The Northwest Plan: a Real Fix for Social Security

by Bruce Webb; plan details and numbers by Coberly and Arne

The Northwest Plan takes as a starting point by answering the question raised in A Time for Clarity by coming down clearly on the side of the beneficiary. Which among other things means accepting that the current Trust Fund is an asset and not a liability. This doesn’t mean we can ignore the burden it places on future taxpayers, we just insist it be placed in numeric context. Exactly how much burden does redemption really place on future taxpayers? By year? And ‘$13.6 trillion over the Infinite Future Horizon’ is not in fact an answer to those questions.

The Northwest Plan starts by examining the six possible approaches and initially rejects the two that are directly harmful to future beneficiaries which is to say 1) raise retirement age & 2) adjust benefit formulae. There are projections that would force us to those positions but we see no reason to start with the proposition “Mom is projected to living longer than her Gramma did so lets just hitch her to the plow until she is 70”. Because for most workers retirement is the goal and not something you are “forced to” endure. Healthy time with the grandkids, time to travel, time not being under the thumb of your boss is what we are shooting for.

This is not to say that the Northwest Plan slavishly insists on delivering exactly 100% of the scheduled benefit, just that we get as close to it as we can without undue burden on workers or diverting assets away from other social goods. Of the three of us Arne and I am most mindful of Rosser’s Equation, which takes into account the fact that since initial benefits rise with real wage that future retirees will be able to buy a bigger basket of goods than current ones do. In fact if we did nothing to Social Security and the economy came in line with Intermediate Cost projections the reset in benefits in 2041 still leaves future retirees with a better benefit than currently situated retirees gets today. While a 22% cut seems drastic and is something the Northwest Plan is designed to avoid we do note that with Prof. Rosser that 78% of 160% = 125%. (I want my great-niece to have a better life-style in retirement than her great-grandmother (my Mom) does today. On the other hand my Mom is doing just fine, that N. would only get a 25% better deal would not be not a tragedy. Still I want to deliver 60% if I can.)

So if benefit cuts are what we are trying to avoid, which of the other four approaches do we favor? Well I don’t think any of us reject out of hand diversifying Social Security away from bonds to other asset categories, if that is if that didn’t put benefits unduly at risk and promised a better result. None of the Plans I am aware of take that approach, each has a component that cuts guaranteed benefits, and too many take a Dow 36,000 approach to potential risk of equities. Nor do we favor approaching this via raising the cap outright, though I for one would be open to adjusting the formula that increases it annually. But that is not part of the current Northwest Plan. What is is below the fold.

If we reject initially approaches 1-4 we are left with 5 & 6: raise payroll tax across the board, or target policy in ways that will lead to increases in Real Wage. Given that the future is unknowable the Northwest Plan starts by assuming Intermediate Cost but builds in triggers to account for performance better than that. (If the economy performs substantially under Intermediate Cost we will have problems far bigger than Social Security to contend with). What is the real cost of a payroll based fix?

Well in large part it depends on when you start, the Trustees explain it as follows.

Over the full 75-year projection period the actuarial deficit estimated for the combined trust funds is 1.70 percent of taxable payroll—0.26 percentage point smaller than the 1.95 percent deficit projected in last year’s report. This deficit indicates that financial adequacy of the program for the next 75 years could be restored if increases were made equivalent to immediately and per manently increasing the Social Security payroll tax from its current level of 12.4 percent (for employees and employers combined) to 14.10 percent. Alternatively, changes could be made equivalent to reducing all current and future benefits by about 11.5 percent. Other ways of reducing the deficit include making transfers from general revenues or adopting some combina tion of approaches.
If no action were taken until the combined trust funds become exhausted in 2041, then the effects of changes would be more concentrated on fewer years and fewer cohorts:

For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2041. In this case, the payroll tax would be increased to 15.94 percent at the point of trust fund exhaustion in 2041 and continue rising to 16.60 percent in 2082.

Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2041. Under this scenario, benefits would be reduced 22 percent at the point of trust fund exhaus tion in 2041, with reductions reaching 25 percent in 2082.

In summary we could raise payroll tax by 1.70% immediately, or we could wait until 2041 and raise it by 3.54% initially with increases of an additional 0.66% over the subsequent forty-two years.

This gives us a range of options for a tax-based fix, and none of them are ugly, in each case the net is a better real basket of goods. For example take a worker making a wage of $12.50 per hour, fairly typical for a moderately skilled laborer or clerk, which over the course of a year gives a annual wage income of $26,000. If we asked that worker if he would accept an increase in payroll tax of $221 per year with another $221 coming from his employer in he knew that would deliver 100% of the scheduled benefit with no need to change retirement age would he take that? Is an extra three years of retirement worth $4.25 a week out of your current take home? (1.7%/2 = 0.85 x $26,000 = S221/52 = $4.25). Of course the numbers increase proportionately as you move up the income ladder but even for people earning at the cap we just are not talking that much money ($106,850 x 0.85% = $908/52 = $17.50 or double that for the self-employed).

This is doable, but the Northwest Plan seeks to make it even more doable with two alternative plans. One plan shows the actuarial result if you phase in this increase starting a 0.1% in 2010 and increasing it at that rate each year until 2030, then holding until 2053 where if need a trigger kicks in with gradual increases from there. This is what Coberly calls Tenth Now. The second plan would hold rates where they are until 2028 and start the increases then. This is what Coberly calls Trigger 2. The spreadsheets are fairly cryptic, you have to know how Social Security organizes its data to begin to understand them, and they are currently only partially available in Excel, instead originating in an AppleWorks format, but for those that want the early versions they are available at by emailing me at bruce.webb2 at verizon dot net. (clearly indicate subject, this is mostly my spam mail box). When we get them worked into more readible form we will get them up on the web.

Beyond the tax piece the Northwest Plan also addresses the question of growth. People often make the claim that “We can’t tax or grow out way out of this” but that is only true if you conflate so-called Entitlements into some hybrid SocialSecurityMedicarePartAMedicairdMedicarePartB&D program. Instead all of these programs have their own challenges and their own solutions. If we examine Social Security in isolation there are not only tax based fixes but all growth based fixes. Arne I working some of this out, in the meanwhile you can see his work at Arne’s Blog

The Northwest Plan in combination can deliver a 100% benefit at a very reasonable price to the worker. At the very least in a democratic society ALL options should be on the table and not just the subset that most editorials offer us today. We don’t need to tie Mama to the plow, under the Tenth Now plan she and her employer just has to start paying 0.1% more per year, For the worker earning $12.50 per hour that works out to $26 in the first year, meaning just on an extra one hour of labor per year or a contribution of a buck a month. Depending on wage history it might mean working up to 20 hours more by 2030. Still not a bad tradeoff for three years of lost retirement (and even at that raising retirement age only closes about one-third of the gap.)

At a minimum it is worth calculating the impact of including a payroll tax base component in an overall Social Security Fix.

(Please feel free to check the math, we want to get this right)