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Promoting Economic Growth through Social Security Reform

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Promoting Economic Growth through Social Security Reform

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Promoting Economic Growth through Social Security Reform

  1. 1. CRFB.org
  2. 2. CRFB.org 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Economic Growth is Slowing 2 5-Year Rolling Average Potential GDP Growth Source: Committee for a Responsible Federal Budget calculation based on CBO data. Actual Projected
  3. 3. CRFB.org 0% 25% 50% 75% 100% 125% 150% 175% 200% 225% 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Debt is Rising 3 Percent of GDP Source: Committee for a Responsible Federal Budget projections based on 2018 CBO Long-Term Budget Outlook. Actual Projected
  4. 4. CRFB.org Population Aging is Largely Responsible for Both 4 0 20 40 60 80 100 120 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 Population 65 or Older, Millions 65 to 74 75 to 84 85 to 94 95 or Older Actual Projected Source: Committee for a Responsible Federal Budget estimates based on Congressional Budget Office and U.S. Census Bureau data..
  5. 5. CRFB.org Population Aging is Largely Responsible for Both 5 0.8% 0.2% 1.0% 0.7% 1.3% 0.9% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 50-Year Historic 2019-2028 Contribution from Productivity Contribution from Capital Contribution from Labor Percentage Points of GDP Growth Source: Committee for a Responsible Federal Budget estimates based on CBO data.
  6. 6. CRFB.org The Symptom Can Be the Solution: Social Security Reform as a Growth Strategy  Social Security is the largest federal program and the program most affected by population aging  Social Security is the largest source of taxation and retirement income for most Americans  Social Security sends powerful signals on how much to save, how much to work, and when and how to retire  Social Security reform can increase economic growth by boosting labor, capital, and resource allocation 6
  7. 7. CRFB.org A Framework for Pro-Growth Social Security Reform 7
  8. 8. CRFB.org A Framework for Pro-Growth Social Security Reform 1. Promote Delayed Retirement and Productive Aging by increasing Social Security’s retirement ages while insulating vulnerable workers with an Age 62 Poverty Protection Benefit (62-PPB) 2. Reward Work at All Ages by counting all years of work toward benefits based on each year’s earnings rather than average 35-year lifetime earnings (“mini-PIA”) 3. Increase Savings and Investment by automatically enrolling workers in add-on “Supplemental Retirement Accounts” (SRAs) unless a worker opts out 4. Improve Certainty and Sustainability by making Social Security sustainably solvent through a mix of progressive revenue and benefit adjustments 8
  9. 9. CRFB.org Impact of Our Social Security Reform Framework  Increase economic growth by ~0.25% per year  We estimate a 3.5% to 13% boost in GNP in 2050  Increase average per-person income by ~$8,000 in 2050  Restore solvency to Social Security  We estimate our plan would close 115% -130% of the 75-year solvency gap  Increase progressivity and improve retirement security  Most low- and middle-income workers would have more retirement income  Reduce projected debt growth by 25-45% of GDP  We project debt of 115% to 135% of GDP in 2050 instead of 160% 9
  10. 10. CRFB.org Promote Delayed Retirement and Productive Aging Recommendation #1:  Raise the retirement ages (EEA & NRA) by one year and then index to longevity  Establish an “Age 62 Poverty Protection Benefit” (62- PPB) at 100% of poverty to insulate and enhance benefits for vulnerable workers 10 Delayed retirement and productive aging will increase labor supply
  11. 11. CRFB.org 23% 48% 74% 88% 90% 91% 91% 88% 85% 78% 62% 37% 17% 46% 69% 88% 97% 98% 98% 98% 97% 95% 92% 81% 47% 24% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 16-17 18-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70+ 2017 1960 Older Americans Are the “The Largest Underused Pool of Human Resources in the Economy” 11 Source: Bureau of Labor Statistics. Percent of Male Labor Force Participation in Age Range
  12. 12. CRFB.org 26.3% 60.6% 50.7% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Employment at Equivalent Life Expectancy Age 65 Employment at Relative Life Expectancy Age 65 Employment at Chronological Age 65 Fewer Older Americans Work than in the Past, When Life Expectancy Was Shorter and Jobs Much More Physical 12 Source: Cosic and Steuerle (2018). Percent of Age 65 Employment
  13. 13. CRFB.org Working Longer is Good For Workers and the Economy  Wealth: An additional year of work increases wealth by 5% and income by 9% (16% for lower-income)  Health: Delaying retirement reduces mortality and a variety of adverse health outcomes and improves physical and brain health  Happiness: Older workers have stronger social networks, more friends, lower divorce rates, and report being happier than their retired counterparts  Growth: A one-year increase in the average retirement age would increase the size of the economy by 2 to 3 percent 13 Sources: Butrica, Smith, and Steuerle (2006); Bronshtein, Scott, Shoven, and Slavov (2018); McKinsey Global Institute (2008); Center for Retirement Research at Boston College (2016, 2018); Dave, Rashad, and Spasojevic (2008); Congressional Budget Office (2012).
