The Future Of Social Security

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The Future of Social
Security
Amy Rehder Harris
Tax Research and Program Analysis Section
Iowa Department of Revenue
(formerly of the Long Term Modeling Group,
Congressional Budget Office, Washington, D.C)
History of Social Security

Social Security (OASDI) is mandatory
public insurance to alleviate poverty in
old-age

Old-Age Insurance established 1935
Expanded to include Survivors and Spouses in
1939
Disability Insurance introduced 1956

Hospital Insurance (Medicare) began 1965


Old-Age Eligibility


Must work at least 10 years
While working, pay 6.2% (12.4%) payroll tax on
earnings up to taxable maximum



$106,800 in 2011
During 2011 – employee pays 2% less – TRA 2010
Upon retirement, benefits a function of




AIME: highest 35 years of earnings (indexed for
inflation)
PIA: progressive formula – higher replacement for lower
lifetime income
NRA: rising from 65 to 67 for birth years 1960+
Age at claim (Claim at EEA of 62 = 30% reduction;
Claim at 70 with DRC = 24% increase)
Primary Insurance Amount
$30,000
$30,000
15 percent replacement
up to maximum
Annual Benefit at NRA
$25,000
$25,000
32 percent replacement
through $54,204
$20,000
$20,000
$15,000
$15,000
$10,000
$10,000
$5,000
$5,000
90 percent replacement up to $8,988
$0
$0
$0
$12,000
$24,000
$36,000
$48,000
$60,000
Average Annual Earnings
$72,000
$84,000
Old-Age Benefits

Retired Workers

32.3 million beneficiaries in Dec. 2008
Average annual benefit was $13,800 in
2008
 Auxiliary Beneficiaries





Spouses: 2.4 million
Survivors: 4.4 million
Children: 2.4 million
Also mother/father or parents
Spouse Benefits

Established in era of one-earner household




Married to a worker at retirement
Married for 10 years or more if divorced
Receive benefit equal to 50 percent of PIA
Reduced based on claim age of spouse
Average annual benefit was $6,800 in
2008
 For two-earner household, spouse with
lower earnings could receive no additional
benefit even though paid tax of 12.4% on
every dollar earned

Survivor Benefits

Established in era of one-earner household




Married to a worker at death
Married to deceased worker for 10 years or
more if divorced
Receive benefit equal to 100 percent of worker
benefit
Reduced based on claim age of survivor
Average annual benefit was $13,300 in
2008
 Survivor in retired household faces up to
1/3 benefit reduction at death of spouse

Annual Cost-of-Living Adjustment

1973 a COLA created to account for
impact of inflation on current beneficiaries

Prior to then, required act of Congress
COLA is linked to consumer price index
 Flat (and falling) prices from late 2008
through 2010 lead to two years of no
cost-of-living increases
 Cry for “relief”



$250 checks sent out in 2009 ($13 B)
Nothing equivalent for 2010 or 2011 planned
Disability Insurance

Eligible if worked 5 of previous 10 years




Benefit is function of earnings divided by years worked
prior to disability (minus lowest 5 years)
7.4 million beneficiaries in 2008 with average
annual benefit of $12,800
Auxiliary beneficiaries: 1.8 million
Large growth in beneficiaries



Recent expansion to mental illness and back pain
Concerns about incentives to claim DI rather than OAI
when nearing EEA (no benefit reduction)
Spike in claims during current recession among
unemployed
Iowa’s Aging Population
24%
24%
22%
22%
20%
20%
18%
18%
Iowa Share 65+
16%
16%
14%
14%
12%
12%
US Share 65+
10%
10%
Iowa Share 75+
8%
8%
6%
6%
US Share 75+
4%
4%
Iowa Share 85+
2%
2%
US Share 85+
0%
0%
2000
2005
2010
2015
2020
2025
2030
Population Pyramid or Tower?
Figure 2. Iowa Population Pyramid Projections, 2010 and 2030
Percent of Total Population
2010
2030
Male
5
4
85+
80 - 84
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5-9
0-4
Female
3
2
1
0
1
2
3
4
5
Female
Male
5
4
3
2
1
0
1
2
3
4
5
Impact of Aging Population

