Social Security: Challenges & Opportunities
Jeffrey R. Brown
January 13, 2005
Outline
1. What is the problem?
2. What solutions are available?• Approaches that do not solve the problem• Approaches that do solve the problem
3. The role of personal accounts
Workers per Beneficiary
0
2
4
6
8
10
12
14
16
18
3.3 today2.0 in 2040
16 in 1950
5 in 1960
Social Security Finances as % of Covered Earnings
8
10
12
14
16
18
20
2018
Expenditures
Tax Revenue
2042
CASH DEFICITS
Options for Restoring Fiscal Balance
1. On pay-as-you-go basis• Increase taxes • Reduce benefits (or benefit growth)
2. Pre-fund• Save more today to reduce future burden• Trust Funds vs. Personal Accounts
Four Different Approaches
Two that do NOT restore fiscal balance The “Do Nothing” approach The “Free Lunch” approach
Two that DO restore fiscal balance Reduce benefit growth (President’s Commission) Increase taxes (Diamond-Orszag)
The “Ostrich Strategy,” aka,The “Do Nothing” Plan
“There is no problem” “No immediate danger” “We can grow our way out” “The forecasts are
unreliable” “Minor tweaks will solve it”
“The higher return on stocks will save the system”
“No cuts in benefit growth are necessary”
“We can guarantee present law benefits with no new revenue”
Free
The “Free Lunch” Plan
Slowing Benefit Growth: The President’s Commission
Don’t touch benefits of today’s seniors Price index future starting benefits
– Future retirees would get at least as much as today’s retirees, adjusted for inflation
Puts system on permanently sustainable path within existing payroll tax rates
Raising Taxes: Diamond-Orszag
Reduce benefit growth– Longevity indexing
Increase taxes– Tax rate increase for longevity– Increase maximum earnings subject to tax– “Universal legacy charge,” aka, tax increase– “Legacy tax above earnings cap”
Tax increases account for approximately 85% of improvement in actuarial balance
Cost of D-O versus Current Law(as % of GDP)
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
2003
2007
2011
2015
2019
2023
2027
2031
2035
2039
2043
2047
2051
2055
2059
2063
2067
2071
2075
Cos
t ra
te a
s pe
rcen
t of
GD
P
D-O Cost
CL Cost
CBO Estimates of Economic Impact(as of 2080 relative to TF financed baseline)
President’s Commission Plan would:– Increase GDP by 3 – 4% – Increase national wealth by10 – 12% – (Minimal effect on labor supply)
Diamond-Orszag Plan would:– Reduce GDP by 1.5% – Lower national capital stock by 0.8% - 1.4% – Reduce labor supply by 1.8 – 1.9%
Why Personal Accounts?
Provide opportunity for ALL Americans to participate in financial markets and build wealth
Improve work incentives
Provider superior mechanism for the country to save for the future and reduce future burden
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