Northwest Plan for Social Security: Conservative “Workers – Take Your Medicine”-ism (and why this Social Democrat likes it)
Long time readers of Angry Bear will be familiar with the Northwest Plan for a Real Social Security Fix. It has been pushed here in a series of posts and in innumerable comments (mostly by Dale Coberly) since 2009 including this core post:
Those who have questions about its details can ask them in Comments. But lets have the short version.
The Northwest Plan is inherently conservative in the old-fashioned sense of the word. It accepts that status quo that has resulted from the Social Security Act of 1935 and the important Amendments of 1939, 1950 and 1956 and for the sake of argument accepts the tests and Reporting imposed on Social Security by current law and the practice of the Social Security Trustees and the projections of the Social Security Office of the Chief Actuary. Having accepted that status quo in all its respects it then proceeds to ask a simple question: “What would it take to guarantee full Scheduled Benefits going forward under the constraints of current law and under the projections of the (standard) Intermediate Cost projection?” Or in other words “What would it take to Fix Social Security without Reforming it?” Where ‘Reform’ would include proposals from both the Right (which mostly take the form of benefit reductions) or from the Left (which generally take the form of modifying or eliminating the income cap formula). Or in still other words “What if we just made workers take their medicine and take the entire burden on themselves?”
In answering this question the authors of the Northwest Plan, primarily Dale Coberly with assists from Bruce Webb and Arne Larson, suggest starting from the arithmetic. Which in this case takes the form of “actuarial gap”. Now actuarial gap can be measured and presented in various ways over various time periods but is by the Trustees typically presented in the following form: “What is the gap between current rates of FICA and the rate currently needed to fully fund Scheduled Benefits over the 75 year Long Range Actuarial Window without changing either the Benefit formula or the Cap formula?” Now granted that there are a lot of barely buried assumptions in this formulation what would happen if we just ran with it? And answers to that under the fold.
We can start with Table IV.B5 of the 2014 Social Security Report
Table IV.B5.—Components of 75-Year Actuarial Balance Under Intermediate Assumptions where the literal bottom line of the Table shows us that the actuarial gap under this set of assumptions is 2.88% of payroll. Meaning that an immediate increase in FICA from its current combined employer-employee rate of 12.4% to 15.28% would restore ‘solvency’ to Social Security. At this point both the Right and the Left tend to jump in and claim this is an impossible solution. Because “unsustainable” and “crowding out” or “regressive” and “ignoring income inequality”. To which at least one contributor to Northwest would respond “Hold your horses friends! Before deciding questions of sustainability or equity can we do a little arithmetic FIRST?” That is what if we regarded Northwest not as the end-all and be-all but instead the starting point for all the rest of the ‘what-ifs’?
The basic ground for discussion is laid out for us by the Trustees in the Summary section of the 2014 Report.
The Trustees estimate that the 75-year actuarial deficit for the combined trust funds is 2.88 percent of taxable payroll — 0.16 percentage point larger than the 2.72 percent deficit in last year’s report. For the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.83 percentage points (from its current level of 12.40 percent to 15.23 percent; a relative increase of 22.8 percent); (2) scheduled benefits during the period would have to be reduced by an amount equivalent to an immediate and permanent reduction of 17.4 percent applied to all current and future beneficiaries, or 20.8 percent if the reductions were applied only to those who become initially eligible for benefits in 2014 or later; or (3) some combination of these approaches would have to be adopted. Under these scenarios, non-interest income would initially be substantially greater than expenditures, and trust fund reserves would accumulate rapidly. Subsequently, however, non-interest income alone would be inadequate, and reserves would be drawn down to cover the differences. This illustrates that if lawmakers were to design legislative solutions only to eliminate the overall actuarial deficit without consideration of year-by-year patterns, then a substantial financial imbalance could remain at the end of the period, and the long-range sustainability of program financing could still be in doubt.
If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2033. In order to maintain solvency throughout the 75-year projection period and finance scheduled benefits fully in every year starting in 2033, it would be necessary to increase revenues by an amount equivalent to a payroll tax rate increase of about 4.2 percentage points (yielding a total payroll tax rate of about 16.6 percent) at the point of trust fund reserve depletion, with the total rate reaching about 17.7 percent in 2088. Alternatively, solvency could be maintained if benefits were reduced to the level that would be payable with scheduled tax rates and earnings subject to tax in each year beginning in 2033. At the point of combined trust fund reserve depletion in 2033, this would be equivalent to a reduction in all scheduled benefits of 23 percent, with reductions reaching 28 percent in 2088. In addition, of course, there is a continuum of policies combining tax increases with benefit reductions that would maintain solvency at the point of trust fund depletion.
