Appendix C
Social Security Options

This appendix provides additional details on the illustrative policy options for Social Security presented in Chapter 6, but first further considers three matters: (1) a variety of measures of the program’s financial condition; (2) the earnings replacement rate; and, very briefly, (3) the policy option of individual investment accounts and the Social Security program.

MEASURES OF THE PROGRAM’S FINANCIAL CONDITION

Any single measure of the Social Security program’s financial condition and prospects is insufficient in light of the program’s multiple goals and the long period of time involved. The measures discussed in this section are not alternatives, but instead provide multiple complementary perspectives, some of which are applied to the illustrative options.

Program Solvency

The Social Security Office of the Actuary (OACT) defines program “solvency” as any time that the (Old-Age, Survivors, and Disability Insurance—OASDI) trust fund is in positive balance. In current law and under the intermediate projections of the Social Security trustees, the program is projected to become insolvent in 2037. Solvency is important in that the program has the legal authority to make benefit payments only as long as it is solvent; once the trust fund is exhausted, Social Security can pay benefits only from its dedicated tax revenue. A drawback of the solvency concept, however, is that it does not measure how healthy the system is in the long



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Appendix C Social Security Options This appendix provides additional details on the illustrative policy op- tions for Social Security presented in Chapter 6, but first further considers three matters: (1) a variety of measures of the program’s financial condition; (2) the earnings replacement rate; and, very briefly, (3) the policy option of individual investment accounts and the Social Security program. MEASURES OF THE PROGRAM’S FINANCIAL CONDITION Any single measure of the Social Security program’s financial condition and prospects is insufficient in light of the program’s multiple goals and the long period of time involved. The measures discussed in this section are not alternatives, but instead provide multiple complementary perspectives, some of which are applied to the illustrative options. Program Solvency The Social Security Office of the Actuary (OACT) defines program “solvency” as any time that the (Old-Age, Survivors, and Disability Insurance —OASDI) trust fund is in positive balance. In current law and under the intermediate projections of the Social Security trustees, the program is projected to become insolvent in 2037. Solvency is important in that the program has the legal authority to make benefit payments only as long as it is solvent; once the trust fund is exhausted, Social Security can pay benefits only from its dedicated tax revenue. A drawback of the solvency concept, however, is that it does not measure how healthy the system is in the long 

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 APPENDIX C run, nor does it take into account the broader budget implications of financ- ing benefits outside the revenue streams now dedicated to the program. For instance, system solvency could be accomplished in a program-accounting sense by the federal government’s issuing new bonds to the trust funds or raising the interest rate on existing trust fund bonds. But from a whole- budget perspective, this accounting approach would not generate additional real resources to pay benefits. For that reason, this solvency concept can be criticized as allowing the risk that future generations must pay for current Social Security benefits; that is, improving program solvency (so defined) is not sufficient to achieve long-run self-financing. Positive Cash Flow If the Social Security system has a positive cash flow in any year, it means that revenues dedicated to the system are at least as large as those required to pay scheduled benefits. If the cash flow becomes negative, it would require cutting benefits, raising taxes, or redeeming trust fund assets. Under current law, cash-flow deficits will begin in 2017 and grow continu- ally, exceeding 6 percent of the nation’s payroll by 2075 ($1.36 trillion dollars in 2001 dollars). Asking that the system have positive annual cash flows is a straightfor- ward and easy-to-understand objective: either Social Security is taking in more money than it must spend, or it is not. This principle is also consistent with the tradition of having Social Security be self-financing, and it does not require an understanding of the complexities of trust fund accounting. A drawback is that it does not indicate how soon the program would (or should) attain self-financing status, nor how it could (or should) be financed in the meantime, nor the role of the trust fund in financing benefits. Thus, meeting this goal is not, by itself, sufficient to ensure the long-term solvency of the program. The 75-year Actuarial Balance Under current practice, Social Security actuaries report the actuarial balance of the retirement and disability programs as the net present value of Social Security system, that is, the present value of expected revenues minus the present value of scheduled expenditures over the “valuation period” of time that is used.1 The valuation period has historically been 75 years; re- cently, however, an in-perpetuity accounting period also has been reported. The use of the 75-year valuation period led to the computation that the 75-year shortfall in 2009 was equivalent to 2 percent of the nation’s taxable payroll. Although it is a useful mechanism for quantifying the magnitude of the financing shortfall, averaged over the valuation period, it has several

