CEPR’s Dean Baker: Wage Growth Continues to be the Key to Social Security Solvency

Dean Baker and colleague Mark Weisbrot have been making a steady case since their publication of the aptly named Social Security: the Phony Crisis back in 1999. In short Social Security does not face a structural demographic problem, instead it has encountered a contingent economic one, marked mostly by a failure of wages to grow with productivity in the ways it did in past decades. The ‘Phony Crisis’ link goes to the Introduction to the book, if you haven’t read it you should. And equally worth reading is the Press Release linked above published last Wednesday. I just want to isolate and emphasize two paragraphs from the Press Release.

Wage growth is the key to the program’s solvency for two reasons. The first is that the upward redistribution of wage income over the last three decades has played a large role in the projected shortfall. As income has been transferred from ordinary workers to those at the top of the wage distribution, a larger share of wage income has escaped taxation. When the Greenspan Commission set the cap for taxable wages in 1983, it covered 90 percent of wage income. Currently the cap only covers around 82 percent of wage income. If the cap had continued to cover 90 percent of wage income, the projected shortfall would be roughly 40 percent less than it is now.

“The other reason why broadly based wage growth is key to the program’s continuing solvency is that the burden of possible future tax increases would be much less consequential if most workers will share in the gains of economic growth. The Social Security trustees project that real wages will rise by more than 34 percent over the next two decades. (They are projected to rise by another 30 percent over the following two decades.) Even if the payroll tax is increased by three percentage points, it would take back less than one-tenth of the projected rise in before-tax wages if wage growth is evenly shared. On the other hand, if most of the gains from growth continue to go to those at the top end of the distribution, any tax increase will be a major burden.

On my reading Dean is calling for a dual approach: one that emphasizes wage growth in increasing revenue to Social Security but which also envisions accompanying tax increases. Whose affordability is that much more eased by the wage boosts. It doesn’t have to be either or, it can be MJ.ABW and NW.

More Jobs. At Better Wages. plus the Northwest Plan.

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by Bruce Webb

In comments Andrew Biggs claims that the NW Plan does not actually eliminate $15.4 trillion in unfunded Social Security liability but instead leaves a 1% payroll gap over the Infinite Future. I have no reason to suspect his math but do suspect he doesn’t fully understand the mechanism.

The Northwest Plan ultimately is a response to long term uncertainty in the projections. Under CBO’s most recent projections the payroll gap for Social Security is about half of that projected by SSA (1.06% to 2.00%). If the schedule of tax increases set forth in the spreadsheet was set in stone this would mean that if actual economic performance came in in line with CBO then Social Security would over the long term be overfunded, which oddly enough would be a very, very bad thing for Social Security, something I pointed out in installment ten of the AB Soc Sec Series The Danger of Low Cost. The NW Plan avoids this by monitoring the tail of the valuation period. For example under 2009 OASDI Trigger the projected Trust Fund ratio remains remarkable steady from around 2062 to 2080 but then takes a mild but noticeable dip to the end of the projection period. If this trend persists as we change valuation periods with the 2010, 2011, and 2012 Reports it might trigger another increase in the mid 2090s. On the other hand if it reverses we might have to push the 2074 increase forward a bit. If it turns out that CBO is more right than SSA this might mean canceling one of the intermediate year cuts and stretching the rest out some, or alternately reduce the amount of the increase in one or more of the scheduled.

In any event we can always adjust the schedule so that the TF ratio result in the new year 75 always remains between 100 and 300 and as such eliminating unfunded liability over that period and so for some extended period beyond.

I suppose someone could take 2009 OASDI Trigger and extend it from 2082 to 2109 and so capture all the potential costs for ‘past and current participants’ and so show that the pace of needed increases after 2082 is such that the people of 2062 should consider changing the benefit formula. On the other hand our bigger policy need in the 2060’s might be planning how to relocate NYC and the whole state of Florida to higher ground. The very uncertainly inherent in future outcomes mitigates against too much prior planning.

