Social Security Solvency Simulator

An Online Simulator for Testing Reform Options

Our Social Security Simulator: An objective, neutral, bipartisan tool for understanding Social Security issues quickly and accurately.

Guide to the Scenarios Page

Political Scenarios

Solution Scenarios

The 'No Fix' Scenario
   A. See What Happens

Find a Fix: Avert Insolvency
   B. Avoid Insolvency by Raising Payroll Taxes
   C. Avoid Insolvency with Federal Operating Subsidies

Find a Fix: Assure Lasting Solvency
   D. Solve for Benefit Reductions
   E. Solve for Federal Capital Infusion
   F. Solve for Tax Credit Subsidy
   G. Solve for Borrowing Scenario

Final Reminders

Return to Simulator Intro


On the whole, this section of the Simulator will be completed after all the others are ready.  But the Modigliani MIT Plan is ready now. It's really quite simple. It raises the payroll tax rate from 12.4% to 13.25%, (Taxes page), and it invests the Trust Fund in a mixture of stocks, corporate bonds, and Treasury bonds (Funding page - 50% stocks, 25% corporate bonds, 25% treasury bonds).

If you select "Political Scenarios", and then "Modigliani MIT Plan", you'll preset the Social Security tax rate to 13.15% (Taxes page) and the Social Security investment mix to 50% stocks, with the rest split equally between corporate bonds and treasury bonds.

You're still free to adjust the Assumptions page as you like, even with the Modigliani plan checked. Different settings yield different results. "Steady Market Capitalization to GDP Ratio" yields a different result on Chart 1A than "Market Cycles Likely." Different assumptions on real stock returns yield different results, not only on Chart 1A but also, and especially, on Chart 5. Once you switch away from the Modigliani plan, its key settings will remain active, unless you hit "Reset".

This section lets you jump-start the Simulator. Are you curious about one of the leading proposals for reform? And whether it's really capable of delivering long-run solvency? Look for it here. Highlight it, click "Selections OK", and then "Run The Numbers".

Once you've selected the Political Scenario you're interested in, the Simulator automatically adjusts its Benefit, Tax, and Funding settings to match the Scenario you've selected (e.g. Bush, Brookings, Moynihan, etc). Page through the Simulator's option menu, if you like, to review the elements of the plan you've selected. Or turn to the Results page and review all the settings.

If you click on the "Moynihan Plan," for example, you won't be permanently locked in to the "Moynihan settings." Each of the Simulator's settings will be adjusted, once, to match the Moynihan strategy. After that, you have the freedom to make whatever additional adjustments you like.

The currently displayed list of Plans is, of course, subject to change. Once implemented, we'll do our best to keep it updated, to reflect the options that are being most actively promoted in the solvency debate.

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If you like, you can also jump-start the process by picking one of the Solution Scenarios listed in this section.

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The 'No Fix' Scenario

In the 'No Fix' section, you're on your own. You don't have to solve the solvency problem at all, if you so choose. Or you develop your own strategy, in which, by adjusting the options yourself, you find the solution that makes the most sense to you.

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A. See What Happens.  Choose this option if you'd like to be on your own as you experiment with all the variables.

With "A. See What Happens" checked, you'll have the Borrowing choice available, on the Taxes page. (For most other choices, the Borrowing option is turned off.)

On the Assumptions page, you'll have both Stock Market options available - the Steady Market to GDP option, as well as the Market Cycles Likely option. (The Simulator turns 'Market Cycles' off when it hunts for the benefits, tax credits, and borrowing solutions.)

The "See What Happens" choice is also useful once you've run one of the Simulator's solution-finding scenarios (D-G). Perhaps you've asked the Simulator to find a solution using the Tax Credits strategy. The Simulator's given you an interesting result, but now you're ready to fine tune it. You reset the Solution Scenarios to "A. See What Happens," which orders the Simulator not to find a solvency solution for you, so you can make further adjustments on your own. When you've chosen Scenario A, you'll also be able to click through all seven of the Simulator's solution charts, in order, to see how the scenario you're testing measures up.

