It is assumed that transition costs will be paid annually as part of the Federal Budget. Annual costs will be small at first but will increase each year as the new system is phased in. The peak annual cost will be at the end of the phase-in or a few years later. In computing the peak annual transition cost the new system workers will be considered in groups and the year will be specified relative to the start of the new system. Group 1 will consist of those workers entering the new system in year 1 and retiring in year 46. Group 16 will consist of those entering the system in year 16 and retiring in year 61. In order to compute the peak annual transition cost, the size and composition of the workforce in the new system in year 45 is computed and then the cost is computed using the 2002 wage data in Table 4.B15 cited below. The peak costs will then be in terms of 2002 dollars.
Transition costs will be scrutinized carefully to see if they are reasonable. Therefore three government agency references that are available on the internet or by request using internet information, are used in the estimation. These references are listed below together with descriptions of how the data in the references were used in estimating transition costs.
Reference: Table 4.B15 – Number of workers with Social
Security ( OASDI ) taxable
earnings and amount of earnings, by sex and age, 2002, from
the Social Security Administration Master Earnings File.
The data were organized by age groups 20-29, 30-39, 40-49, 50-59, 60-61, and 62-64 years. There were also data for workers under 20 and over 64, and these data were used to make minor additions to the peak transition cost computed for the 20-64 age span. The organization by the age groups, the wage data by sex and age group, and the number of workers in 20-29 age group for each sex were used in the analysis. Since the data were for the year 2002, the Federal Budget Expenditure of $2 trillion was used as a reference figure to estimate the peak transition cost as a percentage of the Federal Budget in year 45 of the new system.
Reference: Table 2b. Projected Population Change in the
United States, by Age and Sex,
2000 to 2050, from U.S. Census Bureau, 2004 U.S .Interim Projections.
The data used were the projected percent changes in the 20-44 age group, by sex, from 2010 to 2020, from 2020 to 2030, from 2030 to 2040, and from 2040 to 2050. The percent changes from 2010 to 2020 were used to increase the sizes of the 20-29 age groups in the 2002 Social Security Table 4.B15 cited above to determine the total numbers of workers in groups 6-15. The workers in these groups become in year 45, after applying the survival factors, the 50-59 year age groups. The percent changes from 2020 to 2030 were used to increase the total numbers of workers in groups 6-15 to determine the total numbers of workers in groups 16-25, and these workers become in year 45, after applying the survival factors, the 40-49 year age groups. Note that when these groups are formed that they are formed of 20-29 year old workers. The table below gives the numerical details of the construction of the year-45 worker age profile for men, and for women, which are used to estimate peak transition costs. The percent increases appear in column D and, for men, are respectively 4.2, 5.5, 5.9, and 7.7 percent. Those for women are similar but not the same.
Reference: Period Life Table, 2001, Updated April 22,
2005, from Social Security This reference provided all of the survival ( alias
mortality ) data used in constructing the year-45 worker age profiles,
determining how rapidly the yearly transition cost would drop off from the peak
value, when the yearly transition cost would end, and when essentially all the
current system retirees would be deceased. The year 45 worker age profiles are now used in the
following tables to compute the peak transition cost. The total numbers
of men and of women in the year 45 workforce are given in rows B and together
give the total number of 20-64 year olds in year 45 as 157936. The corresponding
total from reference Table 4.B15 for the year 2002 is 136453 indicating a
substantial increase in the workforce over the next 45 years in spite of the
current low birth rate. It should be noted however that the projected population
increases from the Census Bureau include increases due to immigration. The total transition costs for men and for women are given in rows E and
together give a total cost of $184.7 billion. Taking into account that the total
taxable earnings of the workers under 20 or over 64 is about 3.9% of the total
for that of the 20-64 age group, the peak transition cost is
$184.7 billion times 1.039 or $192 billion, and this is 9.6%
of the $2 trillion Federal Budget Expenditures for 2002. Although we cannot say
what the Feral Budget Expenditures in year 45 will be in terms of 2002 dollars
it looks like the peak transition costs will be about 9.6% of that budget
amount. It is also of interest to look at selected annual transition costs just using
Table 4.B15 total taxable earnings by age group. These cost estimates do not
take into account the population changes but give a pretty
good example of how the annual transition costs build up. Assuming the
new system is started with just new workers entering the workforce and using the
data for all workers (both sexes), the total taxable earnings for all workers
under 30 years of age is roughly $641 billion and 4% of this amount is $25.7
billion. This $25.7 billion is taken as the annual transition
cost in the 10th year of the system. Using the total taxable earnings for all
workers under 40 in this way the annual transition cost of $69.9 billion is
obtained for the 20th year of the system. Continuing in this way we
obtain $121.2 billion and $157.7 billion as the annual transition costs in the
30th and 40th years of the system. If we take the total taxable earnings for all
workers we obtain $169.9 billion as the cost in the 45th year, i.e. the number
corresponding to the $192 billion obtained by the detailed analysis. Multiplying
the $169.9 billion by the population change factor 1.157 we get $196.6 billion,
in reasonable agreement with the $192 billion figure. Note that both of these
peak values would occur a few years after the 45th year because they include
workers over 65.
