Three definitions of Solvency for Social Security
Bruce Webb brings an interesting perspective to the current situation as pundits and politicians figure out ‘what is acceptable’ and what ‘they can live with’ her at AB and at his new website Social Security Defender: (see link below):
Scheduled vs Payable Benefits: three definitions of Solvency
When it comes to Social Security there are three definitions of ‘Solvency’, one used by the ‘Actuary’ another by the ‘Defender’ and the third by the ‘Reformer’. And it is this difference that lays at the heart of the policy disagreements on how to achieve it. Something ostensibly all three seek.
For the ‘Actuary’ ‘Solvency’ is mostly a value free concept. Social Security is solvent when all income from all sources equals all costs leaving Trust Fund assets equalling 100% of the next years projected cost. This is known as having a ‘Trust Fund Ratio’ of 100. If the Trust Funds are projected to be solvent for the upcoming 10 year window Social Security is judged to be in ‘Short Term Actuarial Balance’. If the Trust Funds are projected to maintain that solvency, or at least end up with it without going into the hole over a 75 year period it is judged to be in ‘Long Term Actuarial Balance’. And since 2003 the Trustees added an additional measure of solvency measured over the ‘Infinite Future Horizon’.
Under current law Social Security has a ‘scheduled benefit’ which is the arithmetic result of a formula calculated ultimately on the course of Real Wage increases over the worker’s lifetime. It also has a ‘payable benefit’ based on a formula that is calculated by a combination of Real Wage setting the initial benefit, inflation setting the continuing benefit, and total wages driving the income. The details are not important for the present purpose, suffice it to say that ‘scheduled benefit’ is the measure of Cost while ‘payable benefit’ is the measure of Income minus Cost. And as such ‘involvency’ represents that point here Cost exceeds Income to the extent that Trust Fund assets are driven below a TF Ratio of 100. Or in an alternative formulation when those assets are driven to zero. At which time we have a scenario as depicted in the above figure: a sudden reset of payable benefits from the schedule (where they were topped off by asset redemptions) to the new payable equal to then current income from taxation.
In percentage terms that sudden reset amounts to right on 25% of then current scheduled benefits and it is that discontinuity that defines ‘solvency crisis’. But here is where ‘defenders’ and ‘reformers’ depart.
For Social Security Defenders the crisis is one of a cut in benefits and the solution is putting in place policy that would maintain the scheduled benefit. For Social Security ‘reformers’ the crisis is more political, the risk that a reset in benefits from ‘scheduled’ to ‘payable’ will result in demands that the schedule be maintained via transfers from outside the dedicated income stream of FICA and tax on benefits. As a result the proposed solutions to this same ‘solvency crisis’ via benefit reset are diametrically opposed with defenders advocating measures to maintain current scheduled benefits while reformers see their task as reconciling future retirees to accepting then payable.
The key here, and the stopping point for this post is that either the prescription of the defender in saving scheduled or the reformer in reconciling retirees with payable will, if accomplished by appropriate changes in current law, satisfy the actuary’s test for solvency. As will outcomes in between. From a purely technocratic standpoint any set of policies that has scheduled and payable share the same ultimate projected line with no discontinuity meets the ‘solvency’ test. Meaning that each has ‘fixed’ Social Security by ‘preserving’ benefits in a ‘sustainable’ fashion. Without at any point addressing the question of whether the resulting benefits actually meet any standard of societal inequity.
Are cuts to scheduled actually the ‘Road to Catfood’ or a ‘Concession to Reality’? Well interestingly neither question has anything to do which the metric of ‘Solvency’. The question, while of course of the utmost importance in real terms, is somewhat orthogonal to discussions revolving around ‘actuarial balance’. Because from the latter perspective the ‘crisis’ IS the ‘discontinuity’ and not the real world implications thereof.
And a ‘fix’ is a ‘fix’.
Well, Bruce left out an interest group: add to defenders and reformers those who simply want to kill Social Security.
For them actuarial insolvency is simply a great “fact” to hang the “we’re all going to die” lie on. They advocate neither the tiny tax increase that would preserve benefits, nor the hard, but possibly manageable, benefit cut that would preserve the tax rate.
Instead they offer a variety of fixes, all of which would poison the wound and ultimately lead to the death of Social Security.
I have to add to this group another group who would like to see the death of Social Security. Only these people do not appear to even understand that that is what they want. Rather than let the workers continue to pay for Social Security as they always have, this group wants to create universal justice and equity by forcing the rich to pay for your Social Security benefits. This, of course, would be welfare. But that would make them happy. Almost as happy as having no Social Security at all would make those who want to kill it outright.
