“The Future of Social Security” Diane Owens Speaker/Consultant Step Up Your Social Security The following information comes from the 2008 Social Security Trustee Report available online at http://www.ssa.gov/OACT/TR/2009/ and the Social Security Administration’s Actuary available online.

But First, a Little History On January 31, 1940, the first monthly retirement check was issued to Ida May Fuller in the amount of $22.54. Miss Fuller started collecting benefits at age 65 and lived to be 100 years old.

What Do We Have Now? 3 Part Social Insurance Program Retirement (at 62 or older) Disability (at any age) Survivors of deceased workers Mandatory Payroll Taxes Equal part from employer/employee Covers about 94% of workers/self-employed Defined Benefits Progressive formula replaces “lost” earnings Includes benefits for qualified family

Who Received Benefits in 2009

Where Does the Money Come From? 2009 Income: Payroll Tax 82.6% Trust Fund Interest 14.7% Taxation of Benefits 2.7% Current year revenues come primarily from payroll taxes. Employers & employees each contribute 6.2% of earnings up to the Social Security maximum each year. Maximum Social Security taxable earnings change each year based on average wage increases. For 2009, the maximum is $106,800. Self-employed pay 12.4% on 92.35% of their net profit as reported to IRS; they can deduct ½ of self-employment tax as a business expense on their tax return. Interest from special issue U.S. Treasury Securities is also credited to the Trust Fund; effective interest rate for 2008 was 5.1% Remaining income to Trust Fund comes from income tax paid by Social Security beneficiaries under current tax law. About 1/3 of beneficiaries pay income tax on a portion of their Social Security benefits.

Where Does the Money Go? 2009 Revenue Used for: Benefit Payments 83.7% Increase Trust Funds 15.1% Administrative Expenses ~1% Current year revenues come primarily from payroll taxes. Employers & employees each contribute 6.2% of earnings up to the Social Security maximum each year. Maximum Social Security taxable earnings change each year based on average wage increases. For 2009, the maximum is $106,800. Self-employed pay 12.4% on 92.35% of their net profit as reported to IRS; they can deduct ½ of self-employment tax as a business expense on their tax return. Interest from special issue U.S. Treasury Securities is also credited to the Trust Fund; effective interest rate for 2008 was 5.1% Remaining income to Trust Fund comes from income tax paid by Social Security beneficiaries under current tax law. About 1/3 of beneficiaries pay income tax on a portion of their Social Security benefits.

The Future of Social Security Short-term solvency guaranteed. Trust Funds will continue to increase until 2025 and will pay full benefits through 2037. Long-term solvency still needs to be addressed. Fewer workers to beneficiaries: 3.2 to 1 now Will be 2.1 to 1 by 2031; 1.9 to 1 by 2085 Increased longevity at age 65: Projection for 2060 Average 3 years longer: Men 20.9 years & Women 23.1 years

Beginning 2015, Benefits Paid will Exceed Current Year Revenue (excluding interest) 2025 2015 If no changes are made, beginning in 2037 about 78% of benefits could still be paid from current year revenues. 2010 Trustees Report: For OASDI, annual cost will exceed tax income in 2010 by an estimated $41 billion, although the combined trust funds will continue to grow because projected interest earnings of $118 billion will substantially exceed $41 billion. This large cash-flow shortfall is mainly the result of revenue adjustments in 2010 of $25 billion for prior years for which estimated payroll tax allocations were too large. Annual cost is projected to exceed tax income by $7 billion in 2011, followed by three years of small surpluses before increasing annual shortfalls of tax income return permanently in 2015. The report indicates that annual OASDI income, including interest on trust fund assets, will exceed annual cost and trust fund assets will increase every year until 2025. At that time it will be necessary to begin drawing down trust fund assets to cover part of expenditures until assets are exhausted in 2037. After trust fund exhaustion, continuing tax income would be sufficient to pay 78 percent of scheduled benefits in 2037 and 75 percent in 2084.

Income & Cost of Social Security (as percentage of payroll) 2010 Trustees Report: Both the OASDI and HI annual cost rates are projected to increase over the long run from their 2009 levels (13.00 and 3.69 percent). For OASDI, the income rate will increase little (from 13.07 percent in 2009 to 13.31 percent in 2084) because payroll tax rates are not scheduled to change. Income from the other tax source, taxation of OASDI benefits, will increase only gradually relative to taxable payroll as a greater proportion of Social Security benefits is subject to taxation in future years. The HI income rate is projected to increase gradually from 3.13 in 2009 to 4.30 in 2084 due to the ACA’s increase in payroll tax rates for high earners starting in 2013. Individual tax return filers with earnings above $200,000, and joint return filers with earnings above $250,000, will pay an additional 0.9 percent tax on earnings above the threshold. Because the thresholds are not indexed, an increasing fraction of earnings will be subject to the higher tax rate over time.

