The prospects of phasing in this new system in the very near future do not appear to be very good unless it becomes a big campaign issue in the 2008 elections. Otherwise it may be ignored as much as possible until it becomes necessary to cut Social Security benefits or raise payroll taxes and even then a short term solution might seem to be better than phasing in a completely new system.
There are serious problems with the funding of the current system and although Congress is well aware of these problems, there are no proposed solutions being seriously considered at this time. It appears that many in Congress are content to continue to use the payroll tax surplus as general revenue until it becomes negligible and then to increase the payroll tax rate and hope that the current system could continue to function. Also, although the new system would be great for the workers just entering the workforce, it is not well known to the general public and the workers just entering the workforce do not comprise a significant constituency or voting bloc. That is why we should jump-start the system as described previously. The jump-start cost of transferring all workers in the current system who are under the age of 30 into the new system is estimated to be $151 billion, which is a manageable cost and is comparable to some of the large payroll tax surpluses we have had for a number of years. The percentage of workers in the present system under age 30 is about 28% . This would be a sizable voting bloc and could be quite persuasive with Congress. Also this jump-start would cut 10 years off the times necessary to phase in the new system and pay off the transition costs and this would be another major advantage of the jump-start, popular with both the transferees and the general public.
To sell the phase-in of a completely new system to the public we need to emphasize that the cost involved is essentially just the high payroll tax and time required to phase out the present system! If we didn't have the present system, starting a personal retirement account system would be relatively easy! Of course it is also important to say that a new system could provide superior benefits at a fraction of the cost and if we don't change the present system we are stuck with those high payroll taxes and low benefits.
The following two paragraphs are excerpts from A Summary of the 2007 Annual Reports on the Status of the Social Security and Medicare Programs (referred to subsequently as the Summary) and are from the Social Security and Medicare Boards of Trustees. The excerpts emphasize that there are serious financial problems that need to be solved and that delay in addressing these problems will make it more difficult and costly to solve them.
"We are increasingly concerned about inaction on the financial challenges facing the Social Security and Medicare programs. The longer we wait to address these challenges, the more limited will be the options available, the greater will be the required adjustments, and the more severe the potential detrimental economic impact on our nation".
"Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 16 percent in payroll tax revenues or an immediate reduction in benefits of 13 percent or some combination of the two. Ensuring that the system is solvent on a sustainable basis beyond the next 75 years would require larger changes. To the extent that changes are delayed or phased in gradually, larger adjustments in scheduled benefits and revenues would be required that would be spread over fewer generations".
Using the definition in the Summary, the trust fund represents the accumulated value, including interest, of all prior program annual surpluses and deficits, and provides automatic authority to pay benefits. The health or adequacy of the fund is measured by comparing the assets or accumulated value at the beginning of a year to projected costs for that year and is termed the Trust Fund Ratio, which gives the assets as a percentage of the annual expenditures. A Ratio of 100 percent means the assets are adequate to pay the benefits. The Summary indicates the Ratio for the OASI trust fund is currently about 360%, that it is increasing and will peak in 2015 and begin to fall. The report also indicates that although the trust fund will not be exhausted until 2042, it will be necessary, in 2018, to start using some of the annual interest paid on the trust fund to pay benefits, which means drawing some cash from general revenue. This is made to sound very alarming! To understand this alarm, note that surplus payroll tax has for years been used to supplement general revenue and now, in 2018, it will be necessary to to pay some of the annual interest in cash! Further the Summary indicates that in 2028 the entire annual interest payment, together with the payroll tax and tax on benefits, will not be sufficient to pay benefits and the trust fund value will start to decrease. At that time the size of the trust fund would have to be in the neighborhood of $6 trillion ( it is expected to be over $4.2 trillion in 2016).Now there is no long term benefit in using trust fund assets as a stopgap or temporary way of paying scheduled benefits but there would be a long term benefit in using those assets to pay transition costs of phasing in a new Social Security System!
We can make a strong argument for jump-starting a phase-in of a new Social Security System of worker-owned personal retirement accounts ASAP! The argument is based on data not emphasized in the Summary which incidentally is titled in very large letters A MESSAGE TO THE PUBLIC.
