Will the President’s Proposal Solve Social Security’s Crisis?

Policy Reports | Social Security

No. 280
Wednesday, November 16, 2005
by Andrew J. Rettenmaier and Thomas R. Saving

Executive Summary

Social Security’s Trustees predict the program will begin paying out more than it collects by 2017, and by 2041 will have exhausted its legal authority to draw on other parts of the federal budget to pay full benefits.

In response, the Bush Administration has proposed a two-part Social Security reform plan that would reduce the growth in initial benefit payments awarded to higher earners and allow all younger workers to invest part of their Social Security payroll tax dollars in personal retirement accounts.

President Bush has embraced a progressive price indexation plan of the type developed by investment banker Robert Pozen. However, Pozen’s price indexation formula was designed with personal retirement accounts equal to 2 percent of wages in mind. The Bush administration is pursuing personal accounts twice that size. If the goal is to approximate benefits promised under the current system, a progressive price indexation formula different from Pozen’s is needed.

NCPA Research Fellows at the Private Enterprise Research Center at Texas A&M University have developed a formula that better fits the administration’s 4 percent account. The reformed Social Security benefits have these features:

  • The progressive price-indexed benefit for very low income workers would remain at 100 percent of benefits promised under current law.
  • By contrast, the progressive price indexed benefit will equal only 56 percent of benefits promised under current law for the highest earners by the time today’s five year olds reach the retirement age.
  • Personal retirement account annuities will provide an increasing percentage of total retirement benefits over time for higher earners, primarily because their scheduled benefits are a smaller percentage of lifetime earnings.
  • The combination of private annuities and government-paid benefits will provide a retirement income for high income workers approximately equal to their currently promised benefits — and a retirement income for low earners that is greater than currently promised benefits — while at the same time making Social Security solvent for the long run.
  • Under current law, the Old Age and Survivors portion of Social Security faces a 75-year unfunded obligation (costs minus income) of $4.8 trillion. The Pozen benefit formula (plus Bush-style 4 percent accounts) would produce a 75-year unfunded obligation of $5.5 trillion; however, the cash flow turns from negative to positive in 2061.
  • The alternative plan presented in this paper faces a 75-year unfunded obligation of $4.6 trillion and the cash flows turn from negative to positive by 2055.

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