Monday, September 25, 2006

Penny Saved, Penny Earned Department

A study from the Employee Benefit Research Institute, Retirement Security in the United States--Current Sources, Future Prospects, and Likely Outcomes of Current Trends, points out that:
In 1990, the projected 75-year actuarial balance for the Old-Age, Survivors, and Disability Insurance (OASDI) program was –0.91 percent of taxable OASDI payroll, meaning that the OASDI or Social Security tax would need to be increased by 0.91 percentage points to achieve actuarial balance over the next 75 years from 1990. This 75-year deficit grew to more than 2 percent of taxable payroll before improving to just under 2 percent by 2005.
In other words, if, in 1990, we had kicked up the FICA tax withheld from employees by less than a half percent and increased the employer share (which, yes, I know, really comes out of the pockets of the employees) by an identical amount, the system would have been guaranteed to be solvent until 2065. Since we've waited 16+ years to take any action (and are likely to wait a good deal longer), the tax needed to assure solvency has more than doubled.

The news gets even grimmer when one realizes that Social Security is now scheduled to pay fewer bucks for the bang:
On top of the projected deficit, the amount of preretirement income a worker can expect at retirement from Social Security at specific ages of commencing benefits is going to decline due to the scheduled increases in the normal retirement age. For those age 65 in 2005 and starting to receiving benefits in that year and having made the equivalent of the average wage index over the course of their working career, the replacement rate of income just prior to turning age 65 from Social Security is 42.2 percent. For those turning age 65 in 2025 with the same earnings, the expected replacement rate is 36.3 percent. The replacement rates from Social Security are lower for higher earners and higher for lower earners.
Of course, THAT'S THE GOOD NEWS! The bad news is that:
The Medicare Hospital Insurance Trust Fund is estimated to be facing an actuarial balance of –3.09 percent of taxable payroll, which is a significant increase from the projected balance in 2002 of –2.02 percent. This means that the payroll tax for Medicare would need to be increased by 3.09 percentage points—or benefits would have to be cut by an equivalent amount—in order for the revenues to match expenses for the program over the next 75 years. This level of tax increase would more than double the current payroll tax rate for Medicare.

The projected growth in these expenditures could present serious issues for the federal and state governments. According to a Congressional Budget Office (CBO) study, depending on the spending path of expenditures for Medicaid and Medicare, these expenditures could amount to from 5.3 percent of gross domestic product (GDP) to 21.9 percent of GDP by 2050. For comparison, Social Security expenditures are projected to account for between 6.3 percent to 6.6 percent of GDP by 2050 under the same sending path assumptions.
Hat Tip: Docuticker.

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