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Find a Fix: Avert Insolvency

In this section, the Simulator gives you two options for narrowly averting insolvency while also protecting benefits.

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B. Avoid Insolvency by Raising Payroll Taxes.  Selection B yields a "scrape along the bottom" answer. When everything else comes up short, raise payroll taxes just enough to pay the required benefits.

The Simulator gives you an answer, graphically, but it doesn't adjust the tax rates on the tax page to reflect that answer. Nor will it take the higher tax rates into account in figuring Actuarial Balance. Once you've seen the tax rate that's needed, you may, if you wish, turn to the Taxes page and enter the rate yourself.

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C. Avoid Insolvency with Federal Operating Subsidies.  This option provides another "scrape the bottom" answer. The Simulator displays a graph, Chart 2C, which displays the size of the federal operating subsidy needed, expressed as a percentage of GDP (Gross Domestic Product). The annual budget of the Federal Government normally runs about 20% of GDP, give or take a couple of points. If you pick this option, you may well see an annual subsidy equal to 2% of GDP or more.

In other words, if you think a federal subsidy is the best answer for Social Security, be prepared to defend a subsidy that might eventually consume ten percent of the entire federal budget. In 2001 dollars, ten percent of the federal budget translates into a subsidy of roughly two hundred billion dollars. In 2075, two percent plus of GDP works out to a subsidy of eight or nine trillion in a $351 trillion economy.

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Find a Fix: Assure Lasting Solvency

In this section, the Simulator provides four different strategies for achieving lasting solvency. In all cases, lasting solvency is determined by measuring the Funds-To-Benefits-Ratio from 2070 through 2075. The Simulator finds the lowest-cost solution that's capable of producing a level Funds-to-Benefits Ratio, 2070 through 2075.

For all the Scenarios in this section, the Simulator turns on the "Steady" Market Capitalization to GDP Ratio option on the Assumptions page. It also hides the "Market Cycles" option. (To restore the "Market Cycles" option, switch back to Scenario A, B, or C.)

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D. Solve for Benefit Reductions.  Choose this Scenario, and the Simulator searches for an overall benefit level that's just low enough to yield level Fund-to-Benefit ratios in the final five years of the forecasting period.

The Simulator has two different ways of solving for the "right" Benefit level. If you click on the "Provide Ongoing Federal Subsidies to Social Security" option (Taxes Page), you'll get a more realistic solution. If you leave Federal Subsidies unchecked, the "no subsidy" solution you'll get won't give you the apples-to-apples comparability you're probably seeking. To get apples-to-apples comparability, we recommend checking the Federal Subsidies option on the Taxes page. (You'll be able to see the size of the subsidy in Charts 3A and 3B - the subsidies tend to be modest in size and relatively brief in duration.)

You can test the validity of the simulator's Benefit Cut Solution, if you like. Switch back to "See What Happens", and raise the Target Benefit Level (on the Benefits Page) by one percentage point. Run the numbers again. The fund-to-benefit ratios (Chart 1B) will begin to deteriorate. Or try the opposite tack. Lower the benefit target by one percentage point. Run the numbers. You'll see the fund-to-benefit ratios start to climb.

If you're running the Benefit Reduction Scenario, or any of the next three, the Simulator turns off the "Market Cycles" option on the Assumptions Page. If you turn to the Assumptions Page, you won't even see the "Market Cycles" option displayed. You might, nonetheless, want to see what would happen in a fluctuating stock market. Easy enough. Hit the Scenarios Page, pick "A. See What Happens," click "Selections OK", and then turn to the Assumptions Page.

As you'll see, the Simulator once again displays the "Market Cycles Likely" option. Click on it, click "Settings OK", and run the numbers again. Now you'll see a more realistic funds-to-benefits ratio on Chart 1B.

