Securing Tomorrow: Decoding Social Security Strategic Solutions

1. “The Future of Social Security” Diane Owens Speaker/Consultant Step Up Your Social Security

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 82.6% Trust Fund Interest 14.7% Taxation of Benefits 2.7%

6. Where Does the Money Go? 2009 Revenue Used for: Benefit Payments 83.7% Increase Trust Funds 15.1% Administrative Expenses ~1%

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: 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

8. Beginning 2015, Benefits Paid will Exceed Current Year Revenue (excluding interest) 2025 2015 If nochanges are made, beginning in 2037 about 78% of benefits could still be paid from current year revenues.

9. Income & Cost of Social Security(as percentage of payroll)

10. 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”

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 www.ourfiscalfuture.org

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’sFuture 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’sFuture 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’sFuture 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

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 www.ssa.gov/OACT/solvency/provisions/index.html