For the Intel Science Talent Search, I wrote a paper entitled "Social Security Reform: A Model Combining Market and Non-market Solutions in Order to Achieve Political Consensus," in the social sciences category. As the title states, I developed a mathematical model as well as incorporated concepts from both economics and political science.
The first decision I made when I began my Intel research project was choosing what area of social science my project would entail. Many of my interests were in the field of finance and economics, so I thought a project in that area would be the most enjoyable for me.
After some preliminary research, which included reading past newspaper articles relating to financial subjects, I found that the most looming economic problem in the US was the issue over Social Security, which was promptly addressed in President Bushís 2001 State of the Union Address. In it, President George W. Bush claimed "[Social Security], on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security." However, this claim has been refuted, so another major component of my preliminary research consisted of verifying this claim, through the examination of government documents. According to the 2005 Annual Report of the Board of Old-Age and Survivors Insurance and Disability Insurance Trust Funds, the Trust Fund will be depleted by 2042, when, under the current system, the benefits would then be paid solely from the Federal Insurance Contributions Act (FICA) tax.
The remainder of my research consisted of examining scholarly papers and books on the issue of Social Security reform, to better understand what had already been done, and what further work was needed. To start with no base plan at all would be like re-inventing the wheel; this issue had been so laboriously thought about in the past that there was already a great deal to build off of. Ultimately, I discovered that nearly every plan currently presented has been able to effectively produce a system that retains the solvency of the Social Security Trust fund. However, the difficulty exists in gaining popular support for the plan. An effective plan requires political consensus, and no such plan to date has successfully accomplished this. I felt that the plan that came the closest to this ideal was the Liebman-MacGuineas-Samwick plan, which was nonpartisan, and created by advisors to President Clinton, Senator McCain, and President Bush. Under this plan, benefit cuts would consist of a change in the primary insurance amount formula and an increase in the retirement age, so that the benefits could still be covered by the current 12.4% payroll tax. New revenue would be generated through mandatory account contributions, which would equal 1.5% of earnings, and a gradually increase to the taxable maximum. An important change in the plan is that surpluses in the system would no longer be directed towards other areas of the government, but instead be kept in the Social Security trust fund.
This was the culmination of my research, and the beginning of the development of my model. The mathematics associated with my model of Social Security reform were basic accounting practices, simply calculating a profit and loss of three sample portfolios, in order to examine what the returns for the security-based retirements accounts would be. However, the major background that was needed was a thorough understanding of the securities markets, and the concepts of hedging, putting on long and short positions, as well as developing an acceptable risk-to-reward ratio.
This project was my first experience dealing with fiscal policy, however, and really allowed me to explore the idea of approaching business and economics as a science. It was around the same time I began to take AP Economics, and served as a supplement to the concepts being taught in class, making them all the more relevant. The most basic advice I can give to a student who looks to pursue a research project combining elements of social science and mathematics is to base it on something you already enjoy. If the project is being done for the sake of combining math and science, it will feel more forced than enjoyable.
The primary focus of my project is a modification of the Liebman-MacGuineas-Samwick plan for Social Security reform, which I felt needed a solution to remove the 1.456 trillion dollars worth of debt it accumulated, and that the personal retirement accounts that it created needed some modification. These two problems comprised the first two of my three hypotheses. My first hypothesis was that restrictions on investment options based on annual income will prevent those who will require their Social Security benefits to live from losing them, while allowing those who do not require these benefits to risk them in an investment. Though this could potentially increase the wage gap, it could also build incentive to increase oneís income. In laymanís terms, this meant that the more income one had, the riskier investments they could make in their personal retirement account. The second hypothesis was that by adding an additional 4.54% tax on income generated above $171,600 (2005 USD), the debt generated by the Liebman-MacGuineas-Samwick plan for Social Security could be eliminated. My third hypothesis dealt with the issue of making my plan non-partisan, and incorporated the previous two hypotheses. It read "Hypotheses one and two appeal to two different ideologies, those that support widening the wage gap based upon free enterprise (one), and those that are in favor of economic equity (two). By combining both into one plan, political balance could be achieved." By following these three concepts, I felt that a more ideal model could be created.
