SSA Actuaries Show Personal Accounts Give More "Bang for the Buck" than Current Program

October 14, 2002

A new analysis from Social Security's non-partisan actuaries shows that, contrary to claims by critics of the President's Social Security reform Commission, personal account plans would pay higher benefits than the traditional pay-as-you-go program, even if the current program were boosted by the same transfers of general tax revenue. The analysis was requested by Reps. Jim Kolbe (R-AZ) and Charlie Stenholm (D-TX), co-sponsors of the bipartisan 21 st Century Retirement Security Act.

In a report released in June, economists Peter Diamond of MIT and Peter Orszag of the Brookings Institution argued that the current Social Security program could offer higher benefits than personal account-based proposals by the President's Commission to Strengthen Social Security if the current system were provided with the same general revenue transfers. The report has been much cited by opponents of personal accounts.

This alternative baseline was potentially very useful in showing the costs and benefits of alternative courses of action on Social Security. Unfortunately, it had several shortcomings. First, unlike the permanently solvent Commission Model 2, after 75 years the alternative baseline would become insolvent, demanding large tax increases or benefit cuts. Second, the alternative did not have the same net impact on the federal budget over the 75-year period as the Commission's proposal, as scored by Social Security's actuaries.

The alternative baseline used by the SSA assumes transfers from general revenues equal to the general revenue requirements under Commission Model 2. The baseline would also reduce scheduled benefits sufficient to achieve a unified budget impact comparable to Commission Model 2 and sustainable solvency. Therefore, both Commission Model 2 and the alternative baseline require roughly $2 trillion less (in present value terms) than it would cost to pay full promised benefits under the current program over the next 75 years.

Social Security's Actuaries found that Commission Model 2 would provide higher retirement benefits for virtually all low- and average-wage earners who chose individual accounts. In some cases substantially higher, particularly for low-wage workers. (Total benefits would be lower for average and high wage workers who did not participate in individual accounts) After 2032, Commission Model 2 would pay all retirees who participated in personal accounts higher expected retirement benefits. The chart above compares benefits for low and average wage earners who participated in individual accounts under Commission Model 2 with the alternative baseline described above.

Critics claim that personal account plans mean large benefit cuts and huge, unaffordable infusions of general tax revenue. This new analysis from Social Security's independent actuaries shows precisely the opposite: at a similar cost, personal account-based plans would pay higher benefits. A low-wage worker entering the workforce today could expect benefits up to 25 percent higher from the Commission's personal account proposal than from the current program, even if both plans receive the same amount of funding.

As Reps. Kolbe and Stenholm concluded, "The new analysis by the nonpartisan Social Security Administration Office of the Chief Actuary (OACT) shows that a Social Security reform plan with personal accounts can provide more 'bang for the buck' than simply pumping more money into the current Social Security system."

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