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John Adams “The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.”
Ronald Reagan: 'Everybody that is for abortion has already been born'
"I never said I was worth it. I only said I wouldn't do it for less " William F. Buckley Jr.
More than 30 million Americans depend on Social Security to provide a significant share of their retirement income. Since the program was enacted in 1935, it has served as a vital piece of the “three-legged stool” of retirement security, which today includes employer-provided pension plans and personal savings. Still, President Roosevelt himself viewed Social Security as an evolving program. As he wrote in a 1939 message to Congress: “We shall make the most orderly progress if we look upon Social Security as a development toward a goal rather than a finished product. We shall make the most lasting progress if we recognize that Social Security can furnish only a base upon which each one of our citizens may build his individual security through his own individual efforts.” In this regard, Social Security is one critical piece of the retirement security safety net for seniors – especially those with limited incomes.
As currently structured, however, Social Security is going bankrupt and cannot fulfill its promises to future retirees. Without reform, future retirees face benefit cuts of up to 24 percent in 2037. Attempts to fix the problem without fundamental reform will excessively burden future workers and sacrifice U.S. prosperity.
Further, even if the current system could be sustained, it is no longer a good deal for American workers. The real rate of return for current workers is only about 1 percent to 2 percent, and the expected rate of return for today’s children is expected to fall below 1 percent.
Social Security’s shrinking value and fragile condition pose a serious problem that threatens to break the broader compact in which workers support the generation preceding them, and earn the support of those who follow. To maintain the program’s significant role as a part of the retirement security safety net, Social Security’s mission must be fulfilled somehow. The legacy envisioned by President Roosevelt must be completed without bankrupting future workers.
This proposal addresses the shortcomings of the current system and strengthens the retirement safety net by providing workers with the voluntary option of investing a portion of their FICA payroll taxes into personal savings accounts. Due to the higher rate of return received by investments in secure funds consisting of equities and bonds, these accounts would allow workers to build a significant nest egg for retirement that far exceeds what the current program can provide. Each account will be the property of the individual, and fully inheritable, which will allow workers to pass on any remaining balances in their accounts to their descendants.
Individuals 55 and older will remain in the current system and will not be affected by this proposal in any way: they will receive the benefits they have been promised, and have planned for, during their working years. All other workers will have a choice to stay in the current system or begin contributing to personal accounts. Those who choose the personal account option will have the opportunity to begin investing a significant portion of their payroll taxes into a series of funds managed by the U.S. government. The system would closely resemble the investment options available to Members of Congress and Federal employees through the Thrift Savings Plan [TSP]. As these personal accounts continue to accumulate wealth, they will eventually replace the funding that comes through the government’s pay-as-you-go system. This will reduce the demand on government spending, lead to a larger overall benefit for retired workers, and restore solvency to the Social Security Program.
As with Medicare, the Social Security component of this plan will make the program sustainable for the long run. It will do so without overtaxing future workers and crippling the economy. Based on estimates by the CBO, the program will be solvent with permanent and growing surpluses by 2069, without requiring general fund transfers. While not incorporated in the plan, these surpluses will make it possible to reduce the regressive payroll tax in the future.
In addition, the creation of personal investment accounts for future retirees will provide additional capital stock for the U.S. economy, increasing the potential for growth. This will be especially important in coming decades in helping compensate for the projected slowdown in labor force growth, a key component to increases in GDP.
Guarantee of Contributions. Individuals who choose to invest in personal accounts will be ensured every dollar they place into an account will be guaranteed, even after inflation. With the recent market downturn, individuals must be assured their retirement is secure. By guaranteeing the dollars put into an account, individuals can be assured that a large-scale market downturn will not cost them their Social Security personal accounts.
Personal Choice in Retirement Accounts. Beginning in 2012, the proposal allows each worker younger than 55 to shift a portion of his or her Social Security payroll tax payment into a personal retirement account, chosen from a group of investment funds approved by the government (see below). When fully phased in, the personal accounts will average 5.1 percentage points of the current 12.4-percent Social Security payroll tax.
