Wednesday, April 21, 1999

Timeline2 TIMELINE 3:00-3:30PM Reception 3:30-4:15PMPresentation 4:15-5:15PMDiscussion

Welcome and Introduction3 Overview –“Three-legged Stool” –Breakdown of Social Security –Matrix Criteria Explanation Alternatives –Description and Matrix Evaluation Conclusion –Recommendations Mailing of final report and press release Friday, May 7, 1999 WELCOME AND INTRODUCTION

Overview4 Structure –Social Security –Pensions –Private Savings Direct Effects –Increase Tax Rate (Social Security) Indirect Effects –Increase Awareness of Pensions and Private Savings “Three-Legged Stool”

Overview5 Flowchart of Social Security

Overview6 Status Quo Actuarial Assumptions Inaccurate Accurate Worse Off Better Off Projection Methods Leave System Alone MTL Raise Age LFP Earnings Test Employer Incentives Proven Alternative Leave System Alone Privatization Enact Policies

Overview7 Political Feasibility –Current Political Climate –Politicians –Constituents Administrative Feasibility –Important but Easy Threshold Robustness/Durability –How long will proposed change sustain system? Matrix Criteria

Overview8 Effect on Projected Solvency –According to current Actuarial Assumptions –Effect on long range projections Social (Behavioral) & Economic Impact –Societal View Effect on Labor Force Participation (55+) –Does it fit into an overall plan? Impact on Retirement Incentive –Does it fit into an overall plan Matrix Criteria

Policy Areas9 #1 Status Quo #2 Maximum Taxable Limit #3 Earnings Test and Labor Force Participation #4 Company Incentives for Retaining Older Workers POLICY AREAS

#1 - Status Quo10 Administrative & Political Feasibility Maintain current low administrative costs. System has basically stayed the way it was designed. Most successful social program. Politicians and the community have supported the current method of making projections for the last 25 years.

#1 - Status Quo11 Social and Economic Impacts 2036 Beneficiaries would only receive 3/4 of their currently expected benefits. About 50% of the elderly would be living in poverty. Most Americans would not have another source of income for their retirement. Maintains current built-in retirement incentives No major effect on labor force participation for workers over age 55. Source: Social Security Solvency:

#1 - Status Quo12 Effect on Trust Fund WAIT and SEE...According to the Social Security administration and its advisors, in: –2014- First year OASDI outgo exceeds tax income – Year HI trust fund assets are exhausted – Year DI trust fund assets are exhausted – First year OASDI outgo exceeds tax plus interest income – Year combined OASDI trust funds’ assets are exhausted – Year OASI trust fund assets are exhausted Source: Social Security Solvency:

#1 - Status Quo13 Analysis of Actuarial Projections Analysis points to understandable inaccuracies –Magnitude –Short v. Long-term Caution - Major policy changes based on current assumptions are not prudent –Minor errors result in discrepancies of billions of dollars

#1 - Status Quo14 Alternative Methods of Projections Transparency – Readily available to interested parties Accountability - Winners & Losers –Opportunities to repeat the projection process

#2 - Eliminate the Maximum Taxable Limit 15 #2 - Eliminate the Maximum Taxable Limit The 1999 Maximum Taxable Limit (MTL) for Social Security is $72,600; it is indexed to the average real wage Any income over that $72,600 is “tax-free” from Social Security, but not Medicare *In 1993, there were 1,043,213 tax returns showing income over $200,000. The number is growing at 5.4% annually Eliminating the MTL for Social Security will increase contributions over $90B yearly. *Source: High Income Tax Returns for 1993, published by the IRS, 1997

#2 - Eliminate the Maximum Taxable Limit 16 Feasibility and Political Considerations Politics as usual? The 1993 OBR Act removed the MTL for Medicare. Will it work again? The OASDI tax rate has been raised six times since It may work for individuals, but what about the self-employed? What about corporations?

#3 - Earnings Test and Labor Force Participation 17 #3 - Earnings Test and LFP Our economy is changing from a traditional industrial economy to a service economy. This transition is creating a labor shortage. Social Security is threatened by the burden of supporting retired workers #3 Eliminate the Earnings Test

#3 - Earnings Test and Labor Force Participation 18 Simulations predict a substantial boost to labor supply from eliminating the earnings test, and at a minimal fiscal cost. Elderly bunch in substantial numbers at and just below the earnings exempt amount and the bunching responds to changes in the rules. Friedberg, Leora. The Labor Supply Effect of the Social Security Earnings Test. UCSD, 1997 Relationship of LFP and the Earnings Test

#3 - Earnings Test and Labor Force Participation 19 Political and Administrative Feasibility President Clinton has included the removal of the earnings test in his plan for Social Security In 1996, 75% of Republicans and 45% of Democrats voted to raise the Earnings Test gradually Administrative costs would be reduced

#3 - Earnings Test and Labor Force Participation 20 Increasing labor force participation will ease the labor shortage. Increasing labor force participation will increase income to OASDI, thus improving the balance in the long run. Eliminate the Earnings Test

#4 - Company and Employee Incentives 21 #4 - Company and Employee Incentives Who decides when to retire? Unemployment ---> labor shortage How does it work? Who will support it? Will the system benefit from incentives?

Recommendations22 RECOMMENDATIONS Reevaluate actuarial assumptions Recommended Policy Changes –Given: Eliminating Earnings Test –Eliminate Maximum Taxable Limit –Offer Company and Employee Incentives

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