The Summary can be printed from the internet and you should get hold of a copy if you want to check the data presented here. The thrust of the Message is that the trust fund ratios are either decreasing or will be decreasing in a few short years and that consequently we should be increasing the payroll tax rates very soon or some benefits may have to be cut (or general revenue tapped). However, it can be argued that there are good reasons for considering alternatives.
| Year | A | B | C | D | E | F |
|---|---|---|---|---|---|---|
| 2007 | 2027 | 183 | 101 | 82 | 492 | 3.7 |
| 2008 | 2231 | 204 | 111 | 93 | 511 | 4.0 |
| 2009 | 2454 | 223 | 123 | 100 | 539 | 4.1 |
| 2010 | 2691 | 237 | 135 | 102 | 574 | 4.3 |
| 2011 | 2941 | 250 | 148 | 102 | 611 | 4.4 |
| 2012 | 3200 | 259 | 162 | 97 | 652 | 4.5 |
| 2013 | 3463 | 263 | 176 | 87 | 699 | 4.6 |
| 2014 | 3726 | 263 | 191 | 72 | 750 | 4.6 |
| 2015 | 3988 | 262 | 205 | 57 | 805 | 4.6 |
| 2016 | 4246 | 258 | 219 | 39 | 864 | 4.6 |
| A | End of year fund value (billions) |
|---|---|
| B | Increase in fund value this year in billions (income - outgo) (or total surplus) |
| C | Increase in fund value due to 5.5% interest payment (interest) |
| D | Increase in fund value due to surplus payroll tax and tax on benefits (cash) |
| E | Expenditures as Social Security benefits this year (outgo in billions) |
| F | Trust Fund Ratio this year of fund value to expenditures |
The table above lists the important OASI fund data from 2007 through 2016 where the cash surplus (column D) consisting of payroll tax and tax on benefits is about to disappear. The data in column B (increase in fund value) and column E (expenditures) are taken from the table titled "Estimated Operations of Trust Funds" in the Summary. The OASI assets at the start of 2007 ($1844 billion) and the interest rate on fund assets (5.5%), also from the Summary, were used to compute the other data in the table. For example, the column A value of $2027 billion is the sum of $1844 billion and the column B value of $183 billion, 5.5% of $1844 billion is the column C value of $101 billion. and the column F value of 3.7 is the trust fund ratio of $1844 billion to the 2007 expenditure of $492 billion in column E.
What the table above shows is the size of the OASI trust fund and a breakdown of the OASI surplus into its' interest and cash components, data which are not emphasized or made so explicit in the Summary. It should seem obvious with a trust fund value of over $2 trillion in 2007 and increasing to over $4 trillion in 2016 with a trust fund ratio of 4.6, that the trust fund value can and should be drawn down now! . It's analogous to an assembly firm that has an unnecessarily high inventory of parts where that inventory represents a lot of capital that could be better used in company operations.
How should we view the OASI trust fund? The fund value represents all of the excess payroll tax that has been accumulated, largely since 1983, plus interest from general revenue as the money has in effect been borrowed and spent as general revenue. It has not been used as a necessary reserve to cover a shortfall in payroll tax income but more to cover-up rather large transfers of payroll tax money into general revenue. It's like a large cookie jar full of IOUs! Transferring surplus payroll tax into general revenue has the workers in effect paying a little extra income tax without benefit of any exemptions, i.e. payroll tax is paid on the workers' gross income! Taking back that surplus payroll tax by drawing down the trust fund certainly seems justifiable.
| Year | A | B | C | D | E | F |
|---|---|---|---|---|---|---|
| 2007 | 2027 | 183 | 101 | 82 | 492 | 3.7 |
| 2008 | 2231 | 204 | 111 | 93 | 511 | 4.0 |
| 2009 | 2454 | 223 | 123 | 100 | 539 | 4.1 |
| 2010 | 2540 | 86 | 135 | 102-151 | 574+151 | 3.4 |
| 2011 | 2752 | 212 | 140 | 102-30 | 611+30 | 4.0 |
| 2012 | 2966 | 214 | 151 | 97-35 | 652+35 | 4.0 |
| 2013 | 3177 | 211 | 163 | 87-39 | 699+39 | 4.0 |
| 2014 | 3381 | 204 | 175 | 72-43 | 750+43 | 4.0 |
| 2015 | 3576 | 195 | 186 | 57-48 | 805+48 | 4.0 |
| 2016 | 3759 | 183 | 197 | 39-52 | 864+52 | 3.9 |
We can use the phase-in of a new Social Security System, taking the phase-in costs of the proposed personal retirement system, to demonstrate how that phase-in could be used to draw down the OASI trust fund. The table above shows how this phase-in would affect the OASI fund data if it were started in 2010. It shows the jump-start cost and annual transition costs added to OASI expenditures from 2010 through 2016. The added $151 billion in column E is the jump-start cost of transferring all workers in the present system under the age of 30 into the personal retirement account system and putting 4% of all the OASI previous earnings of each worker, plus 6% compound interest, into that worker's retirement account. As soon as the jump-start is initiated the money in those retirement accounts would be invested in a broad spectrum of common stocks and the Social Security Administration would take on the the added responsibility of being a pension fund manager.
