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					Solving the Social Security Crisis
   With Parametric Changes




   By: Ben Rubin and Michael Dulicio
     Structure of Social Security
• Hybrid between pay-as-you-go and pre-funded
• Current Benefits are drawn out of current taxes
• Some surplus revenue is accumulated in trust
  fund
• Trust fund currently has only 3 years worth of
  benefits
Legacy Debt
    • Early beneficiaries paid
      little into Social Security

    • The Legacy Debt is still
      being passed from
      generation to generation
       The Social Security Problem:
             Demographics
• Demographic changes effecting solvency

   – Decreases in population growth


   – Increasing life spans


• Early retirement decreases quality of old age

   – Decreased benefits per year
Dropping Fertility
Increasing Life Expectancy
Decreasing Workers Per Beneficiary
   Trust Fund Insolvency




                   Exhausted in 2042
              ↙

2003        2042
           Parametric Reforms

• Adjust benefit and tax parameters



• Maintain overall structure of Social Security
           Longevity Indexing
• Example: Gradually Raise Retirement Age to 68
  – Eliminate 26% of 75-year deficit



• Concern: Some are physically unable to work
  beyond 65
   Progressive Benefit Reduction
• Example: Index the benefits of high-earners
  with price growth, not wage growth
  – Eliminate 60% of 75-year deficit



• Protects the economically vulnerable
       Progressive Tax Increases
• Example: Gradually raise the taxable
  maximum threshold
  – Eliminate 12% of 75-year deficit
          Parametric Reforms
• Not mutually exclusive
• Relatively minor adjustments are sufficient
• Progressive reforms protect the vulnerable
               Individual Accounts

• Transition from a defined benefit system to a
  defined contribution system

• Increases national savings rate

• Insures long term balance in Social Security
The Double Burden Problem
The Effect on Trust Fund Solvency




                      Exhausted in 2026
               Summary

• Legacy debt and demographic changes are
  driving Social Security towards insolvency

• Small reforms endogenous to the system can
  fix Social Security

• Structural reforms such as individual accounts
  burden the trust fund during transition

				
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posted:1/14/2012
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