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CHRIS CHAPLAIN SOCIAL SECURITY ADMINISTRATION OFFICE OF THE CHIEF ACTUARY October 8, 2010.

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Presentation on theme: "CHRIS CHAPLAIN SOCIAL SECURITY ADMINISTRATION OFFICE OF THE CHIEF ACTUARY October 8, 2010."— Presentation transcript:

1 CHRIS CHAPLAIN SOCIAL SECURITY ADMINISTRATION OFFICE OF THE CHIEF ACTUARY October 8, 2010

2 75- year Solvency vs Sustainable Solvency 75-year solvency Elimination 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 75 th year Sustainable solvency 75-year solvency and stable or rising trust fund ratio at end of period Higher standard Prevents facing long-term deficit for the next generation 2

3 Recent Comprehensive Proposal: Deutch plan H.R introduced in 2010 Upcoming OCACT memo soon based on 2010TR Sustainable solvency? Not expected Revenue increases? Yes Benefit cuts?No Other No effect of General Fund transfers to Trust Funds No individual accounts 3

4 Deutch plan 4 Change in measurement of COLA Beginning 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

5 Deutch plan 5 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

6 Recent Comprehensive Proposal: Ryan plan Part of H.R introduced in current Congress OCACT solvency memo on April 27, 2010 based on 2009TR Sustainable solvency? Yes Revenue increases? Yes Benefit cuts?Yes Other General Fund transfers Individual Accounts (opt-in) 6

7 Ryan Plan provisions 7 Progressive price indexing Effective for those newly eligible for retired worker benefits in 2018 Holds harmless lower earners (at 30 th percentile) Operationalized by setting new bend point between current law first and second bend points Hypothetical 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 age Financial effects Increase in actuarial balance: 1.04% Change in 75 th year annual balance: 3.36% (current law -4.34%)

8 Ryan Plan provisions 8 Low earner benefit enhancement Full effect for new eligibles in 2027 with phase-in Workers with 30 years of earnings would get PIA of 120% of Federal single aged poverty level, if higher No benefit increase for those with <=20 years of earnings Reduces the 30-year requirement for disabled workers based on years of work Reduces to zero for those with earnings twice that of steady maximum wage earner Poverty level rises with CPI, less than wages, lessening effect Financial effects Decrease in actuarial balance: 0.04% Change in 75 th year annual balance: negligible (less than 0.005% pyrl)

9 Ryan Plan provisions 9 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 75 th year annual balance: 1.23% (current law -4.34%)

10 Ryan Plan provisions 10 Group Health Insurance Premium Coverage Revise treatment of total group health insurance premiums Employee-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 benefits 2010 Health Care law would have effect on this provision Financial effects (based on 2009TR remember) Change in actuarial balance: 1.13% Change in 75 th year annual balance: 0.97% (current law -4.34%)

11 Ryan Plan provisions 11 Individual Accounts Voluntary; have to opt in—if opt out, subject to basic benefit/revenue provisions already discussed Ultimately 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 years Reduction in OASI retirement and aged survivor benefits as revised for plan, ultimately 100% reduction Guarantee on IA returns (next slide) Financial effects Change in actuarial balance: -0.21% Change in 75 th year annual balance: 3.45% (current law -4.34%)

12 Ryan Plan provisions 12 Individual Accounts—guarantee provision Guarantee 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 year Much 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 75 th year annual balance: -0.01% (current law -4.34%) Low yield assumption (2.9% real) = -0.02/-0.06

13 Ryan Plan provisions 13 Specified General Fund Transfers From General Fund of the Treasury when needed to maintain a 100% Trust Fund ratio Offset transfers in later years from Trust Fund has excess amounts but set a floor at 125% Trust Fund ratio After the effects of all other provisions in the plan Financial effects (based on 2009TR remember) Increase in actuarial balance: none Change in 75 th 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)

14 Ryan Plan summary 14 Overall Effect of Proposal

15 Ryan Plan summary—Trust Fund ratios 15

16 Recent Comprehensive Proposal: NAPA Plans Report by National Academy of Public Administration and National Research Council OCACT solvency memo on January 13, 2010 based on 2009TR 4 separate comprehensive proposals Differing mix of revenue increases and benefit cuts No individual accounts or General Fund transfers 16

17 NAPA Plans: Proposal Option 1 Sustainable solvency? Yes Revenue increases? No Benefit cuts?Yes All benefit reductions 17

18 NAPA Proposal Option 1 18 Progressive indexing Effective for those newly eligible for retired worker benefits in 2012 through 2049, stop until 2069, then resume 2070 and later Holds harmless lower earners (at 30 th percentile) Operationalized by setting new bend point between current law first and second bend points Hypothetical 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 Financial effects Change in actuarial balance: 1.25% Change in 75 th year annual balance: 2.91% (current law -4.34%)

19 NAPA Proposal Option 1 19 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 Financial effects Change in actuarial balance: 0.56% Change in 75 th year annual balance: 1.23% (current law -4.34%)