The added $30 billion in 2011, $35 billion in 2012,etc., increasing to $52 billion in 2016 are the annual transition costs entered as additional expenditures. These costs amount to 4% of all the OASI wages earned by the workers in the new system that year and the money is put in those workers' accounts and invested. The result of those added expenditures is shown in D as the resulting cash surplus going into the trust fund. Note that the cash flow into the trust fund is negative in 2010 and 2016. In the other years the annual transition costs reduced but did not eliminate the positive cash flow into the trust fund. The cash surplus in 2010 of -$49 billion means it was necessary to not only eliminate the $102 billion from going into the fund but also to reduce the trust fund by $49 billion. The cash flow of -$13 billion in 2016 indicates we had started to really draw down the trust fund in 2016 rather than 2017, i.e. the payroll tax income was insufficient to pay benefits. That does not mean however that we should have already rushed to raise the payroll tax rate!
Let's summarize what happened in this test draw-down. In 2016 the estimated fund value had been reduced by $487 billion to roughly $3.76 trillion. This reduction breaks down into $89 billion in less interest and $398 billion in less cash The cash went into workers' retirement accounts and was invested in the stock market over this 7 year period. Note that $336 billion of the $389 billion withdrawal was from current cash surpluses and only $62 billion had to be retrieved from the trust fund. This test phase-in of the new retirement account system resulted in all workers earning OASI taxable wages and under the age of 36 then being in the new system and building up personal retirement accounts .It may be seen that the trust fund value in 2016 is still quite large with a trust fund ratio of 3.9, and that the $389 billion withdrawn from the trust fund was put to good use.
Suppose the OASI payroll tax rate is not increased. The Summary indicates that trust fund income including interest will just be sufficient to pay benefits in 2028 and that by 2042 the interest will have disappeared and income (payroll tax plus tax on benefits)will just be sufficient to pay benefits. After 2042 when income is insufficient to pay benefits, it would be necessary to make up the difference with general revenue.
It looks like we could continue to draw down the trust value after 2016, so let's continue to look at the effects of phasing in a system of personal retirement accounts. Continuing the drawdown to 2026 would result in taking out roughly another $800 billion from the trust fund, putting it in retirement accounts, and investing it in the stock market. The annual transition cost would be up to about $100 billion and all workers earning OASI taxable wages and under the age of 46 would be in the new system. By that time, or even a few years earlier, trust fund income including interest would be just sufficient to pay benefits and annual transition costs. That would be the time to start thinking about raising the OASI payroll tax rate. Note that when the present system is phased out, and the retirees seen through their retirement years, there will be no further need of an OASI Trust Fund. Also when it becomes necessary to raise the payroll tax rate and have to deal again with surplus payroll tax, the SSA would have the capability of investing the surplus in a special "surplus account".
It is hoped that the above analysis has made it obvious that (1) the very size of the OASI Trust Fund and (2) the urgent need of social security reform could make (1) phasing in a personal retirement account system, (2)not raising payroll taxes, and (3) maintaining present Social Security benefits, taken together, a major 2008 election issue and a Great Opportunity for the underdog Republicans. They could point out to the workers that this can be accomplished by cashing in the IOUs in the OASI Trust Fund and using all past, present, and future surplus payroll tax (and tax on benefits) for social security reform.
Hopefully Congress will be agreeable to a social security system that is essentially worker-owned and that it will be provided as a government service to insure that workers can have a secure and enjoyable retirement. If studies were to show that our economy could be much stronger if this new system were implemented, it might help in getting public and Congressional approval of its phase-in. Anyhow, what we need first is to have the potential of the new system made known.
If there are people who might be against a system of personal retirement accounts that are worker-owned, they are probably advocates of big government and government control of many aspects of our economy, our private property, and even of individual behavior that does not conform to what they view as proper. On the other hand they may be just people who haven't read this paper and don't understand how good these accounts could be for retirees.
There is a major spending problem with Congress and it looks like a Federal Government spending limit based on our Gross Domestic Product would be a much more effective way to correct and curb excessive spending than by balanced budget proposals. Since Congress is so divided, it might also be better to invite each of 5 or 6 of our prominent think-tanks to examine our next Federal Budget and to indicate various ways in which that budget could be trimmed so that it would not exceed 18% of our GDP for the previous year, and then repeat the exercise using 17% as the limit. The Federal Budget should be put on the internet in sufficient detail, suitably organized, and easily accessible so that the general public can become familiar with Federal Budget details. Hopefully the think-tank analyses could be made available in a single report within a 3 to 6 month period, and available to the general public as well as to Congress. With all cuts identified together with the basis for each cut, this report could be very educational for the general public and could provide the support needed for important Congressional decision-making.
