Introduction to the Social Security Northwest Plan
Bruce Webb introduced the Social Security Northwest Plan in 2009. He credited Arne and Dale as co-authors. The NW Plan only increases payroll taxes if increases are needed. For years before 2009 Bruce had confidence that forecasts were too pessimistic, but he was convinced by Arne to consider a plan that included triggers. Arne’s solution was overly complicated, but Dale Coberly showed that a permanent solution could be had by simply increasing the payroll tax by 0.1 percent each time the annual report showed that “Trust Funds fail the Trustees’ test of short-range financial adequacy.”
The Trust Fund failed the test for the first time per the 2020 annual report, long after Bruce’s proposal was confirmed workable by the Social Security Administration.
Bruce’s posts always produced lively debate. The, “2013 Northwest Plan for a Real Social Security Fix, Angry Bear, Bruce Webb was posted February 9, 2013. Bruce has not posted since 2016, but Arne and Dale continue to defend the NW Plan. As they both still refer to the plan, it is probably a good time to remind readers of what Bruce proposed.
“2013 Northwest Plan for a Real Social Security Fix,” Angry Bear, Bruce Webb, February 9, 2013.
The Northwest Plan for a Real Social Security Fix was first introduced and revised in 2009. Obviously it was never adopted. Still the basic mechanism remains the same as does the rationale and working assumptions and in what follows I am going to assume a certain knowledge of the mechanics of Social Security finance and reporting. For those who get lost I can only suggest revisiting the 2009 version and all the posts surrounding it or just place your questions in comments.
The NW Plan can be described in a variety of ways but here I want to present it as the answer to a question: “Under the Social Security Trustees Intermediate Cost Alternative and given current law Scheduled Benefits and Cap Formula what would be the minimally disruptive revenue only fix to deliver those benefits with no changes in retirement age?” Note the questions that are not being addressed: “Is Intermediate Cost a realistic mid-point projection?” “Are current Scheduled Benefits adequate? too generous? equitable?” “Why NOT adjust the Cap Formula?” While these are all important questions and ones the authors of the NW Plan have plenty of opinions on, they just are not the question at hand.
For the purposes of establishing a baseline for further discussion the NW Plan simply assumes IC and current law benefit and cap formulae, and also adopts the Trustees tests for ‘adequacy’ ‘solvency’ and ‘actuarial balance’. For the Trustees Social Security is in actuarial balance if it is projected under IC assumptions to end each year of the short term window and the last year of the long term window with an asset reserve equal to 100% or more of the next year’s projected cost. The short term window is 10 years and so coincides with the standard budget window used by CBO and OMB. Which in turn means that anytime Social Security is in ‘short term actuarial balance’ it properly has no NECESSARY role in budget talks. This BTW is doubly true if all proposed ‘fixes’ start operating outside that window.
On the other hand the Trustees also take a longer view. Under their definition a ‘current participant’ in Social Security is anyone 15 and older and their long term window is 75 years. Meaning long enough that anyone who could reasonably be contributing today has their retirement interests taken into consideration for the entire working and retirement lives of all but the longest lived of todays teenagers. Who of course are for older workers their grandchildren. The NW Plan provides for ALL those cohorts.
Details below.
The NW Plan starts by examining the following Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2012-90 and fixing the point at which combined OASDI projects to fail the Short Term Test. By interpolation TF Assets will fall below Total Cost around 2027. But since the Test covers all years to then Year Ten test FAILURE projects to occur in 2018 and the NW Plan adopts the former year as the action point. This even though the combination of revenues and reserves in 2018 would still be sufficient to pay full scheduled benefits for 15 more years. Because that would be small comfort for the over 40s among us.
The NW Plan takes this 2018 failure point and calculates a series of 0.1% FICA increases that would under IC assumptions keep 2027 and immediately following years in actuarial balance (Trust Fund ratios in excess of 100). And for good measure does the same for the entire long term window. Not because we have any real confidence in numbers outside the short to medium term but because once engaged on the exercise of addressing Short Term it is trivial to suggest numbers to address the largely theoretical gaps of the Long Term. One just has to take the numbers supplied by the Reports and mechanically insert some FICA rate changes.