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 APPENDIX C drawbacks. It ignores the timing of the cash outlays and cash receipts, and it conceals trends in shortfalls. For example, the 2 percent average actuarial deficit downplays the fact that today’s cash flow surpluses are more than offset by even larger cash flow shortfalls in 75 years, shortfalls that will exceed 6 percent of taxable payroll. Another drawback is that the 75-year time horizon ignores what happens to system finances outside the valuation period. Moreover, the criterion of actuarial balance can be viewed as biased against any reforms that advance-fund the system with investments and that experience paybacks beyond the 75-year window. In summary, the 75-year actuarial balance is a useful measure for this study, but it is only one of the indicators needed to assess the program’s financial condition. System Assets at the End of the Valuation Period Scheduled benefits under present law will, in 75 years, leave Social Se- curity short by about $3.157 trillion or about $21,000 per current worker (in present value). Accordingly, one way to evaluate any Social Security reform proposal would be to ask how much it would reduce the size of this shortfall. Amount of General Revenue Transfer Needed Currently, Social Security would require substantial additional revenue to pay scheduled benefits. If changes can reduce the need for these transfers, this would improve the program’s financial condition by this measure. Actuarial Balance at the End of Valuation Period As noted, the actuarial balance measure favored by OACT does not exclude the possibility that system finances could deteriorate rapidly at some time after the end of the specified valuation period. One way to test for this risk is by whether the actuarial balance is moving in the positive direction at the end of the valuation period. A drawback of this approach is that actuarial projections become more uncertain in the distant future. Still, achieving a stable or rising trust fund ratio—the ratio of assets to spending—at the end of the 75-year valuation period is therefore a useful supplementary test of the program’s long-term financial condition. THE EARNINGS REPLACEMENT RATE FOR INDIVIDUAL WORKERS Many of this report’s graphs and tables estimate Social Security retire- ment benefits as a percentage of individual illustrative workers’ preretire-

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0 APPENDIX C ment earnings. This definition of the “Social Security replacement rate for individual earnings” is widely used, not just currently by the Social Secu- rity Administration, but by others (see, e.g., Congressional Budget Office, 2001:20-21). However, these “replacement rate” figures may be—but aren’t always—markedly lower than those associated with other definitions of replacement rates, such as that used in most retirement planning, with the same or similar economic circumstances. Steuerle et al. (2000) warn against confusing the two definitions in policy discussions.2 Simply stated, the Social Security replacement rate as defined in this report compares that illustrative worker’s benefits on retirement with her or his preretirement earnings (below the maximum relevant for taxation and benefits), throughout her or his career, indexed by average earnings throughout the economy. In contrast, the definition of replacement rate used in most retirement planning compares a family’s income in retirement from all sources (e.g., Social Security benefits plus any labor earnings, income from pensions and income from private savings), to the family’s income from all sources, typically in the years immediately preceding retirement. There are two basic distinctions between the two definitions of retire- ment rates. First, the Social Security definition understandably is limited to Social Security benefits, which derive only from covered payroll earnings. The retirement definition is broader—including all sources of income. The second distinction between the two definitions is the simplest ex- planation of why the Social Security replacement rate often, but not always, is markedly lower than the measure used in retirement planning. The Social Security definition is for individual workers—not couples or other family groups—and thus excludes the Social Security benefits any spouse receives in retirement; it also excludes any spousal preretirement earnings. Because spousal Social Security benefits are often considerable, because there are now many two-earner couples (and likely to be in the future); because spouses’ labor force attachment and rewards increasingly approximate each other; and especially because most people enter retirement married, the Social Security replacement rate is generally lower than that used in retirement planning.3 The research on this topic calculates replacement rates from rich data sources, rather than solely the program’s administrative records: Lusardi and Mitchell (2007) and Mitchell and Phillips (2006, 2009) use data from the Health and Retirement Study; Biggs and Springstead (2007) use the modeling income in the near-term microsimulation model of the Social Se- curity Administration, also with longitudinal microdata at both the family and individual levels. The last study focuses on one aspect of the question: the degree to which benefits and other income sources in retirement replace preretirement earnings, rather than replacing preretirement income from all sources.