The NW Plan eliminates unfunded liabilities because it sets up a mechanism similar to that under which the Fed predicts inflation, with the advantage that SSA will always have a 75 year planning window. If unfunded liability starts creeping back into the picture 20, 30, or 40 years from now the Dales, Bruces and Arnes of that era can deal with it. There is no reason to assume a priori that they will be more feckless than we are and that events occurring decades after our own deaths are our responsibility. This plan if adopted gives us quite powerful assurance that the Social Security car will still have plenty of life left in it 76 years from now. Good enough for me.

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by Bruce Webb

Don’t step in the Voodoo.

Leap in U.S. debt hits taxpayers with 12% more red ink

Yhe latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That’s quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined.

“We have a huge implicit mortgage on every household in America — except, unlike a real mortgage, it’s not backed up by a house,” says David Walker, former U.S. comptroller general, the government’s top auditor.

It is nonsense like this that explains why the Northwest Plan for a Real Social Security Fix is better than my previously preferred plan of ‘Nothing’, it helps to shut Peterson stooges like Walker the hell up.

What Walker is telling us via USA Today (which near as I can see did no ‘analysis’ at all, just parroting the ‘Fiscal Wake-up Tour’ message instead) is that if you add the the current value of all US debt, add to that projected costs of Social Security, Medicare and military pensions you come up with a total of $63.8 trillion which if divided by the number of CURRENT households gives you a total of $546 thousand. This is a meaningless number for any number of reasons. One it implicitly defines ‘household’ as ‘current household and any future households stemming from it’, that is if you have four kids your ultimate per household burden will be a quarter of that. Plus this calculation ignores all future households stemming from future immigration and of course households stemming from them. It is a junk number. But rather than try to demonstrate the absurdity of the logic and the arithmetic lets just make a big chunk of that debt go away.

If the NW Plan was enacted into law tomorrow $15.4 trillion in ‘unfunded liability’ would vanish from the books. Poof! With no money down and easy payments starting in 2010. Which is better than any mattress deal out there.

Social Security and the CBO score future liability on a current law basis, change the law you change the score. Lets take three different households. The first is a household making median household income of $50,000. The second is a household with a single earner making the average income of $40,000. The third is a one person household where the worker is earning $12.50 an hour. Under the NW Plan the first household would pay $1.50 more in taxes per week by the second year, the second household $1.20 cents, the third household 75 cents with no further changes in tax rate until 2026. That is all it would take to wipe almost a quarter of that $63.8 trillion off the books.

Because it is all just word games. Under current law the Federal Government is required to pay Social Security benefits on the established schedule as long as it has money coming in to pay for it. But if the dedicated revenue stream falls short of that Congress is fully empowered to change that current law. Is the Federal Government really on the hook for $15.4 trillion in unfunded liability for Social Security? Well under current law as of June 1, 2009 yes. After passage of the NW Plan not. Or for that matter after passage of some ‘Bi-Partisan’ Commission recommendation not. Trying to equate a current law projected liability into an actual measure of future household debt is just Voodoo Arithmetic. Because at some point Congress will move to add funding to current law or change the current law benefit schedule and in doing so will make that $15.4 trillion dollar ‘unfunded liability’ vanish like smoke.

Don’t fall for the hype. Normal households don’t budget that way. Unless you plan to starve to death you have an unfunded liabiliity for all the food you are going to eat between now and your projected mortality date. If you rent you have an unfunded liability for the cost of keeping a roof over your head. Ditto for your utilities, your clothes, your entertainment. For that matter your real unfunded liability for your car, mortgage and credit cards is far above the face value of the loan balance, absent a Lotto victory you are far more in debt than your current balance sheet shows. But what is important is your carrying costs. Can you make rent and car payments and buy groceries and entertain yourself while paying down your principal balance on your revolving debt? Well then you are fine. That doesn’t mean you don’t need to look down the road at things like future college bills or retirement income, it is that if you do you will probably look at it in terms of your monthly income, can I afford to set aside X hundred dollars a month to pay for Suzie’s education, or maybe to save up for the down payment on that new bass boat? After that it is just a matter of making payments out of current income.

