Saving Social Security Proposals for Reform WEEK 3 Student - - PowerPoint PPT Presentation

Econ 21SI

Saving Social Security

Proposals for Reform

WEEK 3

Student Initiated Course Instructor: Sean Arenson Faculty Sponsor: Prof. John Shoven

Stanford University, Spring Quarter, 2006 Tuesdays, 4:15-5:30PM, Bldg 200 Rm 217 econ21si.stanford.edu

In The News

Universal Themes

May 15, 2006 Report: Portugal Plans Pension Reforms

“Workers with fewer than two children will have to contribute more to their government pensions under planned reforms to prevent the collapse of Portugal's retirement system…Contributions would stay unchanged for people with two children, decrease if they had more than two.” “A Portuguese pension is calculated as a percentage of the top-earning 10 years of the last 15 years of the recipient's working life. Under the reforms, the pension would be calculated according to the employee's entire working life.” “Some workers will be offered the choice of working beyond the current retirement age of 65

• r increasing their pension contributions.”

“The reforms seek to address a pension crisis being felt in several European Union countries due to a falling birth rate and increased life expectancy, as well as lavish payouts.” “Portugal's pension fund may be unable to meet payouts in 10 years. Portugal's birth rate has fallen to 1.5 children per family, down from 2.6 children per family three decades ago.”

In The News

Personal Accounts

May 15, 2006 Americans Unsure About Retirement Funding “Experts say retirees can safely spend about 4 percent of their assets each year, but a study…found that just one in 10 respondents knew that rate.” “36 percent of those surveyed believed retirees could spend up to 14 percent a year, and 40 percent didn't know what a safe spending rate would be.” “The telephone survey involved more than 1,000 working and retired adults 41 and

• lder with at least $100,000 in investable assets”

Econ 21SI

This Week

• Personal Security Accounts 2005
• Hybrid Indexing
• The Unified Budget and the Trust Fund

57% 85% Reduce Benefit formula gradually from 90,32,15 to 90,21,10 25% 25% Index Retirement Age to life expectancy improvements 70% 72% Hybrid Indexing 116% 100% Replace Wage Indexing with Price Indexing 75 Years 2080

Menu of Options

Types of Benefit Cuts

75 Years 2080 14% 40% Raise the Payroll Tax Cutoff to $150,000 34% 104% Raise the OASDI Payroll Tax from 12.4% to 14.4%

Menu of Options

Types of Revenue Increases

• Diamond-Orszag
• President’s Commission Model #2
• Discussion to come…

Proposals for Reform

So far…

• Two-tiered program
• Current law revenue stays in tact
• Tier 1 (DB) replaces traditional benefits with $600 flat

monthly benefit indexed to wages (adequacy)

• Tier 2 (DC) involves mandatory personal accounts funded

by a 2.5% carve-out and a 2.5% add-on (equity)

• Gradual transition – does not affect those over 55 and

workers between 25 and 55 get a blend

Proposals for Reform

Personal Security Accounts 2005

Proposals for Reform

Personal Security Accounts 2005

• Index FRA to increases in life expectancy (after reaching

67 in 2011

• Index early retirement age to life expectancy until it

reaches 65

• Universal coverage
• 50% of PSA converted to inflation-adjusted annuity
• Other 50% lump sum

Proposals for Reform

Personal Security Accounts 2005

• One way of achieving flat benefits: Hybrid Indexing

– AKA “Pozen Plan” or “Progressive Price Indexing”

Proposals for Reform

Personal Security Accounts 2005

• Avg wages grow 1.1% faster than prices
• Retirees in 40 years will receive 55% higher real benefits
• Option #1: Switch to price indexing

– 75 years: 100%, 76th year: 116%

• Problem: Represents large benefit cut for poor

Proposals for Reform

Hybrid Indexing

• Bottom 30% of AIME, benefits grow with wages
• At max AIME, benefits grow with prices
• In between, benefits partially indexed to prices and

partially to wages

• Result: Benefits for lowest earners grow 1.1%/year

faster than highest earners. Eventually, all benefits equalize at current real benefit of highest earners

Proposals for Reform

Hybrid Indexing

• Benefit cut very gradual – 1%/year
• Softens the blow on most vulnerable

Proposals for Reform

Hybrid Indexing

Proposals for Reform

Hybrid Indexing

Current Law Hybrid Indexing

• 1969 – US adopts unified budget
• Counts net transaction between government and public

including earmarked revenue and expenditures

• 1983 – Move to pre-fund Social Security
• Problem: Social Security surpluses counted in trust fund

balance AND annual unified budget

Proposals for Reform

The Unified Budget

• Clinton era surpluses – debt still increasing!
• How can there be a net positive flow of cash AND a net

increase in debt?

• Reality: There never was a true surplus. Surplus entirely

due to trust fund

Proposals for Reform

The Unified Budget

Proposals for Reform

The Unified Budget

• Should be “Trust Funds” budget and “Federal Funds”

budget

• Surpluses and accrued interest in trust funds go to Trust

Funds budget

• Interest to trust funds counted as expense to Federal

Funds budget

• Already done in every state

Proposals for Reform

The Unified Budget

• Currently, OASDI trust fund holds “assets” to Social

Security – who’s liability? Future taxpayers.

Proposals for Reform

The Unified Budget