Simcivic Briefing Book, continued . . .
C. A Solvency Strategy for Republicans
1. Begin with a conservative estimate of PRA potential.
2. Coordinate PRA annuity benefits with Social Security benefits.
3. Diversify the Trust Fund, invest a portion in equities.
4. Set up PRA retirement annuities as Ten Year Annuities, not as lifetime annuities.
5. Raise the taxable income cap by four percentage points.
6. Raise the retirement age slightly, enough to expand the workforce by two percent.
1. The Republican forecast should begin with a conservative estimate of PRA potential.
> Average PRA tax rate of 3%, starting
in 2008. Social Security combined employee-employer tax cut back by 3
percentage points, to 9.4%.
> Current law benefits slowly trimmed back to 53% of their current
level. The trimming begins in 2007, is completed in 2038.
> No borrowing by Social Security.
> Everyone below the age of 55 enrolls in a Personal Retirement
Account.
> PRA owners draw lifetime annuities on retirement.
> PRA portfolios are invested 50% in equities, 50% in bonds.
> The stock/bond ratio shifts to 30/70 at age 62. On retirement,
annuities are 100% bond-funded.
> Average equity returns of 3.5%, average bond returns of 2.2%
> PRA management fees of 0.3% during investor’s work career.
> Annuity management fees of 0.3% during retirement.
> 35% inheritance leakage. For PRA owners who die before retirement,
65% of assets will go into spouses’ PRA’s, the other 35% will
go in cash to children and grandchildren.
> Family emergency leakage out of PRA assets equaling 0.5% a
year.
2. Republicans could coordinate PRA annuity payments with regular Social Security benefits.
• In a fully coordinated program, every PRA annuity
dollar received reduces Social Security’s regular benefits by a dollar.
In a coordinated benefits system, everyone who is unlucky enough to retire
during a stock market downturn still receives their scheduled benefits.
• Monthly payments in a coordinated benefits system are all shown in dark
blue; annuity payments PRA’s are included.
• Scheduled benefits rise from the 53% level to 70%.
• To ensure solvency every step of the way, the benefit reduction phase-in
is accelerated. Instead of ending in 2038, it ends in 2023.
• Monthly benefits show modest declines for the next 20 years, but recover
dependably from 2024 onward.
• The story brightens as more adjustments are made.
3. Forty percent of the Trust Fund assets could
be invested in stocks.
• The benefit schedule reduction, 2007 – 2023,
ends at 71% of regularly scheduled benefits, not at 70%.
• Average monthly benefits in 2075 rise to $1,276.
4. PRA annuities can be changed from lifetime annuities
to Ten Year annuities.
• The benefit target rises to 73% of currently scheduled
benefits.
• Average monthly benefits in 2075 rise to $1,312.
• This is an increase of $36 a month. Why do you suppose Ten Year Annuities
are more effective than lifetime annuities?
• The answer: A ten year annuity delivers more quickly on a PRA’s full
financial promise. In a lifetime annuity , returns stretch out for a much
longer time period, which keeps them from being quite as powerful a solvency
protection tool.
• While the PRA annuity pays out, Social Security’s coordinated benefits
are reduced. Once the annuity ends, Social Security’s full benefit
level kicks in. It doesn’t matter how long a person lives, they’ll
still have Social Security benefits to count on.
5. Raise the Taxable Income
cap. If 85% of payroll is now taxable, raise the percentage to 88% or
89%.
• Social Security’s payable benefit potential
rises further. The target benefit schedule is set at 75% of currently
scheduled benefits.
• Average monthly benefits in 2075 rise to $1,348.
(We model this with a work-around, setting the payroll
tax rate in 2008 at 9.8% for Social Security, 3% for PRA’s. In actuality,
the payroll tax rate stays at 9.4%, but the rate gets applied to a larger
pool of taxable income and generates correspondingly more tax receipts.)
6. Raise the Retirement Age
slightly, to raise the size of the workforce by another two percent or
so.
• Target benefits rise to 76% of the current schedule.
The monthly average reaches $1,366.
(To reflect greater tax proceeds, our workaround sets
SS taxes at 10% in 2018.)
• Note, in the chart just below, the cumulative value
of PRA and Trust Fund stock investments in this scenario.
• The simulator’s stock market component assumes
stock market peaks which are double the value of stock market troughs
(measured using the Market Cap to GDP Ratio).
• The total share of stocks owned by PRA’s and the Trust Fund vary
according to the phase of the stock market cycle, but never reach 25%
of total market capitalization. That’s probably a safe asset accumulation
level.
Recap. In a Coordinated Benefits environment, with Ten Year Annuities, and some other measures that Republicans normally exclude, several useful adjustments become possible:
• The high cost of conversion borrowing is avoided.
• There’s a very modest downturn in average monthly benefits, but it doesn’t persist.
• The upturn in payable benefits begins in the 2020’s.
• Social Security’s lasting solvency is secured.
• Wage indexing is preserved. If GDP growth exceeds expectations, benefit growth will exceed expectations as well.
Each step taken improves Payable Benefits over time:
| Dollars/Month in 2075 | |
| Starting Scenario | $1,258 |
| 40 Percent of Trust Fund in Stocks | $1,275 |
| Change to Ten Year Annuities | $1,312 |
| Raise Taxable Income Cap | $1,348 |
| Boost Retirement Age slightly | $1,366 |
NEXT
A) How to Critique the Republican Approach
B) How to Critique the Democratic Approach
D) A Solvency Strategy for Democrats
E) Faster GDP Growth: Impact on Both Strategies
Briefing Book Summary
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Revision Date 2005-05-02