Worker-Beneficiary Ratio


Iowa and US: 3.0 falling to 2.0
Manifested through deteriorating tax
bases


OASDI: Wages
Income Taxes: Pensions and investment
earnings often receive preferential tax
treatment, additional exempt earnings by age
Taxation of Social Security
“Contributions” taxed as income when
earned by federal and state governments
 Benefits paid at retirement non-taxable
until 1983





If other income above $32,000/$25,000, up to
50% taxable
Revenue to OASDI Trust Fund
Attempting to improve system finances in
preparation for baby boomers
1993 up to 85%, money to Medicare
Taxation of Social Security in Iowa
Followed federal rules by taxing 50% of
benefits for seniors with other income
 Fear that encouraging high-income elderly
to move out of state at retirement
 2006 change – phase-out of taxation on
benefits by 2014 (67% of taxable benefits
exempt in 2011)
 Evidence suggests elderly move to warmer
climates, not non-tax states

Social Security Long Run Finances

Social Security currently running surpluses
– saved in OASDI Trust Fund

Taxes > Benefits
Projections show future will have large
deficits
 How are those projections made?
 What can Congress do to prevent the
system from going broke?

CBO Projected Outlays and
Revenues 1985-2084
10
10
9
9
Share of GDP
8
8
Outlays
7
7
6
6
5
5
4
4
3
3
Revenues
2
2
1
1
0
1985
0
1995
2005
2015
2025
2035
2045
2055
2065
2075
Impact of the Great Recession
- Revenues Minus Outlays
Social Security Administration
Social Security is administered by SSA, an
executive branch agency
 SSA produces an Annual Trustees report
about the future of the system

Short-run (10 years)
 Long-run (75 years)
http://www.ssa.gov/OACT/TR/2010/tr2010.pdf


CBO produces long-term projections
http://www.cbo.gov/ftpdocs/119xx/doc11
943/10-22-SocialSecurity_chartbook.pdf
Long-Run Projections
Taxest = Tax Ratet * Average Waget
* Number Workerst
Benefitst = Average Benefitt
* Number Beneficiariest
Trust Fundt = Trust Fundt-1 + Interestt
+ Taxest – Benefitst
Projecting Taxes
Taxest = Tax Ratet * Average Waget
* Number Workerst
 Average Wage depends on productivity
(real wage growth), inflation, and wages
as a share of compensation (growth of
cash versus benefits)
Projecting Taxes
Taxest = Tax Ratet * Average Waget
* Number Workerst
 Average Wage depends on productivity
(real wage growth), inflation, and wages
as a share of compensation (growth of
cash versus benefits)

Number Workers depends on fertility,
immigration and unemployment
Projecting Benefits
Benefitst = Average Benefitt
* Number Beneficiariest
 Average Benefit depends on past
wages and inflation (along with all of
the policy rules)
Projecting Benefits
Benefitst = Average Benefitt
* Number Beneficiariest
 Average Benefit depends on past
wages and inflation (along with all of
the policy rules)
 Number Beneficiaries depends on
fertility (60 years earlier), mortality,
and disability rates
Projecting Trust Fund Balances
Trust Fundt = Trust Fundt-1 + Interestt
+ Taxest – Benefitst

Interest rates on government bonds
(IOU’s to ourselves)
Ten Key Assumptions

Five Economics Assumptions:

Future earnings
(1)
(2)
(3)
(4)


Real wage growth
Inflation
Unemployment
Wage as a Share of Compensation
Future benefits paid to retirees, the disabled,
spouses and survivors
Earnings on the existing Trust Fund
(5) Interest rate
Ten Key Assumptions (cont)

Five Demographics Assumptions:

How many people will be paying taxes and
receiving benefits
(6) Mortality
(7) Fertility
(8) Immigration
(9 & 10) Disability Incidence and Termination


