Common Sense on Social Security

A Guide to Using the Social Security Solvency Simulator

Using the Simulator isn't that difficult. Pick an option, make an adjustment, click "Settings OK", click "Run The Numbers". Then study the graphs.
 
 


Introduction to the Simulator

Welcome to the Social Security Solvency Simulator.   When you click on the Simulator link, you'll notice that the Simulator loads in a new window.   Meanwhile, this window remains open to serve as your "guide window," to provide the information you might need as you explore the Simulator's many features.  

The Simulator works best with 1024 x 768 resolution or higher, and with a monitor setting greater than 256 color.


Load the Social Security Solvency Simulator   Please allow two minutes for loading, less if you have a broadband connection.

Brief Overview

Dedication

Questions the Simulator Can Help You Test

Tips on How Best to Print Simulator Results

Guide to the Simulator's Scenarios Page

Guide to the Simulator's Benefits Page

Guide to the Simulator's Taxes and Other Revenue Sources Page

Guide to the Funding and Investment Strategies Page

Guide to the Economic Assumptions Page

Guide to the ROI Display Page

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Brief Overview

Welcome to our online Social Security Solvency Simulator. Our latest version, released March 29, 2002, has all the basic functionality needed for analyzing Social Security solvency. While some bells and whistles are not yet functional, and have been "grayed out", the core functionality is fully available. Visit each page. Make your choices. Hit "Settings OK" before leaving the page. When you've made all your choices, click "Run The Numbers." Then visit the Results page to see how well you did.     (If you want to start over, hit "Reset.")

On the Results page -- it is now possible to switch between "Current Dollar" and "Present Value" displays. Present values are calculated as of January 1, 2003, with the discount rate based on Social Security's nominal interest rate.

Benefits.   On the Benefits page, you can adjust the target benefit level and the time period for phasing in benefit adjustments.

Taxes.   On the Taxes page, you can set payroll tax rates for Social Security, and for PRA's (Personal Retirement Accounts) sponsored by Social Security.

Funding.   On the Funding page, you can decide whether the Trust Fund should be allowed to invest in stock, and, if so, how much. You can decide whether an upfront infusion of capital should be provided, and, if so, how much, and over what time period. You can make a number of decisions about how best to operate a PRA program, if chosen.

Scenarios.   On the Scenarios page, you can select seven different solution approaches. Be warned. Once you pick a choice, and hit "Settings OK", that remains your choice until you come back and change it, or cancel it by hitting "Reset". Each choice has a different graph associated with it. You might want to try them all, just to see what you can learn from each of them.

You can also, now, select Prof. Franco Modigliani's proposed solution. Click Political Scenarios, then click the Modigliani MIT Plan, then click Selections OK. This adjusts the Simulator's tax and investment settings to match Professor Modigliani's proposed solvency strategy.

Assumptions.   On the Assumptions page, you can place your guess about future stock market returns, GDP growth rates, the cyclicality of the stock market, the amount of "Inheritance Leakage," and the amount of "Policy Leakage." You can also (new as of October 2) adjust two key sets of assumptions that affect long run real returns on broad stock market index funds - the Dividend/GDP ratio, and the Index Fund Lag Factor. Changes you make to these variables will affect Chart 4 on the second Charts page.

ROI Display.   Shows how the Simulator derives its year-by-year Real ROI numbers. The Simulator draws on GDP, the Market Capitalization-to-GDP Ratio, the Dividend/GDP Ratio, and the Index Fund Lag Factor to compute Real ROI. It also matches the long-run Real ROI investment results to an Internal Rate of Return (IRR) series, so that users can be assured that a 5% Real ROI forecast (Assumptions Page) produces a 5% Real ROI simulation.

Charts.   Two Charts pages display and dramatize for you the Simulator's results. Key variables are now displayed at the top of Charts 1, and again at the top of the Results page. Some of these are color-coded. The color red, you'll notice, is used as a warning. The color orange is also a warning, but not quite as strong. If you find a solution that brings out a lot of blue, you're doing quite well. Green is ambiguous. If you're accumulating unnecessary wealth in the Social Security program, you're likely to see a bit of brown.

Results.   The Results page pulls everything together. All your Assumptions, your Decisions, your Scenario choice, and the results produced when you hit "Run The Numbers".

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Dedicated to Byron Johnson

This Simulator, by the way, is dedicated to the memory of my late father, Byron Johnson, an economist, who wrote his dissertation on Social Security for the Economics Department at the University of Wisconsin. Wisconsin economists played a central role in launching Social Security. (The program has come a long way since Wisconsin graduate student Wilbur Cohen hitched a ride from Madison in the rumble seat of a friend's car to join Professor Ed Witte in Washington and help Witte in setting up Social Security.)

Byron Johnson later served one term in Congress and twelve years on the University of Colorado Board of Regents. He taught economics for a number of years, first at the University of Denver, then at the University of Colorado-Denver.

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Questions the Simulator Can Help You Test

Is Actuarial Balance the Same as Solvency?     When the Simulator first opens, you'll see the Charts One page displaying a value for Actuarial Balance. This number represents the percentage of taxable payroll from 2001 - 2075 by which Social Security is, supposedly, out of balance. (The opening value is -1.93%.) Presumably, therefore, if the tax rate were increased by roughly that amount, Social Security could be brought back "into balance."

