NCPA - National Center for Policy Analysis


December 13, 2004

The National Center for Policy Analysis (NCPA) unveiled a new plan to reform Social Security that for the first time explicitly spells out how to fund the transition from the current pay-as-you-go system to a retirement program that is fully funded.

The NCPA reform plan is the only proposal so far that is fully paid for and does not require borrowed money. It maintains the progressivity of the current system and replaces today's pay-as-you-go system with a fully funded system after one generation. Specifically:

  • All people who are working and have not yet reached the retirement age will be given the option to put part of their payroll taxes into a personal retirement account (PRA), with lower-income workers being able to deposit more than higher-income workers.
  • In exchange, workers must make their own additional contribution of 1.25 percent of wages, to be matched by their employer; roughly speaking, for every $1 contributed by an average-income worker, $3 will be contributed by someone else (the employer and payroll taxes that otherwise would have gone to the government). For every $1 contributed by lower-income workers, $7 will be contributed by someone else.
  • Initially employees and their employers could be allowed to meet their additional PRA contribution requirements by diverting contributions currently made to defined contribution plans, including 401(k) plans, for the first five years. Small businesses could also be allowed a year's delay before matching their employees' contributions.

Deposits to the PRA accounts will be fully funded by expected Social Security surpluses, the Social Security Trust Fund, and additional savings by employees and employers.

  • After about three decades, the reformed Social Security system will be self-financing.
  • The youngest workers will fully fund their own retirement, relying on government only if their retirement incomes fall below 150 percent of poverty.

Source: Andrew Rettenmaier and Thomas R. Saving, "Social Security Reform Without Illusion: The Five Percent Solution," National Center for Policy Analysis No. 272, December 9, 2004.

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