Social Security Solvency

I always think its amusing that congress talks about solving Social Security's long term solvency issue. Stephen Goss the Chief Actuary of SSA spoke at the House Ways and Means Committee yesterday, heres a link to his testimoney. As always, discussion about the 1.5% of GDP gap that occurs by 2035 between the projected cost and Non-interest Income is the high point. In not techinical terms its this 1.5% gap that means Social Security will begin to pay out more to beneficiaries then it takes in from taxes. If we do nothing then only 77% of scheduled benefits could be paid starting in 2036, as someone whos minimium retirement age is 2044 it can be both abstract and alarming.

Currently Socical Security taxes (OASDI on your paycheck) only tax wages up to $106,800 which currently covers somewhere around 82.5% of all earnings. That means that people who earn above $106,800 arent subject to paying taxes on thier excess earnings into Social Security. Of the 14 proposed options that for either increasing revenue or reducing benefits that congress has investigated only two options eliminate the proposed shortfall.

1) Eliminate the OASDI taxable maximun amount between 2011  and 2017, with no additional benefit credit. Basically eliminate the Cap which for the last two years has been at $106,800. Republicans call this a tax increase, which essentially it is, but I personally dont feel bad about people who would have to start paying Social Security taxes on thier income above the $106,800 cap. The alternative idea 2) Price index inital benefits across generations beginning 2017. Reduce all PIA factors (90,32,15) by real growth in average earnings. In basic terms the current formula used to compute a monthly benefit for a person is the Average Indexed Monthly Earnings (AIME) formula, which adds your top 35 years of earnings over your lifetime adjusting for inflation and averages the amount to calculate your benefit. Its a seven step calculation which you can see/do here.

2) Starting in 2017 reduce the indexing factors which would then reduce the final calculated benefit amount, new benefits would be lowered for all new beneficiaries. This is a favored option of Republicans as it prevents a "tax increase" on the rich, but alternatively it reduces benefits for new filers who may need the income, i.e. the poor, middle class, or disabled. In the end its only these two proposed options that eliminate this gap, not rasing the retirement age, minimium retirement age, or reduction of the COLA, means testing, investing benefits in an index fund, etc. Saving Social Security is just about class warfare, whats the solution?

Congressional Budget Office Long Term Budget Outlook Report.

CBO Report Excerpt:
According to CBO's projections, if current laws remained in place, spending on the major mandatory health care programs alone would grow from less than 6 percent of GDP today to about 9 percent in 2035 and would continue to increase thereafter. Spending on Social Security is projected to rise much less sharply, from less than 5 percent of GDP today to about 6 percent in 2030, and then to stabilize at roughly that level. Altogether, the aging of the population and the rising cost of health care would cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 15 percent of GDP 25 years from now. (By comparison, spending on all of the federal government's programs and activities, excluding interest payments on debt, has averaged about 18.5 percent of GDP over the past 40 years.) That combined increase of roughly 5 percentage points for such spending as a share of the economy is equivalent to about $750 billion today. If lawmakers ultimately modified some provisions of current law that might be difficult to sustain for a long period, that increase would be even larger.

This is a link to the full report:
http://www.cbo.gov/ftpdocs/122xx/doc12212/2011_06_22_summary.pdf

Comment:
The problem I have with the CBO report is that it lumps Social Security's cost with the other "Entitlement" programs like Medicare and Medicaid. Even the CBO report notes that what Social Security pays out now in benefits as reported by the 2011 Trustee Report reflected only 5 percent of GDP with it only increasing to a moderate 6 percent of GDP by 2030, but Social Security is fully funded by its own trust funds.  In the short term as the OASDI taxes that are currently being collected from employees fall short of required benefit payouts hence the Trust Funds are being drawn upon. So in technical terms Social Security benefits are budget neutral, they cost nothing. The government pays no monies out of its general revenue to pay Social Security benefits. Social Security is required to purchase US Treasury bonds with the tax revenue it receives. It like any other debt holder of  US Treasury debt expects to be paid. If Social Security was a Large Private Pension with 2+ Trillion dollars of US Treasury Bonds it would also be "contributing" to the US budget woes. We must keep Social Security solvent by eliminating the tax cap on employee wages. This would eliminate both the long term and short term issues Social Security faces.