The workers can continue to pay for their Social Security with no other changes by raising their tax about forty cents per week per year over the next seventy years. Or they could raise their tax eighty cents per week per year over the next twenty years and avoid the “shock” of having to raise them two percent all at once in 2033 or so.
Even that two percent would turn out to be not much of a shock if people were rational, or had it explained to them rationally. But it would be better to raise the tax gradually, both to take the wind out of the “we are all going to die” Big Liars, and to “equitably” have the people who are going to get the benefits pay for them.
In any case, while it’s all right to start out by looking at the “technical” facts… but you better damn get on to looking at the human facts before you spend your life debating technical facts while a generation of retirees tries to live on cat food.
The reformers are the same old anti New Deal crowd. No difference from the destroyers.
Note: no one is talking about bringing the war machine down another 25% percent.
That is because the anti New Dealers were Birchers when “containment” was the chosen tool to destroy the New Deal.
Coberly, say you had to choose, there are no other options. What door do you choose?
A) You accept that SS must be means tested, and the consequence is that SS is welfare.
B) You cut all benefits across the board by at least 25%, setting up the worst case, cat-food out come.
3) raise the payroll tax eighty cents per week each year.
setting up a false choice is what the liars do. it is also what mental patients do.
btw that 25% benefit cut in 2033 is AFTER benefits have been raised a real 40 to 60% assuming the United States does not turn into Guatemala. That won’t be nice for the people then, but it won’t be cat food either. It would actually be an INCREASE in REAL benefits… just not enough of one to keep up with the Joneses.
This is not at all my idea of a reasonable outcome, but it is something that needs to be considered honestly: it is not the same as a 25% cut from PRESENT benefits.
or do nothing s neither option is a viable one. One does not have to choose which is precisely what Barack should be doing to finally break the backs of the Republicans, the Teabaggers, and the ones in the background who are pulling the strings.
What you propose is a tautology.
Coberly is right about the fourth group which I would call Wreckers rather than Killers.
The conventional belief among the economic right is that Government is ALWAYS the Problem, and Never the Solution. Sometimes this is expressed in the form of pure faith in markets, hence the subset of Privatizers, while others would refer back to Malthus and claim that all and every attempt to alleviate misery just leads to greater misery for a greater number.
But for the purposes of the current debate both Privatizers and Malthusians have to pay at least lip service to Solvency lest the popularity of Social Security drive them on what might still be the Third Rail of American Politics. As such they tend to don the clock of Reform rather than fully embrace the rubric of Zombie Eyed Granny Starver (the ZEGS sobriquet often applied to Paul Ryan).
(Long time veterans of AB might remember commentor FA who was quite refreshingly open about his ZEGS beliefs. He was willing to assert his willingness just to step over the bleeding body of an uninsured accident victim. Perhaps the last honest man on the Right. Outside the isolation wing of certain maximum security prisons. Where for all I know he is a current resident.)
And in response to Krasting there is actually a door number four.
4. Adopt policies that target a reversal of the trend that has reduced labor’s share of productivity as against capital over the last thirty years. A combination of Full Employment and Real Wage that actually responds to the market forces that Full Employment would bring would take Social Security to solvency without rate changes. Difficult to do while the bond market is frightened to death by the Confidence Fairy and the Invisible Bond Vigilantes and committed to their fetishistic belief in the All Powerful God NAIRU (to whom Growth must be sacrificed via monetary restraint on any sign of good news for workers on the employment or wage front).
In SS geekdom this approach would be called ‘Targeting Low Cost’. Or perhaps ‘Nothing Plus’.
Bruce is right about door number four.
the objection i have to campaigning on door four is that it has nothing directly to do with social security.
getting a fair wage, or at least an increase in wages that tracks the increase in productivity is not something one can do by addressing Social Security reform. and it may be something we cannot do at all absent a deep and serious change in the attitude of American politics.
but raising the tax a tiny amount on the people who will get the benefits ought to be easy to do… if only the people knew it was an option,
this would require an honest press, and an honest left willing to explain the option to them instead of calling for them to gather outside the White House and chant Scrap The Cap, Scrap The Cap….
Plus the dirty little secret of our Northwest Plan is that it silently allows for door number four.
