chris chaplain social security administration office of the chief actuary october 8, 2010

CHRIS CHAPLAINSOCIAL SECURITY ADMINISTRATION

OFFICE OF THE CHIEF ACTUARYOctober 8, 2010

75- year Solvency vs Sustainable Solvency

75-year solvencyElimination 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 solvency75-year solvency and stable or rising trust fund ratio at end of periodHigher standardPrevents facing long-term deficit for the next generation

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Recent Comprehensive Proposal: Deutch planH.R. 5834 introduced in 2010Upcoming OCACT memo soon based on 2010TRSustainable solvency? Not expectedRevenue increases? YesBenefit cuts? NoOther

No effect of General Fund transfers to Trust FundsNo individual accounts

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Deutch plan

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Change in measurement of COLABeginning 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

Deutch plan

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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

Recent Comprehensive Proposal: Ryan plan

Part of H.R. 4529 introduced in current CongressOCACT solvency memo on April 27, 2010 based on

2009TRSustainable solvency? YesRevenue increases? YesBenefit cuts? YesOther

General Fund transfersIndividual Accounts (opt-in)

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Ryan Plan provisions

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Progressive price indexing Effective for those newly eligible for retired worker benefits in 2018Holds harmless lower earners (at 30th percentile)Operationalized by setting new bend point between current law first

and second bend pointsHypothetical 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 ageFinancial effects

Increase in actuarial balance: 1.04% Change in 75th year annual balance: 3.36% (current law -4.34%)


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Low earner benefit enhancementFull effect for new eligibles in 2027 with phase-inWorkers with 30 years of earnings would get PIA of 120% of Federal

single aged poverty level, if higherNo benefit increase for those with <=20 years of earningsReduces the 30-year requirement for disabled workers based on years

of workReduces to zero for those with earnings twice that of steady maximum

wage earnerPoverty level rises with CPI, less than wages, lessening effectFinancial effects

Decrease in actuarial balance: 0.04% Change in 75th year annual balance: negligible (less than 0.005%

pyrl)


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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%)


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Group Health Insurance Premium CoverageRevise treatment of total group health insurance premiumsEmployee-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 benefits2010 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%)


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Individual AccountsVoluntary; have to opt in—if opt out, subject to basic benefit/revenue

provisions already discussedUltimately 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 yearsReduction in OASI retirement and aged survivor benefits as revised

for plan, ultimately 100% reductionGuarantee 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%)


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Individual Accounts—guarantee provisionGuarantee 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 yearMuch 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


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Specified General Fund TransfersFrom General Fund of the Treasury when needed to maintain a

100% Trust Fund ratioOffset transfers in later years from Trust Fund has excess amounts

but set a floor at 125% Trust Fund ratioAfter 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)

Ryan Plan summary

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Overall Effect of Proposal

Change in Change in 75th year

Actuarial Balance Annual Balance

Progressive Price Indexing 1.04 3.36

Low-Earner Benefit Enhancement -0.04 Negl.

Change in Normal Retirement Age 0.41 1.23

Group Health Insurance Premium Coverage 1.13 0.97

Individual Accounts -0.21 3.45

Guarantee on Individual Accounts (expected yield) -0.01 -0.01

Specified General Fund Transfers 0.00 0.00

Total for all provisions 2.05 7.58

Ryan Plan summary—Trust Fund ratios

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Recent Comprehensive Proposal: NAPA PlansReport by National Academy of Public Administration and

National Research CouncilOCACT solvency memo on January 13, 2010 based on

2009TR4 separate comprehensive proposalsDiffering mix of revenue increases and benefit cutsNo individual accounts or General Fund transfers

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NAPA Plans: Proposal Option 1

Sustainable solvency? YesRevenue increases? NoBenefit cuts? YesAll benefit reductions

