Social Security Reform without Illusion: The Five Percent Solution
Friday, December 17, 2004
by Andrew J. Rettenmaier & Thomas R. Saving
Table of Contents
Redistribution of Benefits
Because this proposal ultimately replaces currently scheduled defined benefits with defined contributions, we must address the issue of the current progressive benefit formula.
“The reformed program replicates Social Security’s progressive benefit structure.”
If the goal of reform is to replace scheduled benefits, different contribution rates by income levels are necessary, given Social Security’s redistributive benefit formula and differing lifetime earnings. Targeting scheduled benefits requires redistribution during the accumulation phase or at retirement. That is, we can have different rates of contribution allowing low-income workers to deposit more taxpayer dollars in their PRAs than high-income workers (as is proposed here) or we can have different payout rates with low-income retirees getting a higher benefit relative to preretirement wages than high-income workers (as occurs in the current system).
Figure II illustrates the relative outcomes using the differential contribution rates that we recommend. Our proposal basically replicates the outcomes of the current defined benefit formula for workers at different incomes who are 55 and 40 years of age. For workers 25 years of age in 2004, lower earners will be better off relative to the current system when compared to higher-income earners.