So people have a choice regarding Social Security. Do you want to lay awake at night wondering how you can possibly come up with your share of $15.4 trillion? Or just roll over thinking “Well I think I can find an extra buck and a half a week in the next two years and a buck or so more per week per year in 2026. Why am I even worrying?”.

NW Plan Spreadsheet (PDF version)

Update: Posted in diaries at Daily Kos

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by Bruce Webb

Yes. Both. But first a recap. The semi-final version of the basic NW Plan was introduced in this post: NW Plan for a Real Social Security Fix. The spreadsheets linked to that post show that under current projections you can fix Social Security by implementing a 0.20% FICA increase in 2010, another of 0.10% in 2011, followed by a series of 0.20% increases in 2026-2036. The NW Plan doesn’t set those future increases in stone, instead they are tied to a specific trigger, the date that either fund that comprise Social Security falls out of the Trustees primary official test, that of Short Term Actuarial Balance. As it happens DI already failed that test last year which explains the immediate increases for 2010 and 2011. But OAS retains a significant degree of uncertainty. For example even though CBO starts from the same set of demographic assumptions as SSA, their different treatments of the economic numbers result in wide variations between their median outcomes. The CBO projections from Aug 2008 can be seen at the following post Probability and Social Security. The most current SSA projections can be seen in the following figure:

(Update: the above figure is from the 2009 Report, the original post included the version from the 2008 (below). Sorry about that.)

The differences between CBO and SSA are explained in large part by different assumptions and methodology but are also effected by being different snapshots in time, SSA building in data for Q3 and Q4 of calender 2008 and Q1 2009 not available to CBO last summer.

So the Northwest Plan is being worked up as a Policy Plan to be presented to policy analysts and policy makers. But like all batttle plans it is unlikely to escape all effects of contact with the enemy, which in this case is the uncertainty of the projections. What the Northwest Plan does is to close both the Short Term and Long Term actuarial gap under the Trustees most current set of assumptions and definitions and provides a mechanism for adjusting the tax schedule each year in anticipation of events as yet fifteen to twenty years down the road. Rather than revisiting the issue every decade or two it provides for a permanent yet flexible fix that in turn allows us to focus if we wish on other measures that might move that future trigger point farther out in time.

For example if we examine the above graph we see that DI (light gray) has vastly more variation than OAS. Under the NW Plan the light gray line that current intersects with zero in 2025 instead would exit the 75 year window right at 180. But if we examine outcome I we see that line exiting the window at above 2000. Oddly it is politically hazardess for Social Security if its Trust Fund balances remain permanently north of a ratio of 300 or so. If over the next few years it looks like DI is on a course approaching outcome I we would want to divert a portion of the 2010 and 2011 increases, which are under the NW Plan devoted to DI, over to OAS. This in turn would serve to move the trigger point for OAS, perhaps imperceptably, perhaps noticeably. But we don’t have to rely on chance events, lowering future costs for DI is a matter of lowering the incidence of disability or of tightening eligibility. I’ll let Nancy Ortiz speak to the latter, from what I hear if anything the rules are too tight and the administration too disfunctional already. On the other hand it would be useful to focus on the differences between Intermediate Cost (II) assumptions on incidence and Low Cost (I) and then work on ways to achieve improved outcomes. For example it is possible that better enforcement of existing workplace safety law might directly serve to drive down disability generally and hence need for DI and in turn reducing DIs impact on OAS.

In this way the OAS trigger set by the NW Plan for 2026 can be an explicit target for economic policy. Once you change your model from the deterministic one typical of today, “Social Security will go to depletion in year X”, instead we should be thinking “What can we do in 2010 to push that trigger point back, or use it to increase benefits”. In that way the NW Plan frees us to approach Social Security pro-actively rather than passively.

