Social Security Reform and the Joint Budget Committee ProcessPresentation Transcript
Social Security Reformand the Joint Budget Committee Process Charles Blahous
Social Security Income and Costs as a % of Taxable Payroll
Key Summary Measures and Statistics (Combined Social Security Trust Funds)Trust Fund Exhaustion Date: 2036 (OASI = 2038, DI = 2018)Choices if resolution delayed until 2036: Benefits reduced 23%, or; Payroll tax rate = 16.4%75-Year Actuarial Imbalance: 2.22% of Taxable Payroll (previous report = 1.92%) ($PV = $6.5 T on TF basis; $9.1 T on unified budget basis)Trust Fund Ratio (100 x TF assets/annual costs): 353 (was 358 in 2008)
Key Points from Trustees’ Messages1) Legislative corrections best enacted soon: “Earlier action will. . . afford elected officials with a greater opportunity to minimize adverse impacts on vulnerable populations, including lower-income workers and those who are already substantially dependent on program benefits.”2) Don’t get distracted by Trust Fund accounting debate: “Whether viewed from the narrower trust fund perspective or from the wider unified budget perspective, the financial challenges . . . must be addressed.”3) Practical policy constraints increase the costs of delay: “In the past, policy makers have been reluctant to significantly reduce the benefits of those who have already begun to collect them. . .The costs that will be borne by younger generations will grow significantly each year that a new cohort of baby boomers joins the benefit rolls.”
2011 Operations of Combined Social Security Trust FundsCategory Amount ($B)A) Expenditures 738.4B) Net payroll tax contributions 564.7C) Taxation of benefits 22.7D) Total tax income (B + C) 587.4E) Deficit of tax income vs. expenditures (D-A) -151.0F) General Fund reimbursements 105.4G) Total non-interest income (B + C + F) 692.8H) Deficit of non-interest income vs. expenditures (G-A) -45.6I) Interest income 114.9J) Total income (B + C + F + I) 807.7K) Net increase in Trust Fund assets (J – A) 69.3
Should the Joint Committee Attempt Social Security Reform?Arguments For: • Social Security faces a substantial shortfall requiring legislative correction. • Social Security is a significant contributor to deficits now and in the future. • Delaying Soc Sec reforms is costly; this is the best near-term opportunity. • The economy may benefit from removing this significant policy uncertainty.Arguments Against: • A ten-year outlook is not the best yardstick for Social Security reform. • Social Security reforms should not be judged by unified budget targets. • Taking on Social Security would make the committee’s tough job still harder.
Joint Budget Committee GoalsFrom the text of the BCA: 1) “The goal of the joint committee shall be to reduce the deficit byat least $1,500,000,000,000 over the period of fiscal years 2012 to2021.” 2) “The joint committee shall provide recommendations andlegislative language that will significantly improve the short-term andlong-term fiscal imbalance of the Federal Government.”Social Security reforms are typically designed pursuant to #2 more than#1, but some past reforms (1977, 1983) have also focused on near-term flows.
Effect of 10-Yr Window On Various Soc Sec Reform ProposalsReforms with Relative Scoring Advantage in 10-Year View: -- CPI Reform -- Raising the Cap on Taxable Wages -- Raising the Early Eligibility Age (EEA)Reforms with Relative Scoring Disadvantage in 10-Year View: -- Re-indexing initial benefits (price indexing; progressive indexing) -- Any reforms involving advance funding (TF investment; personal accts)Neither Advantaged Nor Disadvantaged by Short-term View: -- Raising the Normal Retirement Age (NRA) -- Changing the benefit formula factors
Example of reform with scoring advantage in 10-Yr view:Raise tax cap to cover 90% of wages (phased in 2011-2020)
Example of reform with scoring disadvantage in 10-Yr view: Progressive benefit indexing
Some Subjective Personal (not Trustees’) Opinions1) CPI reform is a technical, broader budget reform, not Soc Sec reform.2) Repairing Soc Sec’s work disincentives is fertile ground for bipartisanship: -- Progressive benefit formula currently based on average (not annual) earnings -- Non-working spouse benefit -- Actuarial adjustments for early/delayed retirement claims -- Eligibility ages (especially EEA) -- Earnings limitation -- Payroll tax on working seniors3) If we continue to cut the payroll tax, one of two things must happen: -- Accelerated program insolvency; -- Reliance on general revenue financing. Both are very dangerous for Social Security.