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Solving the Social Security Crisis With Parametric Changes

Solving the Social Security Crisis With Parametric Changes. By: Ben Rubin and Michael Dulicio. Structure of Social Security . Hybrid between pay-as-you-go and pre-funded Current Benefits are drawn out of current taxes Some surplus revenue is accumulated in trust fund

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Solving the Social Security Crisis With Parametric Changes

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  1. Solving the Social Security Crisis With Parametric Changes By: Ben Rubin and Michael Dulicio

  2. Structure of Social Security • Hybrid between pay-as-you-go and pre-funded • Current Benefits are drawn out of current taxes • Some surplus revenue is accumulated in trust fund • Trust fund currently has only 3 years worth of benefits

  3. Legacy Debt • Early beneficiaries paid little into Social Security • The Legacy Debt is still being passed from generation to generation

  4. The Social Security Problem: Demographics • Demographic changes effecting solvency • Decreases in population growth • Increasing life spans • Early retirement decreases quality of old age • Decreased benefits per year

  5. Dropping Fertility

  6. Increasing Life Expectancy

  7. Decreasing Workers Per Beneficiary

  8. Trust Fund Insolvency Exhausted in 2042 ↙ 2003 2042

  9. Parametric Reforms • Adjust benefit and tax parameters • Maintain overall structure of Social Security

  10. Longevity Indexing • Example: Gradually Raise Retirement Age to 68 • Eliminate 26% of 75-year deficit • Concern: Some are physically unable to work beyond 65

  11. Progressive Benefit Reduction • Example: Index the benefits of high-earners with price growth, not wage growth • Eliminate 60% of 75-year deficit • Protects the economically vulnerable

  12. Progressive Tax Increases • Example: Gradually raise the taxable maximum threshold • Eliminate 12% of 75-year deficit

  13. Parametric Reforms • Not mutually exclusive • Relatively minor adjustments are sufficient • Progressive reforms protect the vulnerable

  14. Individual Accounts • Transition from a defined benefit system to a defined contribution system • Increases national savings rate • Insures long term balance in Social Security

  15. The Double Burden Problem

  16. The Effect on Trust Fund Solvency Exhausted in 2026

  17. Summary • Legacy debt and demographic changes are driving Social Security towards insolvency • Small reforms endogenous to the system can fix Social Security • Structural reforms such as individual accounts burden the trust fund during transition

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