Changing Social Security Sooner Rather Than Later, Avoiding a Shortfall
I was following the links in Dale’s latest commentary on Social Security and clicked in to see what Dale was discussing in his commentary. I was able to web capture the chart (below) which I believe accurately depicts what Dale is writing about in his commentary. The chart is a depiction of a one tenth of one percent increase yearly for the employer and the employee.
There are other solutions to the short fall of Social Security funding. As pointed out, the US is monetarily sovereign and it could just print more dollars to cover the shortfall in funding. Dale’s point contesting the Monetarily Sovereign argument is Social Security is funded by the people. Social Security belongs to the people. In which case, printing more money incurs an intervention of other funding which could include political control and cuts.
Reforming Social Security Sooner Rather Than Later, American Academy of Actuaries,
Authors; Linda K. Stone and Geralyn Trujillo.
Tax Increases
Options that help increase Social Security’s income (so it can pay all scheduled benefits) are:
1) Increase the payroll tax rate by 25% one tenth of 1% per year.
(AB Note: The 25% cited in the original article is the ratio of the increase to the original percentage of 6.2%. Using the percentage 25% from 2024 to 20235 creates a misconception of an immediate increase to 25%. One tenth of 1% for employees and also employers accurately portrays the yearly increase starting in 2024).
- This would raise the current 6.2% tax rate to 7.75%8 for both workers and employers, yielding enough to pay 100% of benefits in 2034.9
- Employee and employer payroll tax rates have never been increased by more than 0.5 percentage points of taxable payroll in any one year.10
- Increasing the tax rate will be financially difficult for some people with very low income. Unless the EITC (Earned Income Tax Credit) also increases. The EITC offsets the payroll tax for low-income people. Increasing the EITC would reduce income taxes and increase the national debt, so federal income taxes would need to be increased to make this revenue neutral.
- It would be less disruptive to employers and workers if increases in the tax rate were gradually phased in (e.g., by 0.1 percentage points per year as suggested in several provisions in E.1 analyzed by Social Security Administration [SSA] actuaries), but the approach would need to be enacted soon in order to pay all benefits in 2034. The graph below compares a gradual to a steep tax increase (last two bars).
8 It would raise the self-employed tax rate from 12.4% to 15.5%.
9 Even if the payroll tax rate increases to 7.75% in 2034, that would not cover all benefits in subsequent years as costs continue to increase faster than income (primarily due to people living longer and lower fertility rates). Table VI. G2 of the 2023 Trustees Report shows the cash shortfall gradually increases until 2077 when it is 5.06% of taxable payroll, so the tax rate would have to gradually increase to 8.73% in 2077 for both workers and employers. Benefit reductions could reduce these tax rates.
10 The self-employed payroll tax rate was increased by 0.95 percentage points in 1981 and 3.35 percentage points in 1983 (when that rate became twice the employee rate)
What is interesting about this article is Angry Bear’s Dale Coberly at offering of a similar solution to Social Security as written to Congressman DeFazio of Oregon in 2018 (?).
First an introduction by my friend Dan Crawford (recently deceased):
Dan here . . . Social Security is an issue that seems to generate a lot of firm beliefs and passion, as witness recent threads. It is rare that people refer to actuary material. On the other sides of the issue are people like Andrew Biggs, who is knowledgeable and smart in his arguments. I am posting this as a reminder to readers that contributors do usually go the extra mile . . . in this case even recently, and since 2008 with Dale, Bruce Webb, and Arne Larson.
Below is a copy of a response to Dale (and his letter to Representative DeFazio) from the Deputy Chief Actuary 2017.
Dear Mr. Coberly,
Representative DeFazio’s office forwarded your letter of August 5, 2017 to our office and asked that we respond to you. Your understanding of the financing of the Social Security Trust Funds is on target, including the implications for borrowing and debt. We appreciate your careful attention to the Trustees Report and the projections we develop for it in order to show policymakers the magnitude of any shortfall they will have to address.
We have looked at your thoughtful and detailed proposal for increasing the scheduled payroll tax rates for Social Security. As I’m sure you are aware, we have scored numerous comprehensive solvency proposals and other individual options for making changes to Social Security. These analyses are available on our website.