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 APPENDIX C Writing in the Social Security Bulletin, Biggs and Springstead (2007:1) summarize their findings as showing “that replacement rates can vary considerably based on the definition of preretirement earnings used and whether replacement rates are measured on an individual or a [family] basis.” INDIVIDUAL INVESTMENT ACCCOUNTS For practical reasons, the committee did not consider options to fun- damentally change the Social Security program as it has been structured from its establishment. Still, we recognize that many options exist and have been proposed to alter the program’s basic structure. One proposal has been to emphasize individual accounts by permitting wage earners to redirect part of their payroll tax payment to individual investment accounts for retirement—perhaps accounts that the wage earner would manage. This redirection of the payroll tax would lead to an offset—that is, a reduction— from regular Social Security benefits. There are many arguments on both sides of this approach; for discussion and analyses of various forms of in- dividual accounts, see, e.g., Brown and Apfel (2006), Cogan and Mitchell (2003), and Furman (2005c). THE COMMITTEE’S ILLUSTRATIVE OPTIONS Improvement in the program’s 75-year actuarial balance is one—though only one—yardstick for how our options would make the Social Security program solvent in the long term. It is used below to show how several reform provisions contribute to the program’s financial condition during that period. Tables C-1 and C-2 provide additional details for current law and each illustrative option.4 (See Table 6-1 for basic information on each option.) Option 1: Changes in Benefits Only; No Tax Changes This option would increase the 75-year actuarial balance by 2.02 per- cent of the payroll under current law, bringing the finances into balance by this measure. (As of 2009, the program’s current balance is –2 percent.) For individual provisions of Option 1: • The change in the preretirement formula for monthly benefits would account for 1.25 percent of the improvement in actuarial balance. This provision’s “progressive indexing” of benefits to a combination of wage and price levels would generally increase the preretirement benefit calculation more slowly than the current in-

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 APPENDIX C TABLE C-1 Projected Social Security Cash Flow as a Percentage of GDP, Selected Years, Current Law Compared with Options 1-4 Option 1a Option 2b Option 3c Option 4d Year Current Law 2010 0.1 0.1 0.1 0.1 0.1 2015 0.0 0.1 0.1 0.2 0.3 2020 –0.5 –0.3 –0.3 –0.2 –0.2 2025 –1.0 –0.6 –0.7 –0.6 –0.5 2030 –1.3 –0.8 –0.8 –0.7 –0.7 2035 –1.4 –0.8 –0.8 –0.7 –0.8 2040 –1.3 –0.6 –0.4 –0.5 –0.6 2045 –1.2 –0.4 –0.2 –0.3 –0.4 2050 –1.2 –0.2 –0.2 –0.3 –0.3 2055 –1.2 –0.1 –0.1 –0.3 –0.3 2060 –1.2 0.0 –0.1 0.0 –0.1 2065 –1.2 0.0 0.0 –0.1 –0.1 2070 –1.3 0.0 0.0 –0.1 0.0 2075 –1.3 0.0 0.0 –0.1 0.0 2080 –1.4 0.0 0.0 0.0 0.0 2082 –1.4 –0.1 0.0 0.0 –0.1 2084 –1.5 –0.1 0.0 0.0 –0.1 NOTE: A year’s “cash flow” is its Social Security revenues minus its expenditures. When the cash flow is positive, the balance in the trust fund increases (see next table). When negative, the trust fund balance decreases. aChanges in benefits only. b2/3 benefit growth reductions; 1/3 payroll tax increases. c1/3 benefit growth reductions; 2/3 payroll tax increases. dPayroll-tax increases only. dexing to wage levels alone. (By and large, wage levels rise through time faster than price levels.) The new provision would begin in 2012 and its effects (relative to the current-law formula) would accumulate through 2049. Then the current-law adjustment would resume until 2070, at which time progressive indexing would restart. • Consistent with discussion by the Office of the Actuary of the Social Security Administration (2009a:3-5), the “progressive index- ing” of benefits to wage and price levels that we use differs from the “progressive price indexing” developed for Robert Pozen in 2003, although for both, the preretirement calculation of benefits for most middle- and upper-earning workers would increase more slowly, as general wage and price levels rise, than under the cur- rent formula. In Options 1-3, this benefit-indexing formula would be unchanged from current law for about the lowest-earning 30 percent of workers and for disabled workers. For others, indexing would in effect be based on a mix of wage and price levels, with

