Social Security and Retirement Costs

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Social Security and Retirement Costs

Post by bobcat2 »

At the Bogleheads Conference this week there was a lot of discussion about Social Security strategies and the stability of the Social Security program. I think the following address by Stephen Goss of Social Security is great background for assessing the strengths and weaknesses of the Social Security Program.

On August 2 at the Retirement Research Consortium Conference in Washington the Chief Actuary of the Social Security Administration, Stephen Goss, talked about the challenges in providing Social Security projections. He explained that current law and an ever-changing economy greatly impacted the accuracy of long term projections to the solvency of the Social Security Trust Fund.

Link to video of Goss presentation - http://www.c-spanvideo.org/program/RetirementCo

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Re: Social Security and Retirement Costs

Post by ThePrune »

Thanks for the link. The speaker, Stephen Goss, is actually a very engaging presenter and managed to clearly convey the key ideas of a very technical topic.
[Note of full disclosure: I read the Social Security Trustee's Report every year, so I'm somewhat interested and educated on this topic.]

One new thing I picked up was mentioned towards the end of the video clip. It turns out that OMB and CBO future deficit and debt projections assume that Social Security will continue to pay out currently promised benefits into the indefinite future. But in fact according to current law that can't happen, because once the SS Trust funds are depleted in the 2033-2035 time range, benefits would need to be reduced to match incoming annual withholding. As Stephen Goss points out, projected deficit / debt would be much lower if projected according to current law.
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Re: Social Security and Retirement Costs

Post by nedsaid »

I actually watched the entire video. Pretty much predicting the future is difficult.

The one fellow who took a long time to ask his question did make a pretty good point. That is that the projections that the actuaries make for Social Security are rather conservative. The actual future of the program might be better than we believe now. Articles that I have read in the past said that estimates of economic growth were very conservative and probably too low. Which is good news for our baby boomers.

Still there are challenges that the program faces. If the projections are correct, there will be enough revenue coming in to fund about 75% of the promises made when the trust fund runs out. My suspicion is that the news will be better than that.

I also think Congress will make whatever changes are needed to keep the program solvent.

In my opinion our largest policy focus should be on a strong and vigorous economy so that there will be enough goods and services for everyone. A strong economy will make it a lot easier to fund programs for the elderly.
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Re: Social Security and Retirement Costs

Post by denovo »

According to the trustees, report, in 203x, if no changes are made Social Security would have to reduce payments by 25 percent t0 remail solvent. So, if you want to be real cautious, knock 25 percent off your expected Social Security payments for 203x and beyond.
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Re: Social Security and Retirement Costs

Post by VictoriaF »

bobcat2 wrote:At the Bogleheads Conference this week there was a lot of discussion about Social Security strategies and the stability of the Social Security program. I think the following address by Stephen Goss of Social Security is great background for assessing the strengths and weaknesses of the Social Security Program.

On August 2 at the Retirement Research Consortium Conference in Washington the Chief Actuary of the Social Security Administration, Stephen Goss, talked about the challenges in providing Social Security projections. He explained that current law and an ever-changing economy greatly impacted the accuracy of long term projections to the solvency of the Social Security Trust Fund.

Link to video of Goss presentation - http://www.c-spanvideo.org/program/RetirementCo

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But, Bob, Goss does not tell us whether we should count Social Security as a bond?!

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Re: Social Security and Retirement Costs

Post by richard »

The Social Security income cap was set based on capturing 90% of payroll. See page 7 of http://www.ssa.gov/policy/docs/ssb/v41n3/v41n3p3.pdf Those who set it did not envision the degree of income inequality we see today, which results in significantly less than 90% beings subject to Social Security taxes. Other than that, forecasts have been on the somewhat pessimistic side of accuracy.
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Re: Social Security and Retirement Costs

Post by bobcat2 »

Hi Prune,

You wrote.
It turns out that OMB and CBO future deficit and debt projections assume that Social Security will continue to pay out currently promised benefits into the indefinite future. But in fact according to current law that can't happen, because once the SS Trust funds are depleted in the 2033-2035 time range, benefits would need to be reduced to match incoming annual withholding. As Stephen Goss points out, projected deficit / debt would be much lower if projected according to current law.
I was at the Conference and didn't catch your point. That is a very good catch on your part.

I thought a key point Goss made is what projection errors after the last SS fix in 1983 have accounted for the shortfall. Many things were projected accurately, e.g. GDP growth, inflation, population demographics, etc.

Two projection errors made in 1983 have caused the great bulk of the shortfall since 1983, particularly error 2.

