FINANCING SOCIAL SECURITY A BOB BALL APPROACH
by Dale Coberly
FINANCING SOCIAL SECURITY
A BOB BALL APPROACH
Bob Ball proposed in 2007 (www.robertmball.org quoted in NASI “Fixing Social Security” Reno and Lavery, 2009, p 14) a “balancing rate increase.”
This is the way his idea was described in the NASI publication:
Acknowledging the uncertainty of 75 year projections, former Social Security Commissioner Robert M. Ball proposed a balancing rate increase that would be adjusted as future estimates change. The balancing rate would be based on the trustees’ most current intermediate assumptions, but it would be clearly understood and clearly communicated to the public that this rate would need to be adjusted up or down over time. This balancing rate would be a fail-safe provision to take effect automatically if Congress did not adjust revenues and costs to changes in the estimates.
When workers are asked, they say they would rather have their payroll tax increased by 1% than have their benefits decreased in any way.
Building on this, I would suggest that the current long term actuarial shortfall projected by the Trustees be addressed by a 1% increase in the payroll tax for each the worker and his employer in 2017 with the clear understanding that another increase might be needed by about 2034.
That 2034 increase would probably only need to be about one half of one percent. At that time it would be necessary to “clearly communicate to the public” that another half-percent increase might be needed in 2053.
It is important for the reader to clearly understand that these future increases are a long time away and may not be needed at all if the economy returns to performing as it has in the past. Moreover, by the time they are likely to be needed, workers will be making 25% and 50%, respectively, more than they are making today. So, for every thousand dollars you make today, you would be making 1250 dollars in 2033, and your tax would increase less than $20 (twenty dollars). In 2053 you would be making about 1500 dollars for every thousand dollars you make today and your tax increase would be about 30 dollars (compared to today’s. But again, remember, these increases would not occur for a long time.
The NASI publication addresses another aspect of adjusting finances to 75 year projections (p 13):
Because Social Security does not need more money immediately, policy
makers could address the long-term shortfall by acting now to schedule rate
increases out in the future when the funds will be needed. Rate increases
scheduled in the future were part of Social Security from its inception in 1935 up through 1990. Such scheduled rates can balance long-range finances and allay concerns that Social Security will not pay legislated benefits. If the funds turn out not to be needed, future Congresses could reduce or rescind the changes. Thompson (2005) made a case for this approach on grounds of fairness. Using the trustees’ official projections, he found that workers will enjoy rising standards of living, while retirees will not keep up. He concluded that it would be more equitable to balance Social Security finances by raising the contribution rate for future workers than by reducing benefits for future retirees.
Future workers could afford to pay more out of their rising real wages . Future retirees, in contrast, would fall even further behind if benefit cuts were part of the solvency plan.
I suggest a way to incorporate both of these ideas is to gradually introduce the 2017 one percent increase at the rate of one tenth of one percent per year. Then when the second installment is needed in 2027, gradually increasing the tax 1%, one tenth percent at a time, would actually result in Social Security being over funded after 2034. This might have the effect of increasing the trust fund to over 200% of what is needed for a prudent reserve. But this extra trust fund would actually eliminate the need for any further tax increase until well beyond the 75 year actuarial window… if ever. This is because interest on the trust fund reduces the amount of payroll tax that needs to be collected.
The virtue of this approach as I see it, is that the needed tax increases each year will be so tiny they will not be felt. And as they accumulate they will be borne by future workers who will have more money to pay for their Social Security and will be the ones who will need the benefit increases (paid for by their higher taxes) that will result from their longer life expectancy,
By “making clear to the public” that those future tax increases may be needed, we should be in a position to laugh at the charge we are “kicking the can down the road.” After all, I know I will want to eat dinners for many years to come, but I don’t have to pay for my next 75 years of dinners today.
I should note that this approach should demonstrate how easy it will be for workers to continue to pay for their basic retirement needs with Social Security protecting their savings.
This will preserve the “worker paid” feature that was so important to Roosevelt and to the generations of beneficiaries over the last 70 years who really liked to be able to say “I paid for it myself.”.