Proposals to Change Social Security (ssa.gov)
Your proposal would increase the payroll tax rate gradually, by 0.2 percentage point per year beginning in 2018 (a 0.1-percent increase for employees and employers, each). Based on the tables you provided, it appears you would propose an “automatic adjustment” to the rate in the future, allowing the tax rate increases to stop and then resume, applying a 0.2 percentage point increase whenever the 10th year subsequent would otherwise have a trust fund ratio (TFR) less than 100 percent of annual cost. The intent appears to be that TFR would not fall below 100 percent. If we are understanding your proposal correctly, this type of adjustment would very likely maintain trust fund solvency for the foreseeable future, based on the Trustees’ intermediate assumptions.
Also, based on our rough estimates, a 0.2 percentage point increase in the payroll tax rate each year from 2018 to 2035, reaching an ultimate rate of 16.0 percent in 2035 and later, would eliminate the actuarial deficit and keep the TFR above 100 for each year thereafter. An increase to 15.8 percent in 2034 would fall just short of both goals. Note that these rough estimates do not include any additional “automatic adjustments” such as the one you propose.
We hope this information is helpful. Please let us know if you have further questions. We are also copying Rina Wulfing from Rep. DeFazio’s office on this email.
Karen P. Glenn
Deputy Chief Actuary
Office of the Chief Actuary
Social Security Administration
(update) Hmmm, if you have not noticed the original year of the start of the increases was 2018. Six years later, we are now discussing 2024 as the start. Note also there will need to be another increase some seventy years out. This comes as a result on not starting in 2018.
Reposted from Jan. 2018: Social Security and conversation, Angry Bear, Dan Crawford
Social Security and conversation, Angry Bear, Dan Crawford
Reforming Social Security Sooner Rather Than Later, American Academy of Actuaries
DeFazio is from Oregon.
Arne:
It is the name, like an “earworm.” It is stuck there and I keep forgetting Oregon.
He’s retiring, ’tis moot …
it is always interesting, if sometimes distressing, to see how other people understand what i am trying to say.
there is nothing really “wrong” with the above, but I know from long experience that it will create misunderstandings.
the first that comes to mind is that the need for future increases is an artifact of the SSA’s use of a 75 nyear actuarial window and therefore their use of an proposed increase in the tax rate that only balances SS income and outgo over that 75 years. The use a 1.55% increase in the tax rate. I use a 2% increase in the tax rate that avoids any need for a further tax raise “for the forseeable future.” In thier Trustees Reportt they refer to a “need for a substantial increase at the end of the 75 year period” This is vague and alrming to those who call a need for a further increase 75 years from now “kicking the can down the road”. The “substantial increase” turns out to be about another 1% in the tax rate. This is more than the difference between their 1.55% and my 2% because it accumulates over time…and runs down the trust fund to zero by the end of the 75 year period. my 2% increase, reached one tenth of one percent per year, avoids both the need for another tax increase in 75 years and the hysteria that ccompanies “kicking the can down the road” for those who think people 75 years from now will be unable to solve the “substantial shortfall” in their own time according to what looks reasonable to them.
and yes, i know even this explanation will not be understood by those who come to the argument determined not to understand anything they don’t already believe.
if anyone is interested i will continue to try to explain things without getting grouchy, but you try not to be so thin skinned. i put a lot of work into this and lose my patience with people who have thought about it, if at all, for less than five seconds, yet insist..sometimes rudely… that i am being dishonest or ignorant while they have the perfect answer.
rereadin what i have written here i have to confess that i am partly responsible for the non-understanding. it is hard to write sentences that are not ambiguous, and when the subject is just a little bit complex it becomes almost impossible to write a sentence that covers all the moving parts at once.
‘you would propose an “automatic adjustment” to the rate in the future, allowing the tax rate increases to stop and then resume’
The structure of Social Security depends on Congress to adjust taxes and benefits as needed to keep it solvent. Although the program has been incredibly successful, it has been in spite of some bad decisions by Congress. Giving Congress a clear guide for when to make changes, which Bruce Webb called “triggers”, would be a great step forward. Since control systems was one of my responsibilities as a manufacturing engineer, I find the idea of removing Congress as a disturbance to be quite appealing.
