Social Security Forum, February 24, 2005

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Social Security Forum, February 24, 2005

• Presenter Dr. R. Steven Daniels
• Department of Public Policy and Administration

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Characteristics of Social Security

• Eligibility
• 40 quarters (10 years) of covered work at least
  920 per quarter (2005).
• Spouse or dependent of covered worker.
• Disabled

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Characteristics of Social Security

• Revenues
• Payroll tax rates 6.2 employer and 6.2
  employee.
• Maximum taxable income is 90,000 in 2005.
• Benefits
• Benefits based on Average Indexed Monthly
  Earnings (Monthly average of best 35 years
  indexed to wages).
• The Principal Insurance Amount, with first
  eligibility in 2005, equals the sum of the
  following
• A. 90 percent of the first 627 of the AIME, plus
• B. 32 percent of the amount above 627 up through
  3,779, plus
• C. 15 percent of any amount in excess of 3,779.

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Characteristics of Social Security

• At the end of 2003, 47 million people were
  receiving benefits 33 million retired persons
  and their dependents, 7 million survivors of
  deceased workers, 8 million disabled workers and
  their dependents.
• In 2003, 154 million people had earnings covered
  by Social Security.

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Social Security Shortfall

• Social Security Trustees 2004 estimate.
• Surplus increases until 2018.
• Outlays exceed income in 2018.
• OASDI trust fund reaches zero in 2042.
• In 2043, revenue covers 73 of benefit.
• Congressional Budget Office 2004 estimate.
• Surplus increases until 2019.
• Outlays exceed income in 2019.
• OASDI trust fund reaches zero in 2052.
• Differences due to different estimates in real
  earnings growth, real interest rate, inflation,
  and unemployment.

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Social Security Shortfall

• Measures necessary to maintain solvency until
  2078 (Social Security Trustees).
• Increase tax rate from 12.4 to 14.29.
• Or, all current and future benefits could be
  reduced by 13.
• Or, raise maximum wage cap to 200,000.
• Or, move money from general revenues or use
  combination of approaches.
• Does not guarantee solvency after 2078.

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Social Security Shortfall
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Caveat about Projections
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Bush Social Security Plan

• Caveats
• No formal plan submitted yet.
• Submitted components are incomplete.
• Other components are based on trial balloons and
  high placed administration sources.

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Bush Social Security Plan

• No changes for Americans 55 and older Current
  social security plan.
• Gradual changes.
• Reforms on the table
• Limiting benefits to wealthy retirees.
• Indexing benefits to prices rather than wages.
• Increasing the retirement age.
• Discouraging early collection of retirement
  benefits.
• Changing the way benefits are calculated.

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Bush Social Security Plan

• Negotiable reforms (?) Maximum taxable income.
• Nonnegotiable Increases in tax rate.
• Centerpiece Personal Retirement Accounts

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Personal Retirement Accounts

• Yearly contribution limits raised over time,
  eventually permitting workers to set aside 4
  percentage points of their payroll taxes in their
  accounts.
• Starts at 1,000 per year going up 100 per year
  to 4 percentage points (maximum 32 of total FICA
  taxes).
• Benefits reduced by one dollar for every dollar
  contributed plus yearly percentage increase in
  wages (usually 3 percent).

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Proposed Benefits of Private Retirement Accounts

• Centralized administrative structure.
• Personal retirement accounts build nest egg.
• Ownership and control.
• Inheritability.
• Better for younger workers.
• Retirement accounts voluntary.

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Proposed Benefits of Private Retirement Accounts

• Available accounts similar to Thrift Savings Plan
  of federal retirees.
• U.S. Treasury securities - 3.67 real interest.
• An index fund comprising investment grade bonds
  4.58 real interest.
• Small and mid-cap stock index fund 8.62 real
  interest.
• Large cap stock index fund 7.33 real interest.
• International stock index fund 1.95 real
  interest.
• Life-cycle portfolios at age 47.
• Invested in a mix of conservative bonds and stock
  funds.

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Proposed Benefits of Private Retirement Accounts

• Not eaten up by Wall Street fees.
• Not accessible prior to retirement.
• Accounts paid out over time rather than all at
  once.
• Accounts phased in.
• Transition financing equal to 754 billion over
  10 years.

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Personal retirement account caveats.

• Accounts do not make Social Security solvent.
• Transition costs could be as high as 2 trillion
  over 10 years.
• Plan shifts resources from current beneficiaries
  to future recipients. Program needs to account
  for shortfall (2.6 trillion over 75 years).

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Personal retirement account caveats.

• System does not allow as much individual
  flexibility as advertised.
• Program requires annuities, which limits the
  inheritability.
• Program places heavy burden on health of stock
  market.
• Plan assumes poor economic performance to produce
  crisis
• Plan assumes good economic performance to ensure
  adequate payoff for private accounts.

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Components to Balance Plan

• Phase I - Renege on treasury notes in Social
  Security Trust Fund (covers tax cuts). Low
  probability.
• Phase II Recalculate initial benefit formula,
  shifting from wage increases in the 35-year
  average to price increases. (See next table).

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Components to Balance Plan
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Conclusion

• Private accounts with limited control for up to
  32 of payroll taxes (although contributions are
  voluntary).
• Probable shift in benefit calculation.
• Additional one-time, transition costs (750
  million to 2 billion).
• Borrowing costs to cover lost revenue to be paid
  to current beneficiaries.