Two Different Approaches “Choosing the Nation’s Fiscal Future” – Joint Report from NAPA/NRC and Title IV H.R. 4529 “The Roadmap for America’s Future Act of 2010”

Choosing the Nation’s Fiscal Future Retains Social Insurance structure* No changes to disability or survivors benefits Outlines 4 options for sustainable solvency: Reduces future rate of growth of benefits with no tax increases Combination: $2 reduction in benefits for each $1 increase in payroll taxes Combination: $1 reduction in benefits for each $2 increase in payroll taxes Increases payroll taxes to fund current law scheduled benefits for future retirees *See Chapter 6 of Report at www.ourfiscalfuture.org

Choosing the Nation’s Fiscal Future Option 1: Reduce Growth of Future Benefits Raise Full Retirement Age to 67 in 2012 & index future increases to average life expectancy Phase-in higher minimum retirement age (now 62) Reduce Cost of Living raises by ~ .3% Reduce growth in benefit rates for highest 70% of earners while protecting low earners Effects: No increase in taxes; benefits grow < real wages Medium earner benefits would replace 27% of average earnings in 2050 (compared to 40% now).

Choosing the Nation’s Fiscal Future Option 4: Increase Payroll Taxes Raise taxable maximum to cover 90% of all earnings Currently at ~ 84% of earnings Raise combined tax rate gradually to 14.7% by 2080 Add 2nd Tier (progressive) tax on earnings above maximum with no credit toward benefits: Start at 2% in 2012 and rise to 5.5% in 2060 Effects: Very high earners would see ~109% payroll tax increase by 2050. Current law taxes about 1/2 of their earnings

The Roadmap for America’s Future Act of 2010 Modifies Benefit Computations in 2018: Reduce future growth in benefit rates: Link to CPI instead of National Average Wage Protect rates of low earners Raise Full Retirement Age to 67 earlier & index further increases to average life expectancy Modifies Revenue Provisions by: Subject total premium cost of employer health plans to payroll tax Transfer General Tax Revenue to/from Trust Funds as needed to maintain solvency

The Roadmap for America’s Future Act of 2010 Establishes voluntary individual accounts: Allows workers under 55 to transfer part of payroll tax to personal account (PSA) Estimated 50% participation rate Offsets Social Security retirement/spousal/survivor benefits based on level of participation Invests assets in a PSA to be paid out as a life annuity on retirement (or to estate) Guarantees account balance when annuity begins would at least = contributions plus CPI-W increases (~ 2.8% per year).

The Roadmap for America’s Future Act of 2010 Effects: Requires General Tax Fund transfers to Trust Fund from 2037 through 2056 Offset by Trust Fund transfers back to General Tax Fund 2063 through 2082 Eventually PSA offsets would reduce traditional retirement benefits to zero Effects on financial markets of increased demand for equities/bonds not clear See http://www.ssa.gov/OACT/solvency/index.html

Or … Choose from a Menu of Proposals Reduce Cost of Living Adjustments Change Benefit Computation Raise FRA to age 67 earlier, then increase to 68 or later Raise Payroll Tax Rates Raise Taxable Maximum Earnings Faster Cover all State & Local Government Employees Invest Trust Fund in Marketable Securities Change Taxation of Benefits to match Private Pensions Transition from Social Insurance program to smaller retirement benefit with voluntary personal account. See www.ssa.gov/OACT/solvency/provisions/index.html Reduce COLA’s – proposals range from .3 to 1% reduction from current law Change benefit computation – phase in average of 40 years earnings instead of current 35 year average in formula; change for some or all newly eligible beneficiaries Raise Full Retirement Age (FRA) to age 67 sooner than current law and continue to phase in higher FRA. Raise payroll tax rates for employees and/or employer portion. Increase annual taxable maximum wages faster than under current law. Cover the remaining 5% of government workers who are still exempt from paying Social Security taxes. Invest all or part of trust fund in marketable securities hoping to get a higher return. NOTE: In 2008 Trust Fund earned an effective interest rate of 5.1% from Special Issue Treasury Securities. Change tax law to increase revenues from taxation of Social Security benefits (currently about 1/3rd of beneficiaries pay some income tax on their benefits). Add provisions for individual accounts, probably for younger workers only. NOTE: Diverting payroll taxes to individual accounts would reduce revenues from the Trust Funds and require additional borrowing to fund traditional benefits earned by older workers. Traditional benefits would be offset (reduced) for workers with individual accounts.