I prefer the gradual approach for another reason as well. I believe that a large change would be used effectively by SS detractors to gut the program. Putting in small changes now is defense against the haters.
Arne
thank you.
Having a Trust Fund of 100% is tremendous overkill and because that should be apparent makes me really suspicious that the proposal is geared to solve the shortfall with much reduced redemption of the Trust Fund. If SS direct revenue (exclude redemption) under tan the model by 3% 2 consecutive quarters there would be heavy duty work to address it. But the reserve level to address a 7% miss for 3 years is like 25%. One hundred percent is simply a useless amount by a whole lot: if the economy were so bad that you needed 100% in a shorter timeframe than Congress could act, the ability to actually do the redemption would be shot to heck because every revenue stream needed to support such a huge net redemption would be trashed, too. So Dale, when would your 0.2% need to start and when would it stop if you wanted a 25% Trust Fund say in 2040 with no intervening benefit shortfall?
Eric377
if the one tenth of one percent tax increases started today, there would be 100% Trust Fund Ratio for the rest of time as far as we can see.
The Actuaries Paper points out that the !.55% in crease starting before the expected trust fund zero date in 2035 or so is the ONLY plan that solves 100% of the “actuarial deficit” over 75 years, and recommends it be phased in starting in 2025 at one tenth of a percent at a time.
that works well enough for me to accept…though i think my slightly different plan works a little better, it is not enough of a difference to matter.
i don’t know where your argument comes from but to me it looks made up from whole cloth without knowing very much about the actual situation.
if you thought it is obvious that a 100% Trust Fund was overkill, what did you think of the 300% Trust Fund which is now expected to be down to 100% in about six years and 0% in about 12 years?
Dale:
I put that up as a supporting document to the plan you sent to DeFazio. The 1.55% is yearly or monthly? It makes a difference over time, you accrue interest of the monthly or yearly contributions too. That 1.55% monthly or yearly may yield 2% in total.
Bill
1.55% increase in the tax starting today for each the worker and the employer soves the deficit problem for 75 years, leaving the people aftere 2099 with a “significant” (actually less than 1% deficit to worry about in the next century.
the 2% increase in the tax, for each the worker and employer, phased in one tenth of one percent per year at a time, solves the deficit entirely and forever “as far as the eye can see.” The interest from the Trust Fund is a factor in that, but not a huge one. I can probably find a simulaion I ran which would demonstrate this in more detail, but you might have to wait a while. In the meantime, take my word that it is not significant…many other factors may emerrge over seventy five years that will have more impact, but probably not change the basic picture: gradual works. In the meanwhile remember that that 1.55% is “immediate an permanent” and works for 75 years. You can read it in the Trustees Report if you are careful.. it appears as a 3.1% immediate and permanent (combined) tax increase. The 3.1% may appear slightly different due to changes in the date of “immediate” or some other factor in the basis of computation that i can’t call to mind at the moment..but try to keep track of “significant” versus “doesn’t matter enough to worry about.”
Eric:
100% of what in reserve?
100% of the following year’s benefits.
i will have to look it up, but because we are now in “short range financial inadequacy” the Trust Fund is expected to fall below 100% of “prudent reserve’ in less than ten years (about six now if i remember). if i remember my analysis of the 2022 report, a one tenth percent (or .2% combined) tax increase started by 2024 the TFR would indeed keep falling, I think–don’t remember off the top of my head–to about 50% over the next 7 years or so before the tax level began to fill in the hole and the TFR began to rise again reaching 100% in a few years and full “long range solvency” [erasing the 75 year actuarial deficit with a TFR of 100% atthe end of the period, and a tax rate that balances the income rate to the cost rate “as far as the eye can see” with no further increases in the tax needed…”over the infinite horizon.” sorry about the vagueness here. i am too lazy to look up my calculations right and now and can’t remember the numbers exactly. stay tuned I might do it later.
i also did an anlysis with a starting rate of increase of 0,2% per year (0,4% combined) that solves the whole problem short range and long in ten years, but i knew how horrified you woud be with having to pay an extra two dollars per week, or four if you are self employed (and earning 50k)…money that you will get back in real dollars three times over when you need it….or even if you don’t need it when you reach “normal retirement age” but want to retire anyway, which is what most people want to do before they are ready for the glue factory.
