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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Long term actuarial solvency is important for SS. But as Bruce says, looking out 75 years is a fools game. Who knows what will happen in that time frame?
Ten-years is hard to predict, but at least some rational assumptions can be made in this time frame.
I see big issues for SS (and thus for the country) over the next 10-15 years. After that, the big problems start to diminish.
I don’t think the NW plan address the short term problem. I look forward to reviewing those spread sheets.
Krasting or anyone.
Send me an e-mail and I can send on the file in .xls or other spreadsheet format. For AB I need to cut the display columns down to something that easily converts to a screen readable jpg
Krasting
depending what spread sheet you are reviewing:
note that everything starts with the Trustees Projections. Then it merely adds one tenth of one percent to the payroll tax for each the employer and the employee whenever the Trustees “would have” predicted “short term actuarial insolvency” (this means that “looking ahead ten years the Trust Fund is projected to fall below one full year’s reserve”).
This becomes a moving tarket, as each “fix” changes the projection. By taking the new projection, and again adding one tenth percent to the tax (each), when that new projection shows “short term actuarial insolvency” you find
the first “fix” is needed in 2018. Then essentially every year until about 2030. Then declining in frequency until by 2080 or so, fixes are needed only about once in every ten years.
At the end of the actuarial window the tax will have been raised by 2% (each), and this is essentially enough to “fund” Social Security going ahead through the “infinite horizon.” You won’t be able to tell this without a little mathematical intuition from the spreadsheet. But if you will look at the pictures in the Trustees Report, you can see that the “cost” line is essentially flat after 2050.
Based on past performance I frankly doubt your (Krasting’s) ability to read or understand the spreadsheet. But we can try to explain the hard parts to the satisfaction of any honest inquirer.
And anyone not quite prepared to take my word for it, is invited to find the NASI (National Academy of Social Insurance) website and look for “Fixing Social Security” by Virgina Reno and Joni Lavery (published 2009).
There they will find a reference to my work (p 14), and to several similar plans scored by the Chief Actuary of the Social Security Administration.
Similar results were published by CBO, which found a one tenth of one percent increase in the tax (combined) over twenty years would “solve” the 75 year “actuarial insolvency” entirely. They have not updated their result to account for the effects of the recession, nor did they continue their “fix” to solve the “infinite horizon problem.” But one should at least be able to see from their result that a “solution” on the order of one tenth of one percent per year works out to be the same as “Trillions of Dollars in Deficit” reduction.
The recession essentially requires the one tenth of one percent CBO fix to be applied to both the employer and employee for the twenty years the CBO fix contemplated. To reach the “infinite horizon” fix that they do not look at… but which the Trustees ominously refer to… the one tenth of one percent increase would need to be repeated at decreasing intervals after the 20 years CBO considers… eventually averaging one half of one tenth of one percent (combined) over the 75 year window… but rising at essentially one tent of one tenth of one percent by the end of that window.
All this, as Krasting recognizes… is too far in the future to be meaningful.
but for the present and near future the one tenth of one percent … about eighty cents per week per year (each)… will handle the problem quite nicely.
My apologies for bouncing back between “each” and “combined.” but it’s the way I “solved” the problem (in stages) and so its the way i think about the numbers. Anyone who is serious about understanding “theSocial Security problem” ought to be able to keep them straight.. easier than resolving whether or not “the employer’s share” is “really the workers money” (but the answer is “it doesnt’ matter what you call it.”)
Bruce W attaches my name to the NW plan. In 2006 I believed that the numbers the trustees were using were systematically too pessimistic, but I asked the question,what if they are right. I looked at the IC numbers and saw that we would be reducing the TF too quickly. I created a spreadsheet to show how much we would need to increase taxes in order to prevent using more than 15 percent of the TF in any year. My results looked very much like Dale’s.
Since then it has become obvious that the TF was buoyed by the housing bubble. Now it is being hurt by the slow recovery. I tend too believe that the methods are too dependent on projecting current conditions and are prone to overreact to both bubbles and downturns. However, for the NW plan, that does not matter. It adjusts to changes in the medium term.
I believe that something close to the NW plan is the best “fix”. It is fair. It is manageable. It is robust. We just need our political negotiators to see that.
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?”