The personal investment component is phased in to allow a smooth transition. Initially, workers are allowed to invest 2 percent of their first $10,000 of annual payroll into personal accounts, and 1 percent of annual payroll above that up to the Social Security earnings limit. The $10,000 level will be indexed for inflation. After 10 years, the amount that workers can invest will be increased to 4 percent up to the inflation-adjusted level, and 2 percent above that. After 10 more years, these amounts will be increased to 6 percent and 3 percent. Eventually, by 2042, workers will be able to invest 8 percent up to the inflation-adjustment level, and 4 percent of payroll above that, for an account averaging 5.1 percent. The choice of personal retirement accounts is entirely voluntary. Even those under 55 can remain in the current system if they choose. Further, those who choose to enter the personal account system also have an opportunity to leave the system, and those who initially opt out of the system of personal accounts can enter into it later on.
Property Right. Each personal account is the property of the individual, and the resources accumulated can be passed on to the individual’s descendants. This contrasts with current government Social Security benefits, which are subject to reductions or other changes by Congress, and which cannot be passed on. The benefits of the personal accounts are tilted in favor of low-income individuals who do not have disposable income to invest. As a result, these individuals will be able to join the investor class for the first time. As Social Security benefits become an individual’s property, the government no longer will be able to raid this money to pay for spending on other programs.
Soundness of Accounts. Those choosing the personal account option will select from a list of managed investment funds approved by the government for soundness and safety. After an account reaches a low threshold, a worker will be enrolled in a “life cycle” fund that automatically adjusts the portfolio based on age. A worker may continue with the life cycle option or choose from a list of five funds similar to the Thrift Savings Plan options. After workers accumulate more than $25,000 in their account, they can choose to invest in additional nongovernment options approved by the Personal Social Security Savings Board.
Protection for Current Retirees and Those Nearing Retirement. As with Medicare, this plan recognizes the obligation to preserve the existing Social Security Program for those who already are retired, and for those near retirement who have planned on its benefits for most of their working lives. Therefore, persons now retired and receiving Social Security benefits, and those currently 55 and older, will remain in the existing system and will receive their promised benefits. Their benefits will in fact be more secure because the transformation of the program, along with other reforms in this proposal, ensures the Federal Government will be able to pay promised benefits.
Enhanced Benefits for Low-Income Americans. Low-income Americans are likely to benefit most from the personal account arrangement, should they choose it. They will have an unprecedented opportunity to join the investor class and increase their personal wealth, and also will be allowed to have larger personal accounts than others. Further, both those who remain in the current system, and those who opt for personal savings accounts, will receive increased benefits. All individuals in the traditional system who meet certain working requirements will be ensured that their minimum benefits are equal to at least 120 percent of the Federal poverty level, an improvement from current law. Those in the personal account system will be guaranteed a minimum of at least 150 percent of the Federal poverty level.
The use of progressive price indexing for lower-income workers (see below) will also allow the benefits for lower-income workers to grow faster than those who have greater means to provide for their retirement. These changes will ensure the system favors those individuals who are most reliant on it for support. In fact, according to a distributional analysis by the CBO, lower-income workers should see an increase in their benefits above currently scheduled benefits.
No Change for Survivors and the Disabled. Those receiving survivor and disability benefits will see no change.
Fiscal Sustainability. The plan makes adjustments in the determination of future initial Social Security benefits that will modernize the program, provide greater support for lower-income beneficiaries, and at the same time make the program’s overall spending sustainable for the long run. This would continue to allow benefits to grow for all individuals. Further, it would only affect individuals under 55. To accomplish these objectives, the proposal uses progressive price indexing and modernizes the Social Security retirement age.
▫ Progressive Price Indexing. At present, an individual’s initial level of Social Security benefits are based on the individual’s average career earnings. To determine average career earnings, an individual’s income from previous years is adjusted upward by the rate that average American wages have increased over time. This approach, called “wage indexing,” exceeds the amount of initial benefit growth needed to keep pace with economic conditions, and contributes to the unsustainable projected burden on Social Security. An alternative approach is “price indexing,” under which initial benefits are adjusted according to the consumer price index.
