NCPA - National Center for Policy Analysis

Options for Social Security Reform

November 9, 2011

A new study by Andrew Rettenmaier, a senior fellow with the National Center for Policy Analysis, and Liqun Liu, a research scientist at the Private Enterprise Research Center at Texas A&M University, compares the implications of maintaining Social Security's current benefit schedule with three changes that would reduce spending in different ways and one that would raise revenues immediately.  The study analyzes the extent to which each provision would reduce the program's long-run deficits, affect spending, and change the distribution of benefits and taxes.

The four reforms considered are:

Progressive price indexing. 

  • Progressive price indexing would substantially reduce the long-run funding gap to $3.2 trillion from the current law funding gap of $16.1 trillion.
  • Thus, it would only require a modest solvency tax increase equal to 0.6 percent of taxable payroll.
  • In terms of long-run spending, it would result in the second smallest program, about 82 percent of the size of the current program.

Changing the benefit formula. 

  • Changing the benefit formula would essentially eliminate the long-run funding gap and require no additional solvency tax.
  • It also would produce the most dramatic reduction in spending on benefits, equal to 23 percent of long-run spending under the current benefit formula.
  • In addition, it would retain the progressive nature of the benefit formula, but reduces the degree of progressivity relative to the current formula.

Raising the retirement age.

  • Raising the retirement age would reduce Social Security's unfunded obligations for retiree benefits to $6.3 trillion and require a solvency tax of 1.3 percent of taxable payroll.
  • It would result in the third-largest program, with about 87 percent of the current law spending.
  • Moreover, though the distribution of net taxes would still be progressive, of the four potential changes considered it would reduce the degree of progressivity the most relative to current law.

Eliminating the taxable maximum. 

  • This provision would reduce Social Security's unfunded obligation for retiree benefits to $8.3 trillion and require a 1.3 percent payroll tax increase.
  • It would result in the largest program in terms of long-run spending, and would increase the progressivity of the program.

Source: Andrew Rettenmaier and Liqun Liu, "How Reforms Would Affect Social Security's Funding Shortfalls, Total Spending, and the Distribution of Benefits and Taxes," National Center for Policy Analysis, November 9, 2011.

For text:

http://www.ncpa.org/pub/st337

 

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