Mechanics of the Northwest Plan for a Real Social Security Fix

by Bruce Webb & Coberly

(Update: links to Google versions of spreadsheets added. .xls versions available by request)
The Northwest Plan is put forth here as a replacement for the plan of Nothing The Cost of Inactivity: ‘Nothing’ as a Plan for Social Security. Not that there is anything wrong with Nothing, we did nothing between 1997 and 2008 and the size of the problem facing Social Security shrank from 2.23% of payroll to 1.7%, and the date of Trust Fund Depletion moved out from 2029 to 2041. There must be a word for a problem that left unaddressed got smaller and more distant in time, but that word is not ‘crisis’. So while Nothing’ has its merits it just is not as satisfying as Something, especially when the Henny Penny’s of this world are running around insisting the sky is falling. So the Northwest Plan is our Something.

It is often claimed that we just can’t tax or grow our way our of the so-called ‘Entitlements Crisis’ which is true if you believe there is some sort of SocialSecurityMedicareMedicaid program out there. But there isn’t any such program and there is no good reason to insist that these programs be considered together. If we isolate Social Security we can see that there are very good possibilities the economy will grow fast enough to continue shrinking the payroll gap just as it did over the last dozen years. And if it doesn’t the cost of closing the gap via tweaks in payroll can be managed in a way that it would not be noticed. Hence the Northwest Plan.

The Plan comes in two flavors, the Tenth Now plan and the Trigger plan. There has been a certain amount of debate over the last few years that the Trustees’ Intermediate Cost alternative’s economic projections were too negative and that we can afford to take his year by year using the numerically proven plan of Nothing. The Tenth Now plan essentially abandons that argument and just accepts Intermediate Cost at face value as a basis for planning policy. Per the 2008 Report the cost of a straight out fix via a payroll tax increase would be 1.7%, presumedly split as now with 0.85% paid by the employer and 0.85% by the employee. This is not a lot of money when you break it down to the individual worker, on the other hand the actual dollars won’t be needed for a few decades, there is no reason we cannot phase this in gradually.

Under Tenth Now FICA rates would be boosted by 0.1% every year from 2010 to 2029 then held steady until 2053 where if needed a new series of increases would be triggered. We say if needed because there are very good chances that we may never need to pull that trigger, and pretty good chances that we can halt the original set of increases prior to 2029 as actual numbers come in. The advantage of Tenth Now is that it arithmetically fixes Social Security and so removes it from the policy debate and with it takes $13.6 trillion in ‘unfunded liability’ off the balance sheets thus removing a weapon from the hands of those who want to use projections over the God help us ‘Infinite Future Horizon’ to scare us into gutting Social Security.

But the truth is that we could maintain a program of Nothing. Under current law Social Security is considered to be in Short Term Actuarial Balance if its Trust Fund Ratio is projected to remain above 100 (one year of reserves) in each of the next ten years. If we examine the projections of Intermediate Cost in the following table we can see that the combined Trust Funds will maintain TF ratios above 100 until around 2037 meaning that they would fail the Short Term test in 2028. Table IV.B3.—Estimated Trust Fund Ratios, Calendar Years 2008-85[In percent]. The Trigger Plan uses that test failure as the event to trigger a new set of increases starting in 2028 that arithmetically keep the combined TF ratio above 100 throughout the standard 75 year window.

On a pure policy basis the Trigger Plan is a better choice because it builds in flexibility. If the economy performs worse than projected the trigger point moves up, if the economy performs better than projected the trigger point moves out but in either case the phased in nature of the changes means no sudden economic discontinuities. Politically Tenth Now might be preferable because it demonstrates how small the cost of a fix really is when it comes right down to the individual weekly paycheck.

Update: Google spreadsheets: NW Plan-Trigger—- NW Plan-Tenth Now
Excel or Appleworks versions are available on request by e-mailing Bruce at Bruce dot Webb2 at verizon dot net.

Both Tenth Now and Trigger treat Social Security as an undifferentiated whole. In truth OAS (Old/Age Survivors) and DI (Disability) are separate programs with separate trust funds. As it turns out DI already has failed the Short Term Actuarial Balance test. This suggest that the right solution is to apply a modified Tenth Now to DI that would have payroll increasing 0.05% (a Twentieth) each year for five years starting in 2010 which then would be followed up by a modified Trigger of about 0.07% for OAS in 2028. This works on a back of the envelope calculation but has not been turned into an actual spreadsheet.

The real reason for releasing the Northwest Plan this week (because versions of it have been discussed here at AB for months) is that with the release of the 2009 Social Security Report Tuesday afternoon we fully expect a full court press to push the Conrad-Gregg/Cooper Wolf SAFE bi-partisan commission legislation which is designed to force a plan based on benefit cuts through Congress on an up or down basis with little scope for debate or modification. It is important that people know that there are alternatives, including one that requires no changes at all until 2028. The only urgency here is among those who don’t want you to know how easily we can maintain Social Security as is.