Social Security Reform without Illusion: The Five Percent Solution

Policy Reports | Social Security

No. 272
Friday, December 17, 2004
by Andrew J. Rettenmaier & Thomas R. Saving


Regardless of one’s position on the pros and cons of prepaying Social Security benefits, all agree that paying future scheduled benefits will require a greater share of the nation’s output. Prepaying retirement benefits — expecting each working generation to provide for some of its own retirement — has been part of the policy discourse since the program’s inception. Since government does not hold the requisite economic assets, prepayment must occur through the vehicle of personal retirement accounts.18

We suggest that all workers be allowed to invest a portion of their payroll taxes in PRAs, provided they and their employers make an additional contribution of their own. In return, they will avoid the current system’s inevitable path of benefit cuts and tax hikes, and participate in a retirement system where expected benefits are very close to those scheduled under current law.

Future retirees will receive part of their retirement benefits from their PRAs and the rest will be paid as a defined benefit. The defined benefit portion is equal to a percent of the worker’s currently scheduled Social Security benefit. The percent is scaled back over time in a way that recognizes the worker’s years of participation in the program prior to reform and ensures that workers close to retirement can replace their scheduled benefits by investing in conservative assets. Younger workers should achieve a retirement income comparable to the current Social Security benefits by investing in balanced portfolios. In addition, those who work full time for 35 years or more are guaranteed that the combination of their PRA annuity and their defined benefit will yield a retirement income at least 150 percent of poverty.

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.

Read Article as PDF