Social Security: 2 Programs, 3 Projections, 3 Actuarial Periods
(Update: the numbers in the above Table represent the present payroll gap. That is an immediate increase in FICA equalling any negative number would fund its respective program over that given period under that set of assumptions). (Update 2…a quirk in the comment section preventing viewing the chart on landing page is fixed…Dan)
The standard way to Report the long-term challenges facing Social Security is by the Long Term Actuarial Gap for combined OASDI under the Intermediate Cost Alternative, which is to say over 75 years and combining the Old Age/Survivors and the Disabled programs together under the Social Security Actuary’s Office’s best median guess as to future demographic and economic numbers. Others say that is not even long enough and say that we should actually examine those numbers over the Infinite Future Horizon. And so one or another of those numbers generally get reported in one of three forms: % of GDP, PV of Unfunded Liability, or % Actuarial Gap.
For others, including me, neither of those make sense for current workers, at least not as the end all and be all. Instead it makes more sense to treat these numbers over your expected work life or perhaps your expected time in retirement, which unless you are a very young worker indeed will be less than 75 years. And certainly not realistically measured over the Infinite Future. Plus you might have some doubts about the Intermediate Cost projection, considering it either too optimistic or too pessimistic on one front or another, or perhaps you have heard that the Disability Insurance program is facing a much more immiment crisis than the Old Age Survivors program.
Luckily the Office of the Chief Actuary has your mind in mind and in Table IV.B4 breaks all of this out into 27 possible combinations of the 2 programs plus a combined number, 3 economic and demographic models, and over 25, 50 and 75 year time periods. I took those numbers are rearranged them into a convenient grid as seen above. The point of departure for discussion probably should be the standard number alluded to in the first para: the 75 year actuarial gap for combined OASDI under Intermediate Cost Assumptions. Which can be seen as the middle number in the last row at 2.72%. This is actually a little higher than the number usually cited which for this Report was 2.66%, that is because this particular table has a more stringent definition for balance in that it requires a Trust Fund Ratio of 100 in the last year. But that doesn’t change the discussion a great deal.
Which discussion I will leave to you all for the time being. Noting only that postive numbers indicate positive actuarial balances for the program in question over that period under that assumption and so represent a program that is “fixed” for the period in question.
might be worth noting that the numbers are percent of payroll… that is multiply this number by your paycheck and that’s the amount of extra payroll tax you would have to pay.
the high cost is considered improbable by the Trustees… it is arrived at by taking the “worst” case for each factor that goes into the estimate.
the low cost is considered improbable by the Trustees… it is arrived at by taking the “best” case for each factor that goes into the estimate.
the numbers are “immediate and permanent” that is you’d have to raise the tax by this much today and run it to the end of the period in question. these numbers are less than the ultimate tax increase that would be required by a gradual increase in the tax that meets the increased costs each year. the difference is because of the interest earned by the excess tax in the early years. at the end of the period the given tax increase would not be enough to meet costs beyond that period because the interest and principle on its “trust fund” would have run out. at that time the Trustees say a further tax increase would be required.
for example, the 2.72% immediate and permanent for the intermediate cost, 75 year projections, would need to increase to about 4% to pay for the next year’s costs. But this would put the tax at a rate sufficient to pay ALL future expenses with no further raises.
I prefer the gradual approach for a number of reasons… one of which is that after 40 years the tax rate would only have had to increase about 2.6%. For the worker this would be an increase of about 1.3%, or an AVERAGE increase over the 40 years of about 0.7%
Moreover this represents a fair approximation to paying his own benefits in retirement. The higher tax in the later years of the gradual approach would be borne by workers who would be making more money than those in the early years, and who would have higher costs in retirement.
In any case, it makes more sense to me to adhere to the “pay as we go” model than to try to guess what costs are going to be for 75 years and play the banking, Trust Fund, borrowing, and “going broke” game that we have been playing since the last “big fix” in 1983.
oh, the “gradual approach” would be the one tenth of one percent per year…about eighty cents per week for each the worker and the employer… that some of you are so tired of hearing about.
you should note that the actual “gradual” approach… to reach 4% after 80 years would only need to be about one half of one tenth of one percent per year combined… about 40 cents per week for BOTH the worker and the employee… or about 20 cents per week per year for the worker.
the reason i suggest one full tenth of one percent per year is that is what it takes to avoid the LOOMING DEATH OF THE TRUST FUND in 2033 or so.
but you don’t really need to get into all the complications unless you love complications… but if you are going to do that, then do it all the way and don’t come running into the room with half-facts shouting the sky is falling we are all going to die.
couple of typos in the above.
it always pays to check my work.