1) Real average wages were projected to grow 1.5% per year. They have actually grown about 1% per year.
2) The ceiling on wages and salaries taxed set in 1983 was expected to capture about 91% of all wages and salaries going forward. But because of greater dispersion in earned income since 1983 (greater income inequality since an increasing share of income has gone to the very highest income groups over time since '83) the ceiling is only covering about 83%-84% of earned income. This forecast error by itself (projection that the wage ceiling would capture 91% of wages and salaries vs actually capturing just over 83%) accounts for over half of the shortfall that has occurred in the SS program since the 1983 Social Security fix.

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Re: Social Security and Retirement Costs

Post by bobcat2 »

Hi Victoria,

I was going to grab Goss after his talk and ask him about Social Security claiming strategies. However, if you watch the entire video, you see Goss walk out of the ballroom and presumely back to the office as soon as his presentation ends. Drat!

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Re: Social Security and Retirement Costs

Post by bdylan »

nedsaid wrote:I actually watched the entire video. Pretty much predicting the future is difficult.

The one fellow who took a long time to ask his question did make a pretty good point. That is that the projections that the actuaries make for Social Security are rather conservative. The actual future of the program might be better than we believe now. Articles that I have read in the past said that estimates of economic growth were very conservative and probably too low. Which is good news for our baby boomers.

Still there are challenges that the program faces. If the projections are correct, there will be enough revenue coming in to fund about 75% of the promises made when the trust fund runs out. My suspicion is that the news will be better than that.

I also think Congress will make whatever changes are needed to keep the program solvent.

In my opinion our largest policy focus should be on a strong and vigorous economy so that there will be enough goods and services for everyone. A strong economy will make it a lot easier to fund programs for the elderly.
Other forecasters (most notably the CBO) are much more pessimistic than SSA is.
richard wrote:The Social Security income cap was set based on capturing 90% of payroll. See page 7 of http://www.ssa.gov/policy/docs/ssb/v41n3/v41n3p3.pdf Those who set it did not envision the degree of income inequality we see today, which results in significantly less than 90% beings subject to Social Security taxes. Other than that, forecasts have been on the somewhat pessimistic side of accuracy.
This isn't true. Social security hit 90 percent of payroll for a year or two in the 80s. Other than that it's almost always been lower. The statement in that paper is descriptive.
bobcat2 wrote:Hi Prune,

You wrote.
It turns out that OMB and CBO future deficit and debt projections assume that Social Security will continue to pay out currently promised benefits into the indefinite future. But in fact according to current law that can't happen, because once the SS Trust funds are depleted in the 2033-2035 time range, benefits would need to be reduced to match incoming annual withholding. As Stephen Goss points out, projected deficit / debt would be much lower if projected according to current law.
I was at the Conference and didn't catch your point. That is a very good catch on your part.

I thought a key point Goss made is what projection errors after the last SS fix in 1983 have accounted for the shortfall. Many things were projected accurately, e.g. GDP growth, inflation, population demographics, etc.

Two projection errors made in 1983 have caused the great bulk of the shortfall since 1983, particularly error 2.

1) Real average wages were projected to grow 1.5% per year. They have actually grown about 1% per year.
2) The ceiling on wages and salaries taxed set in 1983 was expected to capture about 91% of all wages and salaries going forward. But because of greater dispersion in earned income since 1983 (greater income inequality since an increasing share of income has gone to the very highest income groups over time since '83) the ceiling is only covering about 83%-84% of earned income. This forecast error by itself (projection that the wage ceiling would capture 91% of wages and salaries vs actually capturing just over 83%) accounts for over half of the shortfall that has occurred in the SS program since the 1983 Social Security fix.

BobK
I'd be very surprised if he made a big deal about those projections. SSA always knew the early years post 83 would be cash flow positive, and then turn cash flow in the second half of the projection.
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Re: Social Security and Retirement Costs

Post by bobcat2 »

bdylan wrote:
richard wrote:The Social Security income cap was set based on capturing 90% of payroll. See page 7 of http://www.ssa.gov/policy/docs/ssb/v41n3/v41n3p3.pdf Those who set it did not envision the degree of income inequality we see today, which results in significantly less than 90% beings subject to Social Security taxes. Other than that, forecasts have been on the somewhat pessimistic side of accuracy.
This isn't true. Social security hit 90 percent of payroll for a year or two in the 80s. Other than that it's almost always been lower. The statement in that paper is descriptive.
The statement in the paper is not descriptive. Social Security was adjusted in 1983 with the intent of capturing about 91% of wage and salary income going forward. The intent of capturing about 91% of income was met immediately after the change was made. That is why,
Social security hit 90 percent of payroll for a year or two in the 80s.
Then after that there was increasing wage dispersion, with wages skewing more and more to the high end, and thereby reducing the amount of earned income captured by the SS wage ceiling.

