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Polymerase chain reaction is a cornerstone of molecular biology research. Using short pieces of single-stranded DNA called primers the previously invisible becomes tangible.

Saturday, February 26, 2005

Politics: Social Security, The 2005 Memo

I am neither an economist nor a student of economics. I am, however, concerned with all the recent fuss over Social Security and try to stay current with the information available. In a Social Security Administration memorandum dated, February 7, 2005, Chris Chaplain and Alice H. Wade describe and project several adjustments that could be made to strengthen Social Security (via Josh Marshall, talkingpointsmemo.com). They group their 20 scenarios into 7 categories:


  • Reducing the cost-of-living adjustment (COLA),
  • Revising the benefit formula,
  • Changing the normal retirement age,
  • Increasing the payroll tax rate or the taxation of Social Security benefits,
  • Revising the benefit and contribution base,
  • Extending OASDI program coverage, and
  • Changing the investment requirements for the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds.

    Below are the verbatim plan descriptions:

      1. Reduce the COLA for OASDI benefits by 0.5 percentage points beginning December 2005
      2. Reduce the COLA for OASDI benefits by 1 percentage point beginning December 2005
      3. Increase the number of years used to calculate benefits for retirees and survivors (but not for disabled workers) from 35 to 38 (phased in 2005-2009); i.e., 36 for 2005-06, 37 for 2007-08, and 38 for 2009 and later …
      4. Increase the number of years used to calculate benefits for retirees and survivors (but not for disabled workers) from 35 to 38 (phased in 2005-2009); i.e., 36 for 2005-06, 37 for 2007-08, and 38 for 2009 and later 38 for 2009-10, 39 for 2011-12, and 40 for 2013 and later ...
      5. For each year from 2005-2035, multiply the 32 and 15 percent benefit formula factors by 0.987, reducing the factors to 21 and 10 percent respectively, for new eligibles in 2035 and later …
      6. Reduce benefits across the board by 3 percent for those newly eligible for benefits in 2005 and later …
      7. Reduce benefits across the board by 5 percent for those newly eligible for benefits in 2005 and later …
      8. Eliminate the hiatus in the normal retirement age (speed up the increase to age 67)
      9. Eliminate the hiatus in the normal retirement age (speed up the increase to age 67) and then index the normal retirement age (by 1 month every 2 years) until the NRA reaches age 68
      10. Eliminate the hiatus in the normal retirement age (speed up the increase to age 67) and then index the normal retirement age (by 1 month every 2 years) until the NRA reaches age 70
      11. Raise payroll tax rates (for employees and employers combined) by 2.0 percentage points in 2005 and later ...
      12. Raise payroll tax rates (for employees and employers combined) by 2.0 percentage points in 2005 and later by 2.1 percentage points in 2020-2049 and by an additional 2.1 percentage points in 2050
      13. Tax Social Security benefits in a manner similar to private pension income beginning in 2005. Phase out the lower-income thresholds during 2005-2014
      14. Make all earnings subject to the payroll tax (but retain the cap for benefit calculations) beginning in 2005
      15. Make all earnings subject to the payroll tax and credit them for benefit purposes beginning in 2005
      16. Make 90% of the earnings subject to the payroll tax and credit them for benefit purposes (phased in 2005-2014)
      17. Cover newly hired State and local government employees beginning in 2005
      18. Invest 40% of the Trust Funds in equities (phased in 2005-2019), assuming a 6.5-percent real rate of return on equities (standard assumption)
      19. Invest 40% of the Trust Funds in equities (phased in 2005-2019), assuming a 5.5-percent real rate of return on equities
      20. Invest 40% of the Trust Funds in equities (phased in 2005-2019), assuming an ultimate 3 percent real rate of return on equities, the same as the expected yield on Treasury bonds

    I contructed the following table from memo data and added the column “Method”, my simplified categorization of the plans:

    PLANMETHODBenefits Paid Exceed Revenue ReceivedTrust Fund Insolvency
    1Reduce benefits20192052
    2Reduce Benefits20222069
    3Reduce Benefits20182045
    4Reduce Benefits20192047
    5Reduce Benefits20192070
    6Reduce Benefits20192047
    7Reduce Benefits20192050
    8Change Retirement Age20192045
    9Change Retirement Age20192048
    10Change Retirement Age20192048
    11Increase Taxes2024solvent thru 75 year projection
    12Increase Taxes2018solvent thru 75 year projection
    13Increase Taxes20192047
    14Increase Taxes2025solvent thru 75 year projection
    15Increase Taxes and Increase Benefits20242079
    16Increase Taxes and Increase Benefits20212053
    17Increase Benefits20192046
    18Invest Trust Fund in Market20182050
    19Invest Trust Fund in Market20182047
    20Invest Trust Fund in Market20182043

    Notice that plans 11 and 14 delay by 6 or 7 years the time in which benefits paid exceed tax and Trust Fund interest revenue. Additionally, plans 11, 12 and 14 all secure Trust Fund solvency thru the next 75 years. What do these three plans have in common? Tax increases.

    Before that scares anyone off, look at the proposed models. Plans 11 and 12 are regressive, though moderate tax increases. They leave the payroll cap ($90,000 subject to SS tax, anything above that is exempt) intact, but hike the tax rate by 2 percentage points. They are flexible in that the hike can be accomplished by any combination of employer and taxpayer contribution. However, it lets higher income individuals off the hook. This tax increase is regressive because those making less than $90,000 would be effectively taxed at a higher rate than those making over $90,000. In other words, Paris Hilton would be paying the same amount of SS taxes as the combined SS taxes of two first year assistant professors at a NY State university.

    Plan 14 is a progressive tax increase. It eliminates the payroll cap making all earnings (all payroll, interest on savings, dividends on stock, capitol gains, etc…) subject to SS tax. It maintains the cap for benefit calculations. Though it may seem especially unfair for the millionaires and billionaires, some iteration of this plan may be the way to go. The authors of this memo state that each plan projection is considered as if that plan were the only measure implemented. Hybrid plans, they say, would require much more difficult math for the 75 year projection.

    Stay tuned for the 2005 Social Security Trustees Report.

    {Update, 2/26/05, 5:14 pm} Josh Marshall comments on how those who wan't to dismantle Social Security are distorting information from this memo.

    2 comments:

    Unknown said...
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    Unknown said...

    Very interesting site - keep up the good work!