life tables starting with 1900 and going through 2010.
Many financial planners will suggest to those who have not saved to delay retirement by a few years. The reason is quite simple. For each one year you delay retirement your assets continue to grow, you can add more money and you have one less year to fund in retirement (you worked it). For each one year you delay retirement, the value of your theoretical SS-OASI value of taxes paid, plus the taxes you would pay working one more years would theoretically allow that person to fund two and half more years in retirement. In 1983 the full retirement age was increased from 65 to 67. This two year increase effectively eliminate a bit more than five years increase in life expectancy.
If we raise the retirement age based on life expectancy increasing using linear math, then we are putting a cap on the number of years beneficiaries draw on average while increasing the number of years they pay. This is no fair, but then SS was never fair, will never be fair and cannot be changed to be fair.
Arne thinks that the hard work of future workers should not be compensated with a higher standard of living, but pay higher payroll taxes effectively keeping the standard of living stuck in the past.
Higher wages create higher future benefits. The 1977 OASI benefit formula is a sound method to begin each cohort with a standard OASI benefit based on their wages. The problem is that OASI is not fully funded.
CBO and SSA both project that our incomes after inflation will rise faster than needed to cover scheduled SS benefits.
Both the CBO and SSA have year after year calculated an increase in the SSA shortfall in terms of additional taxes needed. More often than not, each year the SSA wage base has increased due to increased wages, yet the shortfall is increasing. If this were not so, SSA would be fully funded.
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