This reform, starting in 2018, employs “progressive price indexing” – a mix of wage indexing and price indexing – for initial Social Security benefits. Individuals who make less than approximately $27,700 per year will continue to receive initial benefits based on wage indexing. Those who make between $27,700 and $149,900 (in 2018) will have their initial benefits adjusted upward by a combination of wage and price indexing that becomes more oriented toward price indexing as they move up the income scale. For example, an individual whose income is half way between roughly $27,700 and $149,900 will have his initial benefit adjusted upward approximately 50 percent by wage indexing and 50 percent by price indexing. Individuals making more than $149,900 will have their initial benefits adjusted upward by price indexing. These amounts will be indexed for inflation.
As a result, all future Social Security beneficiaries will see their benefits grow by an amount at least equal to inflation over time. The reform will not affect the cost-of-living adjustment that Social Security beneficiaries receive each year once they have begun receiving benefits. The use of progressive price indexing will peg the growth of future Social Security outlays to a realistic index of the cost of living, while rescuing the program from the insolvency that will otherwise occur. It will place the program on a sustainable fiscal and economic course.
▫ Modernizing the Retirement Age. When Social Security was enacted, the average life expectancy for men in America was 60 years; for women it was 64. Today, average life expectancy has increased to 75 years for men and 80 years for women (2007 figures). Life expectancies are expected to continue lengthening throughout the century. Given these facts, and the choice among many Americans to work additional years, this proposal extends the gradual increase in the retirement age, from 65 to 67, occurring under existing policies, and speeds it up by 1 year. Once the current-law retirement age reaches 67 in 2026, this proposal continues its progression in line with expected increases in life expectancy. This will have the effect of increasing the retirement age by 1 month every 2 years. The retirement age will gradually increase until it reaches 70 in the next century.
The modernization of the retirement age will not affect the ability of an individual who chooses the personal account system to retire early, as long as his or her account has accumulated enough funds to provide an annuity equivalent to 150 percent of poverty.
The Roadmap specifies reductions in traditional retirement benefits through progressive price indexing for many workers who are age 55 or younger in 2011.
Under current law, the benefit formula has three replacement factors: 90 percent, 32 percent, and 15 percent. The replacement factors are lower for higher levels of earnings. The two dollar levels at which the rates change are called bend points.
Under the Roadmap, an additional bend point would be introduced to the benefit formula. It would be set initially at the 30th percentile of earners, or 25 percent of the way between the original first and second bend points. The replacement factor above that new bend point initially would be 32 percent.
Beginning in 2018, new Social Security recipients with average monthly lifetime earnings above the new bend point would face benefit reductions. Benefits for “maximum earners” (people with high earnings over their lifetime who have made maximum contributions to Social Security) would be determined by price increases since 2010 rather than by earnings increases (which are projected to be higher) during that period. Benefits for other new beneficiaries with lifetime earnings above the new bend point would grow with a mix of price and wage increases.
Because the change would not take effect until 2018, it would not affect people who are age 55 or older in 2010. The change would be applied to the two replacement factors for higher earnings, causing them to gradually decline after 2018. Those factors would fall to zero in 2064, when benefits for a worker with earnings at the second bend point (which would have grown at the rate of earnings) would reach the benefits of the maximum earners (which would have grown at the rate of 18 prices). Thereafter, scheduled benefits for all newly retired beneficiaries would grow with earnings, but no one would receive higher benefits than the worker with earnings at the second bend point.
For recipients of disability benefits converting to Old-Age Insurance (OAI) at the normal retirement age, the benefit reduction would be proportional to the number of years between age 22 and age 62 that the beneficiary was not entitled to disability benefits.
The plan would accelerate the increase in the full retirement age (FRA) to 67 and would thereafter increase it to maintain a constant ratio of life expectancy at the full retirement age to working years before the FRA. The FRA would be 67 for people born in 1959 and then would increase by one month for people born in 1961, another month for people born in 1963, and so on.
