NCPA - National Center for Policy Analysis


May 19, 2005

For younger workers, today's Social Security system is broken. Younger workers will get a worse deal from Social Security than their parents and grandparents because Social Security cannot afford to pay the same generous benefits to today's younger workers that it did to previous generations, says Rea S. Hederman Jr. (Heritage Foundation).

President Bush's plan to reform Social Security is a fairer alternative than just raising taxes or cutting benefits, says Hederman. Critics focus on how the President's plan would change the benefits formula, but they tend to overlook how it would restructure the way a retiree receives benefits.

As Hederman explains, under the President's plan, retirees would receive their benefits from two sources: the traditional Social Security benefit and a worker's personal retirement account (PRA). For example, compare the case of a 25-year-old worker earning $27,500 today, who is expected to retire in 2047:

  • Under current law, he would receive about 75 percent of the benefits Social Security now promises to pay, or about $1,664 a month; if Congress continues to do nothing, the benefits would continue to decline over the years of his retirement.
  • Under the President's plan, he would receive $1,216 a month from traditional Social Security benefits; but by using his PRA balance of $162,965 to purchase an annuity, he would receive an additional $1,131 each month, for a totally monthly benefit of $2,347.

Even taking into account how the President's plan slows the growth of traditional benefits to make the system solvent, a typical worker would still do better under the President's plan than under today's Social Security, says Hederman.

Furthermore, any fix for Social Security replicating 1983's "permanent fix" reform package, which cut benefits and raised taxes, only makes Social Security a worse deal for younger Americans.

Source: Rea S. Hederman, Jr., "How the President's Plan Benefits Younger Workers," Heritage Foundation, WebMemo #734, May 2, 2005.


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