It’s also important to note that the first question here is fundamentally different from the next two. While the first does contain an implied-preference in addition to the actual projection (having to do with risk tolerance), the other questions are pure preference and really amount to no mor than how-do-we (meaning I and anyone like me) feel about all this?
Arne’s more specific contribution to the NW Plan to my mind was the concept of ‘triggers’. Dale’s original version assumed an immediate start and a continuous process of increases, while I pointed out the dangers of overshooting via front loading the increases. IIRC Arne mediated this and helped us come to the idea of moving if, when, and only when IC projections showed SS failing an official test. That is for any given Year, if Year+9 projected to fail the test then phased in FICA increases would be ‘triggered’. There would be a similar process for ‘detriggering’, at least in theory, and certainly for lowering the rate of annual changes. The point being an objective and relatively automatic process for action.
That is triggers make the NW Plan both permanent and variable in response to changes in projections.
TStockman
I disagree. The Trustees Intermediate Projection is the “best guess” of the professionals assigned to answer the question. I see no reason to second guess it. The Low Cost and the High Cost projections are just games to see what would happen if “all factors” fell at one side of the range or the other. That is extremely unlikely, though it could occur.
What is important here is, first, that a very small increase or decrease in the tax rate “as needed” will solve the actuarial problem with almost zero disruption of anyone’s “plans.”
But, second, the fact is that Social Security is designed to achieve a very important result: making sure that people do not starve in the street when they are too old to work and their private “savings” have been destroyed by inflation or bad days on the market. Social Security does that now with a minimum benefit that is paid for by a minimum “tax” that is a fair price for tax payers.
It leaves those same tax payers with enough money in their pockets to make whatever other “choices” that satisfy their personal “risk tolerance.”
Social Security is already pegged at the lowest possible cost that will deliver that for which it was invented… security in old age, for which the risk tolerance has to be zero. We are not talking about losing al few bucks at a poker game and having to walk home. Or even risking a few million bucks on an “investment”, and having to make up for it with another investment out of corporate sized reserves.
This is ordinary workers who have neither the time the expertise or the money to risk, and who, history has shown, will end up starving in the streets when they get old without Social Security or some welfare plan.
Welfare if not the way Americans like to pay for things, or receive them. Social Security merely provides those workers with a way to save their own money for their own retirement, protected from inflation and market risks by pay as you go financing, and from personal misfortune (never having made enough money to save enough to retire) by an insurance adjusted benefit schedule.
For most workers it amounts to an insured savings account that always pays at least enough interest ot match inflation plus about 2% real growth.
Coberly – I think you misunderstand my first point. I have seen either you or Bruce Webb question the intermediate projection in the past. Intoning that this is the best guess of “professionals” is – as pointed out in this thread and elsewhere – not rigorous. The extended time horizon renders the professional’s hypothetical edge meaningless. That’s why the flexible adjustment mechanism Bruce credits to Anne makes sense. It’s also why the reliability/bias of the projection is a legitimate question, in terms of probability (quasi-objective) and in terms of how to respond (risk tolerance.)
I’m not sure you’ve addressed the second portion of my comment either. “Equitable” – a very loaded word – is not the same thing as “in accordance with the aims of the program.” You have a complicated rhetorical problem – and forgive me if I state your policy preferences incorrectly – you’d like to define the redistributive mechanism of the retirement mechanism (bend points plus spousal benefit minus life expectancy actuarial adjustments) as not affecting the basic notion that workers as an undifferentiated class are paying for their own retirements. Even trying to recast the retirement portion as an insurance program doesn’t work, since the high-income near-retirement folks are actually paying a higher premium against less risk. At the same time I would suspect if anything you’d like more redistribution, while preserving the notion of “earned ownership.” It’s perfectly possible to do this, but only on the same terms available to justify welfare as a variety of social insurance.
Stockman
you are working too hard at this.
anyone can layer on reasons and rationalizations until the basic point is lost.
NO, I am not interest in “more distribution.” I have been looking at SS for some time and I like the way it works. It is NOT welfare, and that is critical.
