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Commission Unveils Options for Individual Accounts
December 3, 2001
The President’s Commission to Strengthen Social Security examined three options for Social Security reform at its November 29 meeting, all of which allowed for workers to privately invest a portion of their payroll taxes through individual accounts. It is likely that the commission will formally endorse these options at its final meeting, December 11.
OPTION 1
Workers would be able to invest 2 percent of pay in individual
accounts. (Although the option is modeled for a 2 percent
account, the commission staff stressed that it could easily be
enlarged under this structure.)
There would be no change in benefits for individuals who do not
choose the personal account option.
Individuals who choose personal accounts would have their
government provided benefits reduced by slightly more than a
proportional amount. If the accounts earned more than 3.5
percent on their investments, workers would receive higher
combined benefits than under the current system.
This option moves the system toward fiscal balance, but does not
achieve long-term balance. Therefore, additional Social Security
reforms will eventually be necessary.
OPTION 2
Workers would be able to invest 4 percent of pay in individual
accounts (up to a maximum of $1,000 per year).
Individuals who choose personal accounts would have their
government provided benefits reduced by slightly more than a
proportional amount. If the accounts earned more than 2 percent
on their investments, workers would receive higher combined
benefits than under the current system.
The Benefit formula for the government-provided Social Security
system would be changed from Wage-adjusted to Price-Adjusted,
beginning in 2009. This would slow the rate of growth in benefits
under the current system.
Benefits for low-wage workers and surviving spouses would be
increased.
OPTION 3
This option combines an add-on account, with a carve-out
account. Workers who contributed 1 percent of payroll, over and
above their current payroll taxes, to an individual account, could
divert an additional 2-1/2 percent of their payroll to that account.
Benefit growth in the traditional Social Security system would be
indexed to life-expectancy beginning in 2009.
A third “bend Point” would be added to the benefit formula,
creating a modest means test.
Benefits for low-wage workers and surviving spouses would be
increased.
Additional revenue would be dedicated to bringing the system into
balance. The source of that revenue was not specified.
Individuals who choose personal accounts would have their
government provided benefits reduced by slightly more than a
proportional amount. If the accounts earned more than 2.5
percent on their investments, workers would receive higher
combined benefits than under the current system.
In looking at all three options, some important points emerge:
- Under every proposal, individual accounts would increase
benefits for individuals who selected the accounts.
- Expected benefits through the accounts would increase in
every case relative to today’s levels.
- Expected benefits through the accounts would increase in
every case relative to the benefits payable without
personal accounts.
- Individual accounts provide particular benefits to low-income
workers. Under each option studied by the
Commission, a low income American with an account
holding 60% stocks, 40% bonds could expect higher
benefits than promised by the current system even if
payroll taxes were increased by 15 percent.
The options are intended to be illustrative of the issues and
trade-offs involved and do not necessarily represent the only possible
approaches to individual accounts.
The commission also agreed that contributions to individual
accounts should be collected by a central administrator using the
existing payroll tax system. The aggregate pool of contributions
would be invested in risk-free assets until information on contributions
by individual workers is reconciled with aggregate employer
payments. Once reconciliation takes place, assets would be
transferred to individual accounts, and credited with interest earned
during the reconciliation period. Initially, investments would be made
through a limited number of investment funds, similar to the federal
Thrift Savings Program (TSP). Management of the funds would be
contracted by the government to several private management firms.
Once the build up in individual accounts reaches a certain threshold
balance, workers would be free to move their accounts to a wider
range of privately managed funds.
One area of contention remains payout options upon
retirement. Robert Johnson, President of Black Entertainment
Television, wants workers to be able to withdraw their funds in a lump
sum, maintaining that this is particularly important for African-Americans,
who have shorter life expectancies. Others on the commission prefer a requirement for annutization or a programmed
series of withdrawals.
Reacting to the proposals, Michael Tanner, director of the Cato
Institute's Project on Social Security Privatization, had the following
comments: "The commission's examples clearly show that individual
accounts would lead to higher retirement benefits than can be
sustained under the current system. This is extremely good news to
today's workers; especially low income and minority workers. The
commission has now produced three viable options for reform. It is
time for critics of individual accounts to tell us their alternatives."
As usual, the Cato Institute video-recorded the commission
meeting. This video will be available soon.
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