Simcivic Update #1

Welcome and Introduction

February 14, 2002
revised April 4, 2002

Welcome to Simcivic.org, and to the first in a series of Simcivic Updates. Simcivic.org is the successor to Common Sense on Social Security, still much in business at www.sscommonsense.org. This is a transition year. You'll see Simcivic.org expand steadily as the year goes on.

At Simcivic.org, we have a motto: "Cool Simulators, Smarter Citizens." This won't happen overnight, but we think it's an exciting goal.

Each Simcivic Update appearing here will show, in one way or another, how another approach to Social Security reform can be tested on the Simulator. Which reform approaches make sense? Which ones don't? Which arguments hold water, and which ones are full of holes? Come here to find out.

Introducing the Simulator

Even though the Solvency Simulator isn't fully complete, it already supports a wide range of user inquiries.

Upon opening, it’s set to the “As Is” scenario - if nothing else happens, if Social Security’s actuaries are reasonably on target with their intermediate forecast, here’s what will happen.

What That Means

First, that means a tax rate of 12.4% will continue, half from employees, half from employers.

- The input on the Simulator Taxes page looks like this:

Second, that also means that benefit payments continue at 100% of their currently scheduled level.

-The input on the Simulator’s Benefits Page looks like this:

Third. With these inputs, total Assets peak in the next few years, then decline (measured as a percent of GDP). You can see the consequences for Social Security’s Trust Fund asset pool in Chart 1A.

As you see, assets rise in value to almost 25% of GDP, then get drawn down, till they hit 0 in 2038.

Fourth. If no changes are made to the system, payable benefits drop sharply after 2038, as the Simulator shows, in Chart 2A:

Fifth. The Simulator also lets you see what’s happening from the point of view of the revenue sources being received by Social Security:

Tax receipts exceed the benefit target for another decade or so. Then the rising benefit target overtakes the annual receipts from payroll taxes, so Social Security starts collecting interest payments from the Treasury on the Treasury notes it holds in its Trust Fund. (shown in pink as Trust Fund Earnings) Finally, by about 2025, interest receipts are no longer sufficient, and Social Security begins cashing in the Treasury notes it holds. Payments from Treasury that redeem Trust Fund Capital (shown in purple) make up an increasing share of total annual cash flow until the Trust Fund runs dry in 2038. Then all capital payments stop, and Social Security is left with nothing except an inadequate stream of payroll tax payments.

Sixth. As you know, of course, payments from the Treasury may appear as “cash in” on the Social Security side of the ledger, but they also appear as “cash out” on the Treasury side of the ledger. The Simulator also shows you how it looks from the Treasury side, i.e., from the Federal Budget side, in Chart 3B:

Note the bars in blue, rising above the black 0% line, on the left hand side of the chart. So long as tax receipts exceed benefit payments, Social Security is in a position to use its annual surplus to buy Treasury notes. From the Federal Budget side of the ledger, this represents positive cash flow, obtained from the sale of Treasury notes. In other words - the positive cash flow to the Federal Budget comes from borrowing additional money, each year, from Social Security.

Now note the bars in pink, below the 0% line, the Interest Pmts to SS bars. This represents cash outflow from the federal budget, as Congress must now dedicate an increasing portion of its annual budget to the task of paying interest on its debt to Social Security.

Next, note the purple bars, the Principal Pmts to SS. This shows Congress paying back the principal it owes to Social Security. The total payments rise in magnitude to almost 2% of GDP, which represents close to ten percent of the total federal budget. (The total federal budget tends to run about 20% of GDP)

Finally, with the debt to Social Security entirely paid off, the payments stop, abruptly, in 2038. And the benefits that can be paid to retirees plunge, by almost 30%, virtually overnight.

That’s the current scenario. Bleak after 2038. Expensive for the Federal Budget for two decades prior to 2038.

To fix this problem, there are, of course, a number of strategies that have been proposed. In the next few Simcivic updates, we’ll examine the highlights from some of the most prominent suggestions.

Coming In Future Simcivic Updates

President Bush wants to see a portion of the payroll tax used to finance Personal Retirement Accounts

Is President Bush on the right track?

Congressman Robert Matsui characterizes the insolvency problem “as a two percent problem”.

If this represents the type of solution that he favors, is Congressman Matsui on the right track?

MIT’s Nobel prize winning economist Franco Modigliani wants to let the Trust Fund invest in the stock market.

Is Professor Modigliani on the right track?

Black Entertainment Television’s Robert Johnson (also a Bush Commission member) thinks PRA’s can help poor families build wealth.

Is Robert Johnson’s wealth-building strategy on the right track?

Economist Dean Baker calls the solvency crisis a “phony crisis”, and doubts that any action is needed.

Is Dean Baker on the right track?

Future issues of our Simcivic Update email newsletter will use evidence from the Solvency Simulator to analyze these and other questions.

If you'd like to be added to Simcivic's email list, please send your name and email address to info@simcivic.org.

Steve Johnson, President
Simcivic.org

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