Jump-starting the new system by transferring all workers in the current system
under the age of 30 into the new system is of paramount interest. The benefits
returned on the payroll tax investments of the young workers in the current
system are considered to be very poor and this is assuming the current system
continues to exist roughly as it has in the past. This jump-start could be a
very popular issue with the workers under 30 and as they comprise 28% of all the
workers in the current system, they could exert considerable influence on
Congress. It would cut 10 years off the phase-in time and the
time when all of the transition costs have been paid. In transferring workers
into the new system they would have 4% of all of the taxable wages they had
earned while in the present system put in their retirement accounts. Also there
would be interest added to at least partially compensate for not having had that
4% invested at the time when the corresponding taxable wage was earned. The SSA
would have to compute the amount of 4% tax money plus interest that would be put
in each retirement account and the total jump-start cost using the available
wage data for those workers under 30 for the last 10 years. However those
costs can be estimated using the 2002 Table 4.B15 data and making some
assumptions that are not inconsistent with that data (as was done in comparing
average retiree benefits of the new and current systems). The average wage for
all workers in the 20 - 29 age group is given as $18.3K with 32.915 million
workers in the group. Then it is assumed that the wage distribution runs from
$12.3K to $24.3K with the wage values increasing at $1.34K per year of age. It
was further assumed that the age distribution within the 20 - 29 age group was
uniform and that the interest computed was 6% compounded. Using these numbers it
was determined that the average worker in the group would
have $3600 in 4% tax money and $900 interest put in his retirement account and
that the jump-start cost for this group would be about $147 billion.
For the under-20 group Table 4.B15 gives $4.1K as the average annual wage with
10.915 million workers in the group. Apparently these workers were just doing
summer or part-time work. After trying several sets of assumptions it was
concluded that an average worker in the group would have about $320 in 4% tax
money plus $30 in interest put in his account and that the total jump-start cost
for the group would be about $4 billion. That brings the
total estimated jump-start cost for the under-30 age group to $151 billion. Now
it was noted before that the annual transition cost in the 10th year was about
$25.7 billion . It might seem that the $151 billion figure is inconsistent with
10th year cost but one is an annual cost (which steadily increases each year)
and the other is a total cost, in this case the sum of the annual costs for the
first 10 years (plus interest).