I looked it up: a one tenth percent increase in the tax per year would allow the TF to fall to 100% in 2031, fall to 50% in2041, rise to 100% in 2052 and 162% in 2099. The ultimate tax rate would be 8.5%
A two tenth percent increase in the tax per year would not allow the TF to fall below 100% at all and reach an ultimate payroll tax rate of 8.2% in 2033…that is “solve the SS deficit crisis forever..
All percents here are per worker..what the worker pays out of his paycheck. The employer would pay an equal percent. might sound like a lot to you, but considering that it is the cost of living in reasonable comfort for an expected 20 years or more after you retire…from a job earning twice as much as you make now…it’s a price you would never notice while you were working, but notice a lot if you hadn’t saved it.
note the employer will certainly feel put upon if his part of the payroll tax goes up 2% over ten years, he might need to remember that the wage he is paying (for value received) is expected to up 10% over that time. I think the 2% will come out of the 10% but I am sure he will work it out for himself.
Dale,
You are not understanding what I am saying. the contributions by citizens and business go into the treasury in the first month that gain interest. In the second month, more contributions come in and are added to the first contribution plus its interest. The first contribution plus its interest gain more interest and the second contribution gains its first interest. 1.55% could yield 2% in 10 years.
Bill
i am not understanding what you are saying because it conforms to no reality I recognize. I could be wrong.
The first 3.1% (combined) installment of the “immediate and permanent” would instantly be reduced by one tenth of one percent (of payroll) to pay for next years shortfall. if the trasury is paying 2% real interest (it’s not currently paying that much) that would be 2% of 3%…or 0.06% of payroll which would help pay the approximately 0,1% of payroll deficit the next year…and so on.. Yes this would help build up the trust fund to a point where 70 or so years from now it could be drawn down (and would be) to pay the 1% or so yearly deficits that would emerge by not paying the full yearly deficits over that time..and leave a Trust Fund of zero with a tax rate of 3.1% of payroll to pay a yearly deficit of 4% (language is confused here ..the 4% is what the deficit would otherwise be without what the 3.1% is already filling…it gets too complicated for me to say without help from my computer, which i am not motivated to consult for the moment, believing i have already fully answered the problem and don’t want to spend the rest of my life chasing down other people’s ideas in their desire to keep talking about it while the Congress destroys SS at its leisure.
does that agree with your calculation. I have no confincence it what i have offered here, but I really don’t know what you are getting at with yours.
maybe not build up the trust fund, but slow the rate of decline.
i did write a simulation of “immediate and permanent” agrees with Trustees Report. Trust Fund increases to about TFR240 in 2050 or so then declines to zero by 2099. (failing short term memory here: if you need exact numbers i’ll go back and write them down. i also forgot to look at the yearly “balance” (deficit) which i will go back and look at for my own satisfaction.
as far as i can tell from your comments above you think the 1.55 “immediate and permanent” is not permanent, but somehow grows to 2% from interest…maybe it does, but the way i calculated it’s effect was to include the Trust Fund interest in the income to SS after the “permanent tax increase. might amount to the same thing. i’d have to check. i don’t want to, for reasons i have hinted at…getting too old, running out of time and patience.
i also ran a simulation with “immediate and permanent” now, followed by one tenth percent as needed after about 2040 or so. worked fine, advantage would be getting the i.and p. now to get things started, and then shifint to the one tenth percent to provide the income needed to balance the books “forever” with tiny increases after people’s incomes have risen substanially and they may have learned to understand SS better.
i just thought of another way to accomplish the same thing..raise the tax every year to just cover the yearly deficit (balance). that would be very close, but a little less, than the one tenth percent “at need” in my proposal. this might make Eric happy because it would keep the Trust Fund balance closer to the required prudent reserve instead of the TFR160 that results from the 2 tenths percent per year for ten years that otherwise solves the deficit “forever.”
note that my two tents solution did not, but could. do the same thing if the “trigger” were allowed to work by lowering the tax rate when the TF gets too large. I don’t think it matters much. but that was the original idea. basing the trigger on the Trustees Report of short range financial insolvency does the same thing but in chunks that could result in “short range overshoot” of a few micro tenths of tax increase or desired TFR.
or we could keep talking about this and other magic fixes until the problem goes away when Congress does it’s fix (cut benefits one way or another).
