Restoring Social Securitys Solvency: Plans That Work

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Restoring Social Securitys Solvency Plans That
Work

• John B. Shoven
• Charles R. Schwab Professor of Economics
• Stanford University

Fathauer Lecture in Political Economy Eller
College of Management University of Arizona
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Whats The Problem?

• Promised (Legislated) Retirement Benefits Exceed
  Legislated Funding (i.e. taxes)

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Reasons for the Projected Cost Increases

• Improved Mortality and Life Expectancy
• Relatively Low Fertility
• Uneven Demographics Small Birth Cohorts of the
  1930s and WWII, followed by Baby Boom, followed
  by Baby Bust

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Size of the Problem

• The Benefits Reduction Alternative
• Immediately reduce benefits for those under 55 by
  25 percent across the board
• Wait until 2042, when it would be necessary to
  decrease benefits by 30, even for the elderly.
• Tax Increase Alternative
• Raise the payroll tax from 15.3 to 17.3
  immediately
• Wait until 2042 and raise tax 5

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Choices for Restoring Solvency

• Reduce Promised Benefits
• Increase Revenues
• Higher payroll tax
• Mandatory contributions to individual accounts
• Nothing else works!

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Ways to Reduce Promised Benefits

• Increase Normal Retirement Age
• Index benefits for future retirees to prices
  rather than wages
• Means-test benefits
• Straightforward benefit cut

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Alternative Ways to Increase Revenues

• Increase payroll tax
• Increase or eliminate the earnings cutoff for
  payroll tax (currently 90,000)
• Transfer revenues from general funds of federal
  government
• Mandatory contributions to individual accounts

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Alternative Ways to Restore Solvency

• Presidents Commission to Strengthen Social
  Security Plan 2
• Peter Diamond Peter Orszags plan the natural
  Democratic alternative Saving Social
  Security A Balanced Approach, Brookings, 2004
• Syl Schieber and John Shovens Personal Security
  Accounts 2005 plan The Real Deal The History
  and Future of Social Security, Yale University
  Press, 1999

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What the Plans Have in Common

• Painful Choices they all either cut traditional
  benefits, raise taxes or introduce mandatory
  contributions to individual accounts, or both
• No magic bullets, asterisks, or transferring
  money from the already overcommitted rest of
  government

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Presidential Commission Plan 2

• Beginning in 2009, initial benefits indexed to
  prices rather than wages. Eliminates real
  benefit increases in current law
• Introduces voluntary small individual accounts.
  Workers could redirect 4 of covered pay into
  accounts up to 1,000. In return, workers accept
  lower traditional benefits.
• Increases benefits for widows and those with low
  lifetime earnings

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Diamond-Orszag Plan

• Roughly splits burden of solvency between tax
  increases and benefit cuts
• Taxes and benefits would be indexed to changes in
  life expectancy
• Benefits particularly cut for higher income
  participants
• Maximum earnings base increased
• New 3 tax introduced on earnings above the
  maximum earnings cutoff
• Increase in benefits for widows and low income
  households

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Personal Security Accounts 2005

• Two Tier Social Security Program
• Tier One flat benefit of 600/month, increases
  thru time with wages. Two-earner couples would
  each get 600/month
• Tier Two proceeds from 5 mandatory individual
  accounts

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PSA 2005 Continued

• 12.4 payroll tax remains unchanged
• New, required 2.5 contribution to individual
  accounts with 11 matching by Social Security
• Very gradual transition. Everyone over 55 would
  remain on current plan. Everyone between 25 and
  55 would get blend of new and old plan

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Three Plans That Work

• Presidents Commission 2
• Cuts benefits and introduces voluntary individual
  accounts
• Diamond Orszag
• Raises taxes and cuts benefits, particularly for
  middle and upper income participants
• Schieber-Shoven PSA 2005
• Introduces large, mandatory individual accounts
  and new required contributions

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Current Political Scene

• The Choice is between the Presidents Plan and
  doing nothing
• Doing nothing is a terrible plan
• My position Support the Presidents plan until
  a better plan is proposed in Congress