An Online Simulator for Testing Reform Options
Our Social Security Simulator: An objective, neutral, bipartisan tool
for understanding Social Security issues quickly and accurately.
Taxes and Other Revenue Options
Should Earned Income Cap Be Increased?
Should State and Local Government New-Hires Be Added to SS?
Should Diversion of SS Benefit Taxes to Medicare Be Ended?
Tax Social Security Benefits the Same as Private Pension Income?
Provide Ongoing Federal Subsidy to Social Security? (as needed?)
Allow Social Security to Borrow?
Tax Rates - Please Input
Taxes and Other Revenue Options
The Benefits Page gives you tools for adjusting the amount of money Social Security pays out. This page, the Taxes Page, gives you tools for adjusting the total money that Social Security takes in. The Funding Page gives you tools for adjusting Social Security's investment strategy.
Should Earned Income Cap Be Increased? (not yet coded) While Social Security is financed with payroll taxes, not every dollar of payroll gets taxed. There's an income cutoff - set at $80,400 in 2001 - and none of the money earned above that cutoff is subject to the Social Security tax. By establishing a cap, Congress created an important distinction between "Total Payroll" and "Taxable Payroll." In our $11 trillion dollar economy, Total Payroll amounts to $5.2 trillion, while Taxable Payroll amounts to $4.4 trillion - an "untaxed payroll" gap of about $800 Billion ($0.8 Trillion).
Many reform advocates believe 90% of all payroll should be taxable, not just 85%. Were the earned income cap to be raised today, $260 billion in currently untaxed payroll would immediately be subject to the payroll tax, yielding an additional $30 billion plus in payroll tax proceeds for Social Security.
By 2075, a higher cap on earned income could produce a gross increase of $16 Trillion in additional tax proceeds for Social Security. (Against a total 2002 - 2075 gap of $121 Trillion.)
However, the more that high salary individuals pay in Social Security taxes, the more they'll be owed at retirement. Within three decades, say Social Security's actuaries, the additional benefits owed will most likely cancel out sixty percent of the additional taxes collected, reducing the cumulative gain through 2075 to $6 or $7 Trillion.
Select this option if you believe 90% of all payroll should be taxable.
Should State and Local Government New-Hires Be Added to Social Security? (not yet coded) In years past, Social Security law allowed units of state and local government to provide their own retirement coverage and remain outside Social Security, if they chose, or, if they had initially affiliated with Social Security, to withdraw and enroll in separate retirement programs. The 1983 reforms ended the right of withdrawal. Even so, some five to seven million local and state government employees still don't use Social Security.
A number of reform specialists would end the exemption for state and local government employees and would require 100% participation. To minimize disruption, they'd extend Social Security coverage gradually, allowing currently state and local government employees to remain in their existing programs, but requiring all newly-hired employees to enroll in Social Security.
Bringing state and local government new-hires under the Social Security umbrella would generate rising cash flow for Social Security for the next three decades. In time, those newly-covered state and local employees would themselves retire, and, as they did, Social Security's overall benefit obligations would begin to rise as well.
This proposal is not without critics. Many of the pension programs that now cover state and local government employees provide better retirement benefits than Social Security, in part because they're free to develop larger, higher-return investment portfolios. Employees who enjoy the benefits of stronger plans are not keen on the idea of seeing their agencies "trade down" to the benefits that an underfunded Social Security can afford to pay, even if they personally won't be affected by the shift.
Select this proposal if you'd like to universalize Social Security coverage. Leave it unchecked if you're not in favor of taking such a step.
Should Diversion of Social Security Benefit Taxes to Medicare's Trust Fund Be Ended? (not yet coded) Social Security benefits are taxable for those retirees with substantial incomes. By law, Social Security receives five-sixths of the money so collected, while one-sixth is transferred to Medicare. If this proposal is adopted, 100% of the taxes collected on Social Security benefits would be returned to Social Security. Such an adjustment would net Social Security an additional $4 Trillion over the next 75 years, and close approximately one thirtieth of Social Security's total financing gap.
Tax Social Security Benefits the Same as Private Pension Income (not yet coded) Social Security scholars Henry Aaron, of the Brookings Institute, and Robert Reischauer, now with the Urban Institute, have recommended a more aggressive approach toward taxing Social Security benefits. The issue they raise: Why should Social Security benefits be taxed more lightly than pension benefits from any other source? Adopting this proposal could boost Social Security's total 2002-2075 cash flow by $8 or $9 Trillion.
Provide an Ongoing Federal Subsidy to Social Security (as needed) (not yet coded) This option is normally positioned as an appropriate long-term Federal response to the needs of Social Security retirees. Yes, say those who favor federal subsidies for Social Security, there will be a regular bite taken out of the Federal Budget, but that's OK, because the nation's total "dependency ratio" actually remains rather constant.