  14. 14. CRFB.org Rethink Retirement to Improve Wealth, Health, Happiness, and Economic Growth RetirementCareer Encore Career The Old Model – One-Size-Fits-All and Binary The New Model – Multiple Options and Paths Phased Retirement Continue Working or Switch to Part-Time Career Bridge Job Delayed Retirement Retirement Part-Time Consulting Early Retirement: Permanently Reduced Income Early Retirement: Poverty-Protected Income 14
  15. 15. CRFB.org Helping Those Who Can’t Delay Retirement An Age 62 Poverty Protection Benefit (62-PPB)  Offers minimum benefit at 100% of poverty for 62-year-old retiree  Increases with collection age (143% at age 67)  Does NOT erode as NRA rises, protecting workers from NRA hike  Remains available at age 62 as EEA rises  Also available to those with higher potential benefits as an advance*  Phases in rapidly for full-career worker, and grows with wages 15 *those with an expected benefit above the minimum benefit can collect the 62-PPB at age 62 in exchange for a reduced benefit based on formula similar to RET
  16. 16. CRFB.org 16 100% 124% 143% 0% 114% 143% 0% 107% 143% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Age 62 Age 65 NRA Traditional Minimum Benefit Structure Current EEA/NRA 1-Year Age Increase 2-Year Age Increase Helping Those Who Can’t Delay Retirement Percent of FPL Source: Authors’ calculations.
  17. 17. CRFB.org 100% 124% 143% 100% 124% 155% 100% 124% 165% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Age 62 Age 65 NRA Age 62 Poverty Protection Benefit (62-PPB) Structure Current EEA/NRA 1-Year Age Increase 2-Year Age Increase 17 Helping Those Who Can’t Delay Retirement Percent of FPL Source: Authors’ calculations.
  18. 18. CRFB.org 0% 107% 143% 100% 124% 165% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Age 62 Age 65 NRA Assuming a 2-Year Increase in EEA and NRA Traditional Minimum Benefit Structure 62-PPB Structure 18 Comparing the 62-PPB to a Traditional Min. Benefit Percent of FPL Source: Authors’ calculations.
  19. 19. CRFB.org 19 0% 20% 40% 60% 80% 100% 120% 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 With 1-year NRA increase With 2-year NRA increase Minimum Benefit as a Percentage of the Federal Poverty Line in 2030 62-PPB and Other Minimum Benefits at Age 62 Length of Career (years) Source: SSA and Authors’ calculations.
