Analyzing the Benefit Impact of SSA Proposals on WorkersTiffany BosleyMichael ClingmanKyle Burkhalter

Overview• The Social Security Office of the Chief Actuary (OCACT) is

mainly concerned with the integrity of the Social Security Trust Funds, whether they have the money to pay benefits in both the short and long term. Currently OCACT projects that the combined Trust Fund reserves will deplete in 2033. After that Social Security will have income to pay approximately ¾ of ongoing benefits.

Overview• Congress, the White House, and others are working on

proposals to modify Social Security and fix this problem.• Our office analyzes these proposals and determines whether

they meet various metrics for trust fund solvency over the short and long term.

Overview• But the requesters also want to know how their proposals,

many of which reduce benefits in various ways, will affect individual workers.

• So our office has used hypothetical workers – that is workers with hypothetical earnings – to display how typical workers might be affected by the various proposals.

Steady Hypothetical Worker• In the past, our office used the steady hypothetical worker as

a model of a typical worker.• The steady hypothetical worker earns a constant percent of

the Social Security average wage index (AWI) each year of earnings:• Low (45%)• Medium (100%)• High (160%)

• The steady maximum worker earns the maximum taxable amount each year.

Steady Hypothetical Worker• The steady hypothetical worker was adequate for

demonstrating benefits under present law.• It was also adequate for most of the proposals to modify

Social Security our office received in the past.• However, in the 1990’s the proposals to modify Social Security

became more complex.

Individual Accounts• Many lawmakers proposed making individual accounts (IA) a

part of Social Security.• Our office needed to investigate effects of IAs on hypothetical

workers.

Individual Accounts• Steady hypothetical worker not good model for individual

accounts• Overestimates earnings at younger ages• Underestimates earnings in mid-career• Overestimates deposits to IAs in early work years• Causes IAs to accumulate more money than they would with a

more realistic worker• Gives unrealistic effect for IAs as part of Social Security benefit.

Individual Accounts• Needed to develop more realistic hypothetical worker for use

with individual accounts• Looked at a number of methods for doing this• Eventually chose the “hypothetical scaled worker”

Hypothetical Scaled Worker• Benefits• More accurately follows earnings patterns for a typical worker• Unbiased• Logic relatively straightforward• Consistent with hypothetical steady worker for present law

benefit computations• Beyond IAs, helpful with proposals that depend on earnings levels

in individual years

Scaled Workers• Hypothetical earnings patterns• Reflect average patterns of work and earnings of actual

insured workers (low early, high late)• Scaled worker factors are relative to Average Wage Index

(AWI)• Very Low, Low, Medium, High• Maximum hypothetical earner• Scaled factors for ages 21-64

Raw Scaled Factors• 2009 Continuous Work History Sample (CWHS)• 1% sample of workers who have paid any Social Security (FICA)

taxes during their lifetime• Fully insured = Quarters of Coverage (QCs) at least equal to

years after age 21 through 2008• Minimum 6 QCs• 40 QCs = permanent insured status• QC for 2012 = $1,130• Maximum of 4 QCs per year (for those earning $4,520+)

Raw Scaled Factors• Analysis of earnings 1991-2008• Raw scaled factors calculated by summing earnings for each

age 21 and over and dividing by the corresponding number of workers

• Raw scaled factor examples:• Age 25 = 0.532• Age 35 = 0.827• Age 45 = 0.922

Adjusted Scaled Factors• Raw factors greatly decline for ages 60 & 61• Total/partial retirement of some workers before early

entitlement age (EEA = 62)• Raw factors bounce back up for ages 62-64• Higher-wage workers with consistent employment more likely

to delay entitlement• Adjust factors by increasing age 61 raw factor by projected

ultimate AWI increase (3.92%)

Final Scaled Factors• Earnings for each year = (adjusted scaled factor for that age) x

(AWI for that year)• Use 1960-born adjusted scaled worker• Index earnings to year prior to entitlement (in example, age 64

= 2024)• Career-average earnings = average of highest 35 years of

indexed earnings ($61,929)• Target career-average earnings for Very Low, Low, Medium,

High earners = 25%, 45%, 100%, 160% of projected AWI in 2024

• These percentages match steady earners

Final Scaled Factors• Multiply preliminary adjusted scaled factors by calculated

career-average earnings ratios• Final scaled factors example (age 55):• Preliminary adjusted scaled factor = 0.874• Very low = 0.261• Low = 0.470• Medium = 1.044• High = 1.671

• No scaled factors needed for maximum earner

Distribution of AIMEs of Actual Workers Retiring in 2011, Relative to AIMEsfor Hypothetical Workers Retiring in 2011

Percent with AIME less than Percent with AIME closest toAIME for hypothetical case AIME for hypothetical case

Hypothetical Worker(Career-average earnings) Males Females Total Males Females Total

Very Low ($10,413) 7.1 17.6 12.2 11.5 27.0 18.9

Low ($18,744) 15.4 35.7 25.2 15.0 31.1 22.7

Medium ($41,655) 39.4 74.7 56.4 28.7 28.6 28.7

High ($66,648) 69.8 93.8 81.3 29.5 11.5 20.8

Maximum ($97,322) 100.0 100.0 100.0 15.4 1.9 8.9

Scaled Factors and Proposals• One of the main uses of scaled factors is grading proposals• Many types of proposals (NRA, COLA, Benefit Formula,

Minimum Benefit, etc.)• Scaled factors needed to accurately portray the effect each

proposal would have on benefits of workers at different earnings levels

• How do we project this?

Benefit Illustration for Sample Proposal

Sample Provisions• Sample Proposal: • NRA• COLA• Benefit Formula• Minimum Benefit

Sample NRA Provision• Provision:• After the normal retirement age (NRA) reaches 67 for those age

62 in 2022, increase the NRA 1 month every 2 years until the NRA reaches 68.

• Present Law NRA increases to age 67 for those age 62 in 2022 and then remains constant.

Sample NRA Provision

Sample COLA Provision• Provision:• Starting December 2012, reduce the annual Cost of Living

Adjustment (COLA) by 0.5 percentage point.

• Present Law COLA is calculated based on the increase in the CPI.

Sample COLA Provision

Sample Benefit Formula Provision• Provision:• Beginning with those newly eligible for OASDI benefits in 2012,

multiply the 32 and 15 percent formula factors each year by 0.987. Stop reductions in 2042, when the formula factors reach 21 percent and 10 percent, respectively.

• Present Law formula factors are 90, 32, and 15 percent.

Sample Benefit Formula Provision

Formula shown for those newly eligible in 2012.

Sample Benefit Formula Provision

Sample Minimum Benefit Provision• Provision:• Beginning in 2012, reconfigure the special minimum benefit: (a) A

year of coverage is defined as a year in which 4 quarters of coverage are earned. (b) At implementation, set the PIA for 30 years of coverage equal to 125 percent of the monthly poverty level (about $1,128 in 2010). For those with under 30 years of coverage, the PIA per year of coverage over 10 years is $1,128/20 = $56.40. (c) Index the initial PIA per year of coverage by wage growth for successive cohorts.

Benefit Illustration for Sample Proposal

Benefit Illustration for Sample Proposal

Questions?