It is important to look beyond year 45 to see how rapidly transition costs will
fall off, when they will end, and how rapidly the payroll tax rate could be
reduced to the 4% rate. The referenced Period Life Table was used in this
analysis. Assuming that the 12.4% total payroll tax rate remains in effect, that
the cost of benefits will decrease at the same rate as the number of current
system retirees decreases (mortality effect), and that the current system
retirees were 65 years old in year 45, it was found that the annual transition
costs would be down to 50% of the peak value in 8 years or by year 53 and that
the transition costs would end by year 59. This is also assuming that the
reduction in the cost of paying benefits would go entirely to reducing
transition costs. If the payroll tax rate was 16% in year 45 and remained
constant, then the annual transition cost would be down by 50% in 7 years and
would end in approximately 11 years or by year 56. In this case, the number of
current system retirees would only have to decrease (mortality) by 25%, versus
32% if the payroll tax rate were 12.4%, in order to end the annual transition
costs. After transition costs end, the payroll tax rate can be gradually be stepped
down to the 4% rate. But that would have to be over an additional 20 year period
taking us to year 80 or the year 2085. That’s a 35 year retirement period which
sees the men through their retirement years but still leaves up to 6% of the
women workers and wives of the men receiving benefits. The year 2085 is also 6
years beyond the year 2079 which is cited in the 2005 Annual Report from the
Trustees of the OASDI Trust Fund as the year when the cost of scheduled benefits
will reach 19.1% of taxable income. Further that this cost will have to be met
by a combination of a payroll tax rate and proceeds from income tax on benefits,
with the proceeds expected to be 1% of taxable income in 2079. This is simply a
confirmation that workers in the new system will almost certainly have to pay
increased payroll tax rates before they can be brought down to 4%. It could turn out that paying the transition costs would
be easier than expected. Since the end of World War II, Congress has increased
the payroll tax whenever the surplus has decreased to the point where
benefits might have to be cut. It seems likely therefore that Congress will
increase the payroll tax again before 2017 when it is expected that the surplus
will disappear. Now if the surplus were used to pay transition costs instead of
putting it into the general revenue fund, that would seem to be a proper use of
the surplus. It would pay all of the costs initially and would significantly
help as the transition costs build up.
Online Actuarial Publications.
A
B
C
D
E
F
G
2010-12
1-3
5069
16184 x .3015
.81
4106
62-64
2013-14
4-5
3368
16184 x .2003
.84
2829
60-61
2015-24
6-15
17520
16184 x 1.042
.90
15768
50-59
2025-34
16-25
18484
17520 x 1.055
.95
17560
40-49
2035-44
26-35
19575
18484 x 1.059
.97
18988
30-39
2045-54
36-45
21082
19575 x 1.077
.99
20871
20-29
A:
Years of interest assuming the new system is initiated in
2010.
B:
New system groups/years corresponding to the years of
interest (A).
C:
Total number of workers in groups (B) in thousands.
D:
Computation performed to obtain number of workers (C) in
thousands.
E:
Decimal fraction of workers (C) that survive to year 45.
F:
Total number of workers in groups (B) that survive to year 45
in thousands.
G:
Age group of workers in (F) in years.
Note: For men the number 16184 in Table 1 is the number of
men in age group 20-29 of Table 4B.15.
Similarly the number 15847 is the number of women in
this 20-29 age group.
A
B
C
D
E
F
G
2010-12
1-3
4762
15847 x .3005
.89
4238
62-64
2013-14
4-5
3171
15847 x .2001
.90
2854
60-61
2015-24
6-15
16449
15847 x 1.038
.95
15627
50-59
2025-34
16-25
17387
16449 x 1.057
.98
17039
40-49
2035-44
26-35
18448
17387 x 1.061
.99
18264
30-39
45-54
36-45
19832
18448 x 1.075
.998
19792
20-29
A
20-29
30-39
40-49
50-59
60-61
62-64
Totals
B
20871
18988
17560
15768
2829
4106
80122
C
20133
36481
41204
41836
36963
31133
D
805
1459
1648
1673
1479
1245
E
16.80
27.70
28.94
26.38
4.18
5.11
109.1
A:
Worker age ranges...covering ages 20 - 64 inclusive.
B:
Workforce profile in 45th year in thousands
C:
Average annual taxable wage per worker by age range (in 2002
dollars)
D:
4% of row C wage data or average transition cost per worker
(45th year in 2002 dollars)
E:
Transition cost in billions by age range using workforce
profile in row B.
A
20-29
30-39
40-49
50-59
60-61
62-64
Totals
B
19792
18264
17039
15627
2854
4238
77814
C
16300
25877
28458
28911
24480
20837
D
652
1035
1138
1156
979
834
E
12.90
18.90
19.39
18.06
2.79
3.53
75.57 Selected Annual Costs
Jump-start Costs
End Of Transition Costs (Without The Jump-start)