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E. Solve for Federal Capital Infusion.  If you choose this Scenario, the Simulator searches for an initial infusion of capital just large enough to produce a level fund-to-benefit ratio (Chart 1B) in the final five years of the forecasting period.

The Simulator's capital infusion solution is strongly affected by the Return On Investment. If Social Security's investment pool (Trust Fund, and possibly PRA's) earns a high rate of return from a combination of stocks and bonds, Social Security's initial capital infusion needs are smaller. On the other hand, if Social Security's investment pool consists solely of 2.9% real return Treasury bonds, the Simulator's capital infusion solution will be somewhat higher.

As you'll also discover, the wider the gap between taxes collected and benefits paid out, the higher the capital infusion needed.

The Simulator enters the result of its calculations on the Funding Page, in the Federal Capital Subsidy box at the bottom of the page. And there the number remains, unless and until you change it. If you don't want to keep the number the Simulator finds, turn to the Funding Page and reset the capital subsidy to zero before running another scenario.

In some situations, no answer is possible. If you pose an unsolvable problem, the Simulator will respond with a "No Feasible Solution" message on the Funding page. It will report the last feasible answer it had before reaching its limit.

The Capital Infusion Scenario addresses one of the central issues in the Social Security reform debate. Should Social Security remain unfunded? Or should it be funded, as most private pensions are, with a permanent pool of capital?

If funding Social Security is a desirable strategy, then you may find an initial infusion of capital to be quite useful. Even half a trillion or a trillion dollar infusion over the next fifteen years could go a long way toward protecting future retiree benefits. As private sector experts know, it's almost impossible to convert an unfunded pension into a funded pension without a front-end capital contribution.

On the other hand, there are clear hazards and costs associated with any capital infusion strategy. These must be weighed as well before any decision is made.

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F. Solve for Tax Credit Subsidy.  Some current and former Members of Congress recommend a 2% increase in the payroll tax in order to finance the creation of a PRA (Personal Retirement Account) system. At the same time, to protect taxpayers, they also recommend a system of tax credits, to help taxpayers recover the extra taxes they've paid through a system of tax credits. (The strategy of financing add-on PRA's through tax credits is often termed the Archer-Shaw Plan.)

It is expected that the PRA system in time will become self-sustaining, able to support retiree benefits with a total PRA-plus-Social Security tax level of 12.4% instead of 14.4%. Once this point has been reached, the tax credit advocates argue, the payroll tax rate should be dropped to 12.4% and PRA tax credits ended.

If you'd like to see how such a strategy might play out, choose the Tax Credits Scenario. The Simulator will search for the year when the payroll tax can be cut. It won't, however, look past the year 2050. Once it bumps into its 2050 boundary, it resets the tax cut year to 2045, and then searches for an overall benefit level low enough to assure lasting solvency.

On the other hand, if a tax credits solution is within easy reach, the Simulator makes a year-by-year search for the earliest possible year in which to cut taxes. If it hasn't found a solution by the time it reaches the year 2020, it adjusts its search strategy one last time. It begins to test deeper and deeper tax cuts. Eventually it finds a tax rate at which the Fund-to-Benefit Ratio lines level out.

If you run th Tax Credits Scenario without having entered a tax rate for PRA's, the Simulator automatically enters a 2% tax rate for you. If you've already entered a starting tax rate for PRA's, the Simulator uses the rate you've chosen.

Once you've run the Tax Credits Scenario, you can check your results by looking in three different places. Check the Taxes Page, to see when the tax rate is due to be cut, and by how much. Check the Benefits Page, to see if the Simulator trimmed the Target Benefit level at all. And check the Results page. There you'll find the year in which the tax rate falls and the cumulative tax credits received by taxpayers. The Results Page also displays the tax rate schedule, as well as the Target Benefit level.

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G. Solve for Borrowing Scenario.  In the mid-90's, some members of the Advisory Council on Social Security suggested that a PRA system should be created, and that the transition to such a program ought to be financed through borrowing. Carolyn Weaver (of the American Enterprise Institute) and Sylvester Schieber were the key authors of this proposal. In time, they said, PRA's would grow so strong that Social Security could pay down the debt it had accumulated. Once its debt had been zeroed out, payroll tax rates could be reduced accordingly.