The SS fix of 1983 took into account that the demographic bulge of baby boomers would begin retiring and taking SS in about 2010. Adjusting the wage ceiling to capture 91% of earned income instead of the previous roughly 85% of earned income was a deliberate change in the system to capture the additional revenue needed to fund the SS benefits of the boomers and future recipients after the boomers.

Goss makes this point twice in the video. Once in about the middle of his presentation and again in response to a question after his presentation.

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Re: Social Security and Retirement Costs

Post by bdylan »

bobcat2 wrote:
bdylan wrote:
richard wrote:The Social Security income cap was set based on capturing 90% of payroll. See page 7 of http://www.ssa.gov/policy/docs/ssb/v41n3/v41n3p3.pdf Those who set it did not envision the degree of income inequality we see today, which results in significantly less than 90% beings subject to Social Security taxes. Other than that, forecasts have been on the somewhat pessimistic side of accuracy.
This isn't true. Social security hit 90 percent of payroll for a year or two in the 80s. Other than that it's almost always been lower. The statement in that paper is descriptive.
The statement in the paper is not descriptive. Social Security was adjusted in 1983 with the intent of capturing about 91% of wage and salary income going forward. The intent of capturing about 91% of income was met immediately after the change was made. That is why,
Social security hit 90 percent of payroll for a year or two in the 80s.
Then after that there was increasing wage dispersion, with wages skewing more and more to the high end, and thereby reducing the amount of earned income captured by the SS wage ceiling.

The SS fix of 1983 took into account that the demographic bulge of baby boomers would begin retiring and taking SS in about 2010. Adjusting the wage ceiling to capture 91% of earned income instead of the previous roughly 85% of earned income was a deliberate change in the system to capture the additional revenue needed to fund the SS benefits of the boomers and future recipients after the boomers.

Goss makes this point twice in the video. Once in about the middle of his presentation and again in response to a question after his presentation.

BobK
The paper cited is about the 77 reforms. Regardless, Steve is wrong here. Here's a good paper on the tax maxes evolution

http://www.ssa.gov/policy/docs/policybr ... 11-02.html

More importantly, the 83 reforms had very little to do with long term solvency. The NRA increases are a short of hand wave in that direction, but it's just not true that members of the Greenspan commission intended to pay for the baby boomers in any meaningful fashion. See Bob Myers oral interview here
http://www.ssa.gov/history/myersorl.html

You can see this in moynihans later comments on this issue as well.
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Re: Social Security and Retirement Costs

Post by bdylan »

Also, what changes in the 83 reforms affected the tax max?
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Re: Social Security and Retirement Costs

Post by momar »

Projections decades into the future are meaningless. To see that this is so for this particular case, find a table showing the projected year the trust fund runs out, by year. I've seen it, but am on my mobile now and can't look for it.

We can't predict the economy with much certainty a few years out, yet people talk about 75 year projections as if they mean anything. To put this in perspective, how much stock should we give the projections of 1940 when planning our next few years?
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Re: Social Security and Retirement Costs

Post by bdylan »

momar wrote:Projections decades into the future are meaningless. To see that this is so for this particular case, find a table showing the projected year the trust fund runs out, by year. I've seen it, but am on my mobile now and can't look for it.

We can't predict the economy with much certainty a few years out, yet people talk about 75 year projections as if they mean anything. To put this in perspective, how much stock should we give the projections of 1940 when planning our next few years?
Social securities projections are pretty good (and done yearly!). Many of the big factors - demographics, mortality - are known. Much better than projections on health care.

But, as you say, 75 years is a long time, so yes, a grain of salt is required.
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Re: Social Security and Retirement Costs

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bdylan wrote:The paper cited is about the 77 reforms. Regardless, Steve is wrong here. Here's a good paper on the tax maxes evolution

