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Using simulation to make sense of Social Security Reform
Using simulation to make sense of our shared civic future
Briefing Book on Social Security SolvencyA) How to Critique the Republican approach
Most of the analysis in this Briefing Book is based
on the Simcivic.org solvency simulation tool. The stock market ROI analysis
is based on research summarized in
“Are Seven Percent Returns Realistic?”. You can reproduce
all the analysis that follows by using our online simulator. Briefing Book Summary The Republican strategy is a study in unfounded optimism. It bets on personal accounts and high stock market returns to offset the pain of significant reductions in the overall Social Security benefit schedule. The first section of the Briefing Book, "How to Critique the Republican Approach," delivers a step-by-step analysis of the weaknesses in the Republican approach. A mature Personal Account program would, in the overly optimistic Republican scenario, generate an average monthly annuity (in 2003 dollars) of $783. Replace these optimistic estimates with more realistic judgments, though, and the monthly annuity drops by $443 to $340. Meanwhile, regular Social Security benefits are trimmed to 55% of the level called for by current law. Regular benefits in 2075 are shown at $989, initially, but this estimate assumes higher bond interest rates than economists now think likely. Regular benefits are therefore restated, to $953 per month. In the overly optimistic scenario, the combined monthly average reaches $1,772. In the more realistic estimate, this drops by $479, to $1,293. (Average monthly benefits in 2003, the start year for the simulation run, are about $850.) Both scenarios, the overly optimistic and the more realistic, meet a common test. Both have been designed to assure lasting solvency for Social Security. The Democratic strategy is one of evasion. The second section of the Briefing Book identifies four standard evasions commonly used by Democrats in criticizing the Republican personal account agenda. On the one hand, Democrats argue that Social Security is essentially healthy, as it will still have the ability to pay seventy percent of benefits owed even when it becomes insolvent. On the other hand, Democrats are dead set against any reduction in benefits. Seventy percent of what's owed proves health, but it would be a betrayal of the nation's seniors to reduce the current benefit schedule by a penny. The Democrats third evasion - the assertion that: Grow Assets, Liquidate Assets is a perfectly respectable strategy for the Social Security Trust Fund. No responsible pension manager would operate by these principles in the private sector, of course, but it's not clear that the search for responsible principles underlies the Democratic position. Finally, the Democrats are in the habit of calling the insolvency forecast a "two percent problem." Translation: A two percentage point increase in the payroll tax would presumably "solve" the problem. It doesn't. It merely repeats the nonsense of Grow Assets, Liquidate Assets. Genuine solvency requires a substantially higher tax increase than the Democratic leaders have claimed. A responsible Republican approach to lasting solvency is then outlined. The Briefing Book begins with a responsible forecast of long-run stock market returns, add responsible estimates for various personal account leakage rates, and makes a couple of new adjustments to the standard Republican approach. The final monthly benefit one might expect comes in at $1,366 - a bit higher than we saw earlier. A responsible Democratic approach to lasting solvency is also outlined. It stays away from personal accounts, and it adjusts other elements of the overall Social Security program - Trust Fund investment strategy, retirement age, the level of the taxable income cap, the overall benefit formula - to assure lasting solvency for Social Security. The final monthly benefit from these adjustments comes in at $1,402 - just a touch higher than the Republican scenario outlined above. Benefit levels during the intermediate years are higher as well. Any scenario that avoids personal accounts inevitably delivers higher benefits over the next three decades than a comparable personal account scenario. If the economy grows more rapidly than expected, benefit levels rise for all scenarios. The Briefing Book shows gains from faster economic growth vastly overshadowing the differences between the Republican and Democratic approaches. The next five web pages set forth the Simcivic analysis. At each step in the analysis, images from the Solvency Simulator are used to illustrate changes in benefits, changes in Trust Fund levels, and changes in cash inflows and outflows. Remember. You can reproduce all this analysis by using our online Simulation Tool. A. How to Critique the Republican Approach Revision Date 2005-05-02 |