What future Social Security, etc ret progs may look like? - BPC report

[Sojourner]

http://cdn.bipartisanpolicy.org/wp-content/uploads/2016/06/BPC-Retirement-Security-Report.pdf

Basically, pay more taxes, work longer, and you get a better deal if you’re low income.


Some excerpts (Soc Sec proposed changes are further down the list with some bolded highlights)…

Pg. 9
In defined contribution plans, participants aged 55 and older should be allowed to use their retirement savings to purchase annuities that begin payments later in life.  Workers with defined benefit pensions should be able to receive part of their benefit as a lump sum and the rest as monthly income for life, rather than the all-or-nothing choice most have today.

Federal and state tax policy, however, actually subsidizes the use of home equity for pre-retirement consumption, leaving many retired homeowners burdened with debt and with less equity to support retirement security. We recommend ending these subsidies by eliminating tax benefits for borrowing that reduces home equity.

Pg. 10
better communicating the consequences of claiming Social Security early.  For example, renaming the earliest eligibility age, currently age 62, as the “reduced benefit age” would better highlight the lower monthly benefits that result from early claiming.

Pg. 16
the current financing outlook for Social Security is unsustainable.  Dedicated revenues for the program are insufficient to finance scheduled benefits. The time to protect Social Security, the bedrock of the U.S. retirement system, is now.  Significant changes to the program are unavoidable, and workers need to know what to expect in order to plan appropriately.  Elected officeholders and administration officials should commit to taking meaningful action to address these challenges by the end of 2017.

Pg. 63
Recommendation: Implement specific policy changes that would enable more plans to offer automatic installment purchases (i.e., laddering) of guaranteed lifetime-income products.
Individuals who purchase an annuity contract risk buying at the wrong time, such as right after a drop in the market or when interest rates, and therefore annuity payouts, are low.  Purchasing an annuity on an installment basis over a period of years, an approach known as “laddering,” can reduce timing risk.

Pg. 66
Recommendation: Allow participants aged 55 and older to initiate in-service rollovers for the purchase of annuities that begin making payments later in life, and improve the portability of in-plan annuity contracts.

Pg. 67
We recommend finalizing Treasury’s proposed rule to encourage DB plans to give participants flexibility in choosing what portion of their benefit to take as a monthly payment and what portion to take as a lump sum.

Pg. 71
Recommendation: End subsidies [mortgage interest tax deduction] that encourage the use of home equity for pre-retirement consumption.

Recommendation: Strengthen programs that support and advise consumers on reverse mortgages.

Pg. 80
the commission’s package of recommendations would extend Social Security’s ability to pay benefits without abrupt reductions through the end of the 75-year projection period.  Moreover, the program’s chief actuary found that this package successfully meets the criteria for “sustainable solvency,” meaning that Social Security would be financially sound beyond the end of the 75-year projection period.   Figure 20

Under current law, if the Social Security trust funds are empty, Social Security cannot spend more on benefits than it collects in program revenues. The OASI Trust Fund is projected to be depleted in 2035.

This implies a roughly 23-percent reduction in total Social Security benefits paid relative to scheduled levels in 2035, when the OASI Trust Fund is exhausted, and each year thereafter.  We assume that this reduction in benefits is applied evenly to all Social Security beneficiaries.

Pg. 85
Figure 25 shows that benefit adjustments would be more generous for individuals who have spent 40 years in the workforce compared to those who have worked for only 35 years, regardless of their earnings level.

Our package of recommendations would achieve these results by modifying Social Security’s benefits and dedicated revenues.  On net, both the Office of the Chief Actuary and the Urban Institute estimate that the reforms we have proposed would close 54 percent of the program’s shortfall through changes to revenues and 46 percent through adjustments to scheduled benefits.

Pg. 89
The current [SS] benefit formula includes two “bend points” at which the marginal replacement rate for earnings, known as the PIA factor, changes.
We recommend revising these bend points and PIA factors, as indicated in Figures 26 and 27, to make the benefit structure more progressive. A 10-year phase-in of the new formula would begin for claimants who turn 62 in 2022.  Due in part to this recommendation, our package actually increases benefits for the lower-earning workers who are at greatest risk of experiencing poverty in old age.

Pg. 90
Recommendation: Apply the [SS] benefit formula annually to earnings to more evenly reward continued work.

