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RECENT COMPREHENSIVE SOLVENCY PROPOSALS

RECENT COMPREHENSIVE SOLVENCY PROPOSALS. CHRIS CHAPLAIN SOCIAL SECURITY ADMINISTRATION OFFICE OF THE CHIEF ACTUARY October 8, 2010. 75- year Solvency vs Sustainable Solvency . 75-year solvency Elimination of actuarial deficit (1.92% of payroll for 2010TR)

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RECENT COMPREHENSIVE SOLVENCY PROPOSALS

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  1. RECENT COMPREHENSIVE SOLVENCY PROPOSALS CHRIS CHAPLAIN SOCIAL SECURITY ADMINISTRATION OFFICE OF THE CHIEF ACTUARY October 8, 2010

  2. 75- year Solvency vs Sustainable Solvency 75-year solvency • Elimination of actuarial deficit (1.92% of payroll for 2010TR) • Full payment of scheduled benefits for 75-year period and 1 year’s worth of cost in Trust Funds at end of 75th year Sustainable solvency • 75-year solvency and stable or rising trust fund ratio at end of period • Higher standard • Prevents facing long-term deficit for the next generation

  3. Recent Comprehensive Proposal: Deutch plan • H.R. 5834 introduced in 2010 • Upcoming OCACT memo soon based on 2010TR • Sustainable solvency? Not expected • Revenue increases? Yes • Benefit cuts? No • Other • No effect of General Fund transfers to Trust Funds • No individual accounts

  4. Deutch plan Change in measurement of COLA • Beginning December 2012, use Consumer Price Index for the Elderly (CPI-E) rather than current CPI-W, to establish Social Security COLAs • CPI-E uses different relative weights of items (e.g., more medical items) thought to apply more to the elderly • Historical experience of CPI-E suggests an approximate average 0.2 percentage point increase over CPI-W • Financial effects--not published yet but clearly would reduce the actuarial balance taken alone

  5. Deutch plan Elimination of taxable maximum • Eliminate taxable maximum effective 2017, phased in linearly from 2011 through 2016 by taxing increasing portions of earnings above the current-law taxable maximum • OASDI payroll tax rate of 12.4% on all earnings, ultimately • Benefit credit does apply • Establish 2 new bend points, one at $106,800 and one at $250,000 in 2010 dollars, wage-indexed thereafter • Benefit formula factors of 3% on average indexed monthly earnings (AIME) between $106,800 and $250,000, and 0.25% on AIME above $250,000 • Financial effects--not published yet

  6. Recent Comprehensive Proposal: Ryan plan • Part of H.R. 4529 introduced in current Congress • OCACT solvency memo on April 27, 2010 based on 2009TR • Sustainable solvency? Yes • Revenue increases? Yes • Benefit cuts? Yes • Other • General Fund transfers • Individual Accounts (opt-in)

  7. Ryan Plan provisions Progressive price indexing • Effective for those newly eligible for retired worker benefits in 2018 • Holds harmless lower earners (at 30th percentile) • Operationalized by setting new bend point between current law first and second bend points • Hypothetical maximum earner receives “CPI-indexed” benefit (PIA formula factors reduced by lagged real wage growth) • No effect on disabled workers but proportional reduction at conversion to retired worker benefits at normal retirement age • Financial effects • Increase in actuarial balance: 1.04% • Change in 75th year annual balance: 3.36% (current law -4.34%)

  8. Ryan Plan provisions Low earner benefit enhancement • Full effect for new eligibles in 2027 with phase-in • Workers with 30 years of earnings would get PIA of 120% of Federal single aged poverty level, if higher • No benefit increase for those with <=20 years of earnings • Reduces the 30-year requirement for disabled workers based on years of work • Reduces to zero for those with earnings twice that of steady maximum wage earner • Poverty level rises with CPI, less than wages, lessening effect • Financial effects • Decrease in actuarial balance: 0.04% • Change in 75th year annual balance: negligible (less than 0.005% pyrl)

  9. Ryan Plan provisions Change in Normal Retirement Age (NRA) • For age 62 in 2018, NRA increases to 66 years, 6 months (from 66 years, 4 months) • Once NRA reaches age 67 (for age 62 in 2021), increase NRA to maintain a constant ratio of expected retirement years (life expectancy at NRA) to potential work years (NRA minus 20) • NRA would be expected to increase throughout the long-range period given that life expectancy at NRA increases over time • Financial effects • Change in actuarial balance: 0.41% • Change in 75th year annual balance: 1.23% (current law -4.34%)

  10. Ryan Plan provisions Group Health Insurance Premium Coverage • Revise treatment of total group health insurance premiums • Employee-paid premiums • Current-law: a deduction to Social Security taxable earnings • Proposal: discontinue deduction to SS earnings • Employer-paid premiums • Current-law: not counted as Social Security taxable earnings • Proposal: count as Social Security taxable earnings • Additional earnings would potentially increase benefits • 2010 Health Care law would have effect on this provision • Financial effects (based on 2009TR remember) • Change in actuarial balance: 1.13% • Change in 75th year annual balance: 0.97% (current law -4.34%)

