Transcript PPA 419 – Aging Service Administration

PPA 419 – Aging Service
Administration
Lecture 4b – Social Security
Reform
Commission to Strengthen Social
Security Reform Plans
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Reform Model 1 establishes a voluntary personal account option
but does not specify other changes in Social Security’s benefit
and revenue structure to achieve full long-term sustainability.
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Workers can voluntarily invest 2 percent of their taxable wages in a
personal account.
In exchange, traditional Social Security benefits are offset by the worker’s
personal account contributions compounded at an interest rate of 3.5
percent above inflation.
No other changes are made to traditional Social Security.
Expected benefits to retirees rise while the annual cash deficit of Social
Security falls by the end of the valuation period.
Workers, retirees, and taxpayers continue to face uncertainty because a
large financing gap remains requiring future benefit changes or substantial
new revenues.
Additional revenues are needed to keep the trust fund solvent starting in the
2030s.
Commission to Strengthen Social
Security Reform Plans
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Reform Model 2 enables future retirees to receive Social Security benefits that
are at least as great as today’s retirees, even after adjusting for inflation, and
increases Social Security benefits paid to low-income workers. Model 2
establishes a voluntary personal account without raising taxes or requiring
additional worker contributions. It achieves solvency and balances Social
Security revenues and costs.
 Workers can voluntarily redirect 4 percent of their payroll taxes up to $1000
annually to a personal account (the maximum contribution is indexed annually to
wage growth). No additional contribution from the worker would be required.
 In exchange for the account, traditional Social Security benefits are offset by the
worker’s personal account contributions compounded at an interest rate of 2
percent above inflation.
 Workers opting for personal accounts can reasonably expect combined benefits
greater than those paid to current retirees; greater than those paid to workers
without accounts; and greater than the future benefits payable under the current
system should it not be reformed.
 The plan makes Social Security more progressive by establishing a minimum
benefit payable to 30-year minimum wage workers of 120 percent of the poverty
line. Additional protections against poverty are provided for survivors as well.
Commission to Strengthen Social
Security Reform Plans

Reform Model 2 enables future retirees to receive Social Security benefits that are at
least as great as today’s retirees, even after adjusting for inflation, and increases
Social Security benefits paid to low-income workers. Model 2 establishes a voluntary
personal account without raising taxes or requiring additional worker contributions. It
achieves solvency and balances Social Security revenues and costs.
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Workers can voluntarily redirect 4 percent of their payroll taxes up to $1000
annually to a personal account (the Benefits under the traditional component of
Social Security would be price indexed, beginning in 2009.
Expected benefits payable to a medium earner choosing a personal account and
retiring in 2052 would be 59 percent above benefits currently paid to today’s
retirees. At the end of the75-year valuation period, the personal account system
would hold $12.3 trillion (in today’s dollars; $1.3 trillion in present value), much of
which would be new saving. This accomplishment would need neither increased
taxes nor increased worker contributions over the long term.
Temporary transfers from general revenue would be needed to keep the Trust
Fund solvent between 2025 and 2054.
This model achieves a positive system cash flow at the end of the 75-year
valuation period under all participation rates.
Commission to Strengthen Social
Security Reform Plans
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Reform Model 3 establishes a voluntary personal account option that
generally enables workers to reach or exceed current-law scheduled
benefits and wage replacement ratios. It achieves solvency by adding
revenues and by slowing benefit growth less than price indexing.
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Personal accounts are created by a match of part of the payroll tax – 2.5 percent
up to $1000 annually (indexed annually for wage growth) – for any worker who
contributes an additional 1 percent of wages subject to Social Security payroll
taxes.
The add-on contribution is partially subsidized for workers in a progressive
manner by a refundable tax credit.
In exchange, traditional Social Security benefits are offset by the worker’s
personal account contributions compounded at an interest rate of 2.5 percent
above inflation.
The plan makes the traditional Social Security system more progressive by
establishing a minimum benefit payable to 30-year minimum wage workers of
100 percent of the poverty line (111 percent for a 40-year worker). This minimum
benefit would be indexed to wage growth. Additional protections against poverty
are provided for survivors as well.
Commission to Strengthen Social
Security Reform Plans