Individuals with few Social Security-covered earnings years are not necessarily from lower-income households.  Rather, many older Americans with shorter earnings records either immigrated midcareer, are married to a higher-income spouse, or became wealthy through inheritance or their own efforts.  The current benefit formula, however, redistributes income toward such beneficiaries on the often-mistaken presumption that they are low-income individuals.

Pg. 92
Social Security’s structure should reflect this reality by rewarding additional years in the workforce beyond the 35 years that the program now recognizes.  Thus, we recommend counting up to 40 years of earnings in the annual-PIA formula, and dividing the result by 37.  This change would provide an incentive to continue working, especially for individuals who are nearing typical retirement ages.

Pg. 95
To reflect changes in life expectancy, we recommend gradually raising both the FRA and the maximum benefit age. Starting in 2022, both of these thresholds would rise by one month every two years.  The gradual increases would continue for 48 years until the full retirement age reaches 69 and the maximum benefit age reaches 72 (in 2070).
The earliest age of eligibility would remain unchanged, meaning that the maximum benefit reduction for early claiming would increase by 5 percentage points for each year that the FRA is increased.

Pg. 96
We recommend capping the maximum spousal benefit for new claimants at half of the 75th percentile PIA (which is equal to the spousal benefit received by someone married to a worker in the 75th percentile of the earnings distribution) and then indexing it to the C-CPI-U thereafter.
Limiting spousal benefits for higher-earning couples would improve Social Security’s financial outlook and do so in a way that primarily reduces benefits to households with other significant sources of income and assets.

Pg. 97
We recommend enhancing the survivors benefit so that widows and widowers receive 75 percent of their deceased spouse’s benefit in addition to the entirety of their own benefit. Initial benefits for married claimants would be adjusted so that expected lifetime benefits remain unaffected on average.  Our modeling shows that this adjustment would reduce initial benefits for a 62-year-old married individual claiming in 2020 by roughly 9 percent.

Pg. 98
we propose raising the cap from $118,500 (in 2016) to $195,000 by 2020 and indexing further increases thereafter to average wage growth plus 0.5 percentage points.

A compromise plan to shore up the finances of the Social Security trust funds suggests the need for a balanced blend of new revenues and restraints on benefits.  The commission believes that beneficiaries with the highest incomes should make proportionally larger contributions on both sides.

We recommend increasing the payroll- and self-employment-tax rates by 1 percentage point (0.5 percentage points for both employees and employers). The increase should be implemented gradually, by raising the combined payroll tax paid by employees and employers 0.1 percentage points each year for the next 10 years (beginning in 2017).

Pg. 99
We recommend including in taxable income all benefits received by Social Security beneficiaries with adjusted gross incomes (AGI) of over $250,000 (or $500,000 for couples) starting in 2022, with both thresholds being indexed to average wage growth in subsequent years.  For these high-income beneficiaries, the change would result in a small increase from the 85 percent of Social Security benefits that is subject to tax under current law to 100 percent.

[robartsd]

Sojourner, thanks for the digest.

Of particular interest to many MMM readers is the adjustment against high earner who choose to retire early (of course most on the forums discussing early retirement aren't counting on Social Security)

Recommendation: Apply the [SS] benefit formula annually to earnings to more evenly reward continued work.

Individuals with few Social Security-covered earnings years are not necessarily from lower-income households.  Rather, many older Americans with shorter earnings records either immigrated midcareer, are married to a higher-income spouse, or became wealthy through inheritance or their own efforts.  The current benefit formula, however, redistributes income toward such beneficiaries on the often-mistaken presumption that they are low-income individuals.

Pg. 92
Social Security’s structure should reflect this reality by rewarding additional years in the workforce beyond the 35 years that the program now recognizes.  Thus, we recommend counting up to 40 years of earnings in the annual-PIA formula, and dividing the result by 37.  This change would provide an incentive to continue working, especially for individuals who are nearing typical retirement ages.

[randymarsh]

I think a lot of these recommendations are political suicide. Increasing benefits for the lowest income workers is not going to go over well while at the same time increasing the wage cap and removing the mortgage interest deduction.

I understand SS has always been somewhat progressive, with lower income workers getting a higher % of their income in benefits, but the more progressive you make it the more it's going to become a welfare program and once that happens, the public won't offer nearly as much support.

[Yaeger]

Wow, screw a bunch of that nonsense. It should be clear by now than Social Security isn't working and efforts should be made to dial it back, or return it to the original purpose that it was designed to protect: people outliving their savings. Raise the FRB age much faster and much higher to keep track with life expectancy.

