Northwest Plan 2013 – Extracts by Webb
Click to embiggen. And then do some magnifying. Because even a selected file covering the whole 75 year projection period yields small type.
Anyway this is my first take from Dale Coberly’s numbers for 2013 Northwest Plan with three calculated columns added by me. Those are the three with “Cost-Non Interest Income” as part or all of their label. Which should actually be “Cost-New Non Interest Income”. In any event what this extract shows is that even after the series of FICA increases seen in “New Payroll Tax Rate” there would be a shortfall between FICA and Tax on Benefits on the one hand and Cost on the other, which difference would need to be made up from interest on the existing Trust Fund. The very last column shows this shortfall as a percentage of that year’s Trust Fund and so closely approximates the interest rates needed to have the Trust Fund break even, with any excess being devoted to building up the TF balance to maintain actuarial balance.
‘Approximates’ because there is a missing data point here in that calculated Trust Fund balances depend on a (here) hidden return based on assumed interest rates. So to really evaluate the last two columns you would need to view the entire spreadsheet (coming soon to a forum near you).
Which might have us turn to the column third from the right. This shows the non-interest cash deficiency before and after the series of FICA increases start in 2018. In this scenario the deficiency stabilizes at about 5% of Cost over the 30 years of maximum Boomer impact and then goes to a closer approximation of true Pay-Go after mid-century. The effect of this roughly 5% medium term cash shortfall would be to reduce the Trust Fund Ratio from its current level of nearly 4 times cost to a target level of around 1.25 times cost, a small cushion over the 1.00 requirement under current law for ‘actuarial balance’. The result is that the Trust Fund shrinks in relation to all of Cost, GDP and probably Total Public Debt even as its nominal principal value nevers goes negative. That is the NW Plan is designed to put Social Security on a glide path towards Pay-Go having taken care of the Boomer Bulge along the way. Which is to say providing the piece missing (and by some Commissioners by design) from the 1983 Greenspan Commission inspired Social Security legislative deal.
Given the way the image displays it seems like I could have included a lot more columns from the spreadsheet. I don’t know if Coberly’s entire spreadsheet would fit unedited, but in any event I’ll try to get a fuller (and more confusing) version of 2013 NW up on my next post.
As long as Social Security has a Trust Fund … a reserve to balance the normal variations of income to outgo, including the occasional recession… of about one year’s benefits… and the interest rate is somewhere near 5%, the interest on the reserve will be paying about 5% of each years costs (think about it). This IS the way pay as you go works. It is not a “glidepath toward paygo.”
note that is 5% of (eventually) 16% of income or about 0.8% of wages under the cap.
something else for the folks to howl about who don’t think that borrowing money should cost anything, or that retirement should cost THEM anything.
note that there is nothing unfinished about the interest on the trust fund making up the difference between taxes and benefits.
the interest allows taxes to be a bit lower than they would otherwise be. they are set at a level that pays for benefits and maintains a steady Trust Fund reserve. exactly what you need to do.
“they are set”
that is the taxes are set. the interest rate is whatever you get from whoever decides what the interest rate is.
but note that even if the interest rate were zero, it would result in about an eight tenths of one percent increase in the tax. still nothing to cry about, except by those who were sure they were promised they could get something for nothing.
Dale no matter how you slice it taking TF ratios from their current elevated levels near 400 to a relatively stable 125 is a glide path towards PayGo. And a very welcome one. In an ideal world those balances would never have been allowed to get that high to start with. And this could have been accomplished by adopting an explicit version of Northwest in 1983.
But there were political reasons to mid-load the FICA increases rather than spread them out beyond 1993 and so it was done. It anything it is this preexisting distortion that makes the 2009 to 2013 versions of NW so valuable. It explicitly acknowledges the reality of the Trust Fund even as it manages it on a smooth path to a version of Sustainable Solvency. But your formation here implicitly assumes that SS is already in that state. It isn’t and the percentages in the above table tell the story: significantly higher percentages of Cost need to be paid out of cash interest (starting at 9%) than will need to be at the stability point (2-3%). This is simply the arithmetic effect of winding down the Trust Fund Ratio to its proper level.
we are looking at different parts of the elephant.
A big advantage of this plan over cutting benefits (as far as Social Security’s finances) is that any tax increase has an immediate effect. Most plans to cut benefits (except the chained CPI) exclude current and near retirees (those 55 or older) from cuts. Therefore, there will be almost no effect for 7 years and then it will take considerable time for the cuts to become significant. It would be interesting to see the numbers for one of those plans, but the deficiency would surely get much higher before it peaked, especially assuming that nothing is done until 2017 (in which case I’m not sure you could even make an all-cut plan that excludes near-retirees work).
exactly. but you are thinking. they don’t want you to think.
after all cutting benefits only hurts those old people eventually, while raising taxes hurts you immediately.
of course raising taxes only hurts you “eighty cents per week” while cutting benefits will hurt you about 250 dollars a month or more when you get old… oh, you’re not going to get old.? and when you do you’re going to be rich? and you’re going to love your job so much you won’t ever want to quit?
yeah, i thought that too, when i was too young and dumb to think.