NW Plan for a Real Social Security Fix Ver 2.0: 2009 Trigger

by Bruce Webb, data by Coberly

Coberly has now produced new spreadsheets updated in light of the new numbers of the 2009 Report. Copies of past and current spreadsheets are available at our Google Group RealSocialSecurityFix‘s Northwest Plan page. (It should be viewable by anyone). The new Trigger ones linked below.
(UPDATE: Hot off the press, the combined OASDI Trigger Plan. Coberly has simplified and improved the labeling and data presentation).

The newest version treats the DI (Disability Insurance) and OAS (Old Age/Survivors Insurance) individually instead as just part of a combined OASDI. This has a few advantages including the big one that it allows a smoothing and phasing of the tax increases in a way that the impact will be barely perceptible in any given year. Moreover it allows those increases to occur or not in relation to specific Triggers.

The Trustees of Social Security measure the health of two insurance programs by two tests: Short Term Actuarial Balance which is measured over a 10 year period and Long Term Actuarial Balance which is measured over a 75 year period. In 2003 they introduced a new measure which calculates that balance over the Infinite Future Horizon. Our view is that Infinite Future was purely a gimmick introduced to allow new huge scary numbers to be introduced, others including some big name economists who are out there defending Social Security disagree. In any event Coberly and I are not going to bother with it, as the numbers run if you fix the 75 year problem you mostly fix the 100 year problem and there is no real gap between year 100 and Infinity anyway. (If you take the actuarial balance for ‘Future Participants’, i.e. everyone under the age of 15 and people yet unborn, the ystem is in long term surplus of $1.2 trillion Table IV.B7.—Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participants)

The NW Plan is designed to kick in right as either DI or OAS fail the test of Short Term Actuarial Balance and phase in tax increases in a way that allows the Trust Fund to meet both the Short Term and Long Term tests. The plans are flexible in that the Trigger points and the size and phasing of the increases can be changed as new Report Years roll in. And rather than quarrell that SSA is too pessimistic or CBO too optimistic we propose to just run with SSA, if CBO turns out to more correct then all the better, you just tinker with the formula giving everyone years and years to plan. That is the NW Plan takes much of the drama out of Social Security.

As it turns out the Trigger point for DI already happened, it failed the Short Term test a year ago. Meaning that changes have to kick in right away. DI Trigger: 2009 Report. This means an increase in the DI portion of the FICA tax by 0.02% 0.20% in 2010, another 0.01% 0.10% in 2011, and another 0.01% 0.10% in 2039 (updating to 2009 numbers caused a small change in the later two dates). For a median income household and assuming the employer/employee spllit this works out around $1 per week in year one.

OAS is a different story, although it too took a hit in 2009 the result was not to move the Trigger much. If the NW Plan had been in effect over the last couple of years none of the attempted hysteria around ‘Vanishing Surplus’ would have happened, in reality events over the last year have only marginally effected the larger picture. OASI Trigger: 2009 Report. Now it looks like restoring Social Security to Short and Long Term Actuarial Balance requires tax boosts of 0.02% 0.20% per year (once again about a $1 a week for the median income household) for the ten years starting in 2026. Starting in 2036 those increases slow to only needing to change every four to ten years.

These numbers are subject to change with every Report Year, in fact that is one of the points. We don’t really now what 2012 is going to bring, CBO and OMB numbers start diverging broadly after that, if we were using CBO numbers for the Northwest Plan the cost of the fix would be roughly half of that shown in the spreadsheets. The NW Plan is designed to be a flexible planning tool that can respond to new data in real time. Or we could lock ourselves into policy based on assumptions about economic performance after the dawn of the 22nd century and on to the Infinite Future. A better choice for those people would be to relax and watch Star Trek. BTW if you want some Social Security Sci-Fi, follow me below the fold.

Because Low Cost is out there. Relatively few people pay attention to Low Cost and this even in the face of a series of years from 1997 to 2003 or so where the economy consistently returned better numbers than even Low Cost projected and so rapidily moved the date of Trust Fund Depletion back and shrank the payroll gap. The years since then have not been as kind to Low Cost but similarly show that Intermediate Cost remains too pessimistic over the long run. Which means that in addition to monitoring Short Term Actuarial Balance we also need to keep an eye on Long Term, simply to avoid over-funding Social Security.

Why is over-funding Social Security a problem? Well I outlined it in one of my first posts at AB, in fact I actually lifted that from a previous post at the Bruce Web prior to my having AB posting privileges. The Danger of Low Cost
This figure is from the original post and so is from the 2008 Report, it is not much changed with the 2009 (see figure II.D6). In this figure a flat line represents a constant TF ratio, meaning that all income equals all costs with enough left over to maintain a constant reserve. But it not healthy for the country or for Social Security for that line to go flat at too high a level. Because that means that Social Security would be relying to a greater degree on interest earned on the Trust Fund. And while there is nothing phony about the excess FICA tax that has been paid since 1983, that was real money borrowed from workers that was put to use in the real economy hopefully in a way that increased productivity down the road. But whatever utility that spending had it is ultimately discounted by the interest being extracted from the future economy and this is particularly so if that interest is just left to compound endlessly. From 2006 Interest on Interest: a Threat If the Trust Fund settles out with a TF ratio of 500 this implies that 25% of Cost is being covered by General Fund transfers in the form of Interest. Well that still leaves Social Security 75% pay-go from current workers. But as the decades go on the people who originally paid in those extra taxes prior to shortfall in 2017 gradually die off leaving this unproductive albatross behind and ultimately retirees are to some degree getting a free ride based on sacrifices made by earlier generations. Indeed if the Trust Fund goes to 1000 then fully half of Cost could be met from Interest, making it into somewhat of a welfare plan.

So how do we escape this possible long term trap? Well I suggested a variety of approaches on my blog in 2005-2006 but they all boil down to targetting Long Term as well as Short Term. I called this the 100/100 Plan in the days before Coberly supplied numbers. Under DI Trigger the TF ratio drops as low as 107 in the mid 2030’s which triggers the third and final increase in 2039 which gradually increases the TF ratio to the 180s. This isn’t a bad spot, it leaves DI as a little over 90% pay-go, but you don’t want to see it go much higher. Meaning that at some point we might want to reverse the 2039 increase and then maybe roll back the 2011 and 2010 increases as well. Because the following is NOT a good outcome.

The pale grey line is DI and alternative II is Intermediate Cost. We want the II line to flatten, but we have no reason for it to continue to rise. Under Low Cost outcomes or anything approaching it we would by 2019 or so seriously considering cancelling the 2039 increase and then potentially rolling back earlier increases to target a 100-200 range for TF ratio. The black line is OASI. Under Intermediate Cost the Trigger point is set around the 2026-2028 date range. Under Low Cost the Trigger point is never reached and in fact we might even to decide to schedule some gradual tax decreases after 2017 to bring total income in line with cost and put the TF on a glide bath to 100/100.

So the Northwest Plan offers both a carrot and a stick. To the extent that Social Security projects not to diliver a 100% benefit it proposes some mild and phased in increases in tax. If workers are able to boost productivity and more importantly in a way that garners them a fairer share in that productivity than they got over the last eight years we can sweeten that with a possible payroll tax rate cut. Don’t want even a small increase in FICA rates in 2026? Demand better Real Wages in the meantime. There is more than one way to skin the cat of retirement security, the Northwest Plan is just a mechanism to keep the opposition from simply slashing future benefits just because they don’t want to pay back the money they borrowed.