Social Security: Policy Stream

Julie Anderson, Betsy Self, Maee Aly, and Seneca Sok

Options in Revenue

• Adjustmentso Payroll Taxo Taxable Maximum

Options for Adjusting Taxation of Earnings

• Increase by 1 Percentage Point in 2012• Increase by 2 Percentage Points over 20 years• Increase by 3 Percentage Points over 60 years• Eliminate Taxable Maximum• Raise the Taxable Maximum to Cover 90% of Earnings• Tax Covered Earnings Above the Taxable Maximum; Do NOT increase benefits• Tax Covered Earnings Up to $250,000; Do NOT increase benefits• Tax All Earnings Above the Taxable Maximum at 4%; Do NOT increase benefits• Tax All Earnings Above $250,000 at 4%; Do NOT increase benefits

Options that Would Change the Benefits Formula

• Increase the number of years used in calculating Social Security retirement and survivors benefits

• Changing the factors in the formula that determine what percentage of each worker’s average monthly lifetime earnings are replaced.

• Modify the formula used to calculate initial benefits to reduce benefits across the board

Options that Would Change Early and Full Retirement Age

• Modifying adjustments for early or delayed retirement • Adjusting to reflect improvements in longevity

Options that Would Increase Benefits for Low Earners

• Reduce or eliminate benefits for workers with higher incomes – “Means Test”

• Introduce a New Poverty-Related Minimum Benefit• Enhance Low-Earners’ Benefits on the Basis of Years Worked

Beneficiary: Disabled

• 19% of SS beneficiaries are disabled or family of the disabled.

• Expected to exhaust in 2018 under current law

• Alternative: DI & OASI trust funds combine so they last until 2039

Cost of Living Adjustment (COLA)

• Any change in COLA would affect all beneficiaries• COLA is based on the consumer price index (CPI). • Studies have found that the CPI overstates the true

rate of inflation, making COLAs higher than necessary

Disability & COLA• Disability Insurance (DI)

o Younger o Remain in program longero If the COLA was reduced, could be subject to reductions in benefits for

many more years than retirees

Alternative for COLA

Reduce COLAs by 0.5%• Project to begin in 2012• Pay-out would decline by 0.4 % points of GDP in

2040, or by 7 % from currently scheduled pay-outs.

• Extend the trust fund exhaustion date by nine years to 2048.

• Benefits would be reduced by about 6% for people born in the 1950s or later

Alternative for COLA Base COLAs on the Chained CPI-U• Projected to begin in 2012• Use another measure of inflation to

chained CPI-U (consumer price index for all urban consumers)

• It is projected that the CPI-U will increase, by 0.3 % more slowly per year than will the CPI-W.

• Pay-outs would decline by 0.2 % of GDP in 2040, or by 4%, from currently scheduled pay-outs.

• Extend the trust fund exhaustion date by four years, to 2043.

Changes in COLA

Privatization• What Is It?

o Privatization would involve the creation of a private savings account for every worker.

o Workers would “own” this account, meaning it is portable (not tied to a specific job) and self-managed.

o Workers could invest in a broad range of options.o Workers would receive Social Security payments upon retirement, but

value would be frozen.o The account would be inheritable.

• Brookings Plan: o Create private accounts and reduce benefits and increase payroll

tax. o All money from increased tax goes into individual accounts.o Participation is mandatory.

• Cato Plan: o Create private accounts but no reduced benefits or increased

payroll tax. o Participation is voluntary. Workers could contribute either to Social

Security or to savings account.o Employers would continue Social Security payments.

Variations in Plans

• There is general agreement that: o Social Security payments are inadequate for many people.o Many Americans are not saving enough for retirement.o These plans would restore long-term solvency of Social

Security.

• Some disputed claims are that: o Savings investments have potential for higher rate of return

than Social Security does. (While this is true, there are of course also economic downtimes.)

o Individuals would put more money into savings.• Who supports it?

Brookings and Cato Institute.

What are the arguments in favor of it?

• The transition would create shortfalls that would have to be covered by: o “Double payment” by younger workers.o Government payment (from somewhere).o Benefit cuts.o Risk exposure.

o Many people do not have enough financial knowledge.

o Partial privatization or voluntary contribution is a “slippery slope.”• Who opposes it?

Center for American Progress and AARP.

What are the arguments against it?

Universal and/or Automatic Enrollment 401(k)

• What Is It?o A way to increase retirement security by increasing savings. o A form of investment in addition to Social Security.o Workers would have 6% of income put into 401(k) unless they explicitly

opt out.o Workers would own and manage the account.o Contributions could be made during times of unemployment.

• More workers participate in their 401(k) if they are automatically enrolled.• Would increase retirement savings.• Has potential for greater rate of return than Social Security.

• Who supports it?o Center for American Enterprise and Heritage Foundation.

What are the arguments in favor of it?

• Didn’t find any – maybe policy folks ignore the idea rather than confronting it?

• Who opposes it?o No one or unknown.

What are the arguments against it?