Social Security Forum,
February 24, 2005
Presenter: Dr. R. Steven Daniels
Department of Public Policy and
Administration
Characteristics of Social Security
Eligibility
40 quarters (10 years) of covered work
at least $920 per quarter (2005).
Spouse or dependent of covered worker.
Disabled
Characteristics of Social Security
Revenues
Payroll tax rates: 6.2% employer and 6.2% employee.
Maximum taxable income is $90,000 in 2005.
Benefits
Benefits based on Average Indexed Monthly Earnings
(Monthly average of best 35 years indexed to wages).
The Principal Insurance Amount, with first eligibility in
2005, equals the sum of the following:
A. 90 percent of the first $627 of the AIME, plus
B. 32 percent of the amount above $627 up through $3,779,
plus
C. 15 percent of any amount in excess of $3,779.
Characteristics of Social Security
At the end of 2003, 47 million people
were receiving benefits: 33 million
retired persons and their dependents,
7 million survivors of deceased
workers, 8 million disabled workers
and their dependents.
In 2003, 154 million people had
earnings covered by Social Security.
Social Security Shortfall
Social Security Trustees 2004 estimate.
Surplus increases until 2018.
Outlays exceed income in 2018.
OASDI trust fund reaches zero in 2042.
In 2043, revenue covers 73% of benefit.
Congressional Budget Office 2004 estimate.
Surplus increases until 2019.
Outlays exceed income in 2019.
OASDI trust fund reaches zero in 2052.
Differences due to different estimates in real
earnings growth, real interest rate, inflation, and
unemployment.
Social Security Shortfall
Measures necessary to maintain solvency
until 2078 (Social Security Trustees).
Increase tax rate from 12.4% to 14.29%.
Or, all current and future benefits could be
reduced by 13%.
Or, raise maximum wage cap to $200,000.
Or, move money from general revenues or use
combination of approaches.
Does not guarantee solvency after 2078.
Social Security Shortfall
Caveat about Projections
Bush Social Security Plan
Caveats:
No formal plan submitted yet.
Submitted components are incomplete.
Other components are based on trial
balloons and high placed administration
sources.
Bush Social Security Plan
No changes for Americans 55 and older =
Current social security plan.
Gradual changes.
Reforms on the table:
Limiting benefits to wealthy retirees.
Indexing benefits to prices rather than wages.
Increasing the retirement age.
Discouraging early collection of retirement
benefits.
Changing the way benefits are calculated.
Bush Social Security Plan
Negotiable reforms (?): Maximum
taxable income.
Nonnegotiable: Increases in tax
rate.
Centerpiece: Personal Retirement
Accounts
Personal Retirement Accounts
Yearly contribution limits raised over time,
eventually permitting workers to set aside 4
percentage points of their payroll taxes in
their accounts.
Starts at $1,000 per year going up $100 per
year to 4 percentage points (maximum 32% of
total FICA taxes).
Benefits reduced by one dollar for every
dollar contributed plus yearly percentage
increase in wages (usually 3 percent).
Proposed Benefits of Private
Retirement Accounts
Centralized administrative structure.
Personal retirement accounts build
“nest egg”.
Ownership and control.
Inheritability.
Better for younger workers.
Retirement accounts voluntary.
Proposed Benefits of Private
Retirement Accounts
Available accounts similar to Thrift Savings Plan of
federal retirees.
U.S. Treasury securities - 3.67% real interest.
An index fund comprising investment grade bonds –
4.58% real interest.
Small and mid-cap stock index fund – 8.62% real
interest.
Large cap stock index fund – 7.33% real interest.
International stock index fund – 1.95% real interest.
Life-cycle portfolios at age 47.
Invested in a mix of conservative bonds and stock
funds.
Proposed Benefits of Private
Retirement Accounts
Not eaten up by Wall Street fees.
Not accessible prior to retirement.
Accounts paid out over time rather
than all at once.
Accounts phased in.
Transition financing equal to $754
billion over 10 years.
Personal retirement account
caveats.
Accounts do not make Social Security
solvent.
Transition costs could be as high as
$2 trillion over 10 years.
Plan shifts resources from current
beneficiaries to future recipients.
Program needs to account for
shortfall ($2.6 trillion over 75 years).
Personal retirement account
caveats.
System does not allow as much individual
flexibility as advertised.
Program requires annuities, which limits
the inheritability.
Program places heavy burden on health of
stock market.
Plan assumes poor economic performance to
produce crisis
Plan assumes good economic performance to
ensure adequate payoff for private accounts.
Components to Balance Plan
Phase I - Renege on treasury notes in
Social Security Trust Fund (covers tax
cuts). Low probability.
Phase II – Recalculate initial benefit
formula, shifting from wage increases
in the 35-year average to price
increases. (See next table).
Components to Balance Plan
Conclusion
Private accounts with limited control
for up to 32% of payroll taxes
(although contributions are voluntary).
Probable shift in benefit calculation.
Additional one-time, transition costs
($750 million to $2 billion).
Borrowing costs to cover lost revenue
to be paid to current beneficiaries.