Under the Northwest Plan we simply take the Trustees’ Intermediate Cost alternative at face value. If it proves to be too optimistic (as arguably it was between NW Plan ver 2009 and today) a few time shifts in the phased increases gives us NW Plan ver 2012. Still the same 80 cents a week, just starting a few years earlier. By that same token if Intermediate Cost proves to be too pessimistic (as it was between 1997 to 2005) the NW Plan just shaves a couple of years of 80 cent a week increases off the nose or the tail of the phased in increases. And in the extreme case where we actually get Low Cost style economic outcomes the NW Plan actually reduces FICA rates in the outyears. But once implemented the changes year over year are practically imperceptible and mostly time shifted out ten or twenty years.
That is unlike plans that would permanently change the scheduled benefit formula or radically change the income stream and so risk over or undershooting the actual projected gap, the method of the NW Plan assures the Goldielocks Outcome, Social Security porridge never projecting to be too hot or too cold, but always like Baby Bear’s bowl Just Right.
The method is the fix. And perfectly accomodates outside efforts to shove the economy through door 4.
The NW Plan had its origins with Dale but was adjusted due to suggestions by me to the effect that Intermediate Cost was too pessimistic on the real wage front and offsetting suggestions by Arne casting certain doubt on demographic assumptions that if not met would cut the other direction. The resulting Plan doesn’t require definitive judgements as to which set of numbers will actually prove to be correct 20 years out, instead it just replaces 2012 Report projections with 2013 Report projections. Which in the typical nature of the Reports doesn’t require drastic changes in the phased schedule.
Or as I put it ‘The Method is the Fix’. And works whether the year over year changes work to the favor or disadvantage of solvency. Leaving outside policy makers free to target such things as Real Wage improvements knowing that any positive effects on SS will simply be taken into hand as the better numbers roll in.
Hmmm. You guys are worse then our legislators. I asked you for an up and down vote, and you dodge the question.
Look at what has happened the past 60 days. Do you think that your NW plan has a chance in a million given the current mood in DC?
I’ve said to you again and again. The “raise taxes to fix SS” is not going to be considered by either side. I don’t care about your 20 or 80 cents a week arguments.
There will not be any tax increase that support SS.
So that sets up the two door scenario. I know you will still dodge this question. But I assure you that congress will not. It is coming on the table in the next 60 days.
They will pick a door. I say they go for B. We shall see.
it may not have occurred to you but i am not in the Congress. my job is to point out that the false choices they offer us are insane, based on the lies of the Big LIars, aka, “non partisan experts” who work mostly for Peterson.
“Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.
In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”
It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.
I am at loss Bruce K. If you had said or created a scenario in as real terms as possible, and predicted the possible choices as part of bills, then maybe a choice can be bandied about.
If you has asked do you have a choice of the 30 or so possible plans proposed, what do you think would fly in Congress in two months? Reasonably asked perhaps, but as you well know the the recurrent distance between plans and what happens in Congress are very different processes.
Your two choices posits a point of view I haven’t seen publicly talked about…do you have sources to share.
A) You accept that SS must be means tested, and the consequence is that SS is welfare.
B) You cut all benefits across the board by at least 25%, setting up the worst case, cat-food out come.
I assume a 25% cut in benefits means now, as phrased in your quote?
And according to some admin. projections within SS, the thought is that means testing will cost more than it ‘saves’ to administrate. But we know Congressional and thinking tend not to go together at the moment.
Thanks for the note…
I had an aquaintence in the DEA a couple years ago who was retiring as it is required when you reach age 57. He was pretty confident and expected his fed pension was safe in his own mind.
At the same time he was talking about Greece and the US, austeriy as being necessary, and leaning to cuts and cuts.
I blurted out that maybe Obama should cut federal pensions by 5% to save money. He walked away and haven’t seen him since. He is a smart man btw.
Sources? Numerous Republicans have brought up means testing. So I’m walking old ground.
And as to those cuts? It can’t just happen in 2031. So this gets into the thinking of “fazing in”. I have no idea on timing of this. Not any time soon is my guess.
I note that you have not answered the question. I understand your reluctance. Means testing does move SS in the direction of welfare (not really – but that is the perception).
I think means testing would “save” SS over the next 15 years, but it would also fundamentally change the long term direction of public support. I think we agree (sort of) on that.
If you were “forced” to choose my doors, you would choose the cat food option. You love SS, even over that outcome. Go figure.
Mr. Webb: Which catagory does the president fall into?
I happen to believe that Bruce K is correct that the NW plan will never fly. SS is a compromise. It always has been and it will need to make changes that allow both sides to believe they are getting something they want – regardless of what I may think is actually the best solution.