Instead of strengthening Social Security's role as the primary retirement vehicle for U.S. citizens, changes should be made to reduce the amount of burdens that are placed on the taxpayers to allow them to save into better retirement vehicles. We're forcing larger and larger swaths of the population into old age poverty, dependent upon the government because of this.

[randymarsh]

changes should be made to reduce the amount of burdens that are placed on the taxpayers to allow them to save into better retirement vehicles

My concern would be that people just end up increasing their consumption. Then when they can no longer work, they have nothing. That's clearly their fault but having millions of old destitute people is just another problem.

[Bucksandreds]

changes should be made to reduce the amount of burdens that are placed on the taxpayers to allow them to save into better retirement vehicles

My concern would be that people just end up increasing their consumption. Then when they can no longer work, they have nothing. That's clearly their fault but having millions of old destitute people is just another problem.

50-75% of people are absolute idiots. We as a society need to decide if we want them destitute or not. My vote is for strengthening social security. Those of us who want to cut social security are short sided, in my opinion.

[Yaeger]

changes should be made to reduce the amount of burdens that are placed on the taxpayers to allow them to save into better retirement vehicles

My concern would be that people just end up increasing their consumption. Then when they can no longer work, they have nothing. That's clearly their fault but having millions of old destitute people is just another problem.

50-75% of people are absolute idiots. We as a society need to decide if we want them destitute or not. My vote is for strengthening social security. Those of us who want to cut social security are short sided, in my opinion.

It not their fault, it's our fault for creating programs and then allowing the continuation of systems where they're shielded from the negative consequences of selfish actions. Consequences that they can push onto a nameless, faceless crowd that won't protest, the working taxpayers. Why perpetuate that behavior?

[EnjoyIt]

^
I think you are both correct.  Social Security as it stands is not working.  Instead of having a Social Security fund, the US government just uses taxes to pay obligations.  This is doomed to fail as there is no back up.

Either way most Americans are idiots and can't fend for themselves. Cut their social security taxes and they will spend it on Apple watches and Starbucks. Having a destitute older population is not the answer.  But phasing out social security as we know it and then implementing a defined contribution plan of some sorts would be a much better answer.  The plan should be very simple.  50% treasuries and 50% US stock market. With a percentage of contributions paying into a fund that pays out to poor older individuals who never had the opportunity to properly fund their own retirement. You can even make it progressive like Social Security is today.  This is way better than the crazy system we have now.  At Full retirement Age the person takes the amassed cash and buys an annuity with it annuities today I believe range at 5%-6% (I may be wrong).  All profits of the annuity go back into the fund to help pay for the destitute individuals.

Basically someone working from 21-66 making $30K/yr earning 5% a year for 45 years would have collected $625k and at a 6% annuity would have $37500 to live off of for the rest of their lives.  What is interesting, an extra year of work due to compounding will provide an extra $1964 in yearly spending incentivizing working longer.  Even if we want to be a bit progressive, we can start shaving small percentages off the top for funding the destitute.

In the long run, this will become self funding and what we should have created in the beginning.

[Erica]

One thing we cannot forget is the low income have a shorter life expectancy. Probably because most had to work much harder for much less money. Again, this is overall. It depends upon where they live. In some areas, no real disparity exists such as San Francisco.

"Looking at the extreme ends of the income spectrum, economists at the Brookings Institution found that for men born in 1920, there was a six-year difference in life expectancy between the top 10 percent of earners and the bottom 10 percent. For men born in 1950, that difference had more than doubled, to 14 years.
For women, the gap grew to 13 years, from 4.7 years."

[MMM98]

I have heard a variety of efforts to save SS over the years, since the Reagan change of raising the full retirement age to 67.  I was in high school at the time.

Some things never change.

If you go back many of these ideas have been suggested and languished before.  The only one that has a reasonable chance of moving forward is raising or eliminating the maximum SS taxable wage, currently $118,500.  Estimates vary but this will but at least a few decades to Bernie Sanders optimistic 50 years viability to the SS system.

Remember old people vote, changing SS is political suicide.

[robartsd]

Remember old people vote, changing SS is political suicide.

I think older voters will not have a problem with modifying Social Security if you don't reduce benefits to those in or near retirement. This particular proposal would start phasing in changes with individuals who will be eligible for social security in 2022 with transitions of at least 5 years (some changes phase in faster than others in this proposal).

