by Dale Coberly
FINANCING SOCIAL SECURITY
A BOB BALL APPROACH
Bob Ball proposed in 2007 (www.robertmball.org quoted in NASI “Fixing Social Security” Reno and Lavery, 2009, p 14) a “balancing rate increase.”
This is the way his idea was described in the NASI publication:
Acknowledging the uncertainty of 75 year projections, former Social Security Commissioner Robert M. Ball proposed a balancing rate increase that would be adjusted as future estimates change. The balancing rate would be based on the trustees’ most current intermediate assumptions, but it would be clearly understood and clearly communicated to the public that this rate would need to be adjusted up or down over time. This balancing rate would be a fail-safe provision to take effect automatically if Congress did not adjust revenues and costs to changes in the estimates.
When workers are asked, they say they would rather have their payroll tax increased by 1% than have their benefits decreased in any way.
Building on this, I would suggest that the current long term actuarial shortfall projected by the Trustees be addressed by a 1% increase in the payroll tax for each the worker and his employer in 2017 with the clear understanding that another increase might be needed by about 2034.
That 2034 increase would probably only need to be about one half of one percent. At that time it would be necessary to “clearly communicate to the public” that another half-percent increase might be needed in 2053.
It is important for the reader to clearly understand that these future increases are a long time away and may not be needed at all if the economy returns to performing as it has in the past. Moreover, by the time they are likely to be needed, workers will be making 25% and 50%, respectively, more than they are making today. So, for every thousand dollars you make today, you would be making 1250 dollars in 2033, and your tax would increase less than $20 (twenty dollars). In 2053 you would be making about 1500 dollars for every thousand dollars you make today and your tax increase would be about 30 dollars (compared to today’s. But again, remember, these increases would not occur for a long time.
The NASI publication addresses another aspect of adjusting finances to 75 year projections (p 13):
Because Social Security does not need more money immediately, policy
makers could address the long-term shortfall by acting now to schedule rate
increases out in the future when the funds will be needed. Rate increases
scheduled in the future were part of Social Security from its inception in 1935 up through 1990. Such scheduled rates can balance long-range finances and allay concerns that Social Security will not pay legislated benefits. If the funds turn out not to be needed, future Congresses could reduce or rescind the changes. Thompson (2005) made a case for this approach on grounds of fairness. Using the trustees’ official projections, he found that workers will enjoy rising standards of living, while retirees will not keep up. He concluded that it would be more equitable to balance Social Security finances by raising the contribution rate for future workers than by reducing benefits for future retirees.
Future workers could afford to pay more out of their rising real wages . Future retirees, in contrast, would fall even further behind if benefit cuts were part of the solvency plan.
I suggest a way to incorporate both of these ideas is to gradually introduce the 2017 one percent increase at the rate of one tenth of one percent per year. Then when the second installment is needed in 2027, gradually increasing the tax 1%, one tenth percent at a time, would actually result in Social Security being over funded after 2034. This might have the effect of increasing the trust fund to over 200% of what is needed for a prudent reserve. But this extra trust fund would actually eliminate the need for any further tax increase until well beyond the 75 year actuarial window… if ever. This is because interest on the trust fund reduces the amount of payroll tax that needs to be collected.
The virtue of this approach as I see it, is that the needed tax increases each year will be so tiny they will not be felt. And as they accumulate they will be borne by future workers who will have more money to pay for their Social Security and will be the ones who will need the benefit increases (paid for by their higher taxes) that will result from their longer life expectancy,
By “making clear to the public” that those future tax increases may be needed, we should be in a position to laugh at the charge we are “kicking the can down the road.” After all, I know I will want to eat dinners for many years to come, but I don’t have to pay for my next 75 years of dinners today.
I should note that this approach should demonstrate how easy it will be for workers to continue to pay for their basic retirement needs with Social Security protecting their savings.
This will preserve the “worker paid” feature that was so important to Roosevelt and to the generations of beneficiaries over the last 70 years who really liked to be able to say “I paid for it myself.”.