“for every thousand dollars you make today, you would be making 1250 dollars in 2033, and your tax would increase less than $20”
I think this is stated in a way that everyone will understand clearly.
http://canonicalthoughts.blogspot.com/
The key aspect of Social Security that no one seems to mention is that it is a pay-as-you-go system that is supposed to be balanced each year. That is, it is not a savings account for the future, rather a fraction of each years GDP is redirected to those who are retired. The question is: what is that fraction of GDP are we willing to go to retires? The current formula determines that by the number of years worked and amount earned.
The problems with Social Security started when Alan Greenspan created a large surplus in the trust fund. A surplus which was never intended to exist in the original scheme. Thus, people started viewing Social Security as a savings plan with money going in today and coming out tomorrow. Alan Greenspan tried to “financialize” the system rather than continuing the purely economic based model of the system.
Occasional increases, and perhaps decreases, will be needed to meet the calculated obligations. This seems like a reasonable proposal.
David
I agree with you. Trying to make SS “balance” over 75 years is nonsense, but it is the nonsense we have been given… I don’t think by Alan Greenspan, at least not all by himself.
A better way to do it than even this proposal, in my opinion, is what Bruce Webb calls the Northwest Plan: raise the tax about one tenth of a percent in any year the Trustees Project short term actuarial insolvency. My original proposal was also to decrease the tax one tenth of a percent whenever the Trust Fund exceeded some ratio like two or three times the one year prudent reserve.
What I am here not quite calling the Bob Ball plan really does the same thing, though possibly in a form that more people can understand. That “one percent increase” is acceptable to workers when they are asked carefully. The second version I over above, gradually approaches this one percent over ten years, then as would very likely be needed, asks the people if they want to raise it another one percent over the next ten years. My hope is that by that time they will have seen how easy it is … in fact they will not have noticed the increase… and agree to the second increase. By then another full one percent will not actually be needed, but as long as the people have accepted it, and find it easy to pay for, I thought it might be just as well to continue the increases until the second one percent is reached about twenty years from now. That will leave the Trust Fund nearly stable at about two and a half times as big as it needs to be. The virtue of that, besides holding the ultimate tax rate down, by substituting interest on the Trust Fund for payroll taxes, is that it should shut up the Liars who are spending a billion dollars telling the people that paying off those “worthless iou’s” means that the sky is falling and we are all going to die.
In other words, I may be at least as guilty as Greenspan in shifting SS slightly from pay as you go (which is what it should be) to partially pre funded. It makes no real difference except to the people lying about it.
should have been “offer above” not “over above.”
gotta get em while they last.
Arne
thanks. i hope you are right. my experience suggests that no one ever understands anyone else clearly. this appears to be borne out be real research. but careful “arguing” sometimes helps.
FWIW, back in the 80’s when FICA revenues really were too low to cover the draw for payable benefits, SSA didn’t panic, raise alarms, or predict imminent doom. Bob Ball was an active participant in the Greenspan Commission then after a long distinguised career in SSA. Deal is, SSA’s foot soldiers like me, a lowly minion if ever there was one, were told, “Not to worry, we got it covered.” And they did.
FICA was increased, problem solved. So, I got the idea that all you have to do to keep SSA solvent is raise payroll taxes when needed.
Later, when the DI Trust Fund was in danger of drying up, Congress and the Executive (President Ronald Reagan) transferred some money from the RSI TF to the DI TF and all was well. It ain’t rocket science, but
Coberly, Arne and Bruce have worked out the details about how it would work and how existing law permits the method they describe. The only thing I can add is that anyone who tells you different either doesn’t know how social insurance works or is a bald-faced liar. NancyO
Sorry, correction needed.
“It ain’t rocket science, but you really gotta wanna do it.” NancyO
“The key aspect of Social Security that no one seems to mention is that it is a pay-as-you-go system that is supposed to be balanced each year. ”
I think you are keying in on an important aspect, but that you are overstating your case.
People need to be educated that they should expect changes every decade or so because that is how a PAYGO system must work.
It is simply not possible to run SS and be balanced each year. The TF is targeted to 1 years expenses because that is considered a reasonable buffer to manage short-term (10 year) variations. I don’t believe that members of the Greenspan commision really wanted to “financialize” the system. Rather, rates that solved the 10-year problem and looked reasonable for 75 years, caused the TF to swell. People (perhaps especially those who hate SS) chose to ignore that it was also predicted to shrink back to normal.