Possibly my computer is broken this morning – I don’t see “a chart above”.
??
I’ve read that the Disability Insurance component has been doing better than expected recently. I decided to make sure, which I did. I didn’t realize that Trust Fund data is reported monthly. Anyway, it’s good to see that the combined Trust Fund numbers (OASDI) are also a little better than last year’s intermediate projections (the end of calendar year 2013 numbers – the monthly numbers vary a lot, so I’m not sure what can be concluded from them).
Or, just increase the interest rate on the special bonds in then trust by the necessary amount to reach actuarial balance.
Mike B
you can’t conclude much. the numbers vary and are going to vary. the point is that within very broad limits it doesn’t matter how much they vary.
it is going to cost people a certain amount of money to buy groceries after they are too old to work. the amount is going to remain roughly constant as a percent of average wages. if you expect to ever become too old to work, you will need to find a way to “save” enough while you are working to have “enough” when you retire.
Social Security provides a way to do that which is largely immune to things like the stock market and interest rates and inflation and even relatively wide variations in where you fall on the “income scale.”
oh, by “roughly constant” i don’t mean that grocery prices will always be the same percent of wages… but that “basic necessities” will. for example a car was not a “basic necessity” in 1940. it was by 1980. a computer was not a basic necessity in 1980, it is now. in any case, the simplest way to predict “about” how much you will need is to take a percent of wages as a first approximation and adjust from there as the situation unfolds itself.
the reply to Mike B is certainly subject to a great deal of discussion. i mean it only as a place to start. but mostly to get away from worrying about small variations in the size of the trust fund, interest rates, or similar magic numbers that really won’t matter much in the long run.
Matt
playing games with money created out of thin air will not solve… or even touch… the real problem: allocation of resources between your working self and your future “retired” self.
Coberly, IMO raising the rate does the same thing, but is politically more feasible than removing the salary cap or raising the tax rate. And if it pushes the trust fund past the baby boom obligations then you might get balance back automatically as the boomers expire. I really don;t see it as a game, I think it is a viable option – trying to find if someone has done the long term math.
Krasting the graph disappears on one of my devices as well. If you ever have problems with display issues send an email to Dan the Siteowner explaining your combo of OS and Browser.
McOsker
you’d have to make a pretty careful case that i could understand.
we are going to have to pay for our own retirement. it seems to me that normal money will do that just fine.
i can’t understand how any sane person could object to saving an extra 80 cents per week to fund a retirement that may last a lot longer than their parents’ did.
so tell me how the interest rate game solves the allocation of resources problem.
Coberly the fact is that the numbers do matter. The fact that NW is designed to compensate for numbers changing in either a positive or negative direction doesn’t mean we should just ignore the implications of trend numbers consistently above or below Intermediate Cost projections.
For example from 1997 to 2004 actual numbers were coming in ahead of not only Intermediate Cost but most of the data points of Low Cost which at that point would project to an OVERFUNDED Trust Fund. And given the widespread agreement among the broad range of economists (not named Dean Baker or Robert Shiller) which want under the rubric “The Washington Consensus” and held that the business cycle had been broken forever, it became reasonable enought to accept Low Cost as the new Intermediate Cost and so adopt the Plan I was fervently pushing then which I imaginatively called “Nothing” as in ” ‘Nothing’ as a Plan for Social Security”
Well during 2006-7 the confident projections of the Washington Consensus went smash, Dean’s Cassandra like warnings were fully vindicated, and Social Security numbers rather rapidly reverted to and in some ways below the mean. With the result that Intermediate Cost went from being too pessimistic to being mildly optimistic. Which in turn set the stage for me to drop “Nothing” and embrace “Northwest”.
