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Home Publications Blogs CEPR Blog The CRFB's Social Security "Reformer"

The CRFB's Social Security "Reformer"

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Written by David Rosnick   
Wednesday, 05 June 2013 16:38

So the Center for a Responsible Federal Budget is pushing “The Reformer”—their latest tool for confusing the daylights out of anyone interested in Social Security.  According to the CRFB, “The Reformer” lets users select among various options for changing Social Security “in order to close the program’s 75-year shortfall and keep it sustainable for future generations.”

To do this, “The Reformer” estimates the path of the Trust Fund (shown relative to each year’s benefits) over the next 75 years.  So long as the Trust Fund remains positive, “The Reformer” will report that the 75-year shortfall is closed.

However, “The Reformer” doesn’t let anyone off the hook that easily.  If, in 2087, revenue exceeds outlays, “The Reformer” warns “the program is not yet sustainable.”  It tells us this even if the Trust Fund is growing faster than spending!  What is going on here?  Let us take a relatively simple example with two quick changes to the program and see what “The Reformer” says.

First, Social Security caps the payroll tax in relation to the average wage.  Unfortunately, wage gains in recent decades have gone overwhelmingly to those at the top.  This means that Social Security contributions have fallen relative to payrolls.  Suppose we raised the payroll tax cap to cover once more 90% of wages.  This would mean higher-wage workers would get larger benefits, but the program would receive more in additional contributions than it would pay in additional benefits.

Second, the prospect of longer retirements requires workers to save more.  Social Security is no different in this regard.  Thus, in the 25 years from 1965-90, the contribution rate for employees rose 13 times.  On average, the rate rose nearly 0.2 percentage points every other year.  Yet there has been no increase in contributions since then.  If we had continued raising rates like that, it would have stood at 8.4 percent in 2012.  Suppose then that we raised the contribution rate to 7.7 percent and likewise for employers and then never raised it again for at least the next 75 years.  (In real life, I would prefer to delay and phase in such a change but “The Reformer” isn’t that flexible.)

What does “The Reformer” tell us about these changes?  By 2087, the Trust Fund would hold bonds valued at 774 percent of that year’s outlays and be growing.  This wildly exceeds “The Reformer” condition for closing the shortfall.  Nevertheless, “The Reformer” declares that we have closed only 77 percent of the projected gap between spending and revenue in 2087.

Strictly speaking, there would still be a gap between spending and, say, contributions.  But contributions are not the only source of income to Social Security.  If we are genuinely interested in the sustainability of the program, we must look at all sources of income.  How much more income do we need to fill the gap in 2087?  According to “The Reformer”, outlays exceed revenues by 1.1 percentage points of payroll.  Likewise, the Trust Fund’s bonds-- at 774 percent of outlays—amount to 142 percent of payroll.  That means if the Trust Fund accrued interest of only 0.8 percent in the year, interest income would more than cover the difference.

Some might grow concerned about the amount of interest the government would be paying for the money it had borrowed previously from workers through Social Security, but the program is entirely sustainable so long as the government continues paying interest on those bonds.  It is unfortunate that CRFB would design “The Reformer” to mislead in this fashion.

Comments (4)Add Comment
...
written by Marc, June 06, 2013 11:22
But otherwise a cool tool, right?
un-misleading
written by coberly, June 07, 2013 4:36
Dean

I don't know how much your article here clears up the confusion created by the Peterson lie machine.

To make it really simple... raising the payroll tax one tenth of one percent per year (eighty cents per week per year), for each the worker and his boss, would entirely solve the Social Security "problem." This increase would only be needed for a few years at first and then less and less often until by the end of the 75 year window it might only be needed about one year in ten. Meanwhile wages are expected to increase over one full percent per year every year. This would leave workers with twice as much money in their pockets AFTER paying the higher tax, and they would get their money back with interest in the form of benefits also twice as high as todays over a much longer life in retirement.

Raising the cap might seem "just," but the "rich" will not let it happen. Or if they did, the workers would never again be able to say "it's ours; we paid for it."

Neither the CRFB nor the "progressives" want the people to understand this. I have to wonder why.
oops
written by coberly, June 07, 2013 7:59
oops

article was by David Resnick, not Dean.
percent of wages over the cap
written by coberly, June 07, 2013 8:10
The percent of wages over the cap as compared to what it was a few years ago really has nothing to do with Social Security. Social Security is insurance, not welfare.

Although it may sound like "the same thing," the principle is quite different. If you buy insurance that will pay you, say, a thousand dollars a month when you reach 65, and you pay for it a hundred dollars a month over 40 years, it doesn't matter to you, or to the guy who makes a lot more than you that his wages went up more than yours. you both pay the same amount for the same insurance.

What the unequal rise in wages DOES mean is that workers wages on average have not been rising fast enough to pay the effective interest that "pay as you go with wage indexing" normally earns automatically from the rise in wages over time. This keeps the benefit smaller than it would otherwise be.

The answer is not to charge the rich guy more for the same insurance, but to find a way to get better raises for the rest of us. Meanwhile we can still afford to pay for enough insurance to pay for a basic retirement... by raising our premium about eighty cents per week each year. The cost is so tiny you won't feel it. But if you try to make the rich guy pay for benefits he won't get, he'll feel that and he will do whatever he can to stop you, cut your benefits, or kill Social Security outright.

If SS was welfare... which appears to be the only way anybody can think (except Roosevelt who insisted SS NOT be welfare for exactly this reason)... then it would make sense to tax the rich more to pay for it... which is what "raise the cap" means.

But SS is not welfare. It wouldn't work for long if it was. We can pay for it ourselves. And that will be lots better for us. Would be even if was more than eighty cents per week.

Eighty cents.

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