Administration June 5, 2003

Odds of Success of Social Security Reform Vary

May 30, 2001 (PLANSPONSOR.com) - The chances for success of Social Security Reform vary considerably depending on the method of analysis and the assumptions concerning equity returns and administrative costs, according to a new study by the Employee Benefits Research Institute (EBRI).

Reported by

Camilla Klein

According to results from the SSASIM policy simulation model published in the May EBRI Notes, sharply different results are obtained when analyzing different reform scenarios in both static and random modes over the 75-year period used to test for actuarial balance of the Social Security system.

Random projections are important because they make provision for the fluctuations in real-life economic situations especially when equity investments are involved.

Fluctuations

The EBRI report found that traditional methods such as tax hikes and spending cuts appear to have a very small chance of covering the projected costs of the program because of the fluctuations in economic and demographic variables, which are expected to occur over the 75-year period.

However, these fluctuations aren’t reflected when the model is run in static mode, the method that the Social Security Office of the Actuary uses when making projections.

Better Odds

By comparison, a Social Security reform package with individual accounts, similar to that advanced in the last Congress by Representative Bill Archer (R-Texas) and Clay Shaw (R-Florida), has a much higher chance of achieving actuarial balance, provided that administrative costs are low and equities produce their historical rate of return, without which the odds fall sharply.

The legislation would establish individual accounts for each eligible worker, financed by tax credits from general revenue equal to 2% of the worker’s Old-Age Survivors and Disability Insurance (OASDI) taxable earnings for each year. Three fifths of the account balances would be invested in stock index funds, the remainder in corporate bonds.

Getting the Balance Right

The EBRI report compares an Archer/Shaw-type reform, with four traditional Social Security reform options that would:

increase taxes in line with maintain current benefits
cut benefits in line with current taxes
comprise a combination of benefit cuts and tax hikes and increase the normal retirement age by two years for those turning 62 in 2011, and subsequently index it to longevity
immediately increase the OASI payroll tax rate by 2%.

Results show that, based on varying assumptions on equity returns and administrative costs, the chances of achieving actuarial balance for the Archer/Shaw-type reform is:

almost 80% under the most favorable assumptions
slightly below 50% under mid-level assumptions and
almost 25% under the least favorable assumptions.

Under the least favorable assumptions, the probability of achieving actuarial balance is similar to that of the traditional reform options of tax hikes and spending cuts.