NCPA - National Center for Policy Analysis

Social Security Reform Plans Would Strenthen System

December 19, 2001

The final report of the president's Commission to Strengthen Social Security includes three broad frameworks for reform. Congress and the administration must develop the details, but all three options include a provision allowing workers to invest a portion of their Social Security taxes in a private retirement account (PRA).

  • Option one integrates PRAs into Social Security and doesn't include any other changes to the system. It would not fully cure the current system's long-term insolvency within the 75-year valuation period without additional revenues.
  • Workers who choose to participate would invest two percentage points of their 12.4 percent Social Security tax in an individual account.
  • Option two -- which would let workers invest four percentage points of their Social Security tax in PRAs -- would have a benefits floor by 2018, which would guarantee low-income workers benefits equal to 120 percent of the poverty level.
  • If the account earns a two percent average real rate of return, the account holder would receive a pension equal to the reformed benefit level -- and surviving spouse benefits would increase to 75 percent of the couple's benefits.

The third option makes the most changes to the system. Workers who invest one percent of payroll (over and above their Social Security taxes) into a PRA may also divert 2.5 percentage points of the 12.4 percent Social Security tax -- up to a $1,000 maximum -- into the account.

Over time, PRAs will alleviate pressures on the current system. But while all the approaches represent steps in the right direction, total reform can only be accomplished by a completely funded private system.

Source: Matt Moore, "Two Cheers for the Commission to Strengthen Social Security," Brief Analysis No. 387, December 18, 2001, NCPA.

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