  11. Ryan Plan provisions Individual Accounts • Voluntary; have to opt in—if opt out, subject to basic benefit/revenue provisions already discussed • Ultimately redirect 8% of earnings up to $10,000 (in 2010 $, AWI indexed) and 4% of earnings over $10,000 up to taxable maximum) • Phase in over 30 years • Reduction in OASI retirement and aged survivor benefits as revised for plan, ultimately 100% reduction • Guarantee on IA returns (next slide) • Financial effects • Change in actuarial balance: -0.21% • Change in 75th year annual balance: 3.45% (current law -4.34%)

  12. Ryan Plan provisions Individual Accounts—guarantee provision • Guarantee that total accumulations would be at least as large as accumulations increased at rate of inflation based on CPI-W • Ultimate nominal return of 2.8% per year • Much lower than expected yield of about 5.1% real, or about 8% nominal based on default fund allocation of 65% equity, 35% corporate bonds • Because of opt-in feature and low guarantee, assumed 50% participation • Financial effects • Change in actuarial balance: -0.01% • Change in 75th year annual balance: -0.01% (current law -4.34%) • Low yield assumption (2.9% real) = -0.02/-0.06

  13. Ryan Plan provisions Specified General Fund Transfers • From General Fund of the Treasury when needed to maintain a 100% Trust Fund ratio • Offset transfers in later years from Trust Fund has excess amounts but set a floor at 125% Trust Fund ratio • After the effects of all other provisions in the plan • Financial effects (based on 2009TR remember) • Increase in actuarial balance: none • Change in 75th year annual balance: none (current law -4.34%) • Transfers to Trust Funds required through 2056 • Transfers from Trust Funds projected to occur 2063 through 2082 • On present value basis, net effect is zero (full “repayment” made)

  14. Ryan Plan summary Overall Effect of Proposal

  15. Ryan Plan summary—Trust Fund ratios

  16. Recent Comprehensive Proposal: NAPA Plans • Report by National Academy of Public Administration and National Research Council • OCACT solvency memo on January 13, 2010 based on 2009TR • 4 separate comprehensive proposals • Differing mix of revenue increases and benefit cuts • No individual accounts or General Fund transfers

  17. NAPA Plans: Proposal Option 1 • Sustainable solvency? Yes • Revenue increases? No • Benefit cuts? Yes • All benefit reductions

  18. NAPA Proposal Option 1 Progressive indexing • Effective for those newly eligible for retired worker benefits in 2012 through 2049, stop until 2069, then resume 2070 and later • Holds harmless lower earners (at 30th percentile) • Operationalized by setting new bend point between current law first and second bend points • Hypothetical maximum earner has PIA formula factors reduced by a constant 1.1 percent per year—different from “progressive price indexing” • No effect on disabled workers but proportional reduction at conversion to retired worker benefits at normal retirement age • Financial effects • Change in actuarial balance: 1.25% • Change in 75th year annual balance: 2.91% (current law -4.34%)

  19. NAPA Proposal Option 1 Change in Normal Retirement Age (NRA) • Accelerate scheduled increase in NRA from 66 to 67 by years (starting in 2012) • Once NRA reaches age 67 (for age 62 in 2021), increase NRA to maintain a constant ratio of expected retirement years (life expectancy at NRA) to potential work years (NRA minus 20) • Also increase early eligibility age (EEA) for retired workers in 2012 at the same rate as NRA increases • Both EEA and NRA would be expected to increase throughout the long-range period given that life expectancy at NRA increases over time • Financial effects • Change in actuarial balance: 0.56% • Change in 75th year annual balance: 1.23% (current law -4.34%)

  20. NAPA Proposal Option 1 Change in Cost of Living Adjustment • Beginning December 2012, use a “chained” version of the CPI-W in computing cost-of-living adjustment (COLA) for benefits • Design is to account for “upper-level substitution bias” in the current CPI-W computation • Would be expected to reduce CPI-W by 0.3 percentage points per year on average • Affects only OASI benefits • Financial effects • Change in actuarial balance: 0.36% • Change in 75th year annual balance: 0.50% (current law -4.34%)

  21. NAPA Proposal Option 1 Overall Effect of Proposal

  22. NAPA Plans: Proposal Option 2 • Sustainable solvency? Yes • Revenue increases? Yes • Benefit cuts? Yes • Two-thirds benefit reductions and one-third revenue increases