In short, the NW Plan imposes a permanent (actually 75 year) fix given best available information in the Plan year. On the other hand, that best available information changes with each Report year. But here is the key, by accepting a diagnostic that places ‘failure’ 13-15 years in advance of the real-world consequences and starts the fix at the earlier date almost any conceivable change in outlook can be addressed by tweaking the FICA numbers at the tail, in almost all conceivable circumstances you have that 10-13 year lead time and an existing fix that at worst addresses the vast majority of the new projected gap. Which in most cases will not have actual incidence until 30 or 40 years down the road. In posts to come I will be putting up results of the new NW Plan spreadsheet based on the 2012 Report (the latest available). This post on the other hand is designed to let some of the conceptual objections be aired before diving into the actual numbers and assumptions.
I repeat myself, but Trust Fund ratio of 100% does not seem responsive to any true concerns. Basically it provides either way more time than needed to identify and correct issues or it provides reasonable time in hypothetical situations so dire that the redemption of the debt is questionable, as would be the priority of addressing retirees’ concerns versus everyone else.
Imagine SS tax revenues start under running modeled balance requirements by 5%. Within just a couple of quarters there would be an amazing sense of urgency to get to work, yet the Fund would have assets for close to 2 decades.
On the contrary, picture a 33% under model situation. What’s going on in the country that 1/3 of under cap wages and salaries failed to materialize? Anyone think that the Treasury will at that moment calmly redeem whatever unplanned tens or even hundreds of billions that the Trust Fund would be expected to chip in?
Keep in mind that missing big on SS tax revenue means missing big on federal, state and local income tax revenue, not to mention probably millions of families losing employment-based health insurance. One hundred percent is truly a dangerous level for the system as the two sensible options are to boost current tax income so that it never gets redeemed (basically ‘we stole it, but what are you going to do about it?’) or walkway from it when it’s needed (‘can’t you see we have a national emergency you bunch of crybabies?’).
I think the NW plan is okay, but just start it later so you hit operational balance at a much lower Trust Fund.
Eric
thank you for your delightful fantasy. get back to us when you know what your are talking about.
well, just an observation, once the” short range financial inadequacy” is triggered, every following year in which the Trust Fund remains in short range (within) fiancial inadequacy the one tenth of one percent increase (per year) remains in effect. as for “low cost” being “still out there”, as long as the TF does not fall into short range financial inadequacy the one tenth percent increase is not made… theoretically (unlikely) this could result in even one tenth of one percent increase never being needed…thus we no longer have to cross our fingers every year and pray for “low cost”,
the projected 2018 “failure” date Bruce suggests is not a failure, it is a first “warning” by the actuaries that there is a problem on the horizon that needs to be addressed. as it happened we encountered short term inadequacy in 2020 and remain in short term inadequacy and Comgress has not done a thing about it, except to keep lying and proposing secret “commissions” to cut Social Security in a way the voters won’t know who to blame.
and the people who visit this august forum seem content with that. “what, me worry?” everyone is intent on clouding the issue with more words and more words. my guess is that the enemies of SS did not make much of a fuss about short range inadequacy, because in a very few years they can see “bankruptcy looming” so clost that they can scare the people into letting them do something stupid and cruel. timing is everything.
meanwhile the American Academy of Actuaries tells us that a one tenth of one percent raise in the tax per year( for a few years) can still preserve promised benefits forever..as long as we start by 2025.
and your hmble servant notes that even if we do nothing until 2032 or so….which seems most likely… at that time a 2% increase in the tax all at once, and only once, will still preserve promised benefits forever. and i guarantee no one would miss that 2%, especially if some honest persons reminded them that they will get the money back three times over during a longer retirement with higher real benefits.
but it doesn’t look like anyone around here is going to do that.
i forgot to mention that even that sudden 2% increase in the tax will come when real wages are ten percent higher than they are now. but people won’t realize that. and they certainly won’t remember that if they had started raising the tax one tenth of a pecent per year at a time the full 2% tax raise would not come into effect until around 2050….that’s because each year the tax is raised pushes back the day when the full increase will be needed. it’s just the math.
