NCPA - National Center for Policy Analysis

Options For Social Security Reform

June 7, 1999

The debate over Social Security reform has evolved, and both Republicans and Democrats have been looking for solutions and evaluating reform options, leading to a whole new vocabulary of reform.

Most reform plans that create personal retirement accounts propose to fund them by using the budget surplus, but the mechanism differs from plan to plan. For example:

  • "Carve-outs" redirect some portion of a worker's 12.4 percent Social Security payroll tax into a personal retirement account invested in stocks and bonds and owned by the individual worker.
  • Under Sen. Phil Gramm's (R-Texas) reform proposal, for instance, the carve-out is 3 percentage points; 2 percent carve-out plans include a proposal by Sens. Judd Gregg (R- N.H.), John Breaux (D-La.) and Bob Kerrey (D-Neb.) and a House version by Reps. Jim Kolbe (R-Ariz.) and Charlie Stenholm (D-Texas).
  • "Add-ons" are funded in some way other than by diverting the payroll tax; for example, House Ways and Means Chairman Bill Archer (R-Texas) and Rep. Clay Shaw (R-Fla.) would create private retirement accounts financed by a 2 percent refundable income tax credit.
  • "Claw-backs" reduce the government's obligation to pay benefits by reducing each individual's monthly retirement benefit paid by Social Security by the amount funded from that individual's private account; however, the government guarantees every retiree will receive at least the same benefits as those promised under the current Social Security system.
  • "Drop-back" plans reduce the government's financial obligation as private account balances grow, and a person can benefit from the internal growth of the private account by taking a little more risk.

Without reform in the near future, say experts, the pay-as-you-go Social Security system cannot sustain the tax rates that will be required to pay benefits to retirees in the mid-21st century.

Source: John C. Goodman and Merrill Matthews Jr., "The Language of Social Security Reform," Brief Analysis No. 293, June 7, 1999, National Center for Policy Analysis, 12655 N. Central Expy., Suite 720, Dallas, Texas 75251, (972) 386-6272.

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