Recessions happened more frequently when 100 percent became the norm. A smaller trust fund could make sense now, but there may be two things not be aware of. Congress allowed the trust fund to be diminished from 1973 until 1983. It took them 10 years to act.
Whatever level you pick, the trust fund needs to increase (after about 2034) to maintain that level. It is currently $2.8T. Annual costs will reach that level in about 2065. The proposal is geared to solve the shortfall by putting the program on a basis to keep going for generations.
2023
212%
2024
194%
2025
175%
2026
156%
2027
138%
2028
118%
2029
99%
2030
80%
2031
60%
2032
41%
2033
21%
2034
1%
from table VI.G& of the 2020 report
If Congress waits until the TF gets to 25 percent, they will have less than 2 years to act and the gradual increases will not be enough.
Arne:
That is true
Linked this one too, Wodin’sday Wait … What!?, and the previous again
I was driven out of the conversation, that’s the best I can do …
Ten Bears
best you can do, i think, is try to get the basic message out. SS can be saved entirely by increasing the payroll tax about a dollar a week per year…if we act now.
SS Actuary agrees, American Association of Actuaries agrees, Coberly agrees..what could they all be wrong about?
Try to avoid talking it to death with people who have no idea what they are talking about but have their own world shaking ideas how to avoid paying for it at all.
a person might note that the Academy of Actuaries did not include MMT as one of their options.
They did include “make the rich pay” but pointe out, for those who actually read it, that it would not work. as well as violate the “traditions” (fairness) that have made SS work for eighty seven years.
“Fairness” is it “make the rich pay” for my groceries because they have more money than i have.
or is it “make the rich pay a fair price for the insurance (plus real interest) they get.
oops , i used “fair” to define fairness. begging the question. fair means paying the same price for a loaf of bread as everyone else.
since the FICA “tax” rate is “flat”, the rich pay more money than the poor, but that extra money is what allows SS to pay a hugely progressive benefit to those who otherwise would be destitute. which is what makes in “insurance.”
but the learned left professors won’t have that. it MUST be a tax, and it MUST be “regressive” because the rich don’t pay in proportion to their wealth. well, actually they do. what they don’t do is pay in “increased proportion” according to their wealth. this helps keep them from feeling robbed. but, being the kind of people who get rich in the first place, the very rich will feel robbed until they pick up every nickle on the table. they are kind of like the “progressives” that way.
SS Trust Fund worries? — just a matter of flip-flopping income streams
Isn’t the Trust Fund question just a matter of flip-flopping income streams? My understanding is that TF bonds are cashed with income tax.
When the TF runs out, FICA can be raised while income tax is cut — not exactly the same payers for both taxes; but for most payers no giant burden.
Raising, or eliminating, the FICA cap comes to mind. Rebuilding labor union density even comes to mind — flooding FICA income.
Something like a five year, projected outgo, fund could insure Congress never takes too long getting around to resetting FICA tax level.
Denis
your proposals, while interesting, don’t seem to recognize that the SSA Actuary and the American Academy of Actuaries, and your modest servant, have all come up with plans that look nothing like yours and a lot like the one I have been selling on AB for fifteen years.
It would help me feel better if you noticed that.
all the plans i mentioned acknowledge current reality, actually do the math, and come up with “a gradual raise in the payroll tax of about one tenth percent per year up to a total increase of about 2% will pay for Social Security…that is your groceries when you can no longer work…for as far as the eye can see.
