Comparing Proposals for Social Security Reform

Studies | Social Security

No. 227
Wednesday, September 01, 1999
by Liqun Liu and Andrew J. Rettenmaier


Conclusions

"Current economic and budgetary conditions present a unique opportunity for reform."

There is no easy fix for the Social Security system. A conservative estimate of its unfunded liability, the present value of the difference between projected revenues and expenses, is more than $4.5 trillion. We estimate that maintaining the scheduled benefits under the current system will require a future payroll tax rate in excess of 19 percent for the retirement portion of Social Security alone. The trustees estimate that with no change in the current system, we will either have to increase taxes by more than one-half, cut benefits by one-third or adopt some combination of revenue enhancement and benefit reduction in the next century. Reforms like increasing the retirement age effectively lower benefits, while increasing the maximum taxable wages effectively raises taxes. However, current economic and budgetary conditions present a unique opportunity to guarantee that scheduled retirement benefits are paid with no new taxes and no increase in government debt. By using the projected budget surplus to help fund a transition to a system in which individuals make deposits to their own private retirement accounts, several of the competing proposals in the 106th Congress take advantage of this unique opportunity. They promise to eliminate the unfunded liability without cutting benefits or raising tax rates. Under these plans, future benefits are paid for with a combination of privately funded annuities and tax revenues.

"The alternatives to using the budget surplus are a transitional tax or added payroll taxes."

While the budget surplus could be returned to taxpayers through a tax cut, the unfunded liability of the Social Security system is a real obligation. Using the surplus to establish the private accounts now and funding them sufficiently produces a fully funded private system in the long run. The alternatives to using the budget surplus to achieve a fully funded system are a transitional tax or mandatory contributions in addition to current payroll taxes.

The NCPA-PERC proposal we offer is similar in spirit to those currently before the Congress. However, it shortens the length of transition to a fully funded system by allowing younger workers to contribute more than older workers to private accounts. Doing so guarantees that today's young will for the most part replace their Social Security with private savings and greatly expands the nation's capital stock. As a consequence, national income and taxes grow most rapidly under the NCPA-PERC plan.

Politicians in both major political parties have recognized the importance of reforming Social Security now rather than later. We must embrace this recognition by adopting reforms that provide a real solution to the problem. Moving to a system of personal retirement accounts is such a solution and produces many collateral benefits, including giving workers ownership of their retirement pensions, raising the national savings level and ultimately increasing national income.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.


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