Briefing Book
White House Conference


American Academy of Actuaries

Ron Gebhardtsbauer, Senior Pension Fellow

1100 Seventeenth Street NW, Seventh Floor
Washington, DC 20036
Telephone 202 223 8196
Facsimile 202 872 1948

  1. Social Security has been very successful at reducing poverty among the elderly. However, the Trust Funds could be exhausted around 2032, at which point Social Security's tax income will cover only 75% of the benefits (using the Intermediate Assumptions).

  2. US Budget problems come much sooner: In 2008, when the first baby boomers reach age 62, Social Security's net income will decrease dramatically, which can quickly cause deficits.

  3. If we fix Social Security soon while the sun is out:
    1. Fixes can be less drastic than if made later (since more people are part of the solution),
    2. Changes can be phased in gradually (which avoids notches),
    3. We can plan ahead for the changes,
    4. It will restore confidence in Social Security again.

  4. No painless options: No option for solving Social Security's financial problems is painless. Even privatization requires increased taxes or benefit cuts. The attached page lists various options and how much of Social Security's financial problem each fixes, along with some pros and cons (also see my speech with Vice President Gore).

  5. Public Opinion: Based on polls from Americans Discuss Social Security, the options most disliked are benefit cuts, followed by tax increases. The most favored options are:
    1. Covering new employees of state and local governments that aren't already in Social Security.
    2. Raising the taxable wage base quickly from $68,400 to $90,000 (or more). Even people with incomes over $100,000 opted for this over benefit cuts.
    3. Means Test - large benefit reductions for retirees with incomes over a certain threshold (Concord Coalition suggested $40,000 in the early 1990s, but I get the sense that people had a much higher threshold in mind). Note: A means test can discourage saving and encourage abuse. It would change Social Security from a popular universal program into welfare.
    4. Raising the retirement age for full benefits was, surprisingly, next though it had less than 50% support). Future retirees will still get benefits for more years than current retirees and we are healthier at older ages now. With shortages in the labor force in the coming decades, employers may want their older employees to stay on (at least part-time). Note: Unless the retirement age continues to increase with life spans, Social Security will be out of balance in 20 years or so (unless automatic tax increases or automatic benefit decreases are scheduled continually into the future).

  6. How can Social Security's surplus income be really saved?
    1. Use it to reduce National Debt (e.g. FY1998). Congress would have to balance the budget without Social Security. (E.g., Rep. Livingston's proposal or a balanced budget rule)
    2. Invest it in private sector. With a higher return, Social Security becomes cheaper (after an expensive transition), but government becomes more expensive if a carve-out is used.
      1. Trust Funds can get the best return and spread the risk better, but politics could affect investment decisions. Two Federal agencies already invest in stocks (Fed TSP & PBGC)
      2. Individual Accounts put more risk on individuals and have implementation problems. Carve-outs could force more benefit cuts. Add-ons are like a tax increase, unless voluntary. Great Britain allows voluntary contracting out of the 2nd tier, and has been fairly successful, except for sales abuses and high expenses. The lst tier is a flat $4OO/month benefit.
    3. PAYGO: Alternatively, Social Security could return to pay as you go, by delaying reforms until 20 13, when the money is needed. However, then future generations would have to pay more in taxes than the current generation, unless benefits were decreased a little more or the retirement age was increased a little more.

Actuaries Look at Options for Reforming Social Security
The American Academy of Actuaries has described below commonly discussed options for reforming Social Security, along with their impact on the solvency of the program's trust fund. You can vote here for the best combination that makes Social Security solvent again. (The total impact on solvency must equal or exceed 100%.) In addition, in order to keep Social Security solvent permanently, other adjustments would be needed in the future. This game is on our web site at www.actuary.org.

Option Supporters say ... Opponents say ... % Fix Vote
1- Raise the retirement age to 70 by 2030 and keep adjusting the age as people live longer. Since Social Security was enacted, life expectancy has increased from 61 to 76 years, and we are healthier at older ages. It makes sense to keep pace by asking people to work longer before claiming full retirement benefits. Could be hard on people with physically demanding jobs or who are partially disabled; employers may not want an older workforce with associated higher health care costs.
Alt: Accelerate increase in retirement age to 67 and index thereafter.		 60%


23%
2- Reduce cost-of-living adjustment (COLA) by 1/2 percentage points A Congressional commission felt that the Consumer Price Index (CPI) was overstated by 1.1 percentage points, meaning the minimal COLA is too high. BLS decreased the CPI estimate by 3/4%. COLA reductions are cumulative which mean oldest retirees fall far behind in purchasing power. Very elderly women already have very high poverty rates. 33%
3- Reduce benefits by 5% for future retirees Everyone should be part of the solution. This would hit hardest people with low incomes who often rely entirely on Social Security for all their retirement income. 23%
4- Affluence Test: Reduce benefits for those whose total retirement income exceeds $45,000 per year. This option preserves benefits for those most in need. A couple with total retirement income (including investment earning & the value of Medicare) of $60K would lose 30% of their Social Security benefit. Over $100K, they would lose 85%. Discourages savings and encourages people to hide assets; changes Social Security from universal program to one based on need. Social Security needs universal support to survive. Some people might try to avoid paying taxes if they didn't get anything from them. 75%
5- Raise payroll tax on workers and employers by 1/2 percentage points each Increasing the Social Security payroll tax from 12.4% to 13.4% is a minor concession considering it would solve almost half of the system's financial problems. Because we may also have to increase the Medicare payroll tax, total taxation could be burdensome, particularly for low-income people. Workers might save less, employers pay less to pension. 45%
6- Increase wages subject to Social Security tax Raising the current $68,400 limit of $90,000 would increase FICA (& SECA) taxes for those who can afford it. This would make Social Security a worse deal for those with higher incomes. They would get very little for their additional contribution. Social Security needs universal support.
Alt: Eliminate cap		 23%


68%
7- Tax Social Security benefits like pension benefits Why aren't Social Security benefits taxes as much as pension benefits? Low-income retirees (30% of total) would still pay no income tax. It simplifies tax rules. This will increase the taxes of middle income people. 14%
8- Include new state and local government workers State and local workers should pay their fair share to keep Social Security solvent. These workers do fine under their own pensions; this would divert contributions from state and local government pension plans. 10%
9- Invest some of the Social Security Trust Fund in private investments such as stocks Could boost return on investment with less risk to individuals; hiring investment managers and using indexes avoids government interference. Saves money outside government. Social Security's assets could be 5% of private market; stock voting and stock selection could be politicized. Could increase income taxes, interest rates, and borrowing costs. [1]
10- Create personal retirement accounts (Divert 1 percentage point of payroll tax to a private account) Could boost return on investment. Add-on would increase national savings and productivity. Saves money outside government. Gives individual more control over investments and responsibility for retirement. Individuals take on investment risk, inflation risk, longevity risk, leakage risk. Large transition costs must be paid to cover current retirees and administrative costs could eat into returns. Could increase income taxes, interest rates, and borrowing costs. Add-on reduces other saving and pension contributions. [2]

Total 100

1 The report of the 1996 Social Security Advisory Council suggested that this would solve about 42% of Social Security's current financial problems. However, this is heavily dependent on the assumption for future investment returns.
2 The Trust Funds would get less income. However, benefits from the personal retirement accounts could offset any reduction in benefits from the Trust Fund for the average investor. Due to transition costs, however, retirees in the next several decades may not do as well and we all may have to pay more in income taxes.

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