It was not a terrible way to deal with the demographic bulge, but it created an opening for disinformation.
My reading of the 1935 Act (and the 1939 ammendments) is that they expected SS to be a mix of PAYGO and funded. There is a clause indicating a trigger of 300 percent. However, by the time of the first report, the TF had already exceeded 300 percent. No one realized that war in Europe would grow the economy so fast.
In the early 40s it was easy for Congress to delay the planned tax rate increases because by their reckoning the TF was already flush. There were also members who did not want the government to be responsible for investing the TF. If the TF had enough money to be considered “fully funded” (by the definition I understand) it would need to have over $15T.
It would have needed something other than special treasures to invest in since (before 2008) it would have been larger that the federal debt. It would have been larger than the capitalization of the NYSE. The decisions Congress made in the 40s, 50s, and 60s changed SS from what was planned in the 30s. I am sure we would still be arguing about it, but the issues would be a bit different.
Nothing to add. Nice post and thread.
Thanks Bruce.
And thanks, Arne. I don’t want to seem to be disagreeing with you. Frankly I don’t know enough about the detailed history of SS.
But I think that SS has not changed in any significant way from what was planned (don’t over react to this, i don’t know any more about what was “planned” than I know about the “history.”
But SS was designed as insurance by workers paid for by workers. There was always an element of partial prepay. But when the SS committee that designed the plan introduced “government funding” at some time in the future, Roosevelt vetoed it. He insisted that it remain worker paid, “so no damn politician can take it away from them.”
In one way it doesn’t matter much if retirement insurance is paid for directly by the workers or paid for by “the government” because the workers will still be paying for their own retirement… economically there is no other way. Nevertheless the difference is important. When people see a direct connection between their own payment and their own benefits they … in this country anyway so far… feel better about both paying the tax and accepting the benefits. And “the rich” are deprived… to the extent they know what they are talking about… of the excuse to complain that they are being taxed to support the workers… “all workers” not just the very poor. It has been a big part of the Peterson lie to convince everyone that in fact Social Security IS welfare and that “we” (he means “we rich”) will be paying a staggering burden to keep the elderly in idleness.
At the very beginning of SS the tax was a good deal more than it had to be just to pay for the eligible retirees each year. The excess not only became the trust fund, but it provided those who became eligible later to feel that they had “paid for” their own retirement…. as in fact they had. Their lifetime taxes and contributions to welfare and charity and the support of their own parents, and the loss of their savings during the depression, and frankly, the loss of their opportunity to earn money while serving in the war, or the draft… need to be considered by any sane (honest) “analysis” of the “legacy debt.”
And later, when the tax was raised in 1983 it fell mostly on exactly the Boomers who would otherwise have gotten a windfall by paying low taxes for the small generation of their parents, and had their larger generation paid for by the smaller following generation of their children.
The “equity” of all this works out as closely as any…again… sane person has a right to worry about. And if the principle of “worker paid” is continued in the future, along with the occasional “pre paid” excursion, it will certainly be a lot easier to keep this equity in mind.
Not that it’s easy when Peterson is spending a billion dollars on paid liars to mislead the people.
Meanwhile, one of my grandnephews mentioned to me recently that of course his generation would probably never get any of the SS benefits which they are paying for. I think I disabused him of that notion thanks mainly to posts which I have read here, but I don’t have the qualifications (government/financial/business experience) of the sources who gave him that notion in the first place, so maybe he was just humoring his crazy uncle.
It would really be great to start seeing Messrs Coberly and Webb on TV talk shows, perhaps promoting a new book on the issue, and putting the liars on the defensive for a change.
JimV
I’d love too. Give me a chance to fight with someone besides my friends.
But they won’t show. They know they haven’t got a case… once people even hear the truth they will just start laughing about the whole silly scare.
The opposition to SS are not interested in the TRUTH. They are interested in the MONEY!
Jim the problem is that those people with “government, financial, business experience” who are promoting the message “No check for you!” to millennials know full well the numbers behind the following equation:
No Check for You = After Trust Fund Depletion a Remaining Check only 15% BETTER in Real Basket of Goods Terms than Similarly Situated Retirees Today
Yes you read that right. Under current projections if nothing is done future retirees will experience a cut from a check about 30% larger in real goods terms than retirees get today down to a check maybe only 12-15% larger. And this taking into account a continuation of current income inequality trends and continuing improvements in mortality.
