Proposed SS reform: "A Well- Tailored Safety Net"

[samclem]

The new proposal is the subject of a new book, and described at this link.

The plan would:
- Cut overall SS payments compared to today's levels to put the program on a sound fiscal footing.
- Increase minimum payments (to very low wage earners)
- Provide larger benefits (but still smaller than those under the present system) as people get older.

Like the ideas released by the Fiscal Commission's co-chairs, this plan would reduce SS costs. But the author believes it does this in a better way.

As illustrated in the accompanying table, an average earner retiring at age 65 would get a benefit that is 24% bigger at age 95 under “A Well-Tailored Safety Net” than under the Fiscal Commission plan after all changes are phased in.
Why is “A Well-Tailored Safety Net” able to provide much more robust support, particularly in very old age?
There are several reasons. One is a provision called Old-Age Risk-Sharing, under which the maximum benefit cuts come in the initial year of retirement, but the cuts are progressively smaller for lower earners and phase out for everyone to preserve strong support for those who live to an advanced age.
Once fully phased in, average earners would face a 20% upfront benefit cut that would fully unwind over two decades. Lower earners would face a 10% upfront cut (offset by a more generous minimum benefit), while higher earners would face a 30% cut that also would unwind over 20 years.
This approach recognizes that it’s possible to go too far in raising the retirement age, given that lower earners will have a tougher time adapting to less support from Social Security early in their 60s and higher earners enjoy a disproportionate share of life expectancy gains.

For FIREees, one of the issues we frequently discuss is the need for longevity insurance. It appears that the "Tailored Safety Net" would help address this problem--if it looks like we need to pare down the withdrawals because we're living longer than we anticipated, at least the SS checks will be rising a little to help make up the difference.

 

[REWahoo]

Looking at information linked, I didn't see any detail on how this proposed "WTSN" would be phased in. Any info on that aspect of the proposal?

 

[TromboneAl]

Not likely to affect anyone who is over 55 today, I'm guessing (hoping).

 

[MasterBlaster]

We should see a lot of these type proposals. There are many ways to skin a cat, and many ways to balance the budget and to put SS on sound(er) footing.

I wouldn't react much to any one proposal. Otherwise you'll drive yourself nuts.

My personal method to insure SS longevity, and to balance the budget is to send all those pesky early retirees back to work. And double their taxes while we are at it !

 

[REWahoo]

I wouldn't react much to any one proposal. Otherwise you'll drive yourself nuts.

Is it OK with you that we at least discuss them? I promise not to react much...

 

[W2R]

Is it OK with you that we at least discuss them? I promise not to react much...

I am reacting too much already.... Better not post what I am thinking about this proposal.

 

[MasterBlaster]

Originally Posted by MasterBlaster
I wouldn't react much to any one proposal. Otherwise you'll drive yourself nuts.

Is it OK with you that we at least discuss them? I promise not to react much...

Yes you may, So pontificate away ad nauseum.

That is, provided you aren't yet nuts.

If you are already a nutcase or at least leaning that way, then you'd better stop for your own safety.

 

[samclem]

Looking at information linked, I didn't see any detail on how this proposed "WTSN" would be phased in. Any info on that aspect of the proposal?

According to the book (thanks, Amazon "What's Inside" function!) the program would phase in over 20 years, starting in 2013. My guess is that those who start taking benefits between 2013 and 2033 would get some pro-rated difference amount between the present program and the new program.

It's just a proposal by one author, no reason to believe it will gain traction. But, compared to some of the bitter medicine being prescribed elsewhere, it's got pluses and minuses. It would make the system even more "progressive." Looking deeper, the plan has a lot of less significant aspects (small personal accounts that are "paid for" at the current SS tax level, a benefit scale that is intended to encourage people to work longer, elimination of the reqmt for employers to pay the SS tax on wages below $10K for workers over 62, etc). There's a lot of social engineering that is distasteful to me. But, the "meat" of the idea is to raise benefit checks as retirees get older and to shift a larger percentage of benefits to lower-income workers.

 

[REWahoo]

It's just a proposal by one author, no reason to believe it will gain traction.

Agreed, but it is an interesting approach and one I hadn't heard proposed until now. I can see some merit in the concept of increasing benefits with age. Of course the devil is in the details...

 

[Nords]

... the program would phase in over 20 years, starting in 2013. My guess is that those who start taking benefits between 2013 and 2033 would get some pro-rated difference amount between the present program and the new program.

Ruh-roh...

 

[ziggy29]

Wow, I'm looking at one place in the detailed document where they say the CPI "overstates inflation." In what universe?

 

[Independent]

The unusual thing about this plan is that it tilts the benefits by age, increasing benefits at ages above 85 and lowering them for those below. Since most people don't live to really advanced ages, there is some leverage there. If we reduce benefits by P% at age 70, we can increase them by something significantly bigger than P at age 90. I guess that has never made my list of things that need to be changed, but other people may differ.

Other than that, it looks like he would raise taxes by 1% of income (10% of current revenue) immediately, create "individual accounts" that must be invested in Treasuries, and apparently claims that eliminates the need for SS to draw down the "trust fund". That only works if any withdrawals from the IAs are used to make further reductions in the paygo benefits, something that's not addressed in this article.

But we can't really evaluate this proposal against others because

“A Well-Tailored Safety Net” is designed to erase the entire 75-year cash-flow shortfall (though that hasn’t been validated by Social Security’s actuaries).

One nice thing about the SSA scoring is they always start with a clear description of the proposal's provisions - the bad as well as the good. I didn't see that in this article, maybe it's in a few pages in the book.

Edit: Appendix 1 in the book is labeled "Details". I'll look at it.

Okay, the percents below are fractions of the current SS gap closed by each change:

25% Additional payroll tax - varying from 0.5% to 1.5% depending on income
13% New 2% tax on income over the current wage base
18% Tax the growth in employer paid health insurance in excess of GDP growth
33% Cut benefits paid to early retirees
15% Increase normal retirement age to a max of 68 (in 2028)
-8% Provide a higher floor for low income workers (negative sign means this increases the gap)
08% Cover state & local workers under Social Security

There are other changes, but I don't see "percent of gap" estimates for them.

At any rate, he closes 56% of the gap with tax increases, 40% with benefit cuts, and gets another 8% from the timing of adding additional workers.