Simcivic Briefing Book, continued . . .

D. A Solvency Strategy for Democrats

1. Begin with a realistic AS IS forecast. Acknowledge Social Security’s “Payable Benefits” prospects.

2. Allow the Trust Fund to invest in equities.

3. Raise the taxable income cap.

4. Raise the retirement age in 2018, enough to expand the workforce by two percent.

5. Raise the retirement age again in 2028, enough to expand the workforce by another two percent.

6. Trim benefits back to 78% of the current schedule.

Recap.

1. Democrats should begin with an AS IS forecast whose Payable Benefits in 2075 are only $1208 per month

• Average monthly benefits rise steadily till Social Security’s Trust Fund has been completely liquidated. (This assumes a 2.2% bond rate for the Trust Fund.)
• Monthly benefits then become Payable Benefits. Social Security pays what it can afford, based only on the payroll taxes it’s collecting.
• Benefits creep back up, reaching $1,208 per month in 2075.

2. First, they could allow the Trust Fund to invest 30% of its assets in stocks.

• Authorizing the Trust Fund to invest in the equities market would require a managing board for the Trust Fund as autonomous as the Federal Reserve’s Board of Governors.
• Social Security’s Trust Fund will stay solvent a bit longer. Once its assets are liquidated, benefits are paid based on payroll taxes coming in.
• The simulator is set to use a 3.5% real ROI for stocks.

3. The taxable income cap could be raised in 2006.

• Social Security’s Trust Fund stays solvent longer still. Once its assets are liquidated, benefits are paid based on payroll taxes coming in.
(The simulator doesn’t have an option that directly modifies the taxable income cap. As a work-around, a payroll tax rate of 12.9% is entered in 2006. This simulates a 12.4% tax rate applied to a larger tax base.)
• Payable benefits in 2075 rise from $1,208 to $1,257.

4. Retirement age could be raised slightly in 2018.

• Raising the retirement age expands the workforce slightly and boosts Social Security tax receipts slightly. (This simulation assumes a two percent increase in the workforce.)
• Payable Benefits in 2075 rise from $1,257 to $1,276.
• The Trust Fund still hasn’t been secured. It runs out by 2045, and there’s still a plunge in Payable Benefits.
• The increase in the retirement age is simulated by raising the tax rate from 12.9 to 13.1 (a work-around). The real tax rate is still 12.4, but the pool paying taxes grows.

5. Retirement age could be raised slightly more, in 2028.

• Another boost in retirement age raises the size of the workforce by another 2 percent or so.
• Payable Benefits in 2075 rise from $1,276 to $1,296.
• The Trust Fund still runs out, and there’s still a plunge in Payable Benefits when it does.
• The work-around simulation – payroll tax in 2028 of 13.3. Real payroll tax is still 12.4%.

6. Benefits could be trimmed to 78% of current law schedule, with the trimming back phased in 2007 – 2038. This turns the Trust Fund into a permanent endowment.

• Finally, it’s time to trim back the benefit schedule enough to create a permanent Trust Fund Endowment for Social Security.
• The benefit schedule is shaved back, slowly but steadily. By 2038, it stabilizes at 78% of its previous level.
• Payable Benefits in 2075 are now up to $1,402. The “spike and collapse” pattern in the Payable Benefits chart disappears.
• This end point, $1,420 per month, is slightly higher than the end point in the Republican scenario. Retiree benefits from now into the 2030’s are a bit stronger as well.

• The Trust Fund is now healthy, as shown in Chart 1A, “Total Assets: Pct of GDP.” The darker blue portion at the bottom represents Social Security bond holdings, the lighter section above represents Social Security equity holdings.
• The most valid test for long-run solvency is Chart 1B, the “Funds-to-Benefits Ratio.” As the chart on the right shows, the ratio is steady at the end of the forecasting period. The Trust Fund has turned into a permanent endowment.
• A permanent endowment strategy for the Trust Fund produces lasting solvency, a “grow assets, liquidate assets” strategy does not.

• Now for another look. The Simulator has two settings for its stock market simulation function: “Market Cycles Likely” and “Steady Market Capitalization to GDP Ratio.”
• The top set of charts show the forecast with “Market Cycles Likely” selected.
• The second set shows the same forecast with “Steady Market Cap/GDP Ratio” selected.
• Total asset levels are a little lower, but very steady. And the Funds-to-Benefits Ratio is quite steady in the out-years of the forecast, thus passing the acid test for lasting solvency.

• Chart 3A, “Benefit Sources as Pct of GDP,” shows the inflow-outflow pattern.
• The “Benefit Target” has stabilized at about 5.4% of GDP, somewhat above today’s level.
• “Tax Receipts,” in gray, stabilize at 5% of GDP.
• With the Trust Fund stabilized as a permanent endowment, its earnings function provide a supplemental source of funds for retirees. Its earnings flow is shown in pink.
• (Every now and then, when the stock market declines, the Trust Fund liquidates capital. Proceeds derived from these intermittent capital liquidations are shown in blue.)

Recap: If Democrats were to propose a permanent endowment for Social Security’s Trust Fund, such an approach could include:

• Authorizing Social Security’s Trust Fund to invest 30% of its assets in equities.
• Raising the cap on taxable income enough to boost tax receipts four percent.
• Raising the retirement age, in two steps, enough to expand the taxable workforce by 4%.
• Trimming the benefit increase schedule to 78% of its current level.

This approach has several interesting features:

• The Trust Fund ends up with a permanent endowment.
• Pay As You Go financing covers 93% of future benefits.
• Earnings from the Trust Fund’s permanent endowment cover the remaining 7%.
• While benefits don’t rise as rapidly as current law provides for, they do rise steadily.
• Solvency for the Social Security system is permanently guaranteed. The days of “Grow Assets, Liquidate Assets” are gone.
• Benefit levels over the long-run are comparable or superior to the levels that a prudent PRA scenario is likely to produce.
• Benefit levels between 2010 and 2040 are higher than in the prudent PRA scenario.
• Benefit schedules are still indexed to wages, not to inflation. If GDP grows more rapidly than SSA’s forecast expects, benefits will rise accordingly.
• No federal borrowing is required at any point.

NEXT

A) How to Critique the Republican Approach
B) How to Critique the Democratic Approach
C) A Solvency Strategy for Republicans
E) Impact of Faster GDP Growth

Briefing Book Summary

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Revision Date 2005-05-01