“earned ownership” is no more notional than your “earned ownership” in your stocks and bonds or even paycheck.
and the “higher premium against less risk” is the same fallacy that drives the “old folks need to pay a higher premium for health insurance because their health care costs will be higher.
most of us live a whole lifetime. it is a fact of nature that our health care costs become higher just as our ability to pay for them becomes lower. the rational solution to this dilemma is just to prorate “lifetime” health care costs across an entire working lifetime. ln the same way it is beyond stupid to claim that “higher income” older people are paying too much for the remaining risk that they will become poor. They “buy” an insurance plan on the idea that over a lifetime there will be ups and downs in both income and risks. You don’t get to arrive at the end of the risks, claim your income is too high, and disavow the insurance benefit you got. No more than you can sell your house and demand you get your homeowners/fire insurance premiums back because you never had a claim.
I think you mean well, but this weaseling is more becoming of the enemies of Social Security who at least know they are trying to destroy it.
Great stuff for the graduate seminar. Damned nonsense for explaining Social Security to the people who depend on it… people who have a hard enough time understanding why they should pay six percent of their income for something that will never happen: they know they will never get old, and that when they do they will be rich and they will have a job they love so much they will never retire.
Stockman
you never saw me question the intermediate projection. i said at the outset that i was not an actuary. all i did was point out the consequences of the Trustees best guess in terms that were actually meaningful to ordinary workers from paycheck to paycheck.
And I never “intone” that the best guess is “rigorous.”
So give me a break.
All I have ever really said is that the 5 Trillion or 6 Trillion or 8 Trillion, or even the “20.5 Trillion Unfunded Deficit!” amounts to something like 20 cents per week per year for the average worker. I have even gone so far as to suggest that that is an actual “plan”, though it would be better for a number of reasons to implement it at the rate of 80 cents per week per year for the first few years. It is still too small a price for anyone to notice, and it “solves” the actuarial deficit sooner and would hopefully shut up the Big LIe hysterics.
I am learning that human beings have weasely brains and you can never expect them to quit weaseling away at something if they think there’s money in it for them.
Arne
Thank you for your independent confirmation. My own path to the same result was completely different from yours.
I heard an NPR program in which the coming catastrophe to be caused by Social Security was described in terms that offended my sense of the conservation of matter. So I looked into it.
The first thing I saw was the Trustees claiming that SS would require either a 25% cut in benefits or a 33% increase in taxes. This met my test for “lie.”
It would be 33% of a 6% tax or 2%, which has a hell of a lot less impact on workers than a 25% cut in retirement benefits would have.
Which at the time was about 15 dollars per week.
I mentioned this on line… “my initial plan” I guess.
But I got to thinking about it some more and playing with a spread sheet, and it “emerged” from the spread sheet that a one half of one tenth of one percent increase in the tax (combined) per year “solved” the actuarial deficit. It was a short step from there to discover that a one tenth of one percent increase in the tax (each) whenever the Trustees reported short term actuarial insolvency, not only solved the long term deficit, it eliminated any even close approach to deficit for the entire 75 year window and beyond.
It turns out that NASI gives you and me and Bruce credit for the NW plan, and I am content with that. But they also give “prior publication” to someone named Thompson, and it is not particularly clear which aspects of the NW plan they are calling “ours.”
Not to worry. The whole world remembers Newton. No one remembers Leibniz. Sure as hell no one remembers who invented the wheel… or “honor your mother and your father.”
Or as I told MG, who was claiming credit for it at the same time as he was telling me I was a fool who didn’t know anything about the budget… I don’t care who gets credit for it. I just want to see it implemented before the bad guys and the morons destroy Social Security..
In fairness to Stockman most of the motives he maybe is mistakingly attributing to Dale are actually pretty valid for me.
The Northwest Plan is a methodology and not an ideology and to some extent was thr result of a clash in world views between an essentially conservative Dale and a Social Democrat Bruce whose point of agreement was that people shouldn’t break shit that works.
But if you are looking for a guy that thinks about stuff like Equity and Redistribution with capital letters then I plead guilty. On the other hand Dale just wants to fix the gap in the fence.
BTW a truncated version of the spreadsheet is up in a new post.
Ah, Coberly: two “weasels,” one condescending “mean well” and an accusation of grad school irrelevance – that’s pretty good score for my one comment.
Yes, there is a difference between a risk premium that remains flat and one that increases with difference risk. Consider my example more akin to charging a high rate for hurricane insurance on a home in Arizona than Key West.
