Bush and Kerry Reform Approaches:   Simulation Scenarios

Monthly Benefit Comparison Table (below)

Text Description of Reform Scenarios (below)

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Monthly Benefit Comparison Table

Social Security's 2001 Forecast
- Current law stays the same, no changes
- Once Trust Fund is depleted, benefits paid out of Social Security payroll tax receipts only
- Real GDP Growth of 1.6% assume (from Trustees' Report)  ALL FIVE SLOW GROWTH SCENARIOS USE TRUSTEES' FORECAST

The Ideal Case PRA Scenario
- Lowers SS payroll tax to 10% in 2005, sets PRA payroll tax at 2.4%
- Gradually lowers SS benefit levels to 57% of current law schedule
- Assures lasting solvency for SS
- Uses unrealistic assumptions for return on stocks, management fees, stock/bond mix, percent of stock market PRA's will be allowed to own, inheritance leakage, and family emergency leakage

Five scenarios have been developed and tested. Two growth rates have
been used in running these tests. In all except the "AS IS" case, we have required
the scenarios we've tested to produce lasting solvency for Social Security.
This means Social Security's asset reserves, whatever they may be, will hold
steady in the final years of the forecast; it also assures comparability among
scenarios.

The slow GDP growth rate estimate, 1.6% a year after inflation, is the default rate
used in the Trustees' Report. It assumes very low population growth, and rather slow
productivity growth.

The faster GDP growth rate estimate, 2.6% a year after inflation, uses the same
population estimage but boosts the productivity growth rate by one percentage point.
(It relies on a special run prepared by Social Security's Office of the Actuary on how
a faster productivity growth rate would affect long-run solvency.)

The first scenario is the "AS IS" case. No change to the law. Once Congress
pays off all the Trust Fund debt it owes to Social Security, Social Security only pays
out what it can afford to spend from current cash flow. This scenario represents the
"bad fate"; that everyone would like to avoid.

The second scenario is a Fantasy PRA case. It assumes real stock returns of 6.5% a year,
which can materialize only if the Market Capitaliztion-to-GDP Ratio from now till 2075 drops to a
small fraction of its current level. The Fantasy PRA case also assumes unrealistically
favorable management fees, inheritance leakage rates, and family emergency leakage rates.

Real stock returns of 6.5% were assumed by the Bush Commission on Social Security Reform
in formulating its PRA forecasts, an unsupportable guess that undermines all its projections.
The second scenario uses unsupportably low fee and leak assumptions as well, to complete
the PRA fantasy profile. It can't come to pass, but it gives an idea of the claims that some
PRA supporters like to make.

The third scenario is a Realistic PRA case. It assumes real stock returns of 4.5% a year,
achievable with the sort of Market Capitalization to GDP Ratios that seem likely from now
on. It also assumes more realistic management fees and leakage rates, factors which will
inevitably drain away an ongoing fraction of accumulated PRA savings, and which must
be built into any scenario that hopes to paint a realistic picture of a PRA future.

If Congress were to adopt Bush's PRA approach, using a 2.4% average payroll tax, and reducing
Social Security's long-run benefit formulas enough to ensure lasting solvency, the Realistic
PRA case shows the likely results.

The fourth scenario is a Pay As You Go Solvency case. Senator Kerry has argued for protecting
Social Security's basic Pay As You Go framework. This case shows the reduction in benefit
formulas needed to assure Social Security's lasting formulas.

Were Congress to adopt a lasting solvency strategy based on Kerry's Pay As You Go outlook,
this scenario shows the likely results.

The fifth scenario, Realistic PRA with Coordinated Benefits, teases the
reader by asking the question of what a Realistic PRA strategy might look like if it were
authored by the Democratic Party.   All the same market return and leakage assumptions
are retained from Scenario 3.  

But Social Security's benefit formulas are set at a higher rate, and all PRA annuity
payments are coordinated and folded in. For every PRA $1 that a retiree receives, Social
Security would reduce the regular benefit by the same $1. It doesn't matter - in a
coordinated benefit system - whether stocks are doing well or poorly when I retire; I'll
draw the same ultimate benefit either way.

This scenario also converts PRA's into ten-year annuities at retirement, not lifetime
annuities, because we get more bang for the PRA buck if we avoid lifetime annuities
and opt for ten-year annuities instead.

Note the key results:

In a Slow GDP Growth mode, the Realistic PRA scenario pays an average monthly
benefit of $1,381 in 2075. ($1,025 in regular benefits and $356 in PRA annuities.)
Pay As You Go Solvency generates an average monthly benefit of $1,348.

PRA's are marginally better, on average, though retirees with below-average market
performance would be worse off in a Realistic PRA scenario than in a Pay As You Go
Solvency scenario.

In a Faster GDP Growth economy, the Realistic PRA scenario generates an average
monthly benefit of $2,558. ($2,035 in regular benefits and $523 in PRA annuities.)
Pay As You Go Solvency generages an average monthly benefit of $2,576 - slightly
better than the Realistic PRA scenario.

Revision Date 2004-08-16