The NW Plan provides a Social Security fix that is at the same time permanent, flexible in the face of events, and modifiable by direct action by policy. It is certainly worth a try.

But the title of the post also says it is a benchmark. How so? Answer below the fold.

On the merits ‘Nothing’ has been shown to be a perfectly sound plan. That is instead of rasing taxes by $1/week as the NW Plan does we could reallocate current FICA between DI and OAS in a way that made their future shortfall and depletion dates congruent and then start trying to move the joint trigger point outwards via economic policy. This would mirror past practice. But ‘Nothing’ is a tough sell, it implies that the people pushing it are in some sort of denial rather than what is the case, that examination of the data shows ‘Nothing’ to be on net a historical proven plan since 1997. But rather than continually rebattling that war we propose the implementation of the NW Plan to at least serve as a benchmark.

Because the NW Plan is scorable, it has numbers that can be checked and against which conclusions can be drawn such as “Yes under Intermediate Cost assumptions the NW Plan would put Social Security into Short and Long Term Actuarial balance at a cost of X dollars in 2010, Y dollars in 2011 and Zetc dollars in years 2026 and following.” Which then allows us to challenge any other plan to match up dollar for dollar. What does their plan cost in the form of foregone benefits or increased taxes in any future year? If it doesn’t actually provide better retirement benefits at a lower cost what are its offsetting advantages that would induce workers to take the deal? Put your numbers on the table and lets compare.

It is one of the striking features of the overall Social Security debate that future impacts for any given year are rarely if ever spelled out. Yes under Intermediate Cost assumptions cash income from taxation falls behind cost in 2017. What does that mean for 2017? or 2023? Yes if we do nothing on Social Security the system will only have projected resources to pay out 75% of benefits in 2037? What does that mean in real terms? Well you never know because the argument always moves form ‘Crisis’ to ‘Benefit cuts’ without anyone pausing to quantify the effects or reflect on alternatives.

Well the Northwest Plan is such an alternative. It provides 100% of the scheduled benefit while maintaining the Trust Funds in actuarial balance through the current 75 year window. Plus it offers a mechanism that allows Social Security to maintain that state over the Infinite Future if you like. Want to wipe $15.3 trillion dollars in unfunded liability off the U.S.’s books tomorrow? Enact the NW Plan.

Of course it will cost you a $1.50 a week by year two. Maybe that is a deal breaker, but at least people need to explain why that shoud be. Over to you all.

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by Bruce Webb


The above two figures are from CBO’s Aug 2008 study on long-term Social Security solvency. I am not going to discuss them in depth but just point out that we trap ourselves when we say Oh-mi-God Social Security depletion moved back from 2041 to 2037!!” when the reality is that it is just the center point of the probability distribution that so moved. There is still a 50% chance that the result will be better than that and of course 50% that it will be worse. But we are free to act in such a way that moves that probability ban the other way. The Northwest Plan just being the simplest.

Of course there is also a 10% chance that Social Security if left alone actually ends up over-funded even if we do nothing at all. Meaning we should not freak out every time the mid-point of the distribution moves.

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(Update: input numbers by Coberly the Office of the Actuary of SSA; calculations and output numbers by Coberly)

Click to enlarge. This is what the result of implementing DI and OAS Triggers immediately would look like. 100% of scheduled benefits, no increase in retirement age, ending Trust Fund ratio of 123. This should be considered a baseline for policy, it may be that we would want to target policy in ways that would reduce ultimate tax rates, and it may be that the economy just does that for us. But this is what a tax based fix looks like: a couple of years of adjustments initially, a decade of small adjustments after 2026, followed by long stretches when no changes need be made at all.

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by Bruce Webb, data by Coberly

Coberly has now produced new spreadsheets updated in light of the new numbers of the 2009 Report. Copies of past and current spreadsheets are available at our Google Group RealSocialSecurityFix‘s Northwest Plan page. (It should be viewable by anyone). The new Trigger ones linked below.
(UPDATE: Hot off the press, the combined OASDI Trigger Plan. Coberly has simplified and improved the labeling and data presentation).