If you choose the Borrowing Scenario, the Simulator will help you investigate the Ins and Outs of such a strategy. It allows you to pick a PRA tax rate as low as 2%, as high as 6%, or anywhere in between. It assumes a total tax rate of 12.4% from 2065 onward, and fills in the Social Security rate accordingly. It also sets a standard 80% benefit level, regardless of the PRA rate you've chosen. The simulator allows Social Security to borrow as needed, but requires all debt to be paid off by 2065.

Given these initial assumptions, the Simulator then solves for the right 2003 - 2064 Social Security tax rate. The higher the PRA tax rate chosen, the greater the borrowing required. (Low PRA tax rates don't require any borrowing.) Chart 2G shows year-by-year debt levels, as a percent of GDP. Chart 3B shows the amounts lent to Social Security from the Federal Budget, then the amounts repaid by Social Security to the Federal Treasury.

The original Schieber-Weaver proposal called for a two-tier system, with basic benefits financed by a 7.4% payroll tax (vs. today's employee-plus-employer rate of 12.4%), and PRA's financed by an additional 5% tax, for a total of 12.4%.

Getting to the two-tier system they seek required, in their minds, a lengthy period of borrowing, in order to finance the transition costs, followed by an equally lengthy period for debt retirement. To help in financing the transition costs and retiring the debt, the Schieber-Weaver proposal recommended a total PRA-plus-payroll tax rate of 13.92% for the first seventy years. Then, with the debt fully repaid, their proposal called for the total PRA-plus-payroll tax to be scaled back to the original 12.4% rate -- 5% for PRA's, 7.4% for Social Security's basic Tier One benefits.

In Scenario G, the Simulator follows the general outlines of their approach, but it first sets a fixed benefit rate and then finds the appropriate solvency-producing tax rate.

If you like, you can use Scenario A to emulate the Schieber-Weaver proposal more closely. You won't find it easy to emulate their results, though, unless you turn to the Assumptions page and reset the expected real ROI for stocks from our default rate of 5% to the 7% real return rate that Schieber and Weaver confidently expected in 1995. (In our view, as we explain at length elsewhere on this website, average real returns of 7% in decades to come are quite unlikely, given lower population growth rates and a permanent rise in stock prices and Market Cap-to-GDP levels.)

If you're trying hard to emulate the Schieber-Weaver scenario, you may also want to check the "coordinated benefits" box on the Funding page. And choose a lower inheritance leakage rate than 100% (on the Assumptions page), with most inheritance funds recycled back into the PRA system, not flung out the window.

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Final Reminders.  The Solution Scenarios (D, E, F, and G) all result in new settings for some of the Simulator's input values.

The Benefit Cut (D), Tax Credit (F), and Borrowing (G) scenarios are each likely to adjust the Target Benefit percentage on the Benefits Page.

The Tax Credit (F) and Borrowing (G) scenarios are likely to change Tax Rates.

The Capital Infusion (E) scenario will alter the Capital Subsidy setting on the Funding page.

If you want to get rid of these new settings, before doing your next run, simply click the "Reset" button.

A suggestion. Any time you run a solution-finding scenario (D-G) whose results seem interesting, switch back to Scenario A, "See What Happens", and run the numbers again. You should get an identical result.

A cautionary note. Whenever you switch away from one of these Scenarios and back to scenario (A), the baseline "See What Happens" Scenario, you should know that any new tax, benefit, or capital subsidy setting reported out by the Simulator will remain as calculated until you modify it.

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You're the customer. Your experience in using the Simulator is important to us. If you have any feedback to offer, any changes to suggest, we'd be happy to hear from you!

Benefits Guide    Taxes Guide    Funding Guide    Assumptions Guide

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Page Version 1.05
Revision Date April 13, 2006