Dale:
That is a good point and one I did not even think of as a potential and unplanned solution.
bill
well, a lot of “the northwest plan” was unplanned. it arose initially, from my point of view, from my discovery…by actually reading the Trustees Report carefully, and actually “doing the math” carefully, and finding the actual cost of fixing the “acturial deficit” was very small. at that time i did not think about “short range inadequacy” and just spread the cost over the whole 75 year actuarial window…and found it to be very small indeed.
when the short range test of financial adequacy presented itself to me, i built a spread sheet that recreated the results of the Trustees Report using their actuarial inputs (outside of my expertise) and calculating their reults in order to make sure my calculations got the same result their calculations did. then i wondered how big gradual raise in the tax would need to be to avoid short range inadequacy …which was what most of the yelling was about at the time..because it predicted actual depletion of the Trust Fund…called “broke; flat bust” by our oh so honest leaders. just because intutitvely in seemed like a good place to begin, as well as a round number, i started by “raising the tax” rate on my spread sheet by one tenth of one percent in the first year the Actuaries (not the Trustees…they are politicians, not to be trusted) projected short range inadequacy (that is, predicted entering the period when the Trust Fund was projected to fall below 100% of one year’s expected benefits), and coninued increasing the tax each year that the Trust Fund remained in short range financial inadequacy, not raisint the tax when the TF emerged from short range inadequacy. and starting the raises again when (if) it reentered short range inadequacy. just by luck, one tenth of one percent worked fine. the other “unexpected” consequences of this emerged essentially out of the ether..that is, i did not plan them, and neither did anyone else. Bruce was the first to notice that with the gradual increases in the tax, the Trust Fund would never have to be repaid at all, just remain as a “paper” prudent reserve. to be drawn on if something like a major recession occured unexpectedly before gradual raises in the tax could meet the need for continued benefits. of course the gradual raises would continue and the recession would abate so the gradual increases would fairly soon replenish the trust fund..probably without needing a ultimaetly higher tax rate than the the 2% (4% combined) rate baked into the program by demographics.
that’s my story and i’m sticking to it. Bruce named the plan “Northwest” and he called it to the attention of Academy of Social Research, who understood its value,,,until they suffered a change in management a few years later.. and introduced me to Nancy Altman’s secredt social security on-line group. who welcomed me for a few days until they found out i was serious about the one tenth percent solution, not sufficiently diplomatic when famous experts said my solution was wrong because their own back of the envelope caluclations gave them a different answer, and then pointed out that their “tax the rich” solution in logically inconsistent with Nancy’s book “the battle to save Social Security”…which i had thought a very good book,,,,so they expelled me. and called me obscene names when said the contradiction was “stupid.”
none of those people was stupid. but their argument was. a distinction they could not make. Arne made some good suggestions and no doubt talked about them with Bruce. I can’t remember being aware of them at the time. But as far as I know, I am the one who made the initial discovery that even the “intermediate” projection was actually very affordable, and i am the one who made the deatailed calculationst that proved that and formed the logical and matematical basis for the “Northwest Plan.” I did not think it worthwhile or smart to make a fuss about precedence, partly because I valued Bruce’s contributions and took his word about Arne’s. I still think it would be stupid of me to make a fuss about precedence, but it annoys me personally that I am presented here as a minor figure johnny come lately who made a cosmetic contribution.
not that it matters, since my fifteen years of adequacy have come to nothing anyway. apparently either because of my bad manners, or the people just can’t be bothered and prefer to wait for a magical solution that come from the sky to provide everyone with free lunches forever.
i meant to say fifteen years of advocacy..but that and other typos suggest that my fifteen years of adequacy may also be coming to an end.
Excellent story which I would like to commit to Angry Bear.
Dale:
I was thinking along the lines of a 5% increase in salary of which 6% + 1% of the salary increase would go to SS by the employee as well as similar from the employer. I would have to do the number to get to the totals. That in itself is relief. That is an excellent story you just told and very workable from my reading it.