20 NAPA Proposal Option 1 20 Change in Cost of Living Adjustment Beginning December 2012, use a “chained” version of the CPI-W in computing cost-of-living adjustment (COLA) for benefits Design is to account for “upper-level substitution bias” in the current CPI-W computation Would be expected to reduce CPI-W by 0.3 percentage points per year on average Affects only OASI benefits Financial effects Change in actuarial balance: 0.36% Change in 75 th year annual balance: 0.50% (current law -4.34%)

21 NAPA Proposal Option 1 21 Overall Effect of Proposal

22 NAPA Plans: Proposal Option 2 Sustainable solvency? Yes Revenue increases? Yes Benefit cuts?Yes Two-thirds benefit reductions and one-third revenue increases 22

23 NAPA Proposal Option 2 23 Progressive indexing Effective for those newly eligible for retired worker benefits in 2012 through 2061 Holds harmless lower earners (at 30 th percentile) Operationalized by setting new bend point between current law first and second bend points Hypothetical maximum earner has PIA formula factors reduced by a constant 1.1 percent per year—similar to provision for Proposal Option 1 No effect on disabled workers but proportional reduction at conversion to retired worker benefits at normal retirement age Financial effects Change in actuarial balance: 1.34% Change in 75 th year annual balance: 3.33% (current law -4.34%)

24 NAPA Proposal Option 2 24 Increase Payroll Tax Rates OASDI payroll tax rate would change from 12.4% in several increments 12.6% in % in % in % in % in % in 2060 and later Employee and employer portions would increase in equal increments Financial effects Change in actuarial balance: 0.73% Change in 75 th year annual balance: 0.91% (current law -4.34%)

25 NAPA Proposal Option 2 25 Overall Effect of Proposal

26 NAPA Plans: Proposal Option 3 Sustainable solvency? Yes Revenue increases? Yes Benefit cuts?Yes One-third benefit reductions and two-thirds revenue increases 26

27 NAPA Proposal Option 3 27 Progressive indexing Effective for those newly eligible for retired worker benefits in 2012 through 2021, stop through 2059, and resume for 2060 and later Holds harmless lower earners (at 30 th percentile) Operationalized by setting new bend point between current law first and second bend points Hypothetical maximum earner has PIA formula factors reduced by a constant 1.1 percent per year—similar to provision for Proposal Options 1 and 2 No effect on disabled workers but proportional reduction at conversion to retired worker benefits at normal retirement age Financial effects Change in actuarial balance: 0.63% Change in 75 th year annual balance: 1.60% (current law -4.34%)

28 NAPA Proposal Option 3 28 Increase Payroll Tax Rates OASDI payroll tax rate would change from 12.4% in several increments 12.6% in % in % in % in % in % in 2075 and later Employee and employer portions would increase in equal increments Financial effects Change in actuarial balance: 1.02% Change in 75 th year annual balance: 2.07% (current law -4.34%)

29 NAPA Proposal Option 3 29 Payroll Tax Rates Above Current Law Taxable Maximum Taxable maximum is $106,800 for 2010 Apply an OASDI payroll tax rate above taxable maximum as follows: 2.0% in % in 2060 and later No benefit credit for additional earnings taxed Employee and employer portions would increase in equal increments Financial effects Change in actuarial balance: 0.41% Change in 75 th year annual balance: 0.60% (current law -4.34%)

30 NAPA Proposal Option 3 30 Overall Effect of Proposal

31 NAPA Plans: Proposal Option 4 Sustainable solvency? Yes Revenue increases? Yes Benefit cuts?No All revenue increases 31

32 NAPA Proposal Option 4 32 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 Security No benefit credit for additional earnings taxed Financial effects Change in actuarial balance: 0.69% Change in 75 th year annual balance: 1.06% (current law -4.34%)

33 NAPA Proposal Option 4 33 Increase Payroll Tax Rates (below taxable maximum) OASDI payroll tax rate would change from 12.4% in several increments 12.7% in % in % in % in % in % in 2080 and later Employee and employer portions would increase in equal increments Financial effects Change in actuarial balance: 0.83% Change in 75 th year annual balance: 2.25% (current law -4.34%)

34 NAPA Proposal Option 4 34 Assign Payroll Tax Rates Above Current Law Taxable Maximum Taxable maximum is $106,800 for 2010 Apply an OASDI payroll tax rate above taxable maximum as follows: 2.0% in % in % in % in % in 2060 and later No benefit credit for additional earnings taxed Employee and employer portions would increase in equal increments Financial effects Change in actuarial balance: 0.65% Change in 75 th year annual balance: 1.10% (current law -4.34%)

35 NAPA Proposal Option 4 35 Overall Effect of Proposal

36 NAPA plans summary—Trust Fund ratios 36

37 More information on provisions / proposals 37 Visit our office’s website For options that could be included in a comprehensive proposal, click on “solvency provisions” For comprehensive proposals, click on “solvency memoranda”


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