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 APPENDIX C TABLE C-2 Projected Social Security Trust Fund Ratio, Selected Years, Current Law Compared with Options 1-4 Option 1a Option 2b Option 3c Option 4d Year Current Law 2010 360 360 360 360 360 2015 359 367 365 373 375 2020 315 351 334 353 359 2025 244 311 290 319 319 2030 153 257 233 270 277 2035 50 202 178 227 229 2040 0 155 128 187 184 2045 0 121 114 167 157 2050 0 100 113 151 131 2055 0 91 112 137 117 2060 0 90 117 120 96 2065 0 95 122 123 97 2070 0 103 132 125 93 2075 0 109 142 126 99 2080 0 112 152 130 99 2082 0 113 155 132 100 2084 0 114 157 135 100 NOTE: The “trust fund ratio” is the trust fund balance at the beginning of the year, divided by that year’s spending. aChanges in benefits only. b2/3 benefit growth reductions; 1/3 payroll tax increases. c1/3 benefit growth reductions; 2/3 payroll tax increases. dPayroll-tax increases only. the price level becoming more predominant as career earnings rise, up to the maximum subject to the Social Security payroll tax. As a result, the rate of increase in the preretirement benefits would usu- ally be greatest for the lowest earners, and decrease with earnings, up to the payroll tax maximum, but to no less than the rate of price inflation.5 • Increasing the future age for full and early retirement benefits ac- counts for a 0.56 percent increase in the balance. • Changing the cost-of-living adjustment to monthly benefits in re- tirement adds 0.36 percent to the balance.6 Option  gets roughly two-thirds of its effect by reducing benefit growth and one-third by payroll-tax increases. It improves the 75-year actuarial balance by 2.07 percent of payroll. • For the preretirement benefit formula, another form of progressive indexing is the only provision affecting benefits. It improves the

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 APPENDIX C balance by 1.34 percent. This form of progressive indexing starts in 2012 and accumulates through 2061, after which the current-law calculation is reinstated. • While retaining the current-law cap on taxable earnings, the Social Security payroll tax would increase (from 12.4 percent) to 12.6 percent in 2012, 12.9 percent in 2020, 13.1 percent in 2030, 13.9 percent in 2040, decrease to 13.5 percent in 2050, and then finally decrease to 13.3 percent in 2060. Given the benefit change, this provision would add 0.73 percent to the 75-year balance. Option  improves the 75-year balance by 2.05 percent—roughly one- third by benefit-growth reduction and two-thirds by increased payroll taxation. • A milder form of progressive indexing of the preretirement benefit formula would improve the balance by 0.63 percent. It would start in 2012 and accumulate only through 2021, when the current for- mula would be reinstated. However, progressive indexing would restart in 2060. • The existing rate of payroll taxation for Social Security (for earn- ings under the current-law cap) would increase to 12.6 percent in 2012, 12.9 percent in 2020, 13.3 percent in 2030, 13.8 percent in 2040, 14.4 percent in 2060, and finally to 14.5 percent in 2075. Added to the provision above, this tax provision would add 1.02 percent of payroll to the balance improvement. • The other tax provision would add a second tier of taxation for any earnings above the current-law cap. (There would be no credit toward benefits.) The second-tier tax would start at 2 percent in 2012 and rise to 3 percent in 2060. Given Option 3’s other two provisions, this one would add an additional 0.41 percent to the improved balance. Option  achieves long-term program solvency by tax increases only, without changing the benefits scheduled under current law. It improves the 75-year balance by 2 percent. • For the existing payroll tax, the cap on taxation would be raised by an additional 2 percent above the current-law formula starting 2012, until 2048 when this tax applies to 90 percent of covered earnings. (There would be no benefit credit for earnings above the current-law cap.) This provision would make a 0.69 percent im- provement in the actuarial balance. • Additionally, the rate of taxation under the raised cap would go up to 12.7 percent in 2012, 13 percent in 2025, 13.3 percent in 2040,

