An Online Simulator for Testing Reform Options
Our Social Security Simulator: An objective, neutral, bipartisan tool for understanding Social Security issues quickly and accurately.
The Benefits Page gives you tools for adjusting the amount of money Social Security pays out. The Taxes Page gives you tools for adjusting the total money that Social Security takes in. This page, the Funding Page, gives you tools for adjusting Social Security's investment strategy.
Should the Trust Fund Become a Permanent Investment Fund?
Percent of Trust Fund Portfolio to Invest in Stocks?
Should Personal Retirement Accounts Be Created?
Percent of PRA Portfolios to Invest in Stocks?
Percent of PRA Portfolio in Stocks - After Age 62?
Percent of PRA Portfolio in Stock - After Retirement?
Should PRA Payments to Retirees Be Coordinated with SS Benefits?
Percent of PRA Payments Coordinated with SS Benefits?
How Long Should PRA Annuity Last After Retirement?
Cutoff Age for Starting PRA's?
Should Newborns Be Awarded Token PRA's? If so, how much?
Should Up-Front Capitalization Be Provided?
Federal Capital Subsidy to SS ($$ in Trillions)
Time Period for Paying Subsidy into Social Security
Should the Trust Fund Become a Permanent Investment Fund?
If the "Permanent Investment Fund" option is not checked, the Simulator invests the entire Trust Fund surplus in Treasury bonds, earning a real, after-inflation return of 2.9%.
If this option is checked, the Simulator assumes that the Trust Fund is now permitted to invest in corporate bonds, instead of Treasury bonds, and also assumes the Trust Fund will earn a slightly higher rate of return.
Percent of Trust Fund Portfolio to Invest in Stocks? Checking the Permanent Investment Fund option activates this option. Once activated, it allows you to set the percentage of Trust Fund holdings to be invested in the stock market.
You may wonder how the Simulator deals with a mixed stock/bond portfolio. As each year begins, the Simulator allocates the starting asset base to stocks and bonds according to the portfolio allocation choice you've made. The stock assets grow (or shrink) in value according to that year's assumed inflation rate and real ROI (Return On Investment). The bond assets grow according to the assumed inflation rate plus the assumed ROI for bonds. The End-Of-Year (EOY) stock and bond asset values are added together, and the same allocation process is repeated for the following year.
The year-by-year size of the Trust Fund's asset base is reflected in Chart 1A, "Total Assets as a Percent of GDP". Trust Fund assets are dark blue, while PRA assets, if any, are teal in color. If you've authorized the Trust Fund to invest in the stock market, Chart 5B will display the portion of total stock market value owned by the Trust Fund.
Should Personal Retirement Accounts Be Created?
If this "Create PRA's" left unchecked, none of the Simulator's PRA-related options will be activated. Nor will any of their settings be reflected on the Results Page.
If this option is checked, the eight options that follow will be activated, along with the PRA Taxes line on the Taxes page. Of course, if this option is checked, while the PRA Tax Rate remains set at 0%, you won't see any difference in Social Security's solvency outcome. For PRA's to affect long-run solvency, a PRA Tax Rate higher than 0% is needed.
Percent of PRA Portfolios to Invest in Stocks? The choice made here will affect all cohorts (i.e., all age groups) under the age of 62. The Simulator gives you a wide range of options, running from 0% stocks (and 100% bonds) to 100% stocks (and 0% bonds). If you adjust the setting, be sure to click "Settings OK" before leaving the Funding Page. If you forget, the Simulator won't register the change.
Percent of PRA Portfolio in Stocks - after Age 62? This option controls the stock/bond portfolio mix for age groups from age 62 to retirement. Why, you might wonder, is this necessary?
There are those who believe that PRA account holders will want to scale back on their stock holdings as they approach retirement, as a hedge against the risk that the market will plunge just before they retire. If you expect most PRA owners to scale back on their stock holdings from age 62 on, you may wish to adjust the 62-and-up stock ownership percentage accordingly.
Percent of PRA Portfolio in Stocks-After Retirement? What happens to PRA investment funds once the account holder retires? Two basic answers have been given.
