SOCIAL SECURITY –
                                      WHAT ARE THE FACTS?

                             Moderator: Ian D...
Question 1

                    What is the early history of the Social
                    Security System and attempts t...
Benefits Start

                    • Until 1940, only return of contributions

                    • 1940– Retired worker...
As Benefits Expand

                    • 1956—Disability Benefits Added

                    • By 1975– Program is Mature...
Disability Insurance Program
                            “Matures” by 1975
                                         Number...
Last 2 Major Changes

                    • 1977 Amendments
                        – Benefit tables were out of control
 ...
Projected Social Security Costs
                                                                   and Revenues (OASDI)

 ...
Social Security Surpluses and Deficits 2005$

                                              200

                         ...
Closing the Social Security Actuarial Deficit: What Do We
                                               Gain?

          ...
Why not Continue to Invest the
                           Surpluses in Special Issue Trust Fund
                          ...
The Trust Fund is a bit like your left hand writing your right hand
                                                      ...
Question 3

                    What kinds of reforms are currently being
                    considered?




            ...
We Have A Choice

                    1)    Raise Scheduled Revenue
                    2)    Lower Scheduled Benefits
   ...
Some Options

                    • Retirement Age
                    • Benefit Formula
                    • Cost-of-Liv...
Anatomy of the Carveout IA

                    • 1) Specify a portion of the OASI payroll tax to
                      tr...
A Reform Consistent with The President’s
                                         Outline
                      •   All in...
Total Retirement Benefits Under a Plan Consistent with the
                                        President’s Outline
   ...
Annual Revenues and Costs of OASI with and without Reform

                                                               ...
The Bottom Line
                      • Fundamental reform with prepayment can revitalize
                        Social S...
Question 4

                    What are the implications of Social Security
                    financing for Public Fina...
Social Security Debt



                                                     15


                                        ...
Question 5

                    What is the rate of return on my Social
                    Security contributions?




  ...
Question 6

                    Is it possible to move to a funded Social
                    Security system?




       ...
Some Fundamentals of Reform with Individual Accounts

                      • Who participates in the reformed system?
   ...
Stock Market Peaks and Troughs
                                                 Annual Rates of Return on 35-year Portfoli...
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SOA 2005 Annual Meeting - Social Security: What are the Facts?

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Transcript of "SOA 2005 Annual Meeting - Social Security: What are the Facts?"