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 APPENDIX C 14 percent in 2060, 14.5 percent in 2070, and finally 14.7 percent in 2080. This provision makes a 0.83 percent improvement in the actuarial balance. • Furthermore, a second-tier payroll tax would be added for any earnings above the raised first-tier cap, again with no credit toward benefits. The added second-tier tax would be 2 percent in 2012, 3 percent in 2025, 3.5 percent in 2040, 4.5 percent in 2050, and finally 5.5 percent in 2060. This provision improves the balance by by 0.65 percent. Table C-1 projects the program’s future cash flow, that is, its revenues minus its spending. After taking account of interest credited to the trust- fund balance, in a year when a year’s cash flow is positive, the trust-fund balance increases; when negative, it decreases. Table C-2 projects each option’s year-by-year effect on the balance of the trust fund, relative to the next year’s spending, an indicator of how each option’s cash flow affects the current balance in the trust fund. The tables show the reduction and then exhaustion of the trust fund under current law, its “recharging” through the reform options, and its maintaining a balance to 2084 that the committee considers adequate for program finance in the long run. The options were designed not just for program solvency, but to avoid cutting benefits so much, or raising payroll taxation so high, as to raise the trust fund balance much beyond the level needed for long-term solvency. Also note that, under our illustrative reforms, at times in the future the cash flow is slightly negative, and the trust fund ratio drops below 100 percent—one yardstick of program finances. The ratio can drop below 100 percent for a limited period without threatening the benefits scheduled af- ter reform. This is because, for example, while the trust fund ratio relates the start-of-year balance to that year’s spending, revenues enter the trust fund during the year. In fact, once a durable long-term balance is attained between annual revenues and spending—as our reforms do—a few years’ dip in the trust fund ratio need not signal impending depletion of the Social Security reserves. What would be most serious is a sustained downward trend toward the end of the projection period—which does not occur. For Option 4, from 2060 on the trust fund ratio can drop as low as 93 percent and is never higher than 100 percent. Although this ratio avoids a downward trend, out of an abundance of caution it might be necessary to boost revenues modestly in the latter part of the century. Tables C-3 through C-5 show real benefits, replacement rates, and payroll tax paid. They provide supporting and additional detail for Figures 6-5 through 6-13.

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 APPENDIX C TABLE C-3 Projected Monthly Social Security Benefits in 2009 Dollars, Selected Years, for Workers Newly Retired at Age 65, Scheduled Under Current Law Compared with Options 1-4, and at Various Illustrative Earning Levels Option 1a Option 2b Option 3c Option 4d Selected Years Current Law Scaled Very Low Earner ($10,510 for 2009) 2000 564 NA NA NA NA 2010 638 638 638 638 638 2020 689 642 689 689 689 2035 754 714 754 754 754 2050 887 799 887 887 887 2065 1,041 903 1,041 1,041 1,041 2082 1,249 1,029 1,249 1,249 1,249 Scaled Low Earner ($18,919 for 2009) 2000 738 NA NA NA NA 2010 834 834 834 834 834 2020 901 840 901 901 901 2035 986 934 986 986 986 2050 1,161 1,045 1,161 1,161 1,161 2065 1,362 1,181 1,362 1,362 1,362 2082 1,633 1,347 1,633 1,633 1,633 Scaled Medium Earner ($42,042 for 2009) 2000 1,217 NA NA NA NA 2010 1,375 1,375 1,375 1,375 1,375 2020 1,485 1,324 1,421 1,421 1,485 2035 1,625 1,359 1,435 1,523 1,625 2050 1,912 1,405 1,559 1,792 1,912 2065 2,244 1,572 1,711 2,069 2,244 2082 2,691 1,707 2,052 2,264 2,691 Scaled High Earner ($67,267 for 2009) 2000 1,582 NA NA NA NA 2010 1,822 1,822 1,822 1,822 1,822 2020 1,968 1,716 1,842 1,842 1,968 2035 2,154 1,683 1,777 1,951 2,154 2050 2,534 1,653 1,835 2,295 2,534 2065 2,974 1,836 1,917 2,627 2,974 2082 3,567 1,926 2,299 2,720 3,567 Steady Maximum Earnere ($106,800 for 2009) 2000 1,779 NA NA NA NA 2010 2,156 2,156 2,156 2,156 2,156 2020 2,396 2,062 2,213 2,213 2,396 2035 2,634 1,977 2,088 2,340 2,634 2050 3,094 1,875 2,082 2,748 3,094 2065 3,628 2,073 2,101 3,126 3,628 2082 4,350 2,122 2,520 3,128 4,350 NOTE: NA = not applicable. aBenefit changes only. b2/3 benefit-growth reductions; 1/3 payroll-tax increases. c1/3 benefit-growth reductions; 2/3 payroll-tax increases. dPayroll-tax increases only. eThat is, at the cap under the current-law Social Security payroll tax.

