1. “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 and the Social Security Administration’s Actuary available online.

2. 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.

3. 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

4. Who Received Benefits in 2009

5. Where Does the Money Come From?
2009 Income:
Payroll Tax %
Trust Fund Interest %
Taxation of Benefits %
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.

6. Where Does the Money Go? 2009 Revenue Used for:
Benefit Payments % Increase Trust Funds %
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.

7. 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: 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

8. 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 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 At that time it will be necessary to begin drawing down trust fund assets to cover part of expenditures until assets are exhausted in After trust fund exhaustion, continuing tax income would be sufficient to pay 78 percent of scheduled benefits in 2037 and 75 percent in 2084.

9. 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 percent in 2009 to 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 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.

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

11. 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

12. 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).

13. 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

14. 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

15. 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).

16. 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

17. 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
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.