NCPA - National Center for Policy Analysis

The Kolbe-Stenholm Reform Plan

May 11, 1999

The "21st Century Retirement Security Act" introduced recently by Representatives Jim Kolbe (R-Ariz.) and Charles Stenholm (D- Texas) would reduce Social Security's unfunded liability and allow workers to divert a portion of their existing Social Security taxes into personal retirement accounts they would own.

The bill could be the basis for Social Security reform, say Heritage Foundation analysts.

  • The Kolbe-Stenholm plan would require each worker under age 55 to set up an Individual Security Account (ISA) funded with an amount equal to 2 percent of income.
  • This money would be diverted from the Social Security retirement taxes that the worker must pay currently.
  • It would go to an agency, similar to that which currently runs the federal employees' retirement system, through which the funds could be invested in stocks, bonds or government debt.
  • The individual worker would own the account; and, if he or she died before retirement, the full amount in it would go into that worker's estate.

The legislation also proposes gradually lowering traditional Social Security retirement benefits for future retirees in line with the reduction in their payroll taxes. Thus, future retirees would receive both the benefits generated from their ISAs and the monthly payments from Social Security financed by their payroll taxes.

On retirement, the worker could either annuitize the ISA balance or take a phased withdrawal. Alternately, the worker could take as a lump-sum benefit any money left in the account after purchasing an annuity paying at least a poverty-level benefit.

The plan also includes more generous benefits for spouses and a graduated government match of additional savings by low-to- moderate income workers in their ISAs accounts. Finally, there is a guaranteed and enhanced minimum benefit that would protect workers from poverty.

Source: David C. John, "Kolbe-Stenholm Proposal: A Firm Foundation For Social Security Reform," Backgrounder No. 1279, May 10, 1999, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.


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