The newest version treats the DI (Disability Insurance) and OAS (Old Age/Survivors Insurance) individually instead as just part of a combined OASDI. This has a few advantages including the big one that it allows a smoothing and phasing of the tax increases in a way that the impact will be barely perceptible in any given year. Moreover it allows those increases to occur or not in relation to specific Triggers.

The Trustees of Social Security measure the health of two insurance programs by two tests: Short Term Actuarial Balance which is measured over a 10 year period and Long Term Actuarial Balance which is measured over a 75 year period. In 2003 they introduced a new measure which calculates that balance over the Infinite Future Horizon. Our view is that Infinite Future was purely a gimmick introduced to allow new huge scary numbers to be introduced, others including some big name economists who are out there defending Social Security disagree. In any event Coberly and I are not going to bother with it, as the numbers run if you fix the 75 year problem you mostly fix the 100 year problem and there is no real gap between year 100 and Infinity anyway. (If you take the actuarial balance for ‘Future Participants’, i.e. everyone under the age of 15 and people yet unborn, the ystem is in long term surplus of $1.2 trillion Table IV.B7.—Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participants)

The NW Plan is designed to kick in right as either DI or OAS fail the test of Short Term Actuarial Balance and phase in tax increases in a way that allows the Trust Fund to meet both the Short Term and Long Term tests. The plans are flexible in that the Trigger points and the size and phasing of the increases can be changed as new Report Years roll in. And rather than quarrell that SSA is too pessimistic or CBO too optimistic we propose to just run with SSA, if CBO turns out to more correct then all the better, you just tinker with the formula giving everyone years and years to plan. That is the NW Plan takes much of the drama out of Social Security.

As it turns out the Trigger point for DI already happened, it failed the Short Term test a year ago. Meaning that changes have to kick in right away. DI Trigger: 2009 Report. This means an increase in the DI portion of the FICA tax by 0.02% 0.20% in 2010, another 0.01% 0.10% in 2011, and another 0.01% 0.10% in 2039 (updating to 2009 numbers caused a small change in the later two dates). For a median income household and assuming the employer/employee spllit this works out around $1 per week in year one.

OAS is a different story, although it too took a hit in 2009 the result was not to move the Trigger much. If the NW Plan had been in effect over the last couple of years none of the attempted hysteria around ‘Vanishing Surplus’ would have happened, in reality events over the last year have only marginally effected the larger picture. OASI Trigger: 2009 Report. Now it looks like restoring Social Security to Short and Long Term Actuarial Balance requires tax boosts of 0.02% 0.20% per year (once again about a $1 a week for the median income household) for the ten years starting in 2026. Starting in 2036 those increases slow to only needing to change every four to ten years.

These numbers are subject to change with every Report Year, in fact that is one of the points. We don’t really now what 2012 is going to bring, CBO and OMB numbers start diverging broadly after that, if we were using CBO numbers for the Northwest Plan the cost of the fix would be roughly half of that shown in the spreadsheets. The NW Plan is designed to be a flexible planning tool that can respond to new data in real time. Or we could lock ourselves into policy based on assumptions about economic performance after the dawn of the 22nd century and on to the Infinite Future. A better choice for those people would be to relax and watch Star Trek. BTW if you want some Social Security Sci-Fi, follow me below the fold.

Because Low Cost is out there. Relatively few people pay attention to Low Cost and this even in the face of a series of years from 1997 to 2003 or so where the economy consistently returned better numbers than even Low Cost projected and so rapidily moved the date of Trust Fund Depletion back and shrank the payroll gap. The years since then have not been as kind to Low Cost but similarly show that Intermediate Cost remains too pessimistic over the long run. Which means that in addition to monitoring Short Term Actuarial Balance we also need to keep an eye on Long Term, simply to avoid over-funding Social Security.