The "dependency ratio" refers to the total number of children and retirees per employed worker. In the mid-Twentieth Century, retirees were few in number but children were plentiful. In the mid-Twenty-First Century, retirees will be more plentiful, children less so, for a total dependency ratio that's quite similar to the previous century.
In addition, supporters argue, Social Security benefits remain somewhat meager. $10,000 a year for the average retiree doesn't stretch very far, and it would be a shame for benefits to be cut below that level. Better to use federal subsidies to protect America's elderly from poverty.
Critics raise their eyebrows at these arguments. Public spending on children is primarily financed by local property taxes and state income taxes, with only a small amount from the federal government. Meanwhile, public spending on retirees is financed almost wholly by the federal government. Isn't it unrealistic to expect local funds which have been used to finance public schools to be diverted to Social Security?
Furthermore, the Federal Government faces ominous trend lines in Medicare and Medicaid costs. Given the endless inflation in medical costs, no reasonable person should expect Social Security to receive a permanent subsidy from the Federal Government.
As a long-term strategy, the "subsidy" option faces heavy sledding. Nonetheless, it could be a mistake to write it off entirely. As you work with the Simulator, you may well discover scenarios in which the Trust Fund runs out of money temporarily - from 2025 to 2045, let's say - but later returns to solvency and performs well in the latter part of the century.
Should you find such a scenario, you might view a federal subsidy as a potentially useful bridge strategy. If so, you might also want to test the size of the subsidy that would be needed.
Check this option if you'd like the Simulator to calculate the size of the federal subsidy needed to keep Social Security solvent. The Simulator gives its answer as a percent of GDP. As a rough rule of thumb, about 20% of GDP goes to the Federal Budget. If the Simulator finds the needed subsidy to be worth 2% of GDP, such a subsidy is roughly equivalent to 10% of the Federal Budget.
Allow Social Security to Borrow? (as needed?) (not yet coded) No one advocates allowing Social Security to accumulate an endlessly rising debt. Among those who favor Personal Retirement Accounts, however, there are some who believe that the multi-trillion dollar costs of shifting to a PRA-based strategy is best handled by allowing Social Security to borrow, today, when the transition costs are high. Later, once the pool of PRA capital has matured in size and the transition costs have been paid, the debt can be retired.
Should you be interested in testing such a strategy, this option allows you to give it a try. Total debt in 2075, if any, is displayed on the Results Page.
Please Note: The borrowing option is available to you if, on the Scenarios Page, you have selected "A - See What Happens," or "G - Solve for Borrowing". The borrowing option is not consistent with solution scenarios B through F and is removed whenever they have been selected.
Tax Rates - Please Input
This section lets you select the Social Security tax rate you'd like to test. It also enables you, if you check the PRA Tax Rate box, to select a PRA tax rate. Some pointers:
1. Four columns for input have been provided. The first column must always be used; the next three are optional. Columns 2 - 4 give you the ability to adjust Social Security and PRA tax rates three additional times, if you like.
2. The Simulator will use your Column 2, 3, and 4 inputs if you have (a) entered a valid year in the top row, and (b) entered a tax rate percentage in the Social Security row, the PRA row, or both. No entry in the fourth row is needed. The Simulator calculates and displays the fourth row total on its own.
3. Remember, the total tax rate you enter represents the combined employee and employer rate. (Today's Social Security tax is 6.4% for employees and a matching 6.4% for their employers. A Medicare tax of 2.9% is also collected.)
4. If you run Scenario F ("Solve for Tax Credit Subsidy"), the Simulator will use your first column Year 2002 tax rates as the starting point for its calculations. (If you didn't enter a PRA tax rate in Column 1, the Simulator automatically enters 2%. Any numbers already entered in columns 2, 3, and 4 will be discarded.)
Once the Simulator finds its solution, it enters the results in Column 2: The year that the tax credits terminate; The new Social Security tax rate; The PRA tax rate; The total combined rate.
5. Your final tax rate selections - however you may have arrived at them - are recorded on the Results Page.
6. If you run a Scenario you like and want to keep a record of all the choices you made, you can print the Results page. Given the quirkiness of the Netscape browser, this isn't as easy as it sounds. See the note on the Simulator Intro page for suggestions on how best to print Simulator output.
7. Once you've chosen a tax rate, always click "Settings OK" before switching to another page. If you've made changes, and fail to click "Settings OK", the Simulator will continue to use your prior settings.
You're the customer. If you have any suggestions, we'd be delighted to hear from you!
ROI Display Guide
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