http://www.ssa.gov/policy/docs/policybr ... 11-02.html
Opening paragraph of above document.
Since its inception, Social Security has featured a taxable maximum (or "tax max"). In 1937, payroll taxes applied to the first $3,000 in earnings. In 2011, payroll taxes apply to the first $106,800 in earnings. This policy brief summarizes the changes that have occurred to the tax max and to earnings patterns over this period. From 1937 to 1975, Congress increased the tax max on an ad-hoc basis. Increases were justified by the desire to improve system financing and maintain meaningful benefits for middle and higher earners. Since 1975, the tax max has generally increased at the same rate as average wages each year. Some policymakers propose increasing the tax max beyond wage-indexed levels to help restore financial balance and to reflect growing earnings inequality, as workers earning more than the tax max have experienced higher earnings growth rates than other workers in recent decades.
In 1983 they thought that the tax max going forward would capture 91% of earned income and that real wage income would increase 1.5% per year. Had those things happened SS would be in good shape today. Instead what has happened is that earned income has become increasingly skewed to the high end since then and average real wages have grown at about 1%. Had they known that earned income would become more skewed over time (decreasing the amount of earned income covered to about 84%) and that average real wages would grow significantly slower than projected there would have had to have been additional changes to the SS System made by the Greenspan Commission.

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Re: Social Security and Retirement Costs

Post by bdylan »

bobcat2 wrote:
bdylan wrote:The paper cited is about the 77 reforms. Regardless, Steve is wrong here. Here's a good paper on the tax maxes evolution

http://www.ssa.gov/policy/docs/policybr ... 11-02.html
Opening paragraph of above document.
Since its inception, Social Security has featured a taxable maximum (or "tax max"). In 1937, payroll taxes applied to the first $3,000 in earnings. In 2011, payroll taxes apply to the first $106,800 in earnings. This policy brief summarizes the changes that have occurred to the tax max and to earnings patterns over this period. From 1937 to 1975, Congress increased the tax max on an ad-hoc basis. Increases were justified by the desire to improve system financing and maintain meaningful benefits for middle and higher earners. Since 1975, the tax max has generally increased at the same rate as average wages each year. Some policymakers propose increasing the tax max beyond wage-indexed levels to help restore financial balance and to reflect growing earnings inequality, as workers earning more than the tax max have experienced higher earnings growth rates than other workers in recent decades.
In 1983 they thought that the tax max going forward would capture 91% of earned income and that real wage income would increase 1.5% per year. Had those things happened SS would be in good shape today. Instead what has happened is that earned income has become increasingly skewed to the high end since then and average real wages have grown at about 1%. Had they known that earned income would become more skewed over time (decreasing the amount of earned income covered to about 84%) and that average real wages would grow significantly slower than projected there would have had to have been additional changes to the SS System made by the Greenspan Commission.

BobK
Sure but that wasn't intentional, it was just OACTs projection at the time. Maybe we're talking passed each other, but I was speaking of intent. There was never any specific intent (especially in 83 where no tax max changes were made iirc) to set the tax max to hit 90 percent of taxable wages.

And again, Bob Myers makes out clear the Greenspan commission wasn't trying to fix SS for the long term - at most for a generation. They were running into a hard deadline where benefits where going to be suspended if they didn't fix the shorter term problem. Even had they known that longer term the tax max wasn't going to cover 91 percent of taxable wages, it's doubtful they could have, or would have, done much more.
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Re: Social Security and Retirement Costs

Post by MIretired »

bdylan wrote:
bobcat2 wrote:
bdylan wrote:
richard wrote:The Social Security income cap was set based on capturing 90% of payroll. See page 7 of http://www.ssa.gov/policy/docs/ssb/v41n3/v41n3p3.pdf Those who set it did not envision the degree of income inequality we see today, which results in significantly less than 90% beings subject to Social Security taxes. Other than that, forecasts have been on the somewhat pessimistic side of accuracy.
This isn't true. Social security hit 90 percent of payroll for a year or two in the 80s. Other than that it's almost always been lower. The statement in that paper is descriptive.
The statement in the paper is not descriptive. Social Security was adjusted in 1983 with the intent of capturing about 91% of wage and salary income going forward. The intent of capturing about 91% of income was met immediately after the change was made. That is why,
Social security hit 90 percent of payroll for a year or two in the 80s.
Then after that there was increasing wage dispersion, with wages skewing more and more to the high end, and thereby reducing the amount of earned income captured by the SS wage ceiling.

The SS fix of 1983 took into account that the demographic bulge of baby boomers would begin retiring and taking SS in about 2010. Adjusting the wage ceiling to capture 91% of earned income instead of the previous roughly 85% of earned income was a deliberate change in the system to capture the additional revenue needed to fund the SS benefits of the boomers and future recipients after the boomers.

Goss makes this point twice in the video. Once in about the middle of his presentation and again in response to a question after his presentation.