Because my system of progressively increasing the options a citizen has in relation to his income favors the rich while denying the poor of the same options, I chose to solve the $1.654 trillion debt by levying a tax on the wealthy. This creates a political balance, where the rich have the access to more options, but are forced to pay tax. This tax will be charged on the money above the maximum taxable cap for Social Security at the end of its gradual increase, which will be $171,600 in the year 2017. If the wage divisions in the US remain consistent over the next seventy-five-years, charging a 4.54% tax on the top 5% of households in the US would eliminate the deficit by only taking 1.49% of their total income.
While the tax was a relatively simple calculation, the cornerstone of my idea was focused around the personal retirement accounts. To account for the lack of a restriction of options in these accounts, I devised a new plan for the private retirement accounts that divided the working population into three wage brackets: under $50,000, between $50,000 and $100,000, and above $100,000. The lowest wage bracket has to select the first option, the middle bracket has the option of the first two, and the highest bracket can choose among the three.
The restriction of options based on wage brackets is the key focus of the personal retirement accounts, and is based on two theories. The first is that people are greedy, and will sometimes take unnecessary risk to attempt to gain material wealth. My second theory is that it is the poor and middle class, usually of the Democratic Party, who do not want market-based Social Security reform, because they fear that they will lose their retirement fund. The government, under my plan, would be insuring that those who need this money the most, the poor, would be receiving the guaranteed money in their PRA along with their regular benefits. The wealthy, however, who most likely would not require these benefits, would instead choose a market-based PRA.
The first option is very similar to a bank account with a 5% annual interest rate above the rate of inflation. This money is guaranteed by the US government, and is the "no-risk" option. The amount of revenue this option generates is calculated by taking the money in the "With match from Trust Fund" category, and multiplying it by an interest rate of 5%, or .05. Inflation does not factor into this equation, because the 5% interest rate is set above the rate of inflation.
The second option is a hedged portfolio, where a portfolio of stocks is chosen based on several pieces of criteria. All stocks must be a part of the Standard & Poorís 500 Index (S&P 500), have an S&P Star Rating of 5 (the highest), and must have a minimum price of $15. The S&P Star Rating system is an independent ranking system of stocks in the S&P 500. Because this is the "medium-risk" choice, only half of the money that is allotted to the personal retirement accounts will be used to buy the selected group of securities. The other half will be used to sell-short the S&P 500 exchange traded fund (ETF). To sell short is to sell a security without actually owning it. This is done with the expectation that the purchased security will decrease in price, at which point it will be bought. This way, one is still technically "buying low, and selling high," except in reverse order. In this case, we are selling the S&P ETF short in order to protect ourselves from market crashes.
The third option that exists is similar to the second, except the hedge against the S&P index is not used. This is more risky than the second option, but the rewards could potentially be much greater. For example, in the second option, if the entire market rises 30%, and our chosen portfolio rises 35%, we only make a 5% profit. If the third option was chosen, the investor would make a 35% profit. However, this option does not protect against a market failure.
These results of each plan are shown in tables that examine how each option would have performed in the year prior to the completion of my paper, as well as in a hypothetical period when the stock marketís value decreased. The examination of how each portfolio would have performed was necessary to show the pros and cons of each option, and would help the investors make a more savvy decision.
Ultimately, my Intel project was an alteration of the Liebman-MacGuineas-Samwick plan, which I believe accounted for the lack of decision-making sometimes associated with retirement funds, as well as a simple solution to the debt it created. Though the debt seems substantial enough that it would make the plan invalid, the 1.456 trillion dollar debt generated was actually one of the least significant of all other plans created.