Yes, there is a difference between the ownership status of privately held assets and the design of social security benefit levels for individuals. You can argue, for example, that it would be better to implement the NW plan than use chained-CPI, but not because current workers paying current rates somehow “own” the hypothetical higher contributions of those in later cohorts, even leaving aside the question of redistribution within cohorts.
I’m not even particularly against this proposal, or the more-redistributory raise-the-cap solution, or any other actuarially sound proposal. I agree that the closer social security is position to welfare the more vulnerable it is. I do object to your close-minded, strident, anything-for-social-security- and-death-to-“morons”-who-oppose-it rhetoric. And I suspect you’ll need to get a lot better at that political work since regardless of the modesty of the tax increases, they affect a far larger percentage of people than the recently scaled back attempts to introduce more progressivity into income taxes and a lower cap on the inheritance taxes. So I’m saying this for your own good, naturally.
Stockman
I wouldn’t worry too much about my characterization of your ideas. That’s just the closest this old lower class Chicago boy can come to letting you know how they look to him.
Generally I don’t think the “debate” is or ought to be about, well, faculty lounge “respect.” (In my graduate school we were a little more robust in debate, but we had actual facts to refer to ultimately, unlike, say, sociology or economics or english literature.)
And I really worry about people who want to change the debate to the issue of my manners. I think I managed to insert some substantive criticism in among my low brow name calling.
And no, your hurricane insurance in different parts of the country is simply misleading (other terms occur to me, but I am actually trying to be polite).
Buying health insurance and then trying to get your money back because after forty years you never got sick is much closer to what you are trying to say here.
And I don’t argue against chained CPI on the grounds of ownership of the “asset.” I argue against it on the grounds that it is a damned fraud.
But I also point out that the “correct” CPI (an impossible concept) is irrelevant because the workers can decide whatever they think is a fair, or reasonable balance between the current needs of the people still paying the tax, and the needs of those collecting the benefits… who will eventually be the same people.
Stridency is called for. Too many liars and morons out there with their own “ideas” about Social Security that would kill it dead if implemented.
If people can’t understand that eighty cents per week is a low, low price to pay to guarantee at least a minimally decent retirement, then Social Security is doomed.
But the people can understand that. If they hear about it. Most of them.
And while you are trying to divide us up into “cohorts” (generational warfare), let me point out that every generation, every cohort gets back the money it paid in plus a reasonable interest. That interest might vary slightly with the times, but is no more of an “injustice” than the changes in the price of gas, or bread, or the interest you get on bonds… or the fact that one generation goes to war or faces the draft while another doesn’t…
Thing is SS is a “fair” as it is possible to make anything in this world. And all that weaseling around the edges over a tenth of a percent or two is simply designed to turn us into stupid and selfish “individuals” fighting with each other over some insignificant to the point of imaginary delusion of “it’s no fair!”
Sorry I don’t have more time to be polite. I tried handing this off to the polite people. But they have decided they want to “stick it to the rich” and they refuse to even mention that the poor could pay for their own Social Security as they always have.. for a few more pennies a day, and get more than twice as much back as their parents.
Talk about stupid.
Bruce
you may have noticed that I am neither a scholar nor a gentleman.
I do, however, fix fences.
I am not a conservative, and I gave up being a “liberal” when I watched those calling themselves liberals indulge in the same kind of self deception and thinking by formula that the right does.
Given a problem that requires a government solution, including “welfare” and human rights and the environment, you can count me as a liberal.
I give up on liberals when all they can say is “tax the rich” or “evil white men”. I try to point out how they can talk to ordinary people without driving them into the hands of the evil right. But they are no more capable of overcoming the formulas they live by than Rush’s dittoheads.
As for my own failure to be sufficiently diplomatic to avoid driving scholars into the hands of… faculty clubs… I looked pretty hard at what I said that alienates them… and I don’t think it was my bad manners as much as the fact that i disagreed with them. It has been my experience that the smooth talking stranger in the suit is looking for a way to pick your pocket.. only its not your money he is feeling around for.
sorry folks. i have lost my temper.
the enemy is at the gates, and all the scholars and polite people want to do is talk
about the history and philosophy of war, and writing a demand the vandals give us back all the loot they have already collected and go away quietly… but phrased politely of course.
remember when Alan Simpson said “tits” and caused our defenders of Social Security to faint and flutter and ask that nice Mr Bowles to hush Simpson up and go back to raping and murdering the poor elderly with better manners?