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 APPENDIX C TABLE C-4 Projected Social Security Worker Benefits as a Percentage of Past Earnings Selected Years, for Workers Newly Retired at Age 65, Scheduled Under Current Law Compared to Options 1-4, and at Various Illustrative Earning Levels Option 1a Option 2b Option 3c Option 4d Current Law Scaled Low Earner ($18,919 for 2009) 2010 54 54 54 54 54 2020 52 49 52 52 52 2035 49 46 49 49 49 2050 49 44 49 49 49 2065 49 43 49 49 49 2082 49 40 49 49 49 Scaled Medium Earner ($42,042 for 2009) 2010 40 40 40 40 40 2020 39 35 37 37 39 2035 36 30 32 34 36 2050 36 27 30 34 36 2065 36 25 28 34 36 2082 36 23 28 31 36 Scaled High Earner ($67,267 for 2009) 2010 33 33 33 33 33 2020 32 28 30 30 32 2035 30 24 25 27 30 2050 30 20 22 27 30 2065 30 19 19 27 30 2082 30 16 19 23 30 Steady Maximum Earnere ($106,800 for 2009) 2010 27 27 27 27 27 2020 26 22 24 24 26 2035 24 18 19 21 24 2050 24 15 16 21 24 2065 24 14 14 21 24 2082 24 12 14 17 24 aBenefit changes only. b2/3 benefit-growth reductions; 1/3 payroll-tax increases. c1/3 benefit-growth reductions; 2/3 payroll-tax increases. dPayroll-tax increases only. eThat is, at the cap under the current-law Social Security payroll tax.

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 APPENDIX C TABLE C-5 Annual Social Security Payroll Tax Projected to Be Paid, Selected Years Current Law and Options 1-4, Various Illustrative Earning Levels (in 2009 dollars except as noted) Selected Current Memo: Earnings Option 1a Option 2b Option 3c Option 4d Years Law (Current Dollars) Average Wage Worker (about $42,000 in 2009 dollars) 2010 5,295 5,295 5,295 5,295 5,295 42,702 2020 5,919 5,919 6,158 6,158 6,062 47,733 2035 6,923 6,923 7,314 7,426 7,258 55,832 2050 8,146 8,146 8,869 9,066 8,738 65,696 2065 9,557 9,557 10,251 11,099 10,790 77,073 2082 11,458 11,458 12,290 13,399 13,584 92,405 High-Wage Worker ($67,300 in 2009 dollars) 2010 8,481 8,481 8,481 8,481 8,481 68,391 2020 9,480 9,480 9,862 9,862 9,709 76,450 2035 11,088 11,088 11,714 11,893 11,625 89,420 2050 13,047 13,047 14,205 14,520 13,994 105,219 2065 15,307 15,307 16,418 17,775 17,282 123,440 2082 18,351 18,351 19,683 21,459 21,755 147,995 Tax Maximum Worker (max under current law, $106,800 in 2009 dollars) 2010 13,028 13,028 13,028 13,028 13,028 105,063 2020 14,522 14,522 15,107 15,107 14,873 117,110 2035 16,955 16,955 17,912 18,185 17,775 136,731 2050 19,960 19,960 21,730 22,213 21,408 160,964 2065 23,415 23,415 25,115 27,192 26,437 188,835 2082 28,073 28,073 30,110 32,827 33,280 226,392 Very High Wage Worker ($200,000 in 2009 dollars) 2010 13,028 13,028 13,028 13,028 13,028 203,343 2020 14,522 14,522 15,107 17,311 19,521 227,302 2035 16,955 16,955 17,912 20,768 29,965 265,867 2050 19,960 19,960 21,730 25,250 41,608 312,839 2065 23,415 23,415 25,115 32,538 51,382 367,015 2082 28,073 28,073 30,110 39,236 64,684 440,024 All estimates based on the intermediate assumptions of the 2009 Trustees Report. aBenefit changes only. b2/3 benefit growth reductions; 1/3 payroll tax increases. c1/3 benefit growth reductions; 2/3 payroll tax increases. dPayroll-tax increases only. NOTES 1. “Present value” is a way to summarize various time paths of expected future cash flows into and out of the trust fund with a single number. The present value of these flows can be calculated by discounting those that are expected to occur in future years by the appropriate interest rate. For revenues, for example, this present value is in simple terms the sum that, invested at the stated interest rate, could generate that stream of future revenues.

