2013 Northwest Plan for a Real Social Security Fix

The Northwest Plan for a Real Social Security Fix was first introduced and revised in 2009. Obviously it was never adopted. Still the basic mechanism remains the same as does the rationale and working assumptions and in what follows I am going to assume a certain knowledge of the mechanics of Social Security finance and reporting. For those who get lost I can only suggest revisiting the 2009 version and all the posts surrounding it or just place your questions in comments.

 The NW Plan can be described in a variety of ways but here I want to present it as the answer to a question: “Under the Social Security Trustees Intermediate Cost Alternative and given current law Scheduled Benefits and Cap Formula what would be the minimally disruptive revenue only fix to deliver those benefits with no changes in retirement age?” Note the questions that are not being addressed: “Is Intermediate Cost a realistic mid-point projection?” “Are current Scheduled Benefits adequate? too generous? equitable?” “Why NOT adjust the Cap Formula?” While these are all important questions and ones the authors of the NW Plan have plenty of opinions on, they just are not the question at hand.

For the purposes of establishing a baseline for further discussion the NW Plan simply assumes IC and current law benefit and cap formulae, and also adopts the Trustees tests for ‘adequacy’ ‘solvency’ and ‘actuarial balance’. For the Trustees Social Security is in actuarial balance if it is projected under IC assumptions to end each year of the short term window and the last year of the long term window with an asset reserve equal to 100% or more of the next year’s projected cost. The short term window is 10 years and so coincides with the standard budget window used by CBO and OMB. Which in turn means that anytime Social Security is in ‘short term actuarial balance’ it properly has no NECESSARY role in budget talks. This BTW is doubly true if all proposed ‘fixes’ start operating outside that window.

 On the other hand the Trustees also take a longer view. Under their definition a ‘current participant’ in Social Security is anyone 15 and older and their long term window is 75 years. Meaning long enough that anyone who could reasonably be contributing today has their retirement interests taken into consideration for the entire working and retirement lives of all but the longest lived of todays teenagers. Who of course are for older workers their grandchildren. The NW Plan provides for ALL those cohorts. Details below.
The NW Plan starts by examining the following Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2012-90 and fixing the point at which combined OASDI projects to fail the Short Term Test. By interpolation TF Assets will fall below Total Cost around 2027. But since the Test covers all years to then Year Ten test FAILURE projects to occur in 2018 and the NW Plan adopts the former year as the action point. This even though the combination of revenues and reserves in 2018 would still be sufficient to pay full scheduled benefits for 15 more years. Because that would be small comfort for the over 40s among us.

 The NW Plan takes this 2018 failure point and calculates a series of 0.1% FICA increases that would under IC assumptions keep 2027 and immediately following years in actuarial balance (Trust Fund ratios in excess of 100). And for good measure does the same for the entire long term window. Not because we have any real confidence in numbers outside the short to medium term but because once engaged on the exercise of addressing Short Term it is trivial to suggest numbers to address the largely theoretical gaps of the Long Term. One just has to take the numbers supplied by the Reports and mechanically insert some FICA rate changes.

 In short the NW Plan imposes a permanent (actually 75 year) fix given best available information in the Plan year. On the other hand that best available information changes with each Report year. But here is the key, by accepting a diagnostic that places ‘failure’ 13-15 years in advance of the real world consequences and starts the fix at the earlier date almost any conceivable change in outlook can be addressed by tweaking the FICA numbers at the tail, in almost all conceivable circumstances you have that 10-13 year lead time and an existing fix that at worst addresses the vast majority of the new projected gap. Which in most cases will not have actual incidence until 30 or 40 years down the road. In posts to come I will be putting up results of the new NW Plan spreadsheet based on the 2012 Report (the latest available). This post on the other hand is designed to let some of the conceptual objections be aired before diving into the actual numbers and assumptions.

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