I agree that politically it would be very difficult to touch the primary residence mortgage interest deduction. My reading of the proposal is not that they want to take away the interest deduction for a primary mortgage used to purchase or refinance at a lower interest rate, but take it away for HELOC or cash out refinace to provide more incentive to build equity rather than spend it.

[MMM98]

Remember old people vote, changing SS is political suicide.

I think older voters will not have a problem with modifying Social Security if you don't reduce benefits to those in or near retirement. This particular proposal would start phasing in changes with individuals who will be eligible for social security in 2022 with transitions of at least 5 years (some changes phase in faster than others in this proposal).

You must be younger,  50 YO voters, or those receiving full benefits in 2033, will certainly revolt against politicians who vote for this, IMHO.  At 50 it is likely the kids are or soon will be gone and you are dreaming of retirement someday.  This is why the Reagan era changes made in 1983 started impacting retirees in 2000.  17 years is a long time in politics...

[robartsd]

You may be right that this particular proposal makes changes too close to retirement for 50 year olds. I'm just saying it's possible to make changes if you're willing to wait long enough to make them effective. For a 40 year old, a change that might mean a 10-15% reduction in benefits, but makes the system sustainable would be beneficial, without changes a 30% reduction in benefits would be likely in a 40 year old's lifetime. The biggest problem with any change is helping every individual understand how the change will effect them personally (and how that compares to the reality of the current system running out of funds).

[Guses]

It may be easier to let social security "crash and burn" and create a new program instead. The tremendous amount of political will and public acceptance needed for these changes to pass is such that I question it is even feasible.

"Let the house of twigs burn down! They shall rebuild it out of stone!"

[The_Dude]

If you have never calculated your own social security benefit and messed around with income and years and the impact the "bend points" have you are missing out!  The bend points are the single most progressive form of taxation I've ever seen in the US. 

There are only two bend points but that creates three tranches in the benefit calculation.
1 - The first $10.2K in income receives a 90% benefit
2 - Income from $10.2K to $61.8K receives a 32% benefit
3 - Income above $61.8K receives a 15% benefit (though subject to maximum benefit amounts)

The "rate of return" earned on social security taxes withheld from employees and employer is horrible!  If someone earns the median US income for 35 years of $51,939 and:

- Draws SS at 62 and dies at 90 = 2.42% rate of return
- Draw SS at 66 (current FRA) and dies at 90 = 1.46% rate of return
- Draw SS at 66 and dies at 110 = 2.42% rate of return

This all assumes 2015 dollars and so these are "real rates of return."

[Sayonara925]

If you have never calculated your own social security benefit and messed around with income and years and the impact the "bend points" have you are missing out!  The bend points are the single most progressive form of taxation I've ever seen in the US. 

There are only two bend points but that creates three tranches in the benefit calculation.
1 - The first $10.2K in income receives a 90% benefit
2 - Income from $10.2K to $61.8K receives a 32% benefit
3 - Income above $61.8K receives a 15% benefit (though subject to maximum benefit amounts)

The "rate of return" earned on social security taxes withheld from employees and employer is horrible!  If someone earns the median US income for 35 years of $51,939 and:

- Draws SS at 62 and dies at 90 = 2.42% rate of return
- Draw SS at 66 (current FRA) and dies at 90 = 1.46% rate of return
- Draw SS at 66 and dies at 110 = 2.42% rate of return

This all assumes 2015 dollars and so these are "real rates of return."

Attached new proposed bend points graph from the subject OP .pdf document.  They want to bend it more.

BTW, thanks for the rates of return stats.  Eye opening.  Not exactly the deal of the century.

[EnjoyIt]

Attached new proposed bend points graph from the subject OP .pdf document.  They want to bend it more.

BTW, thanks for the rates of return stats.  Eye opening.  Not exactly the deal of the century.

Since Social security is not a fund, all that extra bend point is, is another tax on the slightly wealthier wage earners.  All it does is increase taxes by another 12.4% on anyone making over $118,500.  That is not necessarily the rich folk.  It definitely will be another reason to retire and stop collecting W2 income.

[PAstash]

changes should be made to reduce the amount of burdens that are placed on the taxpayers to allow them to save into better retirement vehicles

My concern would be that people just end up increasing their consumption. Then when they can no longer work, they have nothing. That's clearly their fault but having millions of old destitute people is just another problem.

actually these problems are linked. The missing part is self accountability.