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 APPENDIX C 2. The program trustee’s report now uses the Social Security definition without calling it a “replacement rate” (Social Security Administration, 2009b:198-199). 3. Taking the perspective of the past, however—and depending on the actual earnings his- tory and benefit calculation—dual-earner couples may have either lowered or raised the whole-couple earnings replacement rate, compared to that for individual workers. 4. As said, like Chapter 6 and unlike the rest of the report, this appendix relies on the intermediate economic and other assumptions of the 2009 report of the Social Security Trustees, rather than Congressional Budget Office assumptions. In this way our detailed Social Security illustrations are consistent with the program’s data. A recent comparison of the two is in Congressional Budget Office (2009). 5. To estimate these three illustrative options, the rate of real wage inflation was taken at 1.1 percent annually, the long-term rate used by the Social Security trustees for the current intermediate projections. 6. For this and other options, the sum for the individual provisions may not equal the option’s total (here, 2.02 percent) because of interaction among the effects of the provisions. REFERENCES Biggs, A.G., and Springstead, G.R. (2007). Alternate measures of replacement rates for Social Security benefits and retirement income. Social Security Bulletin, (2), 1-19. Brown, J.R., and Apfel, K.S. (2006). Point/counterpoint: Would private accounts improve Social Security? Journal of Policy Analysis and Management, (Summer), 679-690. Cogan, J., and Mitchell, O. (2003). Perspectives from on the President’s Commission on Social Security reform. Journal of Economic Perspecties, (2), 149-172. Congressional Budget Office. (2001). Social Security: A Primer. Washington, DC: Congres- sional Budget Office. Congressional Budget Office. (2009). CBO’s Long-Term Projections for Social Security: 00 Update. Washington, DC: Congressional Budget Office. Furman, J. (2005). Ealuating Alternatie Social Security Reform Proposals. Testimony of May 12, 2005, before the House Committee on Ways and Means. Serial No. 109-22. Washington, DC: U.S. Government Printing Office. Available: http://frwebgate.access. gpo.gov/cgi-bin/getdoc.cgi?dbname=109_house_hearings&docid=f:24732.pdf [December 2009]. Lusardi, A., and Mitchell, O.S. (2007). Baby boomer retirement security: The roles of plan- ning, financial literacy, and housing wealth. Journal of Monetary Economics, (1), 205-224. Mitchell, O.S., and Phillips, J.W.R. (2006). Social Security replacement rates for alternative earnings benchmarks. Michigan Retirement Research Center Research Paper No. WP 2006-116. Available: http://ssrn.com/abstract=1094839 [December 2009]. Social Security Administration. (2009a). Estimated Financial Effects of the ‘Social Security Solency Act of 00—S. . Memorandum to Senator Robert Bennett from the Office of the Social Security Actuary, February 12, 2009. Available: http://www.ssa.gov/OACT/ solvency/index.html [November 2009]. Social Security Administration. (2009b). The 00 Annual Report of the Board of Trustees of the Federal Old-Age and Suriors Insurance and Federal Disability Insurance Trust Funds. Washington, DC: U.S. Government Printing Office. Steuerle, C.E., Spiro, C., and Carasso, A. (2000). Measuring Replacement Rates at Retire- ment. Series on straight talk on Social Security and retirement policy. Washington, DC: Urban Institute.

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