insolvency to 2044. The final scenario would achieve the goal of long-term solvency. Raising the NRA to 71 on an accelerated schedule would shift the median year of insolvency out 100 years. Under this scenario, the chance of insolvency by 2047 is only 27%.
Investing a Portion of the Trust Fund in the Stock Market
Returning the tax rate and NRA to current policy levels, we evaluated the impact of various levels of investment in the stock market. In this experiment, we invested 1% of the total fund balance in the stock market starting in 2000 and increase this percentage linearly over a 15-year period until the total invested is 10, 20, 30, or 40 percent. A 10 percent level of investment has a small effect and gives only one additional year to the median year of insolvency, and even a 40 percent level of investment only increases the median to 2035.
Combining Policy Options
We next tested the three possible pairs of combinations: tax and NRA increases, NRA increases and investment, and tax increases and investment and then all three simultaneously. We tested a large number of combinations of the various levels of increases and investment. We find evidence that the measures in combination would act synergistically, requiring less drastic action on any one. Combining an immediate tax increase of 1 percent, an increase in the NRA to 68 by 2020, and a 40% level of investment of the fund in the stock market would extend the median year of insolvency to 2072. We note that equities investment provides a substantial boost under this plan. When the 1% tax increase and the NRA change to 68 are implemented with no investment, the median year of bankruptcy is only 2051. Thus 40% investment adds an additional 21 years to the life of the fund in this scenario.
This study considered the impact of three major policy options for affecting the future insolvency of the Social Security Trust Fund both separately and in combination: taxation, changes to the normal retirement age, and investment of a portion of the trust fund in the stock market. When we consider each option separately, fairly dramatic measures are required to substantially extend the date of insolvency with a reasonable measure of certainty. For example, an immediate tax increase to 14.8% would be required to extend the fund beyond 2070. The NRA would have to be raised to 71 by 2022 to achieve a high chance of long-term solvency. And equities investment alone will not postpone insolvency more than a few years. A more effective alternative would incorporate some combination. Indeed, we find that a modest increase in the payroll tax and the NRA combined with a moderate level of investment in the stock market achieves the goal of long-term insolvency. Moreover, we find that investment in the stock market in no case leads to an increased probability of insolvency. Thus while it is not free of risk, it does nothing to worsen the situation but does act synergistically with moderate increases in the payroll tax and the NRA to substantially delay insolvency.
- Lee, R.D. and Tuljapurkar, S. (1994) Stochastic Population forecasts for the U.S.: Beyond High, Medium, and Low, Journal of the American Statistical Association 87(419) pp. 659-671
Michael Anderson is a Research Demographer at Mountain View Research (MVR), Los Altos, CA 94024 (firstname.lastname@example.org). Shripad Tuljapurkar is the President of Mountain View Research (MVR), Los Altos, CA 94024 (email@example.com). Ronald D. Lee is a Professor Demography and Economics and the University of California at Berkeley, Berkeley, CA 94720-2120 (firstname.lastname@example.org). Work at MVR was supported by a research grant from NICHD (HD32124), the John Simon Guggenheim Foundation, and by the SSA via the Michigan Retirement Research Center. Dr. Lees work was supported by a grant from the NIA (AG11761) and by the SSA via the Michigan Retirement Research Center. The authors also acknowledge support by Berkeleys NI-funded Center for the Economics and Demography of Aging. The opinions and conclusions are solely those of the author's) and should not be construed as representing the opinions or policy of SSA or any agency of the Federal Government.