Is This New Social Security Tool Leaving Everyone Confused?

So the Center for a Responsible Federal Budget is pushing “The Reformer”– its latest tool for confusing the daylights out of anyone interested in Social Security. According to the CRFB, “The Reformer” lets users select among various options for changing Social Security “in order to close the program’s 75-year shortfall and keep it sustainable for future generations.”

To do this, “The Reformer” estimates the path of the Trust Fund (shown relative to each year’s benefits) over the next 75 years. So long as the Trust Fund remains positive, “The Reformer” will report that the 75-year shortfall is closed.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

However, “The Reformer” doesn’t let anyone off the hook that easily. If, in 2087, revenue exceeds outlays, “The Reformer” warns “the program is not yet sustainable.” It tells us this even if the Trust Fund is growing faster than spending! What is going on here? Let us take a relatively simple example with two quick changes to the program and see what “The Reformer” says.

First, Social Security caps the payroll tax in relation to the average wage. Unfortunately, wage gains in recent decades have gone overwhelmingly to those at the top. This means that Social Security contributions have fallen relative to payrolls. Suppose we raised the payroll tax cap to cover once more 90 percent of wages. This would mean higher-wage workers would get larger benefits, but the program would receive more in additional contributions than it would pay in additional benefits.

Second, the prospect of longer retirements requires workers to save more. Social Security is no different in this regard. Thus, in the 25 years from 1965-90, the contribution rate for employees rose 13 times. On average, the rate rose nearly 0.2 percentage points every other year. Yet there has been no increase in contributions since then. If we had continued raising rates like that, it would have stood at 8.4 percent in 2012. Suppose then that we raised the contribution rate to 7.7 percent and likewise for employers and then never raised it again for at least the next 75 years. (In real life, I would prefer to delay and phase in such a change but “The Reformer” isn’t that flexible.)

What does “The Reformer” tell us about these changes? By 2087, the Trust Fund would hold bonds valued at 774 percent of that year’s outlays and be growing. This wildly exceeds “The Reformer” condition for closing the shortfall. Nevertheless, “The Reformer” declares that we have closed only 77 percent of the projected gap between spending and revenue in 2087.

Strictly speaking, there would still be a gap between spending and, say, contributions. But contributions are not the only source of income to Social Security. If we are genuinely interested in the sustainability of the program, we must look at all sources of income. How much more income do we need to fill the gap in 2087? According to “The Reformer”, outlays exceed revenues by 1.1 percentage points of payroll. Likewise, the Trust Fund’s bonds — at 774 percent of outlays — amount to 142 percent of payroll. That means if the Trust Fund accrued interest of only 0.8 percent in the year, interest income would more than cover the difference.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Some might grow concerned about the amount of interest the government would be paying for the money it had borrowed previously from workers through Social Security, but the program is entirely sustainable so long as the government continues paying interest on those bonds. It is unfortunate that CRFB would design “The Reformer” to mislead in this fashion.

Originally written for the blog of The Center for Economic and Policy Research, which was established in 1999 to promote democratic debate on the most important economic and social issues that affect people’s lives. CEPR is committed to presenting issues in an accurate and understandable manner, so that the public is better prepared to choose among various policy options. Follow CEPR on Twitter @ceprdc.

Investing Insights: Will Morgan Stanley Continue Its Recovery?