Bill
i don’t really know what you are asking.
a five percent increase in real wage would be absorbed, i imagine by a five pecentincrease in benefits. as benefits are roughly 40% of average wage…adjusted for inflation and real growth in average wages, it’s not exactly a windfall, especially since the real value of the payroll tax they paid also increased by 5% over the same time…even if the nominal tax rate did not change.
i think you are trying to do what i have been complainint about:trying to fix what aint broke with “solutions” that would be like tacking a smoke stack on a Ferrari.
btw, it just occured to me that the “very very small” fix for the SS actuarial deficit was always in plain sight. i should be ashamed that i had to go all around Robin Hood’s barn to see it. But the Trustees Report for some time has reported that an “immediate and permanent” increase of the payroll tax on the order of 3% combined would solve the “actuarial defiit” for 75 years…which is essentially forever from our human point of view, especially if we remember that the people living in 2099 will be both richer and smarter than we are…able to solve their own “looming unfunded deficit” which whould be less than 1% at that time, trouble is the Trustees spoiled it by calling it a “significant shortfall.”
additionally…and idid not “see” this until quite recently, just looking at the tables would show that the tax could be raised each year just enough to cover the next year’s projected costs. again, because the costs are baked into the demographics, this would turn out to be about one tenth of one percent per year…actually less oover time as the tax rate caught up to the total increase needed for the predicted levelling off of the cost rate… about 4% (combined). again, the Trustees spoiled it by reporting a “balance” deficit of 5 to 6% by counting only “non interest income.” my own calculations…agreed with by the deputy chief actuary..shows that a 4% increase would do the job just fine…but timing matters: the arlier the tax increase is enacted, the lower the ultimate increase needs to be.
meanwhile i don’t mean to be insulting: by all means go ahead and work on your idea. you may discover something I missed. but i think it is better for the lone inventor to work in secret until his invention actually works.
i rea;;y don’t want my whining above to be made part of any new AB post. it is not becoming.
Just speculation Dale. Merry Christmas.
well, one other point that emerged gradually, though it was always there for anyone to notice: the critical importance of keeping Social Security paid for by the workers themselves. the enemies of social security has been working hard to convince everyone that Social Security is “the young paying for the old”. they have succeded. even one of the authors of “the northwest plan” thinks “this is the mechanism”. but it is the same mechanism that banks use to pay you back the money you have left with them, plus interest, to save for your future needs….when you come to collect your money, the bank gets your money from the dollars paid into the bank that day (moth, year) by someone else, presumably younger> putting their money into the bank for the same reason you put your money into the bank all those years ago..to earn interest and save for their future. yet no one calls this “the young paying for the old.” you can, if you wish, keep on saying that about Social Security, but it would be to miss the whole point entirely.
back in the day long before money was invented, “the young” did “pay for” the “retirement” of their parents…and other elders in the tribe who may have lost their own children to war, famine, or disease,
but those were the children of “the old”, and probably loved their parents, or even if they did not, understood that preserving the tradition of “honoring your father and your mother” mean that “the young” would pay for your own retirement when you became “the old.” probably a few among them were wise enough to understand that “the old”, their parents, had “paid for” their own retirement by providing food and sheter for “the young” and contributing to the general growth in the economy during their own working years by which “the young” had a head start and exicting infrastrucure to build on to make theselves richer than their parents had been.
i don’t see many people alive today who are that smart. but they have been lied to their whole lives by “non partisan expert” liars and the reporters and columnists who repeat the lies without knowing what they are talking about.
probably need to add that with the invention of money and the economic destruction of the family as a self sufficient economic unit… the idea of “the young” supporting “the old” lost it’s emotional force as well as its “security” and it took time for Social Security to evolve from “the poorhouse, through European style State paid old age pensions, to Roosevelt’s genius plan of “worker paid insurance.”
if SS fails it will be because workers are no longer paid enough for their labor to save enough for their old age. if that happens it is unlikely “the rich” will step in to pay taxes to provide a state pension, in any case the workers will have lost their ownership of their own pensions and will be at the mercy of the rich, or whatever government exists by then. the rich like the poor to be dependent…keeps them from getting uppity.