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Analyzing the Benefit Impact of SSA Proposals on Workers Tiffany Bosley Michael Clingman Kyle Burkhalter.

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Presentation on theme: "Analyzing the Benefit Impact of SSA Proposals on Workers Tiffany Bosley Michael Clingman Kyle Burkhalter."— Presentation transcript:

1 Analyzing the Benefit Impact of SSA Proposals on Workers Tiffany Bosley Michael Clingman Kyle Burkhalter

2 Overview The Social Security Office of the Chief Actuary (OCACT) is mainly concerned with the integrity of the Social Security Trust Funds, whether they have the money to pay benefits in both the short and long term. Currently OCACT projects that the combined Trust Fund reserves will deplete in After that Social Security will have income to pay approximately ¾ of ongoing benefits.

3 Overview Congress, the White House, and others are working on proposals to modify Social Security and fix this problem. Our office analyzes these proposals and determines whether they meet various metrics for trust fund solvency over the short and long term.

4 Overview But the requesters also want to know how their proposals, many of which reduce benefits in various ways, will affect individual workers. So our office has used hypothetical workers – that is workers with hypothetical earnings – to display how typical workers might be affected by the various proposals.

5 Steady Hypothetical Worker In the past, our office used the steady hypothetical worker as a model of a typical worker. The steady hypothetical worker earns a constant percent of the Social Security average wage index (AWI) each year of earnings: Low (45%) Medium (100%) High (160%) The steady maximum worker earns the maximum taxable amount each year.

6 Steady Hypothetical Worker The steady hypothetical worker was adequate for demonstrating benefits under present law. It was also adequate for most of the proposals to modify Social Security our office received in the past. However, in the 1990’s the proposals to modify Social Security became more complex.

7 Individual Accounts Many lawmakers proposed making individual accounts (IA) a part of Social Security. Our office needed to investigate effects of IAs on hypothetical workers.

8 Individual Accounts Steady hypothetical worker not good model for individual accounts Overestimates earnings at younger ages Underestimates earnings in mid-career Overestimates deposits to IAs in early work years Causes IAs to accumulate more money than they would with a more realistic worker Gives unrealistic effect for IAs as part of Social Security benefit.

9 Individual Accounts Needed to develop more realistic hypothetical worker for use with individual accounts Looked at a number of methods for doing this Eventually chose the “hypothetical scaled worker”

10 Hypothetical Scaled Worker Benefits More accurately follows earnings patterns for a typical worker Unbiased Logic relatively straightforward Consistent with hypothetical steady worker for present law benefit computations Beyond IAs, helpful with proposals that depend on earnings levels in individual years

11 Scaled Workers Hypothetical earnings patterns Reflect average patterns of work and earnings of actual insured workers (low early, high late) Scaled worker factors are relative to Average Wage Index (AWI) Very Low, Low, Medium, High Maximum hypothetical earner Scaled factors for ages 21-64

12 Raw Scaled Factors 2009 Continuous Work History Sample (CWHS) 1% sample of workers who have paid any Social Security (FICA) taxes during their lifetime Fully insured = Quarters of Coverage (QCs) at least equal to years after age 21 through 2008 Minimum 6 QCs 40 QCs = permanent insured status QC for 2012 = $1,130 Maximum of 4 QCs per year (for those earning $4,520+)

13 Raw Scaled Factors Analysis of earnings Raw scaled factors calculated by summing earnings for each age 21 and over and dividing by the corresponding number of workers Raw scaled factor examples: Age 25 = Age 35 = Age 45 = 0.922

14 Adjusted Scaled Factors Raw factors greatly decline for ages 60 & 61 Total/partial retirement of some workers before early entitlement age (EEA = 62) Raw factors bounce back up for ages Higher-wage workers with consistent employment more likely to delay entitlement Adjust factors by increasing age 61 raw factor by projected ultimate AWI increase (3.92%)

15 Final Scaled Factors Earnings for each year = (adjusted scaled factor for that age) x (AWI for that year) Use 1960-born adjusted scaled worker Index earnings to year prior to entitlement (in example, age 64 = 2024) Career-average earnings = average of highest 35 years of indexed earnings ($61,929) Target career-average earnings for Very Low, Low, Medium, High earners = 25%, 45%, 100%, 160% of projected AWI in 2024 These percentages match steady earners

16 Final Scaled Factors Multiply preliminary adjusted scaled factors by calculated career-average earnings ratios Final scaled factors example (age 55): Preliminary adjusted scaled factor = Very low = Low = Medium = High = No scaled factors needed for maximum earner

17 Distribution of AIMEs of Actual Workers Retiring in 2011, Relative to AIMEs for Hypothetical Workers Retiring in 2011 Percent with AIME less thanPercent with AIME closest to AIME for hypothetical case Hypothetical Worker (Career-average earnings)MalesFemalesTotalMalesFemalesTotal Very Low ($10,413) Low ($18,744) Medium ($41,655) High ($66,648) Maximum ($97,322)

18 Scaled Factors and Proposals One of the main uses of scaled factors is grading proposals Many types of proposals (NRA, COLA, Benefit Formula, Minimum Benefit, etc.) Scaled factors needed to accurately portray the effect each proposal would have on benefits of workers at different earnings levels How do we project this?

19 Benefit Illustration for Sample Proposal

20 Sample Provisions Sample Proposal: NRA COLA Benefit Formula Minimum Benefit

21 Sample NRA Provision Provision: After the normal retirement age (NRA) reaches 67 for those age 62 in 2022, increase the NRA 1 month every 2 years until the NRA reaches 68. Present Law NRA increases to age 67 for those age 62 in 2022 and then remains constant.

22 Sample NRA Provision

23 Sample COLA Provision Provision: Starting December 2012, reduce the annual Cost of Living Adjustment (COLA) by 0.5 percentage point. Present Law COLA is calculated based on the increase in the CPI.

24 Sample COLA Provision

25 Sample Benefit Formula Provision Provision: Beginning with those newly eligible for OASDI benefits in 2012, multiply the 32 and 15 percent formula factors each year by Stop reductions in 2042, when the formula factors reach 21 percent and 10 percent, respectively. Present Law formula factors are 90, 32, and 15 percent.

26 Sample Benefit Formula Provision Formula shown for those newly eligible in 2012.

27 Sample Benefit Formula Provision

28 Sample Minimum Benefit Provision Provision: Beginning in 2012, reconfigure the special minimum benefit: (a) A year of coverage is defined as a year in which 4 quarters of coverage are earned. (b) At implementation, set the PIA for 30 years of coverage equal to 125 percent of the monthly poverty level (about $1,128 in 2010). For those with under 30 years of coverage, the PIA per year of coverage over 10 years is $1,128/20 = $ (c) Index the initial PIA per year of coverage by wage growth for successive cohorts.

29 Benefit Illustration for Sample Proposal

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32 Questions?


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