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#ExpandSocialSecurity, in practice

#ExpandSocialSecurity, in practice

Last updated on: September 17, 2016 at 8:24 pm by Jane the Actuary

#ExpandSocialSecurity, in practice 2016-09-17T20:24:47-06:00 Jane the Actuary

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So Clinton and the Democrats have as part of their platform expanding Social Security.

“What,” you may have asked, “do they mean by this?”

“Exactly how,” you may have wondered, “do they plan on going about this?”

Now we know. Rep. Linda Sanchez has introduced a bill, H.R. 5952, the Strengthening Social Security Act of 2016, which aims to make benefits more generous in several ways, and it sure seems as if this bill is essentially the Democrat’s platform put into legislation.

Now, when this first came across my twitter feed last week, I had a rather difficult time finding out more about this, but ultimately found a description at the Social Security Administration website, in the form of an analysis of the bill’s costs in its various provisions, as worked out by the Chief Actuary’s office. This is actually a rather nifty website, as they provide analysis for all plans that come across their desk.

So what are the proposals?

Recall that the existing formula is based on “bendpoints”: in 2016, the basic benefit is 90% of wage-indexed average earnings up to $10,272 plus 32% of the tranche of average wages from $10,272 to $61,884, and 15% of the tranche of wages above $51,884 (see here), up to the maximum, based on the maximum average pay via the year-to-year taxable wage maximums.

Thus, the proposal begins with a gradual phase-out of the Social Security taxable ceiling. This, of course, moves Social Security even further away from true “earned benefits” and into a redistributive benefit. There is a benefit accrual, but it is so laughably small as to be an insult — a pay replacement rate of 5% on pay above the old wage base, and that’s averaged separately, so that it can’t serve to boost the “regular” average for periods of low pay.

Second, the proposal boosts this formula, for the lowest tranche of pay, up to a 95% factor. This benefits everyone, of course, but is proportionately most beneficial for low-wage workers.

Third, the first bend point is itself increased, to 15% above the current level.

Fourth, use the CPI-E, the consumer price index for the elderly. This measure of CPI uses as its basket of goods the typical expenditures of the elderly, that is, households with at least one person age 62 or older. This means there’s less weight for items like transportation, education, and apparel, and more for housing and medical care. Because housing and medical care’s costs have been rising at rates higher than general inflation, this inflation measure would produce, as long as these trends continue, larger COLA increases. (But, man, oh man, can you imagine the hue and cry if Medicare controls plus housing market stagnation produce lower CPIs than the CPI-U would generate?)

Fifth, provide for an alternate surviving spouse benefit — either the traditional benefit, or 75% of the combined own and spouse’s benefits, whichever is greater. This changes survivor’s benefits from an aid for the long-term “stay-at-home” spouse without resources of her own, to a perk or marriage in general.

Now, long-time readers know that the Jane Plan proposes a flat benefit for everyone, paid from general revenues, paired with a separate, fully-funded, purely income based component. So, yes, it’s redistributive, but it’s honest and transparent about it. I should also mention that the United Kingdom recently transitioned from a pay-based benefit not that different from Social Security to a flat benefit, by gradually reducing the value of the upper tranche and increasing the value of the lower tranche, so similar to this process of moving from 90% to 95%, but paired with dropping the 32% level down year-by-year.

So that means, that, taken in isolation, I don’t have any strong opinion on whether the first level benefit should be 90% or 95% or 100%. As to the CPI-E vs. CPI-U, well, I don’t have enough expertise to determine whether the former is “better” in an objective sense.

But consider this: here’s the graph that the SSA provides of their analysis of the long term revenue and expenditures under the proposal:

https://www.ssa.gov/oact/solvency/LSanchez_20160909.pdf

The red dotted line is the cost of the proposal, and the grey line is the cost of Social Security as it exists today. Right now, we spend about 5% of GDP; this is slated to rise to 6% of GDP by the late 2030s, dip slightly as baby boomers die, and then grow again as the comparatively small Baby Bust is increasingly joined in retirement by the Millenials. The drop that occurs after 2032 or so? That represents the exhaustion of the Trust Fund and the immediate cut in benefits down to actual FICA revenues when that occurs.

Now, the more generous level of spending of proposal is evident in the rapid climb of that red line, which grows to 6.5% in the late 2040s and reaches nearly 7% later (though it’s not clear to me why it continues to climb so much. But what’s shocking about this proposal is this: even with a funding mechanism of removing the pay cap and providing very little benefit in return, there is still a substantial funding gap. In fact, removing the wage ceiling isn’t even enough to fully fund present-law Social Security benefits, on an ongoing basis. It seems to me that, if you were going to propose a Social Security bill, even if your primary objective was to bump up benefits, you’d at least be sure it was in long-term actuarial balance! (and, though I hate to give them any ideas, you’d think that your next step, after removing the wage base, would be to apply the tax to all income, rather than just wage income — which, I’ll point out, is what the Jane Plan does.)

So bottom line: I’d label this as a “Social Security Reform fail.”

image: https://commons.wikimedia.org/wiki/File:Social_security_card.gif; originally produced by the Social Security Administration and in the public domain

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