2009 changes to mortality assumptions
worsened finances
2010 changes to mortality data improved
finances
SSA Projections

Intermediate assumptions


Uncertainty about 75 years into the future
- Range on assumptions



“Best guess”
Low-cost
High-cost
Problems with scenario analysis


Unlikely
No measured probability of actually happening
CBO Projections

Stochastic projections (500 runs)


Median
Uncertainty about 75 years into the future
- Range on outcomes


90th percentile
10th percentile
Actuarial Balance

75-Year Actuarial Balance



Present value of taxes minus present value of
benefits over present value of payroll
The size of the tax increase needed today to
fund the system for the next 75 years
SSA projects -1.92 (from -2.00 last year)



Legislative changes raising wages as a share of
compensation (Affordable Care Act)
More optimistic current data on death rates
CBO projects range -3.2 to -0.5
Income and Cost Rates

Income Rate/Revenues




Payroll taxes as percent of GDP
2009: 4.9
2084: 4.8-5.2
Cost Rate/Outlays



Benefits as percent of GDP
2009: 4.8
2084: 5.1-8.8
CBO Projected Outlays and
Revenues 1985-2084
10
10
9
9
Share of GDP
8
8
Outlays
7
7
6
6
5
5
4
4
3
3
Revenues
2
2
1
1
0
1985
0
1995
2005
2015
2025
2035
2045
2055
2065
2075
Trust Fund Ratio

Trust fund assets over annual
expenditures






Measures if the system can pay benefits
Currently large surplus
Source of touted “Exhaustion Date”
SSA projects the system will “go broke” in
2037 (same as last year)
CBO projects between 2032 to 2058
However, current outlays exceed revenues –
living on interest and soon trust fund assets
will be “redeemed”
CBO Projected Trust Fund Ratio,
1985-2084
Ratio of Trust Fund Balance to Annual Outlays
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
-25
1985
-25
1995
2005
2015
2025
2035
2045
2055
2065
2075
Hope under Current Law?
Taxest = Tax Ratet * Average Waget
* Number Workerst
Benefitst = Average Benefitt
* Number Beneficiariest
Trust Fundt = Trust Fundt-1 + Interestt
+ Taxest – Benefitst
Hope with Changes to Current Law?
Taxest = Tax Ratet * Average Waget
* Number Workerst
Benefitst = Average Benefitt
* Number Beneficiariest
Trust Fundt = Trust Fundt-1 + Interestt
+ Taxest – Benefitst
Changes to Current Law?

Increase taxes above current 6.2%




Regressive tax
Raise taxable maximum with no benefit
increase?
Risk of doing nothing – required tax increases
(1.9 percentage points today, to 14.3 percent,
good for next 75 years ONLY)
Future workers pay (much higher if wait
longer)
Changes to Current Law?
Increase taxes above current 6.2%
 Reduce benefits paid to current or future
beneficiaries





Raise NRA further?
Risk of doing nothing – about 2040 when
system no longer takes in enough resources
not all of promised benefits can be paid
Across-the-board benefit cuts? (estimated 22
percent cut in benefits for all)
Future beneficiaries pay (much higher if only
new beneficiaries affected)
Changes to Current Law?
Increase taxes above current 6.2%
 Reduce benefits paid to current or future
beneficiaries
 Raise the interest earned by the Trust
Funds through investing in more risky
assets, either the government or
individual workers


Current credit market problems make most
wary
Risks of Government Investing

Bad stock returns could harm new retirees
(35% of the time – lose money)


Only 5% chance better off in all years over
next 75
Public control over private assets creates
conflicts

“Social Investing”
Individual Accounts
Allow individuals to take part of payroll tax
and invest in higher returns paid by the
stock market
 Trade-off is must accept higher risks


Stock market is NOT a sure thing
President Obama
Opposes any “privatization”
 Proposed no specific changes in FY 2012
budget, but some reportedly considered:




