Post on 14-Jan-2016
description
The Future of Social Security
Amy Rehder HarrisTax 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 $102,000 in 2008
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
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$0 $12,000 $24,000 $36,000 $48,000 $60,000 $72,000 $84,000
Average Annual Earnings
An
nu
al B
enef
it a
t N
RA
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
90 percent replacement up to $8,532
32 percent replacementthrough $51,456
15 percent replacement up to maximum
Old-Age Benefits Retired Workers
31.5 million beneficiaries in 2007 Average annual benefit was $12,500 in
2006 Auxiliary Beneficiaries
Spouses: 2.4 million Survivors: 4.6 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 $6,200 in 2006
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 $12,100 in 2006
Survivor in retired household faces up to 1/3 benefit reduction at death of spouse
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)
6.8 million beneficiaries in 2006 with average annual benefit of $11,700
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)
Iowa’s Aging Population
Population Pyramid or Tower?Population Pyramids of Iowa with Row Headers in Column b and Column Headers in Rows 23 to 25
Figure 2. Iowa Population Pyramids, 2003 and Projected 2030Percent of Total Population
2003
Source: U.S. Census Bureau, Population Division, Interim State Population Projections, 2005
2030
5 4 3 2 1 0 1 2 3 4 55 4 3 2 1 0 1 2 3 4 5
0 - 4 5 - 910 - 1415 - 1920 - 2425 - 2930 - 3435 - 3940 - 4445 - 4950 - 5455 - 5960 - 6465 - 6970 - 7475 - 7980 - 84 85+
Male Female Male Female
Impact of Aging Population Rising Worker-Beneficiary Ratio
Iowa and US: 3.3 falling to 2.0 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 (43% of taxable benefits exempt in 2009)
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 1985-2082
0
1
2
3
4
5
6
7
8
9
10
1985 1995 2005 2015 2025 2035 2045 2055 2065 2075
Sh
are
of
GD
P
0
1
2
3
4
5
6
7
8
9
10
Outlays
Revenues
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/TR08/index.html
CBO began long-run analysis in 2004
http://www.cbo.gov/ftpdocs/96xx/doc9649/08-20-SocialSecurityUpdate.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) Real wage growth (2) Inflation(3) Unemployment(4) 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
Recent changes to immigration forecast led to improved finances (8% more workers by 2060 with more, younger immigrants assumed)
SSA Projections Intermediate assumptions
“Best guess” Uncertainty about 75 years into the future
- Range on assumptions 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 -1.70 (from -1.95 last year) CBO projects range -2.7 to 0.1
Income and Cost Rates Income Rate/Revenues
Payroll taxes as percent of GDP 2007: 4.9 2082: 4.2-5.1
Cost Rate/Outlays Benefits as percent of GDP 2007: 4.3 2082: 4.6-7.7
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
2040 CBO projects between 2034 to beyond 2082
CBO Projected Trust Fund Ratio, 1985-2082
-25
-20
-15
-10
-5
0
5
10
1985 1995 2005 2015 2025 2035 2045 2055 2065 2075
Rat
io o
f T
rust
Fu
nd
Bal
ance
to
An
nu
al O
utl
ays
-25
-20
-15
-10
-5
0
5
10
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 under 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 Future workers pay
Required Tax Rate Increases
0%
5%
10%
15%
20%
25%
2003 2013 2023 2033 2043 2053 2063 2073 2083 2093
Year
Ta
x R
ate
0%
5%
10%
15%
20%
25%
Employee Tax Increase
Notes: Results are based on 100 stochastic simulations. Percentiles are derived by ranking each stochastic outcome from worst to best regarding system finances.
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? Future beneficiaries pay
Required Benefit Cuts
0%
10%
20%
30%
40%
50%
60%
70%
1941 1951 1961 1971 1981 1991 2001 2011 2021 2031
Age 62 Birth Cohort
Sh
are
of
Cu
rre
nt
Be
ne
fit
0%
10%
20%
30%
40%
50%
60%
70%
Benefit Cut
Notes: Results are based on 100 stochastic simulations. Percentiles are derived by ranking each stochastic outcome from worst to best regarding system finances.
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
Obama’s Plan Opposes any “privatization” Proposes to improve finances by applying
payroll taxes on high incomes Proposed a 2% to 4% payroll tax on earnings
above $250,000 starting roughly 10 years from now
Preliminary analysis suggests this could address 15% of long-run problem
McCain’s Plan Believes can meet benefit promises to
current and future retirees without raising taxes No specific plan to make changes
Supports personal accounts for current workers as a supplement (Lead economic advisor is former CBO director
during my tenure there – very aware of the future problems and supportive of individual accounts that were analyzed during my tenure)
Nonpartisan Social Security Reform Plan (Three Economists) Raise EEA from 62 to 65 Raise NRA to 68 for 1955 and later Reduce PIA replacement factors
Lowers benefits but more progressive formula Raise taxable maximum (no benefits
credit) Low-earner benefit Reduce spouse benefit Individual Accounts – 1.5% carve-out and
1.5% add-on
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 CBO shifted focus to Medicare
Much bigger financial problem Part of health care “crisis” in America Same concerns about aging with little control
on benefit costs Last action expanded the program!
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+ (85% of beneficiaries)
Everyone automatically covered by HI, must sign up for SMI (95% do)
36.9 million beneficiaries in 2007 Disabled eligible after two years receiving
DI benefits 7.2 million beneficiaries
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) 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 $96.40-238.40 (2008) each month, 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 2007: $432 Billion
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??
0
5
10
15
20
25
30
35
40
1985 1995 2005 2015 2025 2035 2045 2055 2065 2075
0
5
10
15
20
25
30
35
40
Excess Cost Growth of 1 percent
Excess Cost Growth of 2.5 percent
No Excess Cost Growth
CBO Forecast
Percent
…so federal budget in trouble HI Trust Fund, currently in surplus, is
projected to be exhausted in 2019 as costs rise (between $980 billion and $1.4 trillion)
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
Economics informs us – solution is political