Entitlement spending is a major area where Congress has gone overboard in spending, with very good intentions but with insufficient grasp of the impact on taxpayers and the economy. With Medicare, the government pays a group of knowledgeable doctors to set reasonable costs for the various medical treatments that seniors need and then the taxpayers pay 80% of those reasonable costs and those receiving the treatments pay the other 20%. Paying 80% seems overly generous where just paying 50% of reasonable costs could be considered a good deal for the seniors. A gradual reduction in the percentage or portion of reasonable costs paid by Medicare might be a good way to reduce Medicare costs. Another aspect of this problem is that the portion of our total population that is retired is increasing and we really shouldn't burden our young people (workers) with such a large percentage of the health-care costs of retirees.
The Summary indicates a worker and his employer together pay 2.9% of the worker's wage for HI (Health Insurance) to fund Part A Medicare benefits (inpatient hospital and related care). A self-employed person pays the full 2.9%. The Summary states that about 79% of Part B Medicare costs (physician and outpatient services) come from general revenue with the rest coming from premiums paid by the Medicare recipients. It seems obvious that it would be much better to fund Part A benefits in a similar manner.
A total of 1.8% of a worker's wage goes to pay DI (disability Insurance) benefits to the disabled, regardless of what type of work the worker does. It also seems that determining the extent to which a worker is disabled, whether he is capable of doing another type of work, and how much he is to be paid for his disability is a very contentious issue. Annual administrative costs are about 3.5 times higher than the OASI administrative costs as a percentage of expenditures. This also seems to be unfair to the self-employed worker. It looks like the DI (Disability Insurance) program should be phased out with the OASI program and a completely new way of handling disabilities found.
Perhaps the major cause of the accelerating cost of medical care is insurance and so it seems ridiculous to hear people saying that the uninsured need insurance because of the very high cost of medical care. A good way to bring down medical costs is to give people control of the health-care dollars available to them so they can buy the health-care they believe they need or want. For example we could require employers that provide health insurance for their employees to allow each employee to take the dollar cost of his employer provided health insurance as extra pay in lieu of that insurance. That would allow the employee to buy the kind and amount of insurance to meet his own family needs. Another example pertains to Medicare. As a retiree I have been looking to enroll in a Medicare Advantage plan. This is a plan provided by a private insurance company which receives $800 a month per person from Medicare in return for the private insurance company providing that person's Medicare benefits. Medicare does this, at least in part, to save money and the private insurance companies are rather eager to sign-up seniors with Medicare coverage to allow them to provide the seniors their Medicare benefits. Now there are retirees that would like to receive that $800 every month in return for accepting complete financial responsibility for all of their health-care costs. They could be required to accumulate that money in a health savings account and only draw from that account to pay for medical care. The big criticism of allowing retirees to do this is that the reasonably healthy would seize this opportunity leaving the unhealthy with inadequate funds available to meet their medical needs. But what would be a fair monthly allotment to give retirees in return for their assuming complete, or essentially complete, financial responsibility for their own medical care? It's worth looking into.
The consequences of successfully phasing in this new system in general look good. All of the workers would be invested in our economy so we would truly be a nation of investors. As such we would be more of a nation of savers than we are. Workers might well insist on annual wage adjustments for inflation. Our attitudes on how we can best use government to serve the people's needs might well change. The details of just how the retirement account monies would be invested and the accounts managed would have to be worked out. The Social Security Administration would become a very powerful agency and would have a strong influence on our economy. Stock investors generally have voting rights in the companies they have invested in, but in this new system the retirement accounts would be invested in a broad-based fund containing perhaps 1000 to 1500 stocks with dividends being automatically reinvested. The fund might be of two parts with one part growth oriented for the younger workers and a second part conservative oriented for the workers near retirement or in retirement. However the worker-investors would certainly have a strong indirect influence on how corporations are run.
Assuming we did start to phase-in the new system in 2010, it appears that there would be about $200 billion (2002 dollars) per year in retirement account money being invested in the market by the end of the phase-in so the total net amount invested could build up to between $1.5 and $2 trillion before being stabilized by retiree withdrawals. The Wilshire 5000 information on the internet indicates that the total market capitalization was $13.4 trillion on 7/31/2001 so it appears that new system retirement account investment in the market could build up to the point where it would amount to from 10% to 15% of total market capitalization. This would seem large enough to have a stabilizing effect on the market yet small enough to have considerable investment flexibility.