Wednesday, December 09, 2009

Social Security actuaries report the effects of several reform options

After the US gets health reform and climate change done, Social Security is likely to be one of the items on the table. Social Security is a big part of the retirement system, and it also provides insurance against disability, death of a spouse and other contingencies. Although notions of an entitlement crisis are overblown, Social Security does have financing challenges.

Actuaries at the U.S. Social Security Administration, led by Stephen Goss, provided an approximate report on several options to reform Social Security given by the National Academy for Social Insurance. When reading the options chart, the actuarial balance of the trust fund is presently -2.00% of taxable payroll; the trust fund needs to be fully funded for 75 years, and that means that it's presently short by 2% of the total taxable amount of pay in the US. The US only levels payroll taxes on salaries up to $106,800 or so.

For example, reducing the cost of living adjustment by 1% (it's presently linked to the CPI) would eliminate about 75% of the current deficit. That option would have a very bad effect on Social Security recipients. Alternatively, raising payroll taxes by 2.2% in 2010 and beyond would eliminate the entire deficit and more. Taxing every cent of earnings and still crediting them for Social Security benefits would eliminate most of the deficit. Taxing 90% of all earnings, which is the historical level, would eliminate about a quarter of the current deficit.

The options are scored as if each one were enacted separately; in real life, several options could interact to produce a different effect.

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