  1. 1. SOCIAL SECURITY – WHAT ARE THE FACTS? Moderator: Ian Duncan, FSA FIA FCIA MAAA, Solucia Inc. Panelists: Thomas Saving, Ph.D., Texas A&M University; Former Public Trustee of the Social Security and Medicare Programs Steve Goss, ASA, MAAA, Chief Actuary, Social Security Administration Society of Actuaries, Annual Meeting New York, November 15, 2005 Agenda • Introduction: our speakers • Session format 2 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 1
  2. 2. Question 1 What is the early history of the Social Security System and attempts to change/reform it? 3 The Beginning • 1935---Middle of the Depression • A “National” Pension Plan is Born – 1937 Payroll tax • 1% each Employee and Employer • On earnings to $3,000 • No Change until 1950 4 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 2
  3. 3. Benefits Start • Until 1940, only return of contributions • 1940– Retired worker, spouse, and widow benefits at age 65 – Required work after 1936 – Only 222,000 beneficiaries qualified – But 35 million workers contributed 5 Contribution Rates Rise • 1950 1.5% employee and employer each • 1954 2% each, on earnings to $3,600 • 1960 3% each, on earnings to $4,800 • 1966 3.85% each, on earnings to $6,600 • 1969 4.2% each, on earnings to $7,800 • 1974 4.95% each, earnings to $13,200 • 1984 5.7% each, on earnings to $37,800 • 1990 6.2% each, on earnings to $51,300 6 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 3
  4. 4. As Benefits Expand • 1956—Disability Benefits Added • By 1975– Program is Mature – 31 million Beneficiaries – 100 million Workers Contribute – 3.2 Workers per Beneficiary • Today– 3.3 Workers per Beneficiary – 48 million Beneficiaries – 159 million Workers Contribute 7 Old-Age and Survivors Insurance Program “Matures” by 1975 Number of OASI Beneficiaries as a Percentage of the Population Aged 62 and Over 100% 80% 60% 40% 20% 0% 1940 1960 1980 2000 2020 2040 2060 2080 8 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 4
  5. 5. Disability Insurance Program “Matures” by 1975 Number of DI Beneficiaries as a Percentage of the Population Aged 50 Through NRA 20% 15% 10% 5% 0% 1940 1960 1980 2000 2020 2040 2060 2080 9 And Changing Replacement Rates Retiree Benefit at 65 as a Perecentage of Former Earnings Level 70 60 50 S c a le d lo w Percent 40 S c a le d me dium 30 S c a le d high e a rne r S t e a df y m a x im um e a rne r 20 10 - 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 Year of Retirem ent at Age 65 10 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 5
  6. 6. Last 2 Major Changes • 1977 Amendments – Benefit tables were out of control • Double Indexing of Benefit levels – Created “Wage-Indexing” for Initial Benefits • Constant replacement rates • 1983 Amendments – Raise Retirement Age – Tax Benefits/Increase Coverage – Solvency expected for 75 years 11 Question 2 What are the current projections for Social Security solvency? 12 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 6
  7. 7. Projected Social Security Costs and Revenues (OASDI) 20 Costs Percent of Taxable Payroll 2041 18 16 2017 14 Tax Revenues 12 10 8 2000 2010 2020 2030 2040 2050 2060 2070 2080 Source: 2005 Trustees Report (OASDI), Table IV. B1. 13 Why Not Just Stay in the Current System? SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 7
  8. 8. Social Security Surpluses and Deficits 2005$ 200 0 2000 2010 2020 2030 2040 2050 2060 2070 2080 Billions of 2005$ -200 200 355 -400 2027 -600 Trust Fund Exhaustion Date -800 2041 -1000 Source: 2005 Trustees Report (OASDI). 15 The Pure Tax Solution: Erase the Actuarial Deficit: What Does It Buy You? SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 8
  9. 9. Closing the Social Security Actuarial Deficit: What Do We Gain? 20 2041 Costs Percent of Taxable Payroll 2023 18 2017 16 14 Tax Revenues 12 10 8 2000 2010 2020 2030 2040 2050 2060 2070 2080 Source: 2005 Trustees Report (OASDI), Table IV. B1. 17 The Pure Tax Solution Some Qualifications: • Every dollar of surplus between now and 2030 must be invested in stocks and bonds, not in special issue Trust Fund bonds (special public-debt obligations). • Every dollar of the special issue bonds currently in the Trust Fund must be redeemed and invested in stocks and bonds (representing ownership and claims on corporations). • This implies that the Federal Government would control sizable voting interests in US corporations. 18 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 9
  10. 10. Why not Continue to Invest the Surpluses in Special Issue Trust Fund Bonds? These [Trust Fund] balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2000. p. 337. SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 10
