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

Comparing Costs

Figure X - Unfunded Obligations

We now compare the alternatives by calculating the present value of the difference between the respective revenues and costs. Readers should note that an examination of the unfunded obligations over the next 75 years will be biased toward the status quo. Such an examination captures the next 13 years of surpluses under the status quo, but ignores the mounting deficits in the years beyond the 75th year. By contrast, the 75-year window will capture the larger deficits in the early years of the Social Security reform but ignore savings in years beyond the window. [See Figure X.]

  • Under current law, Social Security faces a 75-year unfunded obligation (costs minus income) of $4.86 trillion.
  • The Pozen benefit formula (plus Bush-style 4 percent accounts) leaves 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 leaves a 75-year unfunded obligation of $4.6 trillion; however, the plan turns from negative to positive by 2055.

The Pozen benefit formula combined with 4 percent accounts produces higher benefits than the alternative plan. Pozen’s original plan called for 2 percent accounts. However, if 4 percent accounts are established, the more aggressive price indexing we have suggested is justified.

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