BobK
The paper cited is about the 77 reforms. Regardless, Steve is wrong here. Here's a good paper on the tax maxes evolution

http://www.ssa.gov/policy/docs/policybr ... 11-02.html

More importantly, the 83 reforms had very little to do with long term solvency. The NRA increases are a short of hand wave in that direction, but it's just not true that members of the Greenspan commission intended to pay for the baby boomers in any meaningful fashion. See Bob Myers oral interview here
http://www.ssa.gov/history/myersorl.html
You can see this in moynihans later comments on this issue as well.
Yes. That link by richard is a 1977 reform, which included 'the average wage' increase of tax exempt max going forward, along with some jump steps initially going forward.
The paper cited is about the 77 reforms. Regardless, Steve is wrong here. Here's a good paper on the tax maxes evolution
Is this where you say that Steve(Stephen) is wrong? That there was no avg. wage test for ss exempt max?
He did mention that in the same breath as the '83 adj. And I took it as the adj of '83 as being implied a correction to ss forecasts. And showing a graph of the '83, '85' 200?, and 2011 forecast curves.
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Re: Social Security and Retirement Costs

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But 91% of earned income is what it would have been captured going forward had earned income not have become much more skewed than was projected. Had the wage ceiling going forward in 1983 been shown to capture only 84% of earned income going forward the projections would not have shown that the system was fully funded for the SS planning horizon. Instead it would have shown that the system was underfunded. The amount of that shown underfunding would be the majority of the underfunding that has occurred.
Even had they known that longer term the tax max wasn't going to cover 91 percent of taxable wages, it's doubtful they could have, or would have, done much more.
Who knows what they would have done. I think they would have done something extra, since their own projections would have shown that they had fallen significantly short of solving the LT problem. :wink:

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Re: Social Security and Retirement Costs

Post by MIretired »

bdylan wrote:
momar wrote:Projections decades into the future are meaningless. To see that this is so for this particular case, find a table showing the projected year the trust fund runs out, by year. I've seen it, but am on my mobile now and can't look for it.

We can't predict the economy with much certainty a few years out, yet people talk about 75 year projections as if they mean anything. To put this in perspective, how much stock should we give the projections of 1940 when planning our next few years?
Social securities projections are pretty good (and done yearly!). Many of the big factors - demographics, mortality - are known. Much better than projections on health care.

But, as you say, 75 years is a long time, so yes, a grain of salt is required.
And also, the current LAW is a big uncertainty for the future. And the Goss presentation explained how, if current law were used and ss CANNOT borrow funds, then US debt obligations going 'til 2080 or something are meaningless when ss is scheduled to have no funds other than current income in 1933-35.
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Re: Social Security and Retirement Costs

Post by bdylan »

bobcat2 wrote:But 91% of earned income is what it would have been captured going forward had earned income not have become much more skewed than was projected. Had the wage ceiling going forward in 1983 been shown to capture only 84% of earned income going forward the projections would not have shown that the system was fully funded for the SS planning horizon. Instead it would have shown that the system was underfunded. The amount of that shown underfunding would be the majority of the underfunding that has occurred.
Even had they known that longer term the tax max wasn't going to cover 91 percent of taxable wages, it's doubtful they could have, or would have, done much more.
Who knows what they would have done. I think they would have done something extra, since their own projections would have shown that they had fallen significantly short of solving the LT problem. :wink:

BobK
All true. Though, I will say their forecasting errors have not only been to positive (in fact, most complaints have them as being too pessimistic.)

Here's a good panel with Stephen and Chuck Blahous discussing forecasting by OACT. A bit out of date, but overall, OACT did well.

http://www.aei.org/events/2007/09/07/ar ... tic-event/
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Re: Social Security and Retirement Costs

Post by bdylan »

This is to mipre. Stephen would be wrong if he said that reaching 90 percent of taxable wages was the specific intent of the 83 laws, as they didn't touch the tax max. It was a result of the 77 amendments, and I've never seen anything to suggest 90 percent was targeted (though happy to learn otherwise).

In terms of the scoring. This is accurate, but there is good and bad in that. Is it likely that the disabled will see a 20 percent cut in their benefits in a few years? No, but that's what the trust funds require. Scoring rules for programs with trust funds incent policy makers to make changes prior to trust funds running out. Both good and bad their, but nothing nefarious.
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Re: Social Security and Retirement Costs

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bobcat2 wrote:At the Bogleheads Conference this week there was a lot of discussion about Social Security strategies and the stability of the Social Security program. I think the following address by Stephen Goss of Social Security is great background for assessing the strengths and weaknesses of the Social Security Program.
OK, but this is not investing (off-topic).

Additionally, we're now starting to discuss the future of Social Security, which is somewhat political and has no definitive answer (not actionable). This thread has run its course and is locked. See: Forum Policy
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