The Brookings Institution, Washington, D.C.www.brookings.edu

1
Saving Social Security

• Peter R. Orszag
• Director, Retirement Security Project
• Joseph A. Pechman Senior Fellow, Brookings
• January 13, 2005

2
Social Securitys role

• Social Security is intended to provide core layer
  of financial security during particular times of
  need
• Retirement
• Disability
• Death of a family wage earner
• Not designed to be sufficient by itself
• Recommended replacement rate at retirement
• 70 percent
• SS replacement rate at age 62 (most common age
  for claiming benefits) for medium earners
• 32 percent
• 3. Average retirement benefit

3
For the bottom tier of financial security,
several beneficial attributes

• Benefits protected against
• stock market collapses
• inflation
• risk of outliving assets
• Benefit formula is progressive
• Higher replacement rate for lower than higher
  earners
• Protects against career not turning out well
• Benefits provided to family members. Some
  examples
• Children of workers who die
• Surviving spouses
• Spouses of disabled workers

4
Individual Accounts An Overview

• Individual accounts, such as 401(k)s and IRAs,
  provide critical supplements to Social Security
  and several common-sense reforms would
  substantially raise saving in them
• But individual accounts dont make sense as part
  of the core tier

5
Make It Easier To SaveThe Automatic 401(k)
Source Madrian and Shea
6
But accounts dont make sense within Social
Security

• As pension system moves toward individuals
  bearing more risks, individual accounts in Social
  Security make even less sense
• Individual account system may respond to
  political pressure for
• early withdrawals
• no annuitization
• which would undermine retirement security
• Significant financing issues

7
Addressing the long-term deficit in Social
Security
8
Projected Social Security deficit 0.7 of GDP
9
Social Security is not the main problem.
10
Diamond and Orszag, Saving Social Security

• Restore long-term sustainable solvency
• Do not destroy program in order to save it
• No accounting gimmicks or magic asterisks
• No general revenue transfers, no ignoring risks
  of stocks
• Combine benefit reductions and revenue increases,
  rather than relying solely on either
• Follow precedent of 1983 Greenspan reforms

11
A Progressive Reform

• Protect most vulnerable disabled workers, young
  surviving children, lifetime low earners, widows
• Average earners modest sacrifices
• Higher earners somewhat larger role in reaching
  long-term balance
• -- differential earnings growth, life expectancy
  increases

12
Bottom line Benefits for medium earners

• Benefit reductions less substantial for lower
  earners and more substantial for higher earners.
  
• Real benefit levels continue to increase from
  one generation to the next because of ongoing
  productivity growth.

13
Bottom line Payroll tax rate

• If 2045 increase implemented this year, 35,000
  earner would pay extra 37 per month in combined
  employer-employee taxes
• For 25-year-old average earner, present value of
  additional lifetime tax is 0.3 percent of career
  wages

14
Conclusions

• Individual accounts do not make sense as part of
  Social Security
• Social Security is like a car with a flat tire.
  Lets fix the flat tire, not replace the car.
• Exciting new evidence on ways to boost saving on
  top of Social Security for low- and
  moderate-income households
• Retirement Security Project, funded by Pew
  Charitable Trusts