Why is over-funding Social Security a problem? Well I outlined it in one of my first posts at AB, in fact I actually lifted that from a previous post at the Bruce Web prior to my having AB posting privileges. The Danger of Low Cost
This figure is from the original post and so is from the 2008 Report, it is not much changed with the 2009 (see figure II.D6). In this figure a flat line represents a constant TF ratio, meaning that all income equals all costs with enough left over to maintain a constant reserve. But it not healthy for the country or for Social Security for that line to go flat at too high a level. Because that means that Social Security would be relying to a greater degree on interest earned on the Trust Fund. And while there is nothing phony about the excess FICA tax that has been paid since 1983, that was real money borrowed from workers that was put to use in the real economy hopefully in a way that increased productivity down the road. But whatever utility that spending had it is ultimately discounted by the interest being extracted from the future economy and this is particularly so if that interest is just left to compound endlessly. From 2006 Interest on Interest: a Threat If the Trust Fund settles out with a TF ratio of 500 this implies that 25% of Cost is being covered by General Fund transfers in the form of Interest. Well that still leaves Social Security 75% pay-go from current workers. But as the decades go on the people who originally paid in those extra taxes prior to shortfall in 2017 gradually die off leaving this unproductive albatross behind and ultimately retirees are to some degree getting a free ride based on sacrifices made by earlier generations. Indeed if the Trust Fund goes to 1000 then fully half of Cost could be met from Interest, making it into somewhat of a welfare plan.

So how do we escape this possible long term trap? Well I suggested a variety of approaches on my blog in 2005-2006 but they all boil down to targetting Long Term as well as Short Term. I called this the 100/100 Plan in the days before Coberly supplied numbers. Under DI Trigger the TF ratio drops as low as 107 in the mid 2030’s which triggers the third and final increase in 2039 which gradually increases the TF ratio to the 180s. This isn’t a bad spot, it leaves DI as a little over 90% pay-go, but you don’t want to see it go much higher. Meaning that at some point we might want to reverse the 2039 increase and then maybe roll back the 2011 and 2010 increases as well. Because the following is NOT a good outcome.

The pale grey line is DI and alternative II is Intermediate Cost. We want the II line to flatten, but we have no reason for it to continue to rise. Under Low Cost outcomes or anything approaching it we would by 2019 or so seriously considering cancelling the 2039 increase and then potentially rolling back earlier increases to target a 100-200 range for TF ratio. The black line is OASI. Under Intermediate Cost the Trigger point is set around the 2026-2028 date range. Under Low Cost the Trigger point is never reached and in fact we might even to decide to schedule some gradual tax decreases after 2017 to bring total income in line with cost and put the TF on a glide bath to 100/100.

So the Northwest Plan offers both a carrot and a stick. To the extent that Social Security projects not to diliver a 100% benefit it proposes some mild and phased in increases in tax. If workers are able to boost productivity and more importantly in a way that garners them a fairer share in that productivity than they got over the last eight years we can sweeten that with a possible payroll tax rate cut. Don’t want even a small increase in FICA rates in 2026? Demand better Real Wages in the meantime. There is more than one way to skin the cat of retirement security, the Northwest Plan is just a mechanism to keep the opposition from simply slashing future benefits just because they don’t want to pay back the money they borrowed.

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post by Bruce Webb data by Dale Coberly

For those following along. Recent numbers from CBO and now from Social Security show that the DI (Disability Insurance) component of Social Security is officially broken, it failed the test for Short Term Actuarial Balance last year. And when combined with the OAS component brought Trust Fund depletion forward by four years from 2041 to 2037. But on inspection only about six months of that was the direct result of a revenue dip on the OAS (Old Age/Survivors) side, if the economy recovers along the lines projected by OMB OAS may well be fine long term. So we propose fixing DI, which is broken, and leaving OAS alone until it too trips a trigger for action. If it ever does.

DI Trigger: Google Spreadsheet

0.2% increase in 2010 plus another 0.1% in 2012 plus another 0.1% in 2045 sends DI through the 75 year window with a Trust Fund Ratio of 159. Assuming the employer/employee split this means the average laborer earning $12.50/hour would have to come up with a whopping 50 cents a week to ensure that his disability benefits were no longer at risk.

