An Assessment of the Proposals of the President's Commission to Strengthen Social Security
78 Pages Posted: 15 Aug 2002
Date Written: July 2002
Two of the Social Security Commission's plans restore actuarial balance without their individual accounts, primarily or entirely through benefit reductions. Both have voluntary carve-out individual accounts, with one requiring (subsidized) add-on contributions for opening accounts. "Liability accounts" track diverted payroll taxes (with interest) and are repaid by reducing traditional benefits. The diverted payroll worsens Trust Fund finances because the liability accounts carry sub-market interest rates and because of cash-flow problems. If all eligible workers (two-thirds) open accounts, general revenue transfers over 75 years are 1.2 to 1.5 (0.8 to 1.2) percent of payroll. Preserving disability benefits at their scheduled levels raises transfers to 1.5 to 1.7 (1.1 to 1.3) percent. Nevertheless, expected combined benefits are significantly reduced (and risk-adjusted benefits more so). In 75 years, account assets are 53 to 66 (35 to 44) percent of GDP, and liability accounts exceed 20 (15) percent of GDP.
Keywords: Social security, individual accounts, actuarial balance
JEL Classification: H55, E62
Suggested Citation: Suggested Citation