The more cautious specialists believe that new retirees will, as a matter of common sense, use their accumulated PRA savings to purchase annuities. In return, they'll receive guaranteed monthly payments for the entire term of their annuities. (More on this issue in the "Annuity Duration" section)
Others have boldly argued that retirees will want to manage their own assets, investing as they see fit, drawing their assets down as they choose.
In the first scenario, PRA assets after retirement will almost certainly be converted into bonds, with maturity dates keyed to the annuity payment schedule. If you believe this scenario to be the most likely, a stock percentage of 0% is the logical choice.
On the other hand, if you think the second scenario more likely, then you may want to choose a stock percentage higher than 0% to represent the likely investment strategy for post-retirement PRA assets.
Should PRA Payments to Retirees be Coordinated with SS Benefits? Economist Martin Feldstein has suggested the following approach: "For every dollar received in PRA annuity payments, a retiree's Social Security benefit should be reduced by 75 cents." In other words, each retiree's Social Security benefit payment should be coordinated with his/her PRA annuity payment.
The Archer-Shaw Plan, proposed in the last Congress, was even more aggressive than Feldstein's suggestion, and called for one hundred percent coordination. In the Archer-Shaw Plan, Social Security benefit payments would be cut by a dollar for each dollar received in PRA annuity payments.
Coordinated benefits relieve the pressure on Social Security and make lasting solvency somewhat more achievable. Coordinated benefits also take away retiree worries about stock market risk. Members of a cohort that retires just when the stock market collapses might not be able to buy very large annuities with their accumulated PRA funds, but they won't lose nearly as much in Social Security benefits. Those who retire just as the stock market peaks will enjoy somewhat larger annuities, but their Social Security benefits will be correspondingly smaller. The more coordination, the lower the stock market risk for new retirees.
On the other hand, those who support PRA's as a means of gaining control over their retirement funds aren't likely to welcome coordinated benefits. Too much loss of control.
This option lets you decide. If you favor "coordinated benefits," make sure you've put a checkmark in the box. If you don't like the idea of coordinated benefits, uncheck the box.
Percent of PRA Payments Coordinated with SS Benefits? If the "Coordinate Benefits" box is unchecked, the Simulator gives you 0% as your automatic choice. If the "Coordinate Benefits" box is checked, then you have four additional options: Coordinate 50%, 75%, 90%, or 100%. The Simulator applies your choice to the total annuity flow from PRA's. If, for example, you select 75%, then 75% of the PRA annuity cash flow to retirees will be counted toward Social Security's benefit obligations.
How Long Should PRA Annuity Last After Retirement? This option is closely tied to your decision on Coordinated Benefits. If you uncheck the box on Coordinated Benefits, you won't have any choice. The Simulator will automatically use the Lifetime option. If, however, you check the Coordinated Benefits box, you'll be given three additional options: Ten Year Annuities, Fifteen Year Annuities, and Twenty Year Annuities.
Suppose you select the Ten Year Annuity. The Simulator treats this as a mandatory option, prescribed by Congress, one that all retirees will be expected to follow. Each account holder's PRA savings will be converted, at retirement, into a Ten Year Annuity. The monthly annuity payments will be adjusted, annually, by the anticipated inflation percentage. (Not the actual inflation percentage, just the percentage anticipated at the time the annuity is purchased.) At the end of ten years, the asset pool will have been zeroed out and the annuity payments will end.
During the ten year annuity payout period, Social Security benefits will be reduced according to the coordination formula. If you've chosen 90% coordination, Social Security benefits will be reduced ninety cents for each annuity dollar paid to the retiree. After the ten-year annuity period terminates, the retiree receives the full monthly benefit due from Social Security. With no annuity payments coming in, no reduction is called for.
It's interesting to compare the different choices over the 2002 - 2075 forecasting period. Ten Year Annuities generate significantly more cash flow to retirees than do Lifetime Annuities. Why? Because the cash comes back more quickly. Since the Lifetime Annuity must last considerably longer, its early cash payments are much lower.