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NAPA Proposal Option 1

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Progressive indexing Effective for those newly eligible for retired worker benefits in 2012

through 2049, stop until 2069, then resume 2070 and laterHolds harmless lower earners (at 30th percentile)Operationalized by setting new bend point between current law first

and second bend pointsHypothetical 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



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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



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Change in Cost of Living AdjustmentBeginning December 2012, use a “chained” version of the CPI-W in

computing cost-of-living adjustment (COLA) for benefitsDesign is to account for “upper-level substitution bias” in the current

CPI-W computationWould be expected to reduce CPI-W by 0.3 percentage points per

year on averageAffects only OASI benefitsFinancial effects



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Progressive indexing from 2012-2049, and 2070+ 1.25 2.91

Accelerate increase in NRA to 67, then index EEA and NRA based on retirement years / potential work years 0.56 1.23

Use chained CPI to compute COLA--OASI benefits only 0.36 0.50



Sustainable solvency? YesRevenue increases? YesBenefit cuts? YesTwo-thirds benefit reductions and one-third

revenue increases

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through 2061Holds harmless lower earners (at 30th percentile)Operationalized by setting new bend point between current law first


constant 1.1 percent per year—similar to provision for Proposal Option 1




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Increase Payroll Tax RatesOASDI 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 incrementsFinancial effects



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Progressive indexing from 2012-2061 1.34 3.33

Increase payroll tax rate to 12.6% in 2012, 12.9% in 2020, 13.1% in 2030, 13.9% in 2040, 13.5% in 2050, and 13.3% in 2060 0.73 0.91



Sustainable solvency? YesRevenue increases? YesBenefit cuts? YesOne-third benefit reductions and two-thirds

revenue increases

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through 2021, stop through 2059, and resume for 2060 and laterHolds harmless lower earners (at 30th percentile)Operationalized by setting new bend point between current law first


constant 1.1 percent per year—similar to provision for Proposal Options 1 and 2




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Increase Payroll Tax RatesOASDI 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




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Payroll Tax Rates Above Current Law Taxable Maximum

Taxable maximum is $106,800 for 2010Apply 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 taxedEmployee and employer portions would increase in equal incrementsFinancial effects



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Overall Effect of ProposalChange in Change in 75th year


Progressive indexing from 2012-2021, and 2060+ 0.63 1.60

Increase payroll tax rate to 12.6% in 2012, 12.9% in 2020, 13.3% in 2030, 13.8% in 2040, 14.4% in 2060, and 14.5% in 2075 1.02 2.07

Apply the following payroll tax rates above the current-law taxable maximum: 2.0% in 2012, and 3.0% in 2060. No credit of additional earnings toward benefits. 0.41 0.60



Sustainable solvency? YesRevenue increases? YesBenefit cuts? NoAll revenue increases

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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 SecurityNo benefit credit for additional earnings taxed Financial effects



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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




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Assign Payroll Tax Rates Above Current Law Taxable Maximum

Taxable maximum is $106,800 for 2010Apply 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 taxedEmployee and employer portions would increase in equal incrementsFinancial effects



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Overall Effect of ProposalChange in Change in 75th year


Increase the taxable maximum by 2% per year beginning 2012 until 90% of covered earnings is taxable. No benefit credit for earnings above the present-law taxable maximum 0.69 1.06

Increase payroll tax rate below the current-law taxable maximum to 12.7% in 2012, 13.0% in 2025, 13.3% in 2040, 14.0% in 2060, 14.5% in 2070, and 14.7% in 2080 0.83 2.25

Apply the following payroll tax rates above the current-law taxable maximum: 2.0% in 2012, 3.0% in 2025, 3.5% in 2040, 4.5% in 2050, and 5.5% in 2060. No credit of additional earnings toward benefits. 0.65 1.10


NAPA plans summary—Trust Fund ratios

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More information on provisions / proposals

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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”

chris chaplain social security administration office of the chief actuary october 8, 2010

Documents

th year sustainable

tr sustainable solvency

benefit increase

deutch plan

current cpiw

year period

current law

elderly cpie