This will be a work in progress for a while, but I will publish it anyway. e-mail criticism and commentary to mailto:firstname.lastname@example.org are welcome.
Can we quantify the price of inaction on Social Security? My starting point is this table from EPI Changes in Trustees Projections Over Time.
Note these are not EPI numbers, these are official numbers from the Annual Reports: "Source: Annual Reports of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, 1996-2004."
Trustee report date
1996 1997 1998 1999 2000 2004
Year when tax revenue falls short of benefits
2012 2012 2013 2014 2015 2018
Year when trust fund income falls below expenditures
2019 2019 2021 2022 2024 2028
Trust fund depletion date
2029 2029 2032 2034 2037 2042
Shortfall as a share of taxable payroll
2.19% 2.23% 2.19% 2.07% 1.89% 1.89%
Now let the fun begin. My oh my plenty of numeric fun to be added.
What is the cost of doing nothing? I mean real cost in terms of dollars and cents to a particular worker in postponing Social Security reform by a year? Now there has been some learned talk at MaxSpeak and DeLong on May 22 and 23 about what are the costs of inaction, but they all assume that the current economic and demographic model of Social Security is valid and the proper focus point is the outcomes five, ten, seventy-five and God Help Us, Infinite Future out. Well no I propose to put this whole discussion on the Short Term. What is the cost of postponing action this year given what we know about the year just past and the year now ongoing?
Lets start with a real example. The 2004 Report declared that an immediate increase of 1.89% of payroll would be enough to fully fund Social Security with no changes in benefits or retirement age. This under the Intermediate Cost assumptions. Now the 2005 Report declared that the gap is now 1.92%. Worrisome? Well lets whip out the calculator.
Per the Trustees NOT taking action in 2004 in the face of a 1.89% payroll gap left the $50,000 earner with $945 in his pocket. What were the negative consequences? Well the 2005 Report gives us 1.92% payroll gap. Well translate this into dollars. I have $945 left with every opportunity to invest or spend with whatever utility I would get from that spending and what is my downside? Well it is an additional .03% of payroll taxes going forward. Which for our $50,000 earner is $15 a year going forward. Well I have 17 years to retirement which means my total actual cost going forward for pocketing that $945 is 17 x $15 which equals $255. Not doing anything, and discounting for inflation and interest I could earn on that $945 over the next 17 years and I am still $690 ahead in current dollars.
If the payroll gap stays steady, as it did from 2000 to 2005, then you are ahead by exactly the amount of the payroll gap multiplied by your income plus whatever current and future interest you would earn on that amount.