But the important point is that given the right economic outcomes Northwest would converge on Nothing with the degree of this convergence dependent on whether the trend is above IC and by how much. You can’t or shouldn’t just dismiss the possible impacts of this above projection trend if and when just because NW has a way to accommodate it. This is particularly so since numbers above IC are on the whole positive for such things as addressing income inequality and the decline of labor share.
Northwest may fix Social Security to your satisfaction but for some of us it is just a safety net proposal, a fall back, and not the end all and be all that you often seem to want to make it.
Because in brief: Low Cost outcomes WOULD “matter much in the long run”. The trick is how to get there.
Bruce
you tell me long term trends do matter, then give me a story about how they didn’t matter.
the northwest plan takes care of low cost… you won’t have to raise the payroll tax by one tenth of a percent as often.
it has nothing to say about the future economy. that’s not it’s job. it’s job is to say that we can easily afford to pay for the “sky is falling we are all going to die” estimate all the newspapers say is going to crush the young with a burden of taxes.
what I, even I, will say about the future economy is that I can’t imagine a circumstance in which Social Security as presently designed will not be the best way to save for and insure your ability to retire.
when you get that sure thing on the stock market worked out, and working, for seventy years i’ll take another look at it.
Dale nobody said anything about the stock market. You are just burning your own strawman there.
As to the rest there is a big difference between limiting yourself to:
“Don’t Worry Boys! We Got This Covered!”
and encouraging those boys and girls with the addition of:
“But go ahead and make it better as best you can!”
It is the difference between passive and active. Me I am an activist.
For the Northwest plan, is there a fixed rule that determines when taxes are raised? Is it always by 0.2% (combined)? I think maybe it had to do when the 10-year intermediate cost projection had the Trust Fund ratio below 100%, but I’m not sure I’m remembering correctly (or maybe I just assumed that based on something I read).
Mike you have the important parts right.
The 0.2% is not fixed, it just seems like the right increment when the 75 year gap is out of whack by 2.66 or 2.72 depending. Now once the schedule of future increases projects no 75 year gap at all then the amount of subsequent adjustments in the out year’s would depend on the numbers in the next Year’s Report. Structurally the change in actuarial window by dropping current Year One and moving Year 76 into Year 75 position adds 0.06% to the 75 year gap which in turn would be adjusted upwards or downwards by changes in the economic and demographic projections year over year. Just for administrative convenience it would make sense to schedule a FICA adjustment for every five years or so at the long end of the projection and in some even increment whether 0.1% or 0.2%, but nothing in NW would prevent smaller more frequent changes.
This leaves aside the question of a more short term shock which might require a more short term responses. But current versions of NW have TF Ratios staying in the 124-128 range giving just that amount of extra cushion against short term variations.
Which is a long way of saying there is no 0.2% rule.
Mike B
there is no “rule.” the .2 worked out when i tried it and since it’s a nice round number (one tenth of one percent for each the worker and the boss) i thought i’d keep it simple.
some people don’t like simple. but i don’t like “one rule to rule them all.”
the whole point is simply that a raise in the tax rate too small to notice will entirely solve the whole Xteen Trillion Dollar (present value) Unfunded Deficit! t.m.
but you can’t do what another “expert” suggested… she didn’t like “my” answer because it was not “her” answer: you can’t just pick any number out of the air and call that a “plan”. the number has to work.
one tenth percent each or something very close to it will work… and the nice thing about “whenever the Trustees Project short term actuarial insolvency” is that if one tenth is “too much” that will show up in next year’s projection… and there will be no need to raise the tax that year. you see, it’s self adjusting.
no need to confuse yourself to death with… er… all of the complications a philosopher can think of.
Dear Bruce
the stock market is not a straw man. i am aware you did not mention it. other people do.
one thing you and others might have to get used to is that I am not always talking about “you.”
Dale whe you start a comment with:
“Bruce” and then the first sentence with:
“you tell me long term trends do matter, then give me a story about how they didn’t matter”
It doesn’t take some raving narcissist to conclude that other ‘you’ s in the same comment are in fact referring to that same ‘me’.
If your last sentence was intended as some generally targeted parenthetical it was poorly framed, I mean what signaled the switch?
Probably what signaled the switch was that in my poor brain he word “you” can mean either the person being addressed or some general “you”, which people speaking another dialect might say as “one.”
Sometimes you have to judge from context. Or just ask.