Try it. Turn to the Taxes page. Change the 12.4% SS Tax Rate to 14.3%, 1.9% higher. Click "Settings OK." Click "Run The Numbers." What happens to Actuarial Balance? It's close to 0.0%, isn't it? (Assuming you haven't changed any of the opening settings.) Does Social Security look solvent to you? Go back to the Taxes page. Tweak the tax rate downward, just a notch, to 14.2%. Click "Settings OK" and "Run The Numbers". Look again at Chart 1A.

You may not realize it, but you're now just a little smarter about long-run solvency than the entire 1983 Greenspan Commission, the group that claimed it had cured Social Security's solvency problem by hammering out a plan that restored Social Security's Actuarial Balance to 0.0%. An Actuarial Balance of 0% may sound good, if you hear it. It may look good, in print. But once you see it, on a graph . . . well, it doesn't look like a lasting solution.

How Much Will PRA's Be Worth?     Look again at the top of Charts 1. Note the Cumulative PRA numbers at the top right. They're in the Trillions, of course. (You'll find the same numbers near the top of the Results Page.) Perhaps you'd like to know how much value PRA's would have? So far, they have a value of zero.

How to get a number bigger than zero? Click on Decisions, click on Taxes. Click the PRA checkbox. Enter a tax rate. (2% is suggested. Feel free to try others.) Once you've done that, be sure to click "Settings OK" at the top of the Taxes page.

You can now click "Run The Numbers" and, on Charts 1, you'll see a new total show up for PRA annuity cash paid to retirees, 2002 - 2075. Under the initial settings - which you may or may not agree with - PRA's show a positive cash flow. What's important is how the numbers change, from one test to the next. Here's where the simulator can be of help.

Change the GDP growth rate assumptions, on the Assumptions page.

Change the assumptions for real return on stocks. (Technically speaking, what's being modeled is the likely return rate on a 5000-stock index fund, adjusted for inflation.)

Change the assumptions for management fees, as a percent of assets, both during the working years, when PRA's would be growing, and during the retirement years, when they'll be shrinking.

"Inheritance Leakage." Change the assumptions for the percentage of PRA assets that leak out of the retirement system. The Simulator is currently set to a leakage rate of 100%, with none of assets at the time of death being counted as Survivors benefits according to Social Security's current Survivors Benefit rules. (An inheritance leak rate of 100% matches the assumptions promulgated by the Bush Commission.)

If you think Congress will require spouses, children, and grandchildren to deposit their inherited PRA proceeds in their own PRA accounts, you may want to change these settings. If you do, make sure that the four percentages, Leak + Spouse + Kids + Grandkids, add to 100% before you click "Settings OK".

"Policy Leakage." A second type of leak could easily be caused by Congressional softheartedness, with legislation that allows families hit by severe financial crisis to pull funds out of their PRA's for non-retirement purposes. If you think this might be a serious problem, turn up the Simulator's "Policy Leakage" setting by a notch or two.

Once you push the Policy Leakage setting up a notch, hit "Run The Numbers" again. Watch what happens to the total 2002 - 2075 cash flow to retirees from their PRA's.

The more you use the Simulator, the more comfortable you'll be in using it. The Simulator is both a citizenship tool and a citizenship toy. Not only do we hope that you find it valuable, we also hope you enjoy using it.

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Tips on Printing.

As you experiment with the Simulator, you're likely to find scenarios that interest you. You might find a terrific solution yourself. Or perhaps you'll succeed in demonstrating that someone else's proposed solution isn't really the right answer. And you may sometimes want to save printed copies of the scenarios you develop.

The Simulator's Results Page has been designed for just this purpose. It captures all the choices you made and summarizes their economic impact. The "side by side" Charts Pages are also designed to help you save your findings.

If you're using Internet Explorer as your browser, you should be OK. Before you print, go to Page Setup (on your File Menu) and choose the narrowest margins you can. Change from "Portrait" to "Landscape". Then, when you click on "Print", it's not a bad idea to click "Properties" next, and make certain your printer is set to produce "Landscape" output.

If, however, you're limited to Netscape Communicator, you're likely to be frustrated by Netscape's inability to print Java-based web displays without distortion. We don't recommend using Netscape if you can avoid it. If you're stuck with Netscape as your only browser, we recommend using a work-around whenever you'd like to print your findings. Begin by adjusting the Simulator image displayed on your PC so that you have it framed exactly as you'd like to see it printed. Then click ALT-PRINTSCREEN. This saves the image in your browser window.

Next, open the Paint program on your PC. (Start - Programs - Accessories - Paint) Click CTRL-V. This copies the Simulator image you've just saved into your Paint program. Now you're almost ready to print. Again, make sure that you've picked the narrowest possible print margins, and changed all the settings from Portrait to Landscape. You should now be able to print quite a decent copy of the Simulator display you wanted to save.


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Clearly this isn't a final release. Further adjustments are needed. If you have any questions, if you have any suggestions, or any criticism, feel free to let us know. The more input we have from users, the better we'll do in tailoring the Simulator to your requirements.

We hope you enjoy using the Simulator, and we hope it aids you in learning more about the difficult solvency challenge now facing Social Security.

Steven H. Johnson
President, Simcivic.org

Successor to Common Sense on Social Security

     

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Common Sense on Social Security
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For more information on Social Security, the following web sites are suggested

The Concord Coalition

The Social Security Administration
 
 

Page Version 1.07
Revision Date April 13, 2006