Reform Model 3 establishes a voluntary personal account option that
generally enables workers to reach or exceed current-law scheduled
benefits and wage replacement ratios. It achieves solvency by adding
revenues and by slowing benefit growth less than price indexing.
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Benefits under the traditional component of Social Security would be modified
by:
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adjusting the growth rate in benefits for actual future changes in life expectancy,
increasing work incentives by decreasing the benefits for early retirement and increasing the
benefits for late retirement, and
flattening out the benefit formula (reducing the third bend point factor from 15 to 10 percent).
Benefits payable to workers who opt for personal accounts would be expected to
exceed scheduled benefit levels and current replacement rates.
Benefits payable to workers who do not opt for personal accounts would be over
50 percent higher than those currently paid to today’s retirees.
New sources of dedicated revenue are added in the equivalent amount of 0.6
percent of payroll over the 75-year period, and continuing thereafter.
Additional temporary transfers from general revenues would be needed to keep
the Trust Fund solvent between 2034 and 2063.
Source
 Christopher
J. Niggle, “The Political
Economy of Social Security Reform
Proposals.” Journal of Economic Issues
34: 789-809.
Introduction
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Various interest groups and the executive
branch of the U.S. government have
proposed fundamental changes in the
structure of the U.S. Social Security System.
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Most changes have involved privatization
Justified by projected deficits in SS budget
and low projected rates of return for current
and future recipients.
Introduction
 Niggle
 The
makes several arguments.
probability of an important SS budget
is very low.
 It is very possible that the system as
currently configures will run surpluses
rather than deficits in the future.
 The privatization schemes will not likely
raise the rate of return.
Introduction
 Niggle
 The
(contd.)
privatization schemes would probably
increase inequality, aged poverty, financial
insecurity, and macroeconomic financial
instability.
 The privatization schemes will not raise the
aggregate rates of saving or investment
and may reduce them.
Social Security Finance and
Budget Projections
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Benefits are financed by taxes.
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6.2% of both employer and employee income up
to $87,900 in 2004.
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As a result, tax system is regressive.
 Benefits are progressive.
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Benefits decline as a proportion of income.
Benefits go to disabled, spouses, dependents.
Overall effect to reduce income inequality.
Social Security Finance and
Budget Projections
Original funding system “pay as you go.”
Benefits matched outlays.
 Since 1983, prefunding
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Source of surpluses.
Surpluses in asset portfolio consisting of
nonmarketable U.S. Treasury securities.
Government borrows surplus and pays interest in
the form of bonds (at 5.9%).
In the future, the interest will allow the system to
finance future deficits.
Social Security Finance and
Budget Projections
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Projected deficits results of assumptions
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Demographic projections, labor force participation,
unemployment, labor productivity, real wage
growth, price inflation, growth in national income.
Council’s assumptions may be overly pessimistic.
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Low cost scenario produces surpluses for near future.
Intermediate and high project deficits starting in 2014.
Assume more labor force growth, but not as much
as 20th century. Assume 4.5 unemployment rate
(lower than council’s). Assume growth in GDP
and productivity at their historic rates (not low like
council). Result: Surplus of $9B in 2030.
Financial versus Real Burdens in
Pension Systems and Prefunding
 Real
burden of supporting pension
recipients is goods and services they
receive currently.
 Financial burden transfers money
payments from taxpayers to recipients.
Financial versus Real Burdens in
Pension Systems and Prefunding
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If pension system prefunded, some taxes
may be exchanged for other financial
instruments and future income streams used
to finance future benefits.
 Current surpluses burden only future
consumption by workers. Neither current
system nor proposed privatization will
increase capital formation.
 Total dependency ratio likely to fall or stay the
same.
Privatization Proposals
 Reasons
 Funding
crisis (false)
 Low rate of return (false)
 Pure
privatization cannot guarantee
past returns in stock market
 Management fees and privatization
costs make system expensive (Chile).
Privatization, Saving,
Investment, Economic Growth
 Argument:
Privatization will lead to
higher rates of saving, investment,
productivity, and GDP growth.
 Not likely.
Alternatives to Privatization
 Slight
Change
 Raise
 Major
taxes, eliminate cap on income.
Change
 Return
Social Security to PAYGO system
with slight reserves.
 Finance out of general revenue.
 Index benefits to growth in real wages.
Political Economy of Reform
Proposals
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No funding crisis. Minor adjustments would fix
problem.
 Privatization would not improve collective
living standards.
 Reform would benefit:
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Firms in financial system that manage portfolios.
High income earners
Current shareholders.