Raising taxable maximum to $180,000 from
current $106,800 (90% of wages, up from
84%)
Change COLA calculation, reduce growth of
benefits
Bring uncovered state and local employees into
the system (small numbers)
National Commission on Fiscal
Responsibility and Reform

Make PIA formula more progressive
Raise taxable maximum to 90% of wages
Make COLA calculation more accurate
Raise NRA (69) and EEA (64) by 2075
Cover all state and local employees
Low-earner benefit at 125% of poverty
Raise benefits for very old and long-time disabled
(over 20 years)
Improve education of future retirees


Increase flexibility for claiming benefits
Encourage personal retirement savings
Your future retirement?
Social Security benefits are uncertain for
your generation if reforms not instituted
soon
 Still not a great method of “saving” for
retirement
 Three-legged stool





Public pension (Social Security)
Private pension (401k)
Personal saving (Roth IRA)
Economics informs us - solution is political
Even Bigger Mess: Medicare
Congressional efforts for Social Security
reform ended with 2006 election
 Current health care reform debate has
shifted focus to Medicare





Much bigger financial problem
Same concerns about aging with little control
on benefit costs
Serves as an example of government-run
health care
Considered in Affordable Care Act – mostly as
a source of funds
Medicare defined

Medicare is publicly-provided health
insurance for the elderly


Medicaid is publicly-provided health insurance
for low income uninsured
Four parts




Part A: Hospital Insurance (HI)
Part B: Supplemental Medical Insurance (SMI)
Part C: Medicare Advantage is alternative to
A&B
Part D: Prescription Drugs
Who is covered?

Elderly, 65+ (83.6% of beneficiaries)



Disabled eligible after two years receiving
DI benefits


Everyone automatically covered by HI, must
sign up for SMI (95% do)
38.7 million beneficiaries in 2009
7.6 million beneficiaries in 2009
End stage renal disease (kidney dialysis)
What is covered?
HI covers inpatient hospital care, skilled
nursing facilities, home health services,
and hospice care
 SMI covers doctor visits, lab tests, and
outpatient hospital care
 Part D covers prescription drugs (w limits
– some removed as part of ACA)
 Does NOT cover nursing homes

How is Medicare financed?

HI financed through payroll taxes


1.45% (3.9%) on all earnings (HI Trust Fund)
SMI and Part D financed through monthly
premiums (25%) and general revenues

SMI $96.40-369.10 (2011) each month




means-tested premium
Part D varies by plan
Deducted from Social Security checks
Also co-pays and deductibles
Medicare in financial trouble

Dramatic growth in the program



1980: $37 Billion
2009: $502 Billion ($40 Billion 1-yr increase)
Similar to Social Security, Medicare has a
bleak financial future



Baby boomers start to retire in next 5 years
People living longer
Health costs rising faster than economy as a
whole
Excess Cost Growth

Growth in spending per beneficiary that
exceeds growth in per capita GDP


3.0 percent over 1970-2005
2.1 percent over 1990-2005
Captures both policy changes and
“residual” growth
 Assumption going forward dramatically
alters projections of program growth
 Same issues for Medicaid (program for
poor jointly funded by the states)

Medicare and Medicaid Spending as
Share of GDP: Excess Cost Growth??
40
Percent
40
35
35
30
30
Excess Cost Growth
of 2.5 percent
25
20
25
CBO Forecast
20
15
15
10
Excess Cost Growth 10
of 1 percent
5
0
1985
5
No Excess
Cost Growth
0
1995
2005
2015
2025
2035
2045
2055
2065
2075
…so federal budget in trouble

HI Trust Fund, currently in surplus, is
projected to be exhausted in 2029 as
costs rise

Improved by ACA changes to spending
SMI will squeeze other federal spending as
the Part B costs rise – 75% from current
taxpayers
 Part D cheaper so far, but cries to expand
coverage may raise costs


Estimated to cost $400 B over 10 years
Your future retirement?

Health care diminishing as private
retirement benefit

Reliance on Medicare also uncertain

Health care likely to undergo major
changes in next few years as costs rise

Economics informs us – solution is political
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