  11. 11. The Trust Fund is a bit like your left hand writing your right hand a billion dollar bond and then your right hand claiming that it is rich. Try taking that to the bank. Your banker is sure to ask, what’s in your left hand? Why, surprise, it’s a billion dollar liability! Social Security Budget Requirements and the Trust Fund Balance 1000 20 18 Social Security Budget Requirement Billions 800 Trust Fund if 6% 16 Real Interest is Paid 14 Trust Fund in Trillions 2004$ Current Tax Rate 600 12 10 2004$ 400 Budget Transfer Required 8 to Pay Scheduled Benefits 6 Trustees Projected 200 Trust Fund 4 Current Tax Rate 2 0 0 2000 2010 2020 2030 2040 2050 2060 2070 2080-2 -200 -4 22 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 11
  12. 12. Question 3 What kinds of reforms are currently being considered? 23 Without Change, Trust Funds Will Run Out and Benefits Will Be Reduced OASDI Trust Fund Ratio (as percent of annual program cost) 600 Low Cost 500 400 300 74% of 68% of 200 scheduled scheduled High Cost benefits benefits payable payable 100 0 1940 1960 1980 2000 2020 2040 2060 2080 24 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 12
  13. 13. We Have A Choice 1) Raise Scheduled Revenue 2) Lower Scheduled Benefits 3) Increase Retirement Age • Must do at least one • Enacting Change Relatively Soon More advance notice Gradual change More options 25 The Next Changes • Fix for the next 75 Years • Make Financing Stable at the End – Get cost and income in sync – Get Trust Funds stable or rising – Restore Solvency for foreseeable future • By end of 75 years: Need-- – One third lower cost or – Increase revenue by half or – Some combination of these 26 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 13
  14. 14. Some Options • Retirement Age • Benefit Formula • Cost-of-Living Adjustment • Payroll Tax Rate • Taxable Maximum • Cover State and Local Government employees 27 Individual Accounts • Could contribute to solvency – If financed from General Revenue – AND have benefit offset or clawback • But will not help solvency if “carveout” – Even assuming there is a benefit offset 28 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 14
  15. 15. Anatomy of the Carveout IA • 1) Specify a portion of the OASI payroll tax to transfer to individual accounts • 2) Specify a benefit offset mechanism that will eventually pay back a portion of the contributions • 3) Provide general revenue transfers to offset the expenditures in early decades when little benefit offset is realized 29 Variability of IA Outcome Stochastic Distribution of Expected Net Average Real Yield on Portfolios of Equities and Treas Bonds Over a Full Career Accumulation for a Scaled Worker with a Constant % Contribution 16 14 All Stock 12 65 / 35 10 50 / 50 8 35 / 65 6 All T-Bonds 4 2 0 -2 -4 0 10 20 30 40 50 60 70 80 90 100 Percentile 30 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 15
  16. 16. A Reform Consistent with The President’s Outline • All individuals currently 55 years and older stay in the old system. • Participation is voluntary, at any time workers can “opt in” by making a one-time election to enter the new system. • Beginning in 2009 individual participants under age 59, will be allowed to invest 4 percentage points of their Social Security taxes in private accounts up to $1,000 per year • The $1,000 cap on contributions will grow $100 per year, plus growth in average wages. • Benefits will be subject to progressive price indexation, low income benefits will be fully wage indexed while high income benefits will be fully price indexed. • At retirement the annuity value of private accounts offset the defined benefit payments at the realized real rate of return on Government Bonds. • The total retirement benefit is not guaranteed. 31 Whose benefits are not affected by the This Reform Plan? • Individuals born in 1950 and earlier receive Social Security benefits as they are currently scheduled. • Low income workers receive the Social Security benefits as they are currently scheduled plus the net value of their Personal Retirement Account annuity. 32 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 16
  17. 17. Total Retirement Benefits Under a Plan Consistent with the President’s Outline As a percent of Scheduled Benefits Very Low Low Medium High Birth Year Income Income Income Income 1960 101.4 100.4 96.8 92.5 1980 111.0 110.8 106.3 96.4 2000 115.8 114.4 108.1 100.6 33 Composition of Reformed Benefits for Workers born in 1980 and 2000 by Lifetime Earnings Group 140 120 100 30.0% 35.7% 40.5% 48.7% 88.1% 80 61.9% 57.5% 71.6% PRA Annuity Defined Benefit 60 40 20 0 1980 2000 1980 2000 1980 2000 1980 2000 very low low medium high 34 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 17