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The above table is from the National Academy of Social Insurance’s (NASI) Social Security Brief: Social Security Finances: Findings of the 2009 Trustees Report, a valuable summary from a group broadly supportive of traditional Social Security. If Social Security really was in a serious crisis you would expect the right hand column to show steady increases, a policy of ‘Nothing’ which deducts one year of potential revenue or cost savings from any given ‘fix’ should make the gap for the next year wider. And we can see that pattern in the years from 1993 to 1997. When Krugman said Social Security was in trouble back in 1996 he was right. When people like Bush made the same claim in 2004 they were wrong, the earth had moved under their feet. When I first starting blog commenting back in the 2001-2002 period I was pretty damn confident that the economy would simply grow out of crisis.

Well eight years of Bushonomics has made me more wary but on the whole still hopeful, because after all we are still way improved from where we were in 1997. On the other hand you can’t deny that the current recession is not helping. Something that is even more apparent if you examine the DI (Disability Insurance) component of Social Security in isolation from the OASI (Old Age/Survivors) component.

Last Sunday Coberly and I released the first iteration of the Northwest Plan which outline two different methods of fixing a combined OASDI program via payroll tax. One called ‘Tenth Now’ starts a fix in 2010 and gradually raises payroll tax by 0.1% for 20 years and then freezes the rate until 2053. The other called ‘Trigger’ instead targets the date that Social Security falls out of Short Term Actuarial Balance which under current projections is around 2028. ‘Trigger’ which in reality is just a modified version of our previous plan of ‘Nothing’ is a better policy option. But only if you combine OASI and DI into OASDI (as is usually done). But ‘Nothing’ is not really a plan for DI which actually fell out of Short Term Balance last year and has been running cash deficits for two years before that. So as soon as Coberly gets done running the numbers we expect to release an actual policy proposal for a Real Social Security Fix which I am tentatively calling ‘DI Now/OAS Trigger. The DI Now component will set some small increases for DI in place, while the OAS Trigger will continue to target Short Term Actuarial Balance as the trigger point for action.

The Northwest Plan is not the last word but what it does is establish a basis for pricing other plans. With NW Plan numbers in hand we can reasonably ask say what the cost of avoiding an increase in retirement age would be, or what the cost of avoiding a switch from wage based indexing of initial benefits to price based indexing. What are workers actually being asked to sacrifice to avoid the NW Plan price? I think when workers get that answer they will opt to stick with traditional Social Security and ante up the quarter.

The initial version of the NW Plan is in the hands of some people at SSA, as soon as we have spreadsheets for DI Now/OAS Trigger using 2009 numbers that will get forwarded on as well. But the truth is that we can fix Social Security for literally pennies a day per worker and don’t need to pay attention to hysterical Henny Penny’s. Social Security is mostly not broken and the part that kinda is (DI) is fixable. And we have (or will shortly) numbers to prove it.

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by Bruce Webb & Coberly

(Update: links to Google versions of spreadsheets added. .xls versions available by request)
The Northwest Plan is put forth here as a replacement for the plan of Nothing The Cost of Inactivity: ‘Nothing’ as a Plan for Social Security. Not that there is anything wrong with Nothing, we did nothing between 1997 and 2008 and the size of the problem facing Social Security shrank from 2.23% of payroll to 1.7%, and the date of Trust Fund Depletion moved out from 2029 to 2041. There must be a word for a problem that left unaddressed got smaller and more distant in time, but that word is not ‘crisis’. So while Nothing’ has its merits it just is not as satisfying as Something, especially when the Henny Penny’s of this world are running around insisting the sky is falling. So the Northwest Plan is our Something.

