NCPA's Hybrid Social Security Reform Plan
December 18, 2001
The federal government can fulfill its promises to younger workers without raising payroll taxes when today's 20-year-olds retire, according to a plan proposed by the National Center for Policy Analysis (NCPA). Also, the plan would solve the system's long-term financial problems.
The NCPA "hybrid" plan combines the best features of various proposals. It would allow workers to put 2 percentage points of their payroll taxes into personal retirement accounts (PRAs). These funds would be invested in broad-based portfolios (70 percent stocks/30 percent bonds). Individuals would be free to choose their PRA manager, but in order to ensure adequate rates of return could not select more risky or less risky portfolios.
Under the reform plan:
- The federal government would guarantee every worker the same benefits promised under the current Social Security system.
- Retirees would receive two monthly benefit checks: one from their PRA and another from the government, equal to the promised benefit level.
- If a worker died early, dependents could inherit the PRA funds, provided they are not needed to pay any dependent's promised benefits.
- To eliminate inequities currently faced by working women and divorcees, married couples would be required to divide their PRA funds equally when contributions are made; each spouse would also be guaranteed currently promised minimum benefits.
- Once accounts have grown large enough, workers could annuitize their promised benefits and withdraw any extra PRA funds for personal use.
Texas A&M economist Andy Rettenmaier estimates that under the NCPA plan, Social Security would run an annual surplus about 3.64 percent of taxable payroll by 2070 (see Figure I).
Prior to that, by 2050, retirees would receive more than half their promised Social Security benefit from their PRA (see Figure II). In that and all future years, the payroll tax needed to fund the remainder of promised benefits would be no higher than today's.
Source: John C. Goodman (NCPA president), "Social Security Reform: The NCPA's Hybrid Plan," Brief Analysis No. 385, December 18, 2001, NCPA
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