Reposted from Jan. 2018: Social Security and conversation
(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 from the Deputy Chief Actuary 2017)
Dear Mr. Coberly,
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 at https://www.ssa.gov/OACT/solvency/index.html and https://www.ssa.gov/OACT/solvency/provisions/index.html.
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
“(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. …”
Makes sense, to me the questions aren’t “When does the trust fund run out?” and “What can we do to prevent the trust fund from running out?” rather they are “Does the trust fund help fund benefits?” and “Who benefits from the various plans to keep it from running out?”
Jim:
If you look at Ken Houghton’s post he has the years up when payout will continue to draw on the TF itself, the years when payout will draw upon the TF plus interest, and the years the TF will be exhausted. It is my understanding, by law Congress is supposed to act when the TF is at one year of TF fund exhaustion. Others may explain that one last sentence differently.
In reality, I would say we do not want a TF to be as big as it is. The funds go into special Treasuries which political interests do not want to pay back and in particular political interests or the Repubs, those who do not understand the TF, and those who call it a Ponzi scheme (which it is not).
Dale Coberly’s Northwest Plan does fix the issue of funding forever.
Jim
the Trust Fund is created from “excess” payroll taxes (more than needed to pay current benefits).
it helps fund benefits when income from payroll tax is less than needed to pay current benefits. this happens quite often due to small variations in timing of income in vs payments out. it can happen over a longer time during recession. or it can happen over a longer time due to, say, a large baby boom.
in the latter case the Trust Fund was allowed to grow larger than the normal “one year reserve” which meant the baby boomers would be prepayjng their own retirement costs (which in fact everyone does normally, but which would not have happened at the lower tax levels needed when the population was growing (watch out for that turn: the cost of the baby boom did not come when the baby boom population was growing, but would come when the population stopped growing as the boomers retired). long story short: the enhanced TF, paid for by the boomers, moderated tax collections so they did not fall too lightly on the boomers or too heavily on the after-the-boomers. perfectly sound and fair.
however after-the-boomers are projected to live longer than previous generations, requiring a further tax increase to pay for their longer life expectancy. this tax increase should be paid for by the current generation who will in fact enjoy those longer life expectancies. the increased rate will level off as the increase in life expectancies levels off. perfectly sound and fair. and long predicted.
no one benefits from the plans to keep the TF from running out. it is supposed to return to the normal “one years reserve” (which would typically last five or ten years into a deep recession).
if the tax is raised to keep up with life expectancies, the TF will never have to be paid back with real money, but exist only as a paper debt reserve for future small emergencies.
that doesn’t mean the congress or “the rich” understand any of this. they are too short sighted and they believe their own lies because they have been telling them to themselves for generations. and none of them actually understands how SS works. they thing in “sound bites.” even the good guys.
“by law Congress is supposed to act when the TF is at one year of TF fund exhaustion.”
From the report: :The test of short-range financial adequacy applies to the OASI and DI Trust Funds individually and combined on a hypothetical basis.1 If the estimated trust fund ratio is at least 100 percent at the beginning of the projection period, the test requires that it remain at or above 100 percent throughout the 10-year period. If the ratio is initially less than 100 percent, then it must reach at least 100 percent within 5 years (without reserve depletion at any time during this period) and then remain at or above 100 percent throughout the remainder of the 10-year period. This test is applied using the estimates based on the intermediate assumptions. If either trust fund fails this test, then program solvency in the next 10 years is in question, and lawmakers should take prompt action to improve short-range financial adequacy.“
Arne
thank you.
but we need to be clear “the test requires” does not imply that anyone has to do anything about it. “requires” only means that the lable “solvent” is applied or not applied.
Similarly “lawmakers should” does not mean “lawmakers must.”
After all, lawmakers make the law.