It is often claimed that we just can’t tax or grow our way our of the so-called ‘Entitlements Crisis’ which is true if you believe there is some sort of SocialSecurityMedicareMedicaid program out there. But there isn’t any such program and there is no good reason to insist that these programs be considered together. If we isolate Social Security we can see that there are very good possibilities the economy will grow fast enough to continue shrinking the payroll gap just as it did over the last dozen years. And if it doesn’t the cost of closing the gap via tweaks in payroll can be managed in a way that it would not be noticed. Hence the Northwest Plan.

The Plan comes in two flavors, the Tenth Now plan and the Trigger plan. There has been a certain amount of debate over the last few years that the Trustees’ Intermediate Cost alternative’s economic projections were too negative and that we can afford to take his year by year using the numerically proven plan of Nothing. The Tenth Now plan essentially abandons that argument and just accepts Intermediate Cost at face value as a basis for planning policy. Per the 2008 Report the cost of a straight out fix via a payroll tax increase would be 1.7%, presumedly split as now with 0.85% paid by the employer and 0.85% by the employee. This is not a lot of money when you break it down to the individual worker, on the other hand the actual dollars won’t be needed for a few decades, there is no reason we cannot phase this in gradually.

Under Tenth Now FICA rates would be boosted by 0.1% every year from 2010 to 2029 then held steady until 2053 where if needed a new series of increases would be triggered. We say if needed because there are very good chances that we may never need to pull that trigger, and pretty good chances that we can halt the original set of increases prior to 2029 as actual numbers come in. The advantage of Tenth Now is that it arithmetically fixes Social Security and so removes it from the policy debate and with it takes $13.6 trillion in ‘unfunded liability’ off the balance sheets thus removing a weapon from the hands of those who want to use projections over the God help us ‘Infinite Future Horizon’ to scare us into gutting Social Security.

But the truth is that we could maintain a program of Nothing. Under current law Social Security is considered to be in Short Term Actuarial Balance if its Trust Fund Ratio is projected to remain above 100 (one year of reserves) in each of the next ten years. If we examine the projections of Intermediate Cost in the following table we can see that the combined Trust Funds will maintain TF ratios above 100 until around 2037 meaning that they would fail the Short Term test in 2028. Table IV.B3.—Estimated Trust Fund Ratios, Calendar Years 2008-85[In percent]. The Trigger Plan uses that test failure as the event to trigger a new set of increases starting in 2028 that arithmetically keep the combined TF ratio above 100 throughout the standard 75 year window.

On a pure policy basis the Trigger Plan is a better choice because it builds in flexibility. If the economy performs worse than projected the trigger point moves up, if the economy performs better than projected the trigger point moves out but in either case the phased in nature of the changes means no sudden economic discontinuities. Politically Tenth Now might be preferable because it demonstrates how small the cost of a fix really is when it comes right down to the individual weekly paycheck.

Update: Google spreadsheets: NW Plan-Trigger—- NW Plan-Tenth Now
Excel or Appleworks versions are available on request by e-mailing Bruce at Bruce dot Webb2 at verizon dot net.

Both Tenth Now and Trigger treat Social Security as an undifferentiated whole. In truth OAS (Old/Age Survivors) and DI (Disability) are separate programs with separate trust funds. As it turns out DI already has failed the Short Term Actuarial Balance test. This suggest that the right solution is to apply a modified Tenth Now to DI that would have payroll increasing 0.05% (a Twentieth) each year for five years starting in 2010 which then would be followed up by a modified Trigger of about 0.07% for OAS in 2028. This works on a back of the envelope calculation but has not been turned into an actual spreadsheet.

The real reason for releasing the Northwest Plan this week (because versions of it have been discussed here at AB for months) is that with the release of the 2009 Social Security Report Tuesday afternoon we fully expect a full court press to push the Conrad-Gregg/Cooper Wolf SAFE bi-partisan commission legislation which is designed to force a plan based on benefit cuts through Congress on an up or down basis with little scope for debate or modification. It is important that people know that there are alternatives, including one that requires no changes at all until 2028. The only urgency here is among those who don’t want you to know how easily we can maintain Social Security as is.

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