Potential trust fund fix: Encouraging longer work

Sometimes researchers create structural economic models to help understand the Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds’ solvency issues and to test possible solutions. Taking information (data) from real life, they build a picture of what the world looked like when the data was collected. Then they can use the model to test how future changes might affect the picture. For his 2018 working paper, MRDRC director John Laitner built such a model to examine policies that might encourage people to delay retirement by working longer.[1] Longer careers might benefit the OASI trust fund by increasing the time workers pay OASI taxes.

Laitner’s model uses data from the Health and Retirement Study to provide pension, housing wealth, marital status, retirement planning, and educational information on the household level. From the Consumer Expenditure Survey, he uses information on how household composition and age affect spending. The model takes into account household gains and losses that might occur through, for example, a pay raise or job loss/health crisis. With it, he can compare how households and the OASI trust fund might or might not benefit under different rules.

Laitner uses his model to test what would happen if the way a worker’s monthly old age benefit amount was calculated.[2]  Laitner changes the calculation in a way that would emphasize the importance of end-of-career earnings. This would increase the value of working a year longer before retiring. The new adjustment would not require a tax increase or a benefit decrease.

Would the changes cause people to work longer or retire earlier? How would the change affect the trust fund?  The model predicts that the change would encourage people to work approximately 1.5 years longer. Because those extra years of earnings would provide more OASI taxes, there would be extra tax revenues. According to Laitner’s model, the added taxes seem large enough to cover one-quarter to one-third of the trust fund’s current deficit.

For more information and technical detail, read Laitner’s working paper.

[1] The 2017 OASDI Trustees Report (https://www.ssa.gov/OACT/TR/2017/tr2017.pdf) predicts that unless reforms are made, the OASI trust fund will be gone by 2034. At that time, the report suggests that an immediate, permanent payroll tax increase of 24 percent or a permanent benefit reduction of almost 18 percent, or some combination of the two, would be required to keep the fund solvent for 75 years. Laitner also tests the effects of these possibilities on labor decisions and trust fund balance in his paper.

[2] For an explanation of how SSA currently calculates a benefit amount see https://www.investopedia.com/terms/a/aime.asp