Simcivic.org
Using simulation to make sense of Social Security Reform

Bush and Kerry Strategies Analyzed

Over the past four years, Mr. Bush has made it clear that the only approach to Social Security reform that's of interest will be one that includes Personal Retirement Accounts, funded by a partial diversion of existing payroll taxes into a new PRA system. Mr. Kerry denounces this strategy, and declares that Social Security should continue to be funded on a Pay As You Go basis. (Kerry acceptance speech)

Whose approach is better? From a simulation perspective, it turns out that both are likely to deliver similar amounts of benefits.

To analyze Mr. Bush's approach to Social Security reform, Simcivic developed a realistic simulation that achieves lasting solvency for Social Security using Personal Retirement Accounts to replace a portion of Social Security's existing benefit stream.

To analyze Mr. Kerry's approach to Social Security reform, Simcivic developed a realistic simulation that achieves lasting solvency using Mr. Kerry's preferred Pay As You Go strategy.

Both strategies were analyzed using two different GDP growth assumptions. First, we used a slow growth scenario that matches Social Security's pessimistic forecast about future GDP growth rates. Second, we used a faster growth scenario that assumes higher productivity growth and GDP growth. (Both growth rate scenarios are based on detailed time series tables Simcivic has obtained from Social Security's Office of the Actuary. )

In the slow growth scenario, the Bush strategy and the Kerry strategy end up roughly tied. The Kerry strategy modestly outperforms the Bush strategy in a faster growth scenario. Either way, a faster growth economy generates substantially higher retirement benefits than a slow growth economy.

Slow Growth Scenario - Two Yardsticks

Our first yardstick is average monthly benefits. In 2003, the average monthly benefit paid by Social Security was approximately $850. By 2075, a realistic solvency plan that followed Mr. Bush's guidelines would raise average monthly benefits to $1,381 (2003 dollars). A realistic solvency plan that follows Mr. Kerry's approach would raise the average monthly benefit to $1,348.

A second way to compare the two approaches is to sum up cumulative dollars paid to beneficiaries from 2003 through 2075. A realistic PRA strategy that follows the Bush guidelines produces $362 trillion in current dollar benefits over seven-plus decades. A realistic Pay As You Go strategy produces $372 trillion in current dollar benefits over the same time period.

Monthly benefits slightly better in 2075 under Mr. Bush's approach. Cumulative benefits paid in the simulation period 2003 - 2075 slightly better under Mr. Kerry's approach. In a slow growth scenario, Bush and Kerry style reform approaches are essentially tied.

Faster Growth Scenario - Same Two Yardsticks

Social Security's pessimistic forecast about future growth rates is based in part on the old notion that America's high productivity growth manufacturing sector is fading out and being replaced by a slower productivity growth service sector. Growth pessimism is baked into Social Security's benchmark forecast.

America is now in a digital age, though, in which multiple copies of digitized products often have marginal costs of zero. A zero marginal cost digital sector almost surely heralds a favorable trend reversal for productivity growth rates.

In a faster growth economy, lag effects will push Social Security's so-called "insolvency date" back by at least fifteen years. Faster growth boosts payroll tax receipts now, generates higher benefit obligations later, a dynamic that could postpone Social Security's insolvency date by at least fifteen years.

Both strategies shows substantially higher 2075 monthly benefits when the simulator is set to test a real growth rate of 2.6% a year. Benefits under a Bush-style realistic PRA option rise from $1,381 per month to $2,558. Benefits under a Kerry-style Pay As You Go option rise from $1,358 to $2,576. The monthly benefit edge goes to a Kerry-style approach in a faster growth scenario.

Both strategies show substantially higher cumulative benefits. They rise from $362 trillion to $581 trillion under the Bush option. They rise from $372 trillion to $604 trillion under the Kerry option. Faster GDP growth is enormously valuable to future beneficiaries. The cumulative benefit edge also goes to a Kerry-style approach in a faster growth scenario.

Risks in the Bush Strategy

A Bush-style strategy cannot achieve long-run solvency for Social Security without a significant adjustment to the benefit formulas provided by current Social Security legislation. In the slow growth scenario, aggregate benefits must be trimmed to 57% of current law amounts by 2035. In the faster growth scenario, aggregate benefits must be trimmed to 64% of current law amounts.

Average monthly benefits for new retirees would slowly decline, from $850 a month range to $750, over the next three decades, before they'd begin to creep upward again. PRA annuities would kick in slowly, but it would take quite awhile (decades) before future New Retiree benefits, plus PRA annuities, would visibly outpace current New Retiree Benefits. (See the table which compares Monthly Benefits under all our different simulation scenarios.)

For those who mismanage their PRA's, the monthly Social Security benefit might be all that's left. The Bush strategy profers a dream of individual workers controlling their own accounts, picking their own investment firms, specifying their preferred investment strategies. Were this dream to be realized in new legislation, not all PRA investors would make good decisions. The more control workers are given over "their" investment funds, the more risk that some will lose most or all of their PRA's to bad judgment and stock market misfortune.

Those who make poor decisions and lose their PRA's will still receive monthly benefit checks from Social Security, but only at 57% of the levels now prescribed in current law. Depending on how a PRA program is actually designed, many retirees might end up with nothing more than a deeply cut Social Security benefit.

The greater risk in the larger Bush strategy is the adverse impact of high federal deficits. High deficits eventually raise interest rates. Rising interest rates in turn become a stumbling block to faster GDP growth. Bush might succeed in implementing PRA's, but undermine both PRA's and Social Security as a whole through perpetual deficits that dampen America's long-run growth prospects.

Risks in the Kerry Strategy

A Pay As You Go solvency strategy also trims benefits, but only to 75% of current law levels, not all the way to 57%. Over our simulator's adjustment period, stretching from 2010 to 2035, New Retiree Benefits are essentailly flat. They rise about as fast as inflation, but not any faster.

The greater risk in a Kerry strategy is Kerry's willingness to push for lasting solvency. If Kerry doesn't push for lasting solvency, sooner or later Social Security's finances turn cash negative and abrupt adjustments will be unavoidable.

Both reform strategies work better in a faster growth economy. Bush's deficits do not augur well for a faster growth future. It's not easy to say whether Kerry's economic strategy would outperform Bush's, but a Kerry strategy that reduced the deficit might generate a better growth rate, and, in turn, yield higher Social Security benefits overall.