Test this for yourself. Which strategy does more to help Social Security achieve lasting solvency: the Ten Year Annuity, or the Lifetime Annuity?
Not all PRA owners survive ten years, of course, or fifteen, or twenty. Some will die first (the Simulator incorporates mortality tables provided to us by the Social Security Administration). The annuity payments of those who have died will be received, instead, by their heirs. For a more detailed discussion on how the Simulator handles inheritance, please turn to our Guide to the Assumptions Page.
Cutoff Age for Starting PRA's? If Congress were to adopt a PRA program now, to be implemented during 2002, should everyone below the normal retirement age be required to participate? Most PRA supporters suggest the use of a cutoff age, say 55, past which no one would be required to invest in PRA's. This option allows you to choose the cutoff age you think best.
(What's being suggested is not a cutoff age but a cutoff Birth Year. Choosing 55 as a cutoff age translates into a Birth Year cutoff of 1947. No one born in 1947 or earlier would be required to invest in a PRA.)
From a solvency perspective, you'll find the age cutoff decision makes no detectable difference. Total taxes collected from PRA's and total cash paid out in PRA annuities turn out to be virtually the same over Social Security's 75-year forecasting period, no matter what cutoff age you choose. If you squint, you may discover a tiny 75-year difference, especially if you select a cutoff age of 45 and crank up the PRA tax rate to 3% or more.
Should newborns be awarded token PRA's? If so, how much? Former Senator Robert Kerrey (D-Neb) believed that "starter PRA's" (our term, not his) should be created for every newly born American child, with an initial cash infusion from the Federal Government of $1000 to $2000. If you think this idea has merit, check this option and pick the starting amount you'd favor.
If you pick this option, the Simulator will allocate the appropriate funds to each cohort (each birth-year based age group) at the age of 1. (The mortality rate for children under the age of one is far higher than it is for children past the age of one, so it seems to make sense to wait until the age of one to set up such accounts.) The Simulator approximates the dollar level you've selected by taking a small, fixed percentage of taxable payroll and giving it to each cohort at the right age.
Even if you don't favor government-funded "starter PRA's," Personal Retirement Accounts for children become a distinct possibility once any PRA program is created. Any time a PRA-owning parent dies, some or all of the parent's PRA assets are likely to be inherited by the children. Should Congress require all such inheritances to be deposited in the heirs' PRA's, the children of deceased parents will frequently end up owning PRA's.
Should Up-Front Capitalization Be Provided?
Social Security was established in the 1930's on a pay-as-you-go basis, with annual outlays covered by annual tax collections. The 1983 reform modified this somewhat, when it created today's "Grow assets till 2016, then spend the assets down to zero" strategy. Unless altered by Congress, today's "Grow, Then Zero Out" strategy will eventually bring us back full circle to the original pay-as-you-go formula.
The central strategic decision is this: Should Social Security be reformed within its traditional pay-as-you-go framework? Or should Social Security be permanently funded, and reformed within a funded framework?
A funded Social Security would have at its disposal a permanent pool of capital (either in the Trust Fund, or in PRA's, or both), with annual earnings sufficient to make up the gap between anticipated receipts and anticipated outlays. An unfunded Social Security makes its way without a permanent pool of capital.
As a rule, it's almost impossible to convert an unfunded pension program into a funded program without providing an up-front infusion of capital. Social Security is no exception. If you would like to see Social Security operate as a permanently funded retirement program, this option lets you make that choice.
Federal Capital Subsidy to Social Security. This allows you to input a capital infusion amount. No matter what strategy you choose, solvency is generally more achievable when an up-front capital infusion has been provided.
If, on the Scenarios Page, you have selected "Scenario E - Solve for Federal Capital Infusion", this is the point at which the Simulator's answer will be inserted.
If you don't favor an initial capital infusion, or you doubt that Congress is capable of providing an upfront solvency infusion, then an input value of 0 is the proper choice.
Time Period for Paying Subsidy Into Social Security. If you've chosen a capital infusion total, you'll probably want the pay-in time to stretch out over a period of years. The Simulator lets you specify how many.
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