Monday, November 25, 2013

Keeping the Social Security Trust Fund solvent forever is even easier than I thought

  - by New Deal democrat

After I posted "A Plan to Keep Social Security solvent forever" last week, Bruce Webb, one of the authors of the "Northwest Plan" that keeps Social Security solvent exclusively by gradually increasing payroll withholding taxes, informed me that I had misconstrued their math.  Their plan does indeed call for withholding taxes to rise 2%, but it is 2% including both the employer's and employee's share.  In other words, the employee's share does not rise from 6.2% to 8.2%, but only to 7.2%.  The employer's share also rises to 7.2%, so the total tax withheld increases from 12.4% to 14.4%.

To reiterate the essence of what I wrote last week, I wanted to see what would be necessary if we made "baby steps" extremely small and gradual changes in each of the proposed fixes for Social Security.  Once the present issue of Boomer retirements is dealt with, the plan relies upon using the Social Security Trustees' Report projecting the condition of the fund 20 years out, and automatically making small adjustments each year in the direction needed to balance the Fund over that time frame -- including rebating withholding taxes paid if the Trust Fund is overfunded.

Specifically, in every year where the Trustees report that the Fund will be underfunded by at least 5% 20 years out, the following measures (none of which would apply to current recipients) are taken:

  • 1. The percent of total earned income collected by the fund increases by 1%, and continues to rise by 1% a year until it reaches 90% of all earned income! the percentage it was in the early decades of the program.
  • 2. Withholding taxes increase by 0.1%.  For example, in the first such year withholding taxes increase from 6.2% to 6.3%.
  • 3. The age at which persons qualify for benefits, and to qualify for full benefits, increases by one month.
  • 4. The annual cost of living increase is reduced by 0.1% a year for 10 years (meaning a 1% cut in benefits 10 years out).
The process would get repeated every year until the Trustees report that the Fund is not projected to have any shortfall 20 years out.  Raising the amount of income captured to 90% of all income in 1% annual steps should be done regardless of the status of the other steps, since that is the level of income that in earlier times was subject to withholding.

Based on my understanding of the revenue that would be generated by a gradual increase in withholding taxes, I estimated that it would require about 5 years of such baby steps to bring the current shortfall in the Trust Fund to zero.

But now we know that increases in the withholding tax rate would bring in double the revenue I originally estimated.  Based on this, under the above formula it appears that only 3 years of "baby steps" would be needed.  If the plan were to take effect in 2014, then by 2017, tax withholding by employees would be increased from 6.2% to 6.5%, the retirement age far full benefits would be raised by 3 additional months, and only a 3% cut in benefits implemented over 13 years to new retirees would be necessary.

A 3% decrease in the average annual benefit of roughly $1225.45 a month, or $14,305.40 a year, is  about $38 a month, or $430 a year (13 years from now, only as to new beneficiaries). 

Suppose an actual cut in benefits, even of 3%, is a bridge too far.  We can still overcome the current anticipated shortfall by increasing withholding taxes by 0.4% to 6.6%, implemented over as long as a 20 year period, and gradually increase the retirement age for full benefits by an additional 4 months, so that by 20 years from now, the retirement age for full benefits would be 67 years and 4 months.

This is a far cry from the fiscal Armageddon that is constantly trumpeted in the mainstream media, and far more generous than the "death by 1000 cuts" permanent change to a chain-weighted CPI which has been touted by President Obama.

Now that we've put the Trust Fund in permanent actuarial solvency, we still have to deal with how the general fund should pay back the Trust Fund for its borrowing over the last 30 years - a borrowing that, in one form or another, was inevitable and broadly legitimate.  As we'll see, that isn't as difficult as Doomers make it out to be, either.