I am concerned because waiting until the TF is less than 100 will be much worse than it was in 1982 and if Congress maintains its current intransigence of considering increases as well as cuts, we could reach that point. However, that is four administrations away. I do have hope that when the economy recovers people will be better able to see that they can afford the increases.
I have no confidence in Obama, but it will be the president we elect in 2016 that needs to actually understand SS so he can lead to a politically possible and economically viable solution. (I predict) There will be a general increase of less than coberly’s 80 cents per week. There will be an increase in (not a complete elimination of) the cap. There will be some adjustment of the bend points that increases the progressivity (justified by the greater increase in longevity of the more affluent). Overall, retirees below median will continue to get current scheduled benefits and retirees at the cap will get somewhere between 80 and 90 percent.
As long as it stays essentially paid by workers for workers without Wall Street being involved, it will continue to be a success.
Looks to me as the NW Plan is a compromise between door 1 and door 2.
Jerry the NW Plan as published takes its point of departure from Coberly’s commitment to the scheduled benefit. Arne and I have rather more nuanced views on the whole overall matter of benefits and probabilities and political possibilities and to some degree served as consultants to Dale in formulating Northwest, and on my part anyway believing it to be an excellent policy vehicle even if actual economic, political and demographic results require adjustments beyond the built in tweak/trigger mechanisms of the plan.
I have frankly been delinquent in not taking Coberly’s new 2012 spreadsheets and using them to publish NW Plan Ver 2012. Once (or if) I do it should be clear that it stands clear of either Door 1 or 2, the NW Plan doesn’t require any kind of means testing or benefit cuts. For better or worse it explicitly endorses the current scheduled benefit with the full understanding that the outcome of that is a better benefit in real terms than retirees get today.
That is there is an argument for accepting some result between scheduled and payable on the basis that even the latter represents a small improvement in real terms on that of today’s retirees. And admittedly a lot of my posts could and have been read as an endorsement of actually targeting that outcome. But there is a big difference between endorsement and grudging acceptance of political necessity.
The bottom line is that it is perfectly possible to maintain scheduled benefits within the existing structure of Social Security at a minimal cost to workers. And we got the numbers to show that. There are just a lot of external obstacles to converting that possibility to an actuality.
As to Little John’s question.
Obama’s problem is that he is wearing conventional wisdom blinders and yet is convinced that only he actually has 20/20 vision. Surely all these razor sharp guys he hired out of the University of Chicago and Harvard see clearly what is obscure to the drugged out vision of Dirty Fucking Hippies. As if Krugman, Baker, Josh Marshall or Atrios/Duncan Black remotely fit the DFH model.
I don’t think that Obama is consciously in the pocket of the billionaires or that he has a barely repressed desire to kick the poor and the olds. He just seems to believe that fixing a problem that any clear-eyed person can see requires a steely will and ability to stand the heat needed to do the dirty work. The possibility that his own vision is actually impaired flies over his head.
Door 3) There is no SS crisis. There is no need to means test it, nor tinker with it.
Now if we can just convince the congress-critters, president and future ones.
This all stems from the mistaken beliefs around the us debt and deficits and how our monetary system functions. We should stop calling the deficit as such, when what it really is to the public is a surplus.
look folks, it’s eighty cents per week.
it’s hard for me to see why you can’t afford that. at the end of the day it’s the difference between living on about 18 thousand a year and living on 24 thousand a year.
trust me, you won’t miss the eighty cents… even thought it accumulates. you will miss that six thousand difference.
and it isn’t worth mucking around with means testing, or cutting benefits “a little” to save you, what, eight cents of the eighty?
because eighty cents is just too much for you?
or do you just like playing the Peterson-Obama-Boehner-Simpson game so much you want to do it every year: on the one side those who want to kill SS entirely so we can learn to rely on ourselves and our brokers… and on the other side those who want to kill SS by turning it into welfare so we can all learn to rely on the rich to pay our way.
all to save eighty cents per week. per year.
Ah well Bruce K.
Of course means testing has been floated as trial balloons in statements…I asked, what bills are being introduced that have a chance of being voted on in the next two months per your positing choices as door prizes? It meets the requiements of your question as ‘real’…otherwise a silly supposition.
In a more real sense, I am in Arne’s camp…but then, we all know that vigourous advocacy and media can change the question, so why give in until the choices are real, as in Congress has legislation. Your question Bruce K. is immaterial unless real in the Congressional scheme of things except as play time.