  20. 20. CRFB.org 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 20 Minimum Benefit as a Percentage of the Federal Poverty Line in 2030 62-PPB and Other Minimum Benefits at NRA Length of Career (years) Source: SSA and Authors’ calculations. With 1-year NRA increase With 2-year NRA increase
  21. 21. CRFB.org Reward Work at All Ages 21 Recommendation #2:  Calculate benefits based on ALL years of earnings, including before the 10th and after the 35th year  Apply the progressive benefit formula to each year of earnings – not average earnings – with the “mini-PIA” Rewarding all years of work equally will increase labor supply
  22. 22. CRFB.org The Current PIA Formula Is Based On Lifetime Earnings, Which Punishes More Years of Work  The PIA formula is supposed to replace 90% of the first ~$11,000 of average annual income, 32% of the next ~$56,000, and 15% of the rest  It actually replaces 2.6% (90%/35 years) of the first ~$385,000 of lifetime earnings, 0.9% of the next ~$1.8 million, and 0.4% of the rest  That means early years of work are ‘high value’ and later years of work are ‘low value’  After 35 years of work, replacement rate trends toward 0% (‘no value’)  Raising the tax max or improving benefit progressivity makes this worse 22
  23. 23. CRFB.org Social Security Imposes Higher ‘Taxes’ On Later Years of Work 23 -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Implicit Tax Rate by Career Length in Years Source: Goda, Shoven, and Slavov (2009). Average Earner Tax Max Earner
  24. 24. 24 Instead, All Years of Work Should Matter Equally
  25. 25. CRFB.org Our Plan Increases the Reward to Work 25 Source: Goda, Shoven, and Slavov (2009). This models a similar, though not identical, policy that would smooth implicit tax rates for long-career workers. Percent Change in Implicit Tax Rate for Average Earner by Career Length in Years -10.0% -2.9% -12% -10% -8% -6% -4% -2% 0% +2% +4% +6% +8% +10% 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Average Change:
  26. 26. CRFB.org Increase Savings and Investment 26 Recommendation #3:  Automatically enroll all workers in Supplemental Retirement Accounts (SRAs), deducting 2%-3% of wages  Allow workers to ‘opt out’ of SRAs at any time, but automatically re-enroll them every few years Automatic enrollment in retirement accounts will increase overall savings, expanding investment and boosting capital stock
  27. 27. CRFB.org More Savings Means More Investment 27 Source: FRED. -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Percent of Gross National Income Net Savings Net Domestic Investment
  28. 28. CRFB.org $2,485,000 $1,009,000 $531,000 $201,000 $0 $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 $2,500,000 22 26 30 34 38 42 46 50 54 58 62 66 70 10% Returns 7% Returns Returns Tied to U.S. Treasuries Cumulative Contributions SRAs Could Generate Substantial Wealth 28 Source: Authors’ calculations based on CBO data. SRA Balance by Age for a Typical Worker Contributing 3% Per Year (Nominal Dollars)
  29. 29. CRFB.org Improve Certainty and Sustainability 29 Recommendation #4:  Make Social Security sustainably solvent through a combination of progressive tax and benefit changes  Plan should achieve sustainable solvency, improve progressivity, phase in changes gradually, and re-enforce pro-growth nature of the plan Social Security solvency will reduce projected debt and improve predictability, expanding productive investment and capital stock
  30. 30. CRFB.org Social Security is 16 Years from Trust Fund Insolvency 30 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 2035: Insolvency Requires a 21% Across-the-Board Cut in Benefits Cost Revenue Surpluses Deficits Source: Social Security Administration. Percent of GDP Actual Projected
  31. 31. CRFB.org Achieving Sustainable Solvency Would:  Reduce CBO’s debt projections by 25 percent of GDP in 2050 and over 100 percent by 2090  Prevent a 21% across-the-board benefit cut scheduled to occur under current law (though not in CBO’s baseline)  Improve certainty and predictability over benefit levels Certainty itself improves economic welfare by about 0.5 percent of GDP, based on several studies Predictability will result in better savings, investment, and work decisions 31
  32. 32. CRFB.org $99,500 $97,000 $94,000 $90,500 $84,000 $86,000 $88,000 $90,000 $92,000 $94,000 $96,000 $98,000 $100,000 $102,000 Falling Debt [42% of GDP] Stable Debt [92% of GDP] Current Law [144% of GDP] AFS [219% of GDP] Lower Debt Means Higher Income Source: Congressional Budget Office June 2019 Long Term Budget Outlook. Per-Person Income (Real GNP Per-Capita) in 2049 [Debt % of GDP] 32
  33. 33. CRFB.org There’s No One Way to Fix the Program’s Finances 33 8% 10% 12% 14% 16% 18% 20% 2009 2019 2029 2039 2049 2059 2069 2079 2089 Larson Plan Johnson Plan Conrad-Lockhart Plan Percent of Payroll Source: Social Security Trustees.