  18. 18. Annual Revenues and Costs of OASI with and without Reform 18 Status Quo Cost 16 14 as a percent of payroll 12 Status Quo Income 10 2055 8 6 Reform Income 4 Reform Costs After Benefit Offset 2 0 2005 2015 2025 2035 2045 2055 2065 2075 Calendar Year Source: 2005 Trustees Report and author’s estimates. 35 Diamond-Orszag Plan Compared to Status Quo (OASDI) 20 Percent of Taxable Payroll 18 Status Quo Costs Diamond-Orszag Costs 16 Diamond-Orszag 14 2018 Tax Revenues 12 2020 Status Quo Tax Revenues 10 8 2000 2010 2020 2030 2040 2050 2060 2070 2080 Source: 2004 Trustees Report (OASDI), Table IV. B1. and Office of the Actuary Social Security Administration October 6, 2003 Solvency Memorandum. 36 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 18
  19. 19. The Bottom Line • Fundamental reform with prepayment can revitalize Social Security while reducing government debt. • Over the short term, reform is not free. • Over the long term, reform reduces taxes and restores Social Security to a sound fiscal position. • Reform will eventually benefit recipients and workers alike by bestowing real ownership of pension benefits. • Even if we succeed with Social Security reform, the even larger Medicare debt will remain. 37 Another Bottom Line (Steve) • This Plan Specification is Not Complete • Progressive Indexing (affecting disabled) – 1.43% improvement in 1.92% 75-year deficit – 4.62% improvement in 5.70% 2079 deficit – But President suggests don’t affect disabled • Net effect of Individual Accounts and Offset – Worsen 75-year actuarial deficit – Help 2079 annual deficit • Bottom Line – Need at least significant “transition investment” 38 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 19
  20. 20. Question 4 What are the implications of Social Security financing for Public Finances? 39 The Hard Facts of Transfer Systems – The Debt Owed Current Generations – Must be Paid by New Generations 40 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 20
  21. 21. Social Security Debt 15 10 13.7 Trillions (2005$) 5 0 0.9 -5 -10 -15 What We Owe All Current Participants The Contribution of Future Participants Source: Table IV.B7, 2005 Trustees Report 41 Social Security (OASDI) Surpluses and Deficits as a Percentage of Federal Income Tax Revenues 25 20 15 2027 Percentage 10 4.55% 2022 4.0% 5 2017 0 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 -5 -10 42 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 21
  22. 22. Question 5 What is the rate of return on my Social Security contributions? 43 Internal Real Rates of Return—2-Earner Couples Year Both Both Both Attain Low Medium Medium Age 65 Earners Earners Earners Scheduled Benefits and Taxes 2014 3.46% 2.39% 1.73% 2050 3.49 2.45 1.82 Scheduled Benefits and Increased Taxes 2014 3.46% 2.39% 1.73% 2050 3.38 2.33 1.67 Reduced Benefits and Scheduled Taxes 2014 3.44% 2.37% 1.70% 2050 2.49 1.43 0.78 Source: SSA Actuarial Note 2004.5 Tables 4, 5, 6 44 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 22
  23. 23. Question 6 Is it possible to move to a funded Social Security system? 45 Possibilities • Invest in the Trust Funds – Can this be done? • Invest in Individual Accounts – How much difference would this make on total national saving and investment? 46 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 23
  24. 24. Some Fundamentals of Reform with Individual Accounts • Who participates in the reformed system? • Where do IA Contributions come from? • Are participants compensated for accrued benefits? • How does the benefit structure compare to current Social Security? • Are there any guarantees, and if so, what do they cost? • How much of the current Social Security debt does the reform pay off? • How much additional General Revenue is needed? 47 Are we in a PAYGO world? • Can we really effect additional advance funding through either Trust Fund or IA investments? • To increase saving, we need to have someone decrease consumption, at least in the near term • Is it worth while to increase the rate of return on Social Security if it is simply at the expense of returns elsewhere in the economy? • Or can we really create a climate with more saving and less spending? 48 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 24
  25. 25. Stock Market Peaks and Troughs Annual Rates of Return on 35-year Portfolios 12 10.48 9.74 10 9.28 9.22 8.1 8 7.31 7.35 6.64 6 5.77 4.88 Peak Trough 4 3.06 2.61 2 0 09/29-07/32 03/37-04/42 02/66/05/70 01/73-12/74 08/87-11/87 01/00-07/02 Peaks - Troughs Peaks and troughs as defined by E.S. Browning (WSJ, 08/05/02) based on Dow Jones Industrial Average 49 SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts? 25

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