But that is quite the mouthful to swallow. When Dale and I express this in simple terms, people come back with “well what about income inequality?” “what about the fact that people are living longer?” etc, etc. At which time we have to slow down and explain that all of those ARE ALREADY IN THE NUMBERS. Something the Bad Guys know full well but are equally aware that others don’t know. Which allows them to make people like me look like ignorant rubes.
A few years back the siteowner of Angry Bear asked me to post a Social Security series. Before I had even covered the bases it had grown to 47 posts. In part because I had to slow down and fight with commenters along the way. You know the people who KNEW stuff about Social Security. Stuff they heard everywhere from everyone. For example a supposedly definitive argument I heard was “No young person I talk to thinks Social Security will be there for them”. As if the success of a propaganda campaign was self validating. Holy Ministry of Truth Batman!
Somehow I don’t think a five minute segment on TV promoting some self-published book is going to solve that fundamental problem.
“No Check for You = After Trust Fund Depletion a Remaining Check only 15% BETTER in Real Basket of Goods Terms than Similarly Situated Retirees Today”
Bruce, does this statement mean that SS benefits are growing faster than the rate of inflation?
Jerry
yes. SS benefits are intended to keep up with the growth of real wages. so that future retirees can live at the standard of living of their time and not that of the stone ages, the middle ages, or even 1936.
Bruce, and Barkely Rosser, are entirely correct: with no changes in SS taxes, future benefits will be larger in real terms than they are today.
And I always reply, causing hate, discontent, and mass confusion, “Yes, but you’d be a fool to accept that. For a few pennies more… as your wages grow… you too can keep up with the standard of living you help to create.
As I like to point out, from my grandmothers persepective a car… not a new car, not a fancy car, not a car with remote locking… any car… would have been a standard of living improvement, NOT “just” keeping up with inflation. But by the time she retired having a car was not just “nice”, it was essential. The corner grocery store had disappeard, as had the bus line to downtown or the doctor’s office.
So yes, you can keep up with inflation by doing nothing. But can you live on even inflation adjusted 1936 wages? or 1953?… so why privilege 2014 wages? You won’t like it. But if you have the brains to pay for your own retirement… and to convince the congress that that’s the way you want to do it…. you too will be able to afford a computer so you can talk to the SS office when you retire.
in case you don’t know what that “have a computer so you can talk to ?SS” was all about.
Nancy Ortiz has been trying to tell us… but no one hears her because there is a food fight going on… that SS has plans in the works to shut down ALL of the face to face SS offices, and leave you to cope with “on line” services.
Though it is not germane to my point, they do have back up plan for those who can’t figure out their computer program (from my experience far more likely to be due to inept computer programmers than to the frail elderly unable to cope with technology): those technologically challenged elders will be able to call a telephone help line… in India.
Let me add this while I am thinking about it.
If everything else were equal: life expectancy, number of children being born, interest rates…
and you knew you would need 20,000 dollars per year when you retired just for “bare necessities,” and that you would need to save 6000 a year while you could work in order to have that 20,000 when you couldn’t, you could save that six thousand out of your pay, say 50,000 per year… or 12% of your pay.
now suppose nothing else changes but you find out you are not going to be making 50,000 per year but only, say, 40,000. since nothing else has changed you still need to save that six thousand a year. but now it’s 15% of your pay. what are you going to do.
well, sit down and cry of course. but then you have to decide are you going to save that 6000 so you can retire, or are you going to insist that 12% is God’s limit on what you can save for retiremetn. 12% of 40,000 is $4800 dollars. So there, you have saved yourself $1200 and can afford that new car after all.
Smart. until you go to retire and find you only have 16,000 to live on.
Among the other reasons why an increase in the payroll tax may be needed, besides longer life expectancy, lower fertility rates… is the projection that you will not be making as much MORE in the future as you might have been expecting. When you are making less, “essential spending” is going to be a larger percent of your income.
It turns out that wages will still be growing in real terms, so you will be able to buy that new car after all, but maybe not quite as big as you hoped when you thought you were going to have more money. You’ll be paying a larger PER CENT of a higher wage. You will still have more money left over after paying the tax than you have today.
Don’t fall for the “percent” fallacy.