An Assessment of the Proposals of the President's Commission to Strengthen Social Security

78 Pages Posted: 15 Aug 2002

See all articles by Peter A. Diamond

Peter A. Diamond

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Peter R. Orszag

Lazard Asset Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 2002

Abstract

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

Diamond, Peter A. and Orszag, Peter R., An Assessment of the Proposals of the President's Commission to Strengthen Social Security (July 2002). MIT Department of Economics Working Paper No. 02-28. Available at SSRN: https://ssrn.com/abstract=322040 or http://dx.doi.org/10.2139/ssrn.322040

Peter A. Diamond (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Peter R. Orszag

Lazard Asset Management ( email )

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United States

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