Comparing Proposals for Social Security Reform
Wednesday, September 01, 1999
by Liqun Liu and Andrew J. Rettenmaier
Table of Contents
The Archer-Shaw Plan
"The Archer-Shaw plan promises to maintain currently scheduled benefits -- but does not promise a bonus."
Under the Social Security Guarantee plan outlined by Reps. Archer and Shaw, workers will receive an annual refundable income tax credit equal to 2 percent of wages for deposits to private retirement accounts.29 Like the Gramm-Domenici plan, the Archer-Shaw plan promises to maintain currently scheduled benefits - though with no promise of a bonus. However, at retirement the accumulated balance in the private retirement account is turned over to the Social Security Administration and is annuitized at the market rate of return. Our simulation of the Archer-Shaw reform is shown in Appendix B, Table B-III.30
The Archer-Shaw plan uses roughly 80 percent of the on-budget surplus to fund the PRA contributions. Even so, additional revenues are needed to fund Social Security obligations during the years of the baby boomers' retirement. We assume these needed revenues are generated by higher economic growth induced by a larger capital stock.31
As in the case of the Gramm-Domenici plan, under the Archer-Shaw plan PRA-funded annuities gradually replace Social Security benefits over time:
- After 20 years, the annuity from the private account would replace 12 percent of scheduled Social Security benefits for the average new retiree. [See Figure V.]
- The percent of retirement benefits funded from PRA accounts would rise to 25 percent by 2030 and to 50 percent by 2050.
"Archer-Shaw leads to a substantial tax reduction over time."
The Social Security Administration has evaluated the Archer-Shaw Plan and has suggested that under the plan it is possible to reduce the payroll tax by 2.5 percentage points in 2050 and by another 1 percentage point in 2060. To investigate this finding, we ran a separate simulation that ignores the increased revenues from a larger capital stock and uses the same rate of return assumption used by the Social Security Administration. We found that a 0.91 percentage point reduction in payroll is possible in 2060 rather than 3.5 percentage points.32 Nonetheless, relative to the status quo, Archer-Shaw leads to a substantial reduction in taxes needed to fund benefits over time. [See Figure VI.]