  23. NAPA Proposal Option 2 Progressive indexing • Effective for those newly eligible for retired worker benefits in 2012 through 2061 • Holds harmless lower earners (at 30th percentile) • Operationalized by setting new bend point between current law first and second bend points • Hypothetical maximum earner has PIA formula factors reduced by a constant 1.1 percent per year—similar to provision for Proposal Option 1 • No effect on disabled workers but proportional reduction at conversion to retired worker benefits at normal retirement age • Financial effects • Change in actuarial balance: 1.34% • Change in 75th year annual balance: 3.33% (current law -4.34%)

  24. NAPA Proposal Option 2 Increase Payroll Tax Rates • OASDI payroll tax rate would change from 12.4% in several increments • 12.6% in 2012 • 12.9% in 2020 • 13.1% in 2030 • 13.9% in 2040 • 13.5% in 2050 • 13.3% in 2060 and later • Employee and employer portions would increase in equal increments • Financial effects • Change in actuarial balance: 0.73% • Change in 75th year annual balance: 0.91% (current law -4.34%)

  25. NAPA Proposal Option 2 Overall Effect of Proposal

  26. NAPA Plans: Proposal Option 3 • Sustainable solvency? Yes • Revenue increases? Yes • Benefit cuts? Yes • One-third benefit reductions and two-thirds revenue increases

  27. NAPA Proposal Option 3 Progressive indexing • Effective for those newly eligible for retired worker benefits in 2012 through 2021, stop through 2059, and resume for 2060 and later • Holds harmless lower earners (at 30th percentile) • Operationalized by setting new bend point between current law first and second bend points • Hypothetical maximum earner has PIA formula factors reduced by a constant 1.1 percent per year—similar to provision for Proposal Options 1 and 2 • No effect on disabled workers but proportional reduction at conversion to retired worker benefits at normal retirement age • Financial effects • Change in actuarial balance: 0.63% • Change in 75th year annual balance: 1.60% (current law -4.34%)

  28. NAPA Proposal Option 3 Increase Payroll Tax Rates • OASDI payroll tax rate would change from 12.4% in several increments • 12.6% in 2012 • 12.9% in 2020 • 13.3% in 2030 • 13.8% in 2050 • 14.4% in 2060 • 14.5% in 2075 and later • Employee and employer portions would increase in equal increments • Financial effects • Change in actuarial balance: 1.02% • Change in 75th year annual balance: 2.07% (current law -4.34%)

  29. NAPA Proposal Option 3 Payroll Tax Rates Above Current Law Taxable Maximum • Taxable maximum is $106,800 for 2010 • Apply an OASDI payroll tax rate above taxable maximum as follows: • 2.0% in 2012 • 3.0% in 2060 and later • No benefit credit for additional earnings taxed • Employee and employer portions would increase in equal increments • Financial effects • Change in actuarial balance: 0.41% • Change in 75th year annual balance: 0.60% (current law -4.34%)

  30. NAPA Proposal Option 3 Overall Effect of Proposal

  31. NAPA Plans: Proposal Option 4 • Sustainable solvency? Yes • Revenue increases? Yes • Benefit cuts? No • All revenue increases

  32. NAPA Proposal Option 4 Increase Taxable Maximum Gradually • Increase taxable maximum gradually, beginning 2012, until 90 percent of covered earnings is taxed (projected to occur in 2048). • After 2018, under current-law about 82.8% of covered earnings is projected to be taxed under Social Security • No benefit credit for additional earnings taxed • Financial effects • Change in actuarial balance: 0.69% • Change in 75th year annual balance: 1.06% (current law -4.34%)

  33. NAPA Proposal Option 4 Increase Payroll Tax Rates (below taxable maximum) • OASDI payroll tax rate would change from 12.4% in several increments • 12.7% in 2012 • 13.0% in 2025 • 13.3% in 2040 • 14.0% in 2060 • 14.5% in 2070 • 14.7% in 2080 and later • Employee and employer portions would increase in equal increments • Financial effects • Change in actuarial balance: 0.83% • Change in 75th year annual balance: 2.25% (current law -4.34%)

  34. NAPA Proposal Option 4 Assign Payroll Tax Rates Above Current Law Taxable Maximum • Taxable maximum is $106,800 for 2010 • Apply an OASDI payroll tax rate above taxable maximum as follows: • 2.0% in 2012 • 3.0% in 2025 • 3.5% in 2040 • 4.5% in 2050 • 5.5% in 2060 and later • No benefit credit for additional earnings taxed • Employee and employer portions would increase in equal increments • Financial effects • Change in actuarial balance: 0.65% • Change in 75th year annual balance: 1.10% (current law -4.34%)

  35. NAPA Proposal Option 4 Overall Effect of Proposal

  36. NAPA plans summary—Trust Fund ratios

  37. More information on provisions / proposals • Visit our office’s website www.social.security.gov/OACT/pubs.html • For options that could be included in a comprehensive proposal, click on “solvency provisions” • For comprehensive proposals, click on “solvency memoranda”

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