  34. 34. CRFB.org Our Illustrative Plan Balances Tax and Benefit Changes 34 Note: estimates are rough and rounded. 75-Year Solvency Gap Closed Shortfall Closed in 75th Year Enact Retirement Age, 62-PPB, Mini-PIA, and Computation Years Policies from Pro-Growth Social Security Reform Framework 15% 25% Increase the Taxable Maximum as in Conrad-Lockhart Proposal 30% 25% Adopt Progressive Benefit Formula from Social Security Reform Act 30% 35% Broaden the Payroll Tax Base to Include Cafeteria Plan Income, New State & Local Government Workers, and Other Exempt Income 20% 5% Adopt Chained CPI to Calculate COLAs 20% 20% Total Improvement in Social Security Finances 115% 110% Memo: Improvement Assuming 0.25% Increase in Wage Growth 130% 135%
  35. 35. CRFB.org Impact of Pro-Growth Social Security Reform Framework 35
  36. 36. CRFB.org Pro-Growth Social Security Reform Could Accelerate Economic Growth by a Quarter Percent Per Year 36 Low Estimate High Estimate Raise Retirement Ages w/ Age-62 Poverty Protection Benefit (62-PPB) +1.0% +3.0% Apply Benefit Formula Annually (Mini-PIA), Counting All Years of Work +0.5% +1.5% Establish Supplemental Retirement Accounts (SRAs) +1.0% +3.0% Restore Social Security Solvency +1.0% +5.5% Total Increase in GNP by 2050 (assuming no interactions) +3.5% +13% Memo: Increase to Annual Growth Rate Through 2050 +0.11% +0.40% Central Estimate for Increase in Growth Rate Through 2050 +0.25% Note: estimates are rough and rounded.
  37. 37. CRFB.org Pro-Growth Social Security Reform Would Significantly Boost Output 37 Sources: Authors’ estimates, CBO, JCT, U.S. International Trade Commission, and Penn Wharton Budget Model. >8% 4.5% 1% 1% 0.25% 0.25% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% Pro-Growth Social Security Reform 2013 Immigration Bill Natural Gas "Fracking" 2017 Tax Law (TCJA) Ending the Trade War and Passing TPP $2 Trillion Infrastructure Investment Ultimate GNP Impact
  38. 38. CRFB.org $2,200 $4,600 $7,800 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 Pro-Growth Social Security Reform Would Raise Per-Person Income 38 Source: Authors’ calculations based on CBO data. Additional GNP Per Capita in 2019 Dollars
  39. 39. CRFB.org 160% 135% 115% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 160% 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 Current Law With Social Security Reform Assuming Pro-Growth Effects Pro-Growth Social Security Reform Would Slow the Growth of the National Debt 39 Source: Authors’ calculations based on CBO and SSA data. Debt Held by the Public as a Percent of GDP
  40. 40. CRFB.org 0% 100% 200% 300% 400% 500% 600% 700% 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 Current Law With Social Security Reform Assuming Pro-Growth Effects Trust Fund Depletion in 2035 40 Source: SSA and Authors’ calculations. Trust Fund Ratio as a Percent of Scheduled Benefits Pro-Growth Social Security Reform Would Attain Sustainable Solvency
  41. 41. CRFB.org 41 Note: arrows are in the direction of estimated change in progressivity; size is a rough estimation of magnitude. * denotes estimate of marginal change or unclear change. Pro-Growth Social Security Reform Would Improve Retirement Security
  42. 42. CRFB.org Additional Policies Could Further Boost Growth and Improve Social Security Reform Immigration Laws Repeal the Social Security Earnings Test Modify Actuarial Reductions for Early Retirement Improve Auxiliary Benefits to Reward Work Enact Disability Solutions to Promote Return to and Remain at Work Adopt a More Pro-Growth Payroll Tax Reassess Retirement Ages Government-Wide 42
  43. 43. CRFB.org For More Information  “Promoting Economic Growth through Social Security Reform”: http://www.crfb.org/progrowthSSreform  The Social Security Reformer: http://www.socialsecurityreformer.org/  How Old Will You Be When Social Security’s Funds Run Out?: http://www.crfb.org/blogs/how-old-will-you-be- when-social-securitys-funds-run-out 43

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