Social Security Reform and the Joint Budget Committee

Process

Charles Blahous

Social Security Income and Costs as a % of Taxable Payroll

Key Summary Measures and Statistics (Combined Social Security Trust Funds)

Trust Fund Exhaustion Date:2036 (OASI = 2038, DI = 2018)

Choices if resolution delayed until 2036:Benefits reduced 23%, or;Payroll tax rate = 16.4%

75-Year Actuarial Imbalance:2.22% of Taxable Payroll (previous report = 1.92%)($PV = $6.5 T on TF basis; $9.1 T on unified budget

basis)

Trust Fund Ratio (100 x TF assets/annual costs):353 (was 358 in 2008)

Key Points from Trustees’ Messages

1) Legislative corrections best enacted soon: “Earlier action will. . . afford elected officials with a greater opportunity to minimize adverse impacts on vulnerable populations, including lower-income workers and those who are already substantially dependent on program benefits.”

2) Don’t get distracted by Trust Fund accounting debate: “Whether viewed from the narrower trust fund perspective or from the wider unified budget perspective, the financial challenges . . . must be addressed.”

3) Practical policy constraints increase the costs of delay: “In the past, policy makers have been reluctant to significantly reduce the benefits of those who have already begun to collect them. . .The costs that will be borne by younger generations will grow significantly each year that a new cohort of baby boomers joins the benefit rolls.”

2011 Operations of Combined Social Security Trust Funds

Category Amount ($B)

A) Expenditures 738.4

B) Net payroll tax contributions 564.7

C) Taxation of benefits 22.7

D) Total tax income (B + C) 587.4

E) Deficit of tax income vs. expenditures (D-A) -151.0

F) General Fund reimbursements 105.4

G) Total non-interest income (B + C + F) 692.8

H) Deficit of non-interest income vs. expenditures (G-A) -45.6

I) Interest income 114.9

J) Total income (B + C + F + I) 807.7

K) Net increase in Trust Fund assets (J – A) 69.3

Should the Joint Committee Attempt Social Security Reform?

Arguments For:• Social Security faces a substantial shortfall requiring legislative

correction.• Social Security is a significant contributor to deficits now and in the

future.• Delaying Soc Sec reforms is costly; this is the best near-term

opportunity.• The economy may benefit from removing this significant policy

uncertainty.

Arguments Against:• A ten-year outlook is not the best yardstick for Social Security reform.• Social Security reforms should not be judged by unified budget targets.• Taking on Social Security would make the committee’s tough job still

harder.

Joint Budget Committee Goals

From the text of the BCA:

1) “The goal of the joint committee shall be to reduce the deficit by at least $1,500,000,000,000 over the period of fiscal years 2012 to 2021.”

2) “The joint committee shall provide recommendations and legislative language that will significantly improve the short-term and long-term fiscal imbalance of the Federal Government.”

Social Security reforms are typically designed pursuant to #2 more than #1, but some past reforms (1977, 1983) have also focused on near-term flows.

Effect of 10-Yr Window On Various Soc Sec Reform Proposals

Reforms with Relative Scoring Advantage in 10-Year View:-- CPI Reform-- Raising the Cap on Taxable Wages-- Raising the Early Eligibility Age (EEA)

Reforms with Relative Scoring Disadvantage in 10-Year View:-- Re-indexing initial benefits (price indexing; progressive indexing)-- Any reforms involving advance funding (TF investment; personal

accts)

Neither Advantaged Nor Disadvantaged by Short-term View:-- Raising the Normal Retirement Age (NRA)-- Changing the benefit formula factors

Example of reform with scoring advantage in 10-Yr view:Raise tax cap to cover 90% of wages (phased in 2011-2020)

Example of reform with scoring disadvantage in 10-Yr view: Progressive benefit indexing

Some Subjective Personal (not Trustees’) Opinions

1) CPI reform is a technical, broader budget reform, not Soc Sec reform.

2) Repairing Soc Sec’s work disincentives is fertile ground for bipartisanship:

-- Progressive benefit formula currently based on average (not annual) earnings-- Non-working spouse benefit-- Actuarial adjustments for early/delayed retirement claims-- Eligibility ages (especially EEA)-- Earnings limitation-- Payroll tax on working seniors

3) If we continue to cut the payroll tax, one of two things must happen:-- Accelerated program insolvency;-- Reliance on general revenue financing.Both are very dangerous for Social Security.