Now sharp eyes will not something right away. Given a current 75 year actuarial gap of 2.88% I claimed that an immediate increase from 12.4% to 15.28% would restore the system to ‘solvency’. Yet the Trustees say an increase of 2.83% for from 12.4 to 15.23% (0.05% of payroll LESS) would allow full payment of Scheduled Benefits. Not a big difference really, but does go to show why Social Security financials are tricky, turns out that ‘solvency’ and even more ‘sustainable solvency’ are slightly more stringent than ‘100% payment of scheduled benefits over 75 years). But this can be left for Comments.
But rather than quibble over 0.05% lets take the higher number and start by calculating what an “immediate and permanent payroll tax rate increase” of 2.88% would mean for the average worker using for this purpose SSA’s National Average Wage Index. For 2013 SSA puts this at $44,888.16. Multiply that by 2.88% and you get $1293. Which is our starting point.
Now $1293 is a significant amount of money. But before concluding that it is too much let us consider what it buys which in this case is preventing an initial 23% cut in Scheduled Benefits in 2033 and 28% such cut ultimate. Which is our baseline and makes every other proposal some sort of tradeoff. For example you could cut down on that initial amount by just accepting a later age of retirement. Which raises the question of how much two or so less years of retirement is worth it to you to say money up front.
Or you could just accept a change in the benefit formula itself via adoption of a different inflation measure or changing the initial benefit formula from one established by lifetime wage changes to price changes. And there are ways to combine these measures in a way that ensures no discontinuity in 2033 or any other year, it just means accepting the ultimate benefit cut in phases but still ending up with that 23-28% ultimate number. And there are an infinite combination of changes and cuts and phasing that would smooth out the outcome and all with disparate impacts depending on your age and income. But all mostly arguing that it is better to smooth out the impact rather than taking it all at once.
But lets say that you don’t want a change in the benefit formula, in fact you might consider even the current Scheduled Benefit too low, how then would you avoid the cut? Well there are all kinds of ways. But lets start with the simplest: an increase in FICA amounting to $1293 per year for the average worker. But few people get paid once per year, instead they get paid monthly or bi-weekly or weekly. If weekly and assuming 52 work weeks the FICA increase is right at $25 a week. But this is for a worker making $44,888 a year, mostly weekly workers make less than that. And almost all weekly workers are subject to an employer-employee split of FICA. So instead of our “average worker” lets take an entry level worker making $10 an hour for a 40 hour week with 50 paid weeks of work a year (noting this is significantly more dollars and hours than a minimum wage worker would get) and assume they are paying only half the FICA. In this case an increase in FICA of 2.88% represents $5.75 a paid week or $11.50 a typical two week pay period. For their pink or white collar counterpart working on a monthly salary at $20,000 a year works out to $24 per monthly pay check.
Which is a bite but then has to be used as a baseline for EVERY OTHER proposal out there. What would you pay to avoid two extra years of work life? How much money are personal account proponents suggesting you set aside every month for their alternatives? In each case the worker has to do an individual assessment of the costs and benefits of just taking their medicine. But as the game show hosts say “But there is more!”
And that ‘more’ is the Northwest Plan. If we look back at the text from the Trustees we see to different proposals which we can call “pay me now or pay me later”. The cost of an “Immediate and Permanent” fix is 2.88% of payroll while the cost of a fix delayed until actual time of Trust Fund Depletion would be 4.2%. Which is a significant sticker shock either way. But it isn’t either or, instead you could phase in the increase taking a certain bite each year. Which would push the ultimate take higher than 2.88% but lower than 4.2% and would mostly split the difference. That is is you simply took an approximate ultimate increase of 3.5% and phased it in over 30 years and applied the 50/50 employer-employee split you would be looking at a first year decrease in take home of 0.06%. Which for our average $44,888 earner paid monthly is $2.24. Or for out $10 a hour/$20,000 a year worker paid in 26 pay periods a shade under 25 cents a paycheck. For the first year, it goes up another $2.24 per month for the $44k person and 25 cents a paycheck for the $10/hr person each year.
That is your baseline. And I suggest that given a chance most workers would take that deal in an instant. And THEN entertain other changes to INCREASE benefits. Like adjusting the cap formula so that more national income was ‘covered’. But the bottom line is that workers can simply accept the most conservative assumptions out there, can assume the current benefit formula and the current income cap formula and the current economic assumptions and just decide to take their own medicine and fully fund Social Security as is. For literally pennies a day. And in so doing tell the billionaires to stick their “unsustainable entitlements crisis” up their ass. Which isn’t to say that workers shouldn’t entertain proposals to take their money, because they are taking an unfair share of worker labor productivity, just to say that workers don’t need to beg for it. If push comes to shove workers can afford to pay for Social Security as is.