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Thursday, December 2, 2010

What does the Report of the Fiscal Commission's Co-Chairs Mean for Social Security?

Ben Veghte
Income Security Research Associate, National Academy of Social Insurance

Social Security changes recommended by the co-chairs of the National Commission on Fiscal Responsibility and Reform (NCFRR) on December 1, 2010  include: extending coverage (to uncovered state and local employees); three benefit reductions (affecting the benefit formula, cost of living adjustments, and retirement age); two benefit increases (a new special minimum and a 5 percent boost for longtime recipients); and a revenue increase (lifting the cap on taxable wages). In addition, the recommendation to lower personal income tax rates would reduce revenues to Social Security funds from the taxation of benefits.

 
The details of these provisions, summarized below, are taken from the report released by the Commission co-chairs on December 1, 2010, together with cost estimates on these proposals provided by the Chief Actuary of Social Security.
 
Coverage
1. Cover newly hired state and local government workers after 2010. Currently about 25 percent of such employees are not covered by Social Security.
 
Benefit Reductions
2. Reduce benefits above the median lifetime earnings by modifying the PIA formula.Introduce a new bend point at median earnings. Over the period 2017-2050, gradually reduce the 32 percent PIA factor that now applies below the new bend point to 30 percent, the 32 percent PIA factor that applies above the new bend point to 10 percent, and the 15 percent PIA factor to 5 percent. The following chart by Commission staff summarizes the formula changes.
 
Bend Points in 2010*
Current Law
Proposal
$0 to $9,000
90%
90%
$9,000 to $38,000
32%
30%
$38,000 to $64,000
10%
$64,000 to $107,000
15%
 5%
>$107,000
n/a
* The AIME bend-points are expressed in annualized amounts and rounded to $1,000.
 
3. Reduce the cost-of-living adjustment (COLA) by switching to a chained CPI  starting in December 2011.
 
4. Index the normal retirement age (NRA) and earliest eligibility age (EEA) to longevity.The NRA would gradually increase to 68 by about 2050 and to 69 by about 2075. The EEA would rise to 63 and 64 in tandem. The EEA and NRA increases would be limited to not apply in case of hardship.
 
Benefit Increases
5. A new special minimum benefit.Beginning in 2017, the benefit for 30 years of coverage would equal 125 percent of the monthly poverty level (indexed by the chained CPI from 2009 to 2017). The benefit for successive cohorts would be indexed by average wages thereafter. A year of coverage is 4 quarters of coverage. The special minimum benefit is zero for 10 or fewer years of coverage, and increases linearly for 11 through 30 years of coverage. The years-of-coverage requirement for disabled workers would be based on years of potential work.
 
6. Increase benefits by 5% of average benefits (spread out five years) for individuals who have been eligible for 20 years, effective for all beneficiaries in 2011 and later. The total increase in benefits is 5 percent of the PIA for an average earner.
 
Revenue
7. Increase the Social Security taxable maximum by an additional 2 percent each year until 90 percent of covered earnings are taxable. Starting in 2012, increases are expected for 38 years, reaching 90 percent taxable for 2049 and later. Establish in 2013 a new PIA bend point at the monthly equivalent of the taxable maximum that would be determined without regard to this provision, with a benefit formula factor of 5 percent for AIME above this new bend point (reflected in provision 2, above).
 
Other Changes Affecting Social Security
 
7. Allow retirees to start receiving up to one-half of their benefits at age 62 with the remainder not available until EEA. Actuarial reduction applies accordingly.
 
8. Lower personal income tax rates (which would lower trust fund revenues from taxation of Social Security benefits). The Commission would broaden the federal personal income tax base by reducing exemptions and would then lower tax rates, starting in 2012.  Three income tax brackets would apply with marginal rates of 12 percent (replacing 15 percent), 21 percent (replacing 28 percent and 31 percent), and 28 percent (replacing 36 percent and 39.6 percent).
 
Impact of Provisions on Reducing Social Security’s Actuarial Shortfall
 
75 Year
75th Year
Cover newly hired state and local workers after 2020
8%
0%
Reduce benefits above the mean by modifying PIA factors to 90%|30%|10%|5% by 2050
45%
51%
Reduce cost-of-living adjustment (COLA) by switching to chained CPI
26%
17%
Index normal retirement age (NRA) and earliest eligibility age (EEA) to longevity so that the NRA gradually increases to 68 by about 2050 and to 69 by about 2075, and the EEA to 63 and 64 in same years; also direct SSA to create “hardship exemption”
18%
30%
Provide special minimum benefit of 125% of poverty for an individual with 25 years of work; index minimum benefit level to wage growth
-8%
-6%
Enhance benefits by 5% of average benefits (spread out over 5 years) for individuals who have been eligible for benefits for 20 years
-8%
-6%
Gradually increase taxable maximum to cover 90% of earnings by 2050
35%
22%
Allow retirees to collect half their benefits at a time, including option to collect the first half at age 62
-
-
Personal income tax changes – preliminary estimate of impact on Social Security revenues from taxation of benefits
-8%
-10%
Note: Although the Office of the Actuary of the Social Security Administration notes that it is difficult to predict the precise effects of these measures on the OASDI Trust Fund balance, the total package of Commission recommendations, including these tax reforms, is roughly estimated to close 105% of the 75-year shortfall and to achieve sustainable solvency in the 75th year as well (http://www.ssa.gov/oact/solvency/index.html).
Posted on December 2, 2010  |  Write the first comment
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