What’s wrong with that?
one tenth of one percent of a 50k/y wage is about one dollar per week. the full 2% increase won’t be reached over the same time that real wages will rise at least 20%, so you’d be at least 18% ahead in terms of after tax dollars in your pocket, as well as having paid for a retirement that may last 20 years or more.
Fifteen years ago when i first discovered (noticed?) this, I thought that it would laugh the “great Social Security Unfunded Deficit” liars out of court. I was wrong.
Not really. The Special Treasuries are cashed with incomes taxes because it is to the general fund that the money was leant.
The TF is running out because costs are increasing. Balancing things out by cutting taxes does either increasing the debt or cutting other programs. It really does cost more to live longer.
Discussing raising the cap on this thread indicates you have not read Dale’s other posts. More money going to labor would help, but productivity is not going up as fast as life expectancy.
Instead of your five year fund, I suggest you have a one year fund. To get money into the fund you could increase the FICA tax by 0.1 percent per year until it puts everything in balance.
Dobbs
please try to read the following. it will be on the test.
imagine you are twenty years old and know that you will need to retire some day. in this imaginary world there is no Social Security or (for now, stock or bond market). But there are banks that pay enough interest so you won’t lose your money to inflation. and your savings are guaranteed by the Federal Government which can’t fail like an ordinary bank.
so you decide to put tenpecent of your (every) paycheck into a bank savings account, and you do not draw it out until you retire forty years later. you draw out enough each month to pay your bills and buy groceries. you calculate that the amount you draw out over the rest of your life will be more than you paid in (saved). How can this be?
So you ask your banker. He explains that it is due to the interest, Where did this interest money come from?
Well, he says, essentially the cash itself comes from the twenty year old who came in yesterday to start paying into his saving account. He gave us his money for his first payment. And we use that cash to pay you the money you withdraw from your account to pay for your current needs. But the actual Money (not the dollar bills) comes from the fact that while you have been working these forty years, the economy has grown and that twenty year old is making more money than you did, and since he knows that his retirement will cost more than your, he saves more than you did…but the same 10 percent of his income.
So he is paying for my retirement? No, he is paying for his own retirement just like you did. But while he is waiting, and paying, for his own retirement, we can use what he is paying in to us to pay you what you take out of your savings account.
I [coberly here] want to keep this simple, so i’ll stop here after pointing out that the extra money (not the dollar bills) come from the growth in the economy, either more money (things) for the workers, or more workers, who can pay more than you did, but the same as a percent of their wages, so you can collect more than you paid in. They in their turn will be able to collect more than they paid in, because the workers coming after them will have more money than they had.
This is normal banking. It’s the way money–all investments, including stocks and bonds–works. For local banks the extra money comes from lending your deposits to someone who makes something (lke builds a house) with “your” money [though the bank thinks it’s “their” money] and adds “value” to the economy so everyone has more money, more things (like the house). Over the nation as a whole the growth of money (not dollar bills) is called the “growth of the economy.” and is called interest , and is why you get more from Social SEcurity than you paid in.
we dont’ usually think of the money we withdraw from our bank account as “the young paying for our retirement”…or whatever else we buy with the money. It is only because the people who lie about social security have taught you to think of the dollars going from hand to hand as “the young paying for the old”..or the journalist calling it a “compact between the generations” that has led you to think that it’s a “transfer payment”. It.s not, whatever economists may call it. i can guarantee that no one collects a Social Security check because someone else pays for it. SSA looks at its records and it sees that you paid for it, so it sends you the check.
Do try to understand this. It will be on the test.
Dobbs
and the vast audience of people who care
if the economists call SS a transfer payment [i don’t know if they do…limits to the vast nimber of things i care about] it may be because they are interested in a different problem than I am..perhaps the effect of SS on the calculation of GDP [note not the effect on GDP itself].
my interest in NOT calling SS a transfer payment is to counter the lie that “the young are paying for the old.” they are not. they are paying for their own future groceries….about exactly as much as they would have to pay for them anyway if there was no SS…including the interest on their SS “savings” just like all other savings.
i am sorry if it troubles you that a work can mean different things in different situations. but i assure you reality is more important than words.
typo WORD not Work.