1. Provisions to Change Social Security Office of the Chief Actuary, SSA Provisions to Change Social Security Office of the Chief Actuary, SSA Middle Atlantic Actuarial Club October 8, 2010 1

2. 2 What Kinds of Provisions Do We See In Solvency Packages? 1) Raise Scheduled Revenue Increase payroll tax Increase revenue from taxation of benefits Increase contribution and benefit base (taxable maximum) Find other sources of revenue 2) Lower Scheduled Benefits Change benefit formula Reduce benefits for dependents Reduce cost of living adjustments Increase retirement age 3) Restructure System Individual accounts 4) Offsetting Costs Raise benefits or lower contributions for specific people

3. 3 Long-Range Actuarial Balance Measure of the program’s financial status for the 75- year valuation period as a whole Actuarial balance = -2.00 percent of taxable payroll under 2009 Trustees Report assumptions Beginning of period assets + present value total income – present value total cost – present value 76 th year cost as a percent of taxable payroll

4. 4 Raise Scheduled Revenue

5. 5 Increase Contribution and Benefit Base Taxable Maximum in 2010 is $106,800 Option 1: Make all earnings subject to payroll tax starting in 2010 (retain current-law taxable maximum for benefit calculations) 2.32 savings as a percent of taxable payroll Option 2: Make all earnings subject to payroll tax starting in 2010 and credit them for benefit purposes 1.89 savings as a percent of taxable payroll Option 3: Get creative

6. 6 Increase Contribution and Benefit Base Consider the following: Keep the current-law taxable maximum Assess a separate payroll tax above a higher threshold ($200K, $300K, $400K) Presumably the tax rate would be smaller than the employer/employee combined rate of 12.4% below the taxable maximum (2%, 3%, 4%)

7. 7 Increase Contribution and Benefit Base New Payroll Tax Without Benefit Credit 2017 Start ThresholdPayroll TaxChange in Act. Bal $200,0002%.24 $300,0002%.18 $400,0002%.15 $200,0003%.37 $300,0003%.27 $400,0003%.22 $200,0004%.49 $300,0004%.36 $400,0004%.30

8. 8 Increase Contribution and Benefit Base New Payroll Tax With Benefit Credit 2017 Start ThresholdPayroll TaxChange in Act. Bal $200,0002%.19 $300,0002%.14 $400,0002%.12 $200,0003%.29 $300,0003%.21 $400,0003%.17 $200,0004%.39 $300,0004%.29 $400,0004%.23

9. 9 Increase Contribution and Benefit Base At the beginning of 2010 the taxable ratio was 84% Option 1: Phase-in to 90% taxable ratio over 10 years. All earnings subject to payroll tax are used in benefit calculation. 0.75 savings as a percent of taxable payroll Option 2: Phase-in to 90% taxable ratio over 10 years. Benefit calculation only uses earnings subject to current-law payroll tax. 0.95 savings as a percent of taxable payroll

10. 10 Lower Scheduled Benefits

11. 11 Change Benefit Formula After your Average Indexed Monthly Earning (AIME) is calculated using your full earnings history a benefit formula is applied: 90% of AIME up to Bend Point 1 ($761 in 2010) 32% of AIME above Bend Point 1 and up to Bend Point 2 15% of AIME above Bend Point 2 ($4,586 in 2010) Various provisions modify the benefit formula to decrease benefits Gradually reduce one or more of the three factors Progressive price indexing

12. 12 Progressive Price Indexing 2016 Start Add third bend point in between current-law bend points and raise factors above new bend point such that: Option 1: Workers at or below 30 th percentile maintain current-law benefits and maximum worker benefit grows by inflation rather than average wage growth. 1.31 savings as a percent of taxable payroll Option 2: Workers at or below 50 th percentile maintain current-law benefits and maximum worker benefit grows by inflation rather than average wage growth. 0.87 savings as a percent of taxable payroll Option 3: Workers at or below 60th percentile maintain current-law benefits and maximum worker benefit grows by inflation rather than average wage growth. 0.61 savings as a percent of taxable payroll

13. 13 Reduce Cost of Living Adjustment Provide reduced COLA with 2010 start: Option 1: Beginning in December of 2010, reduce the annual COLA by 1 percentage point 1.55 savings as a percent of taxable payroll Option 2: Beginning in December of 2010, reduce the annual COLA by 0.5 percentage point 0.81 savings as a percent of taxable payroll Option 3: Beginning in December of 2010, reduce the annual COLA by 0.3 percentage point 0.49 savings as a percent of taxable payroll

14. 14 Provisions That Worsen the Actuarial Balance

15. 15 Provisions That Cost Option 1: Beginning in 2010, exempt individuals with more than 180 quarters of coverage 0.26 cost as a percent of taxable payroll Option 2: Provide a 5% benefit increase for any beneficiary that attains age 85 beginning in 2010. 0.09 cost as a percent of taxable payroll