Individual Accounts
The Roadmap would allow workers who are age 55 or younger in 2012 to participate in voluntary individual accounts (IAs), funded with a portion of their payroll taxes. The contributions would begin in 2012 at 2 percent of earnings up to an earnings threshold of $10,000 and at 1 percent of earnings between $10,000 and
the taxable maximum. The accounts would be phased in over time; the threshold would be indexed to average wages, and contribution rates would increase to 4 percent of earnings under the threshold and 2 percent of earnings over the threshold in 2022; 6 percent and 3 percent, respectively, in 2032; and finally 8 percent and 4 percent in 2042. CBO assumed that administrative costs to establish the system of accounts would average $1 billion annually from 2011 to 2013.
For a worker who established an individual account, an offset would be applied to traditional benefits that would reduce those benefits proportionally to the amount of Social Security payroll taxes that the person diverted to his or her account. Specifically, the benefit reduction would be the ratio of the present value of all contributions redirected to the worker’s IA to the present value of all potential IA contributions that might have been made if the plan had been in existence throughout the person’s working lifetime with the contribution rate at the ultimate level of 8 percent and 4 percent.
In CBO’s stochastic analysis—in which economic, demographic, and financial conditions are varied for each year to reflect historical variation and in which multiple simulations are used to develop ranges of possible outcomes—the accounts would be invested in an index portfolio of 65 percent equities and 35 percent corporate bonds and would have earnings reflecting the historical returns and variances of those instruments.
Payouts from individual accounts would be paid as a life annuity and would not be taxed.
As necessary, the government would make payments to account holders upon withdrawal from those accounts in retirement to guarantee that their contributions earned a rate of return at least equal to the rate of inflation. That is, the value of a person's individual account at the time of annuitization would be guaranteed by the government to be at least equal to the sum of the contributions the person had made (adjusted for inflation).
Without constraints, the presence of a guarantee could cause some individuals to choose very risky portfolios. However, under the proposal, the choice of investments would be limited to options like those in the federal government’s Thrift Savings Plan or, for individuals with larger balances in their accounts, options
approved by the Personal Social Security Savings Board.
CBO’s analysis assumes that 40 percent of individuals in the cohorts born in the 2000s and later will establish individual accounts, with higher participation rates among people with higher lifetime earnings. The participation rate is based on the following assumptions and calculations: First, CBO compared the median first year benefits under the Roadmap (for members of each birth cohort and quintile of lifetime earnings) assuming, on the one hand, no IA participation and, on the other hand, full IA participation. People would be expected to participate in IAs if their first-year benefits were significantly larger than if they did not participate, taking into account any additional risk in the IAs. The participation rate is consistent with equal or larger benefits from the IAs when the funds are invested at the risk-free rate of return.
To model the strategy described above, CBO assumed that any 10-year birth cohort and earnings quintile group would have a participation rate between 5 percent and 95 percent. CBO used educational attainment as a proxy for lifetime earnings, because people do not know their lifetime earnings when they are 25 years old, when the decision about establishing an individual account would first have to be made. CBO assumed that people with the highest education (a college degree or more) in the 1990s birth cohort would have a participation rate of 55 percent. In the 2000s birth cohort, that group would have a participation rate of 95 percent; otherwise in that cohort, the next most educated group of people (having completed some college) would have a rate of 35 percent. Members of all other 10-year birth cohorts and educational groups would have a participation rate of 5 percent.
Increases in Retirement Benefits
A new special minimum benefit, to be phased in from 2018 to 2027, would be established for workers with low earnings over many years. The fully phased-in minimum benefit would be equal to 120 percent of the poverty line for a worker with annual earnings less than or equal to those of a full-time worker making the minimum wage for 30 years. The benefit would be phased out as the number of years of low earnings declined, with no enhancement for workers with fewer than 20 years of such earnings. It would also be phased out as average indexed monthly earnings (AIME) increased, with no enhancement for workers with an AIME greater than twice that of a full-time minimum-wage worker.
The Roadmap would eliminate the income and payroll tax exclusions for employment-based health insurance beginning in 2011. As a result, more earnings would become taxable for Social Security purposes, thus boosting future benefit payments, and payroll tax revenues credited to the Social Security trust funds would increase.
Transfers from the Treasury’s General Fund
Transfers from the Treasury’s general fund would occur as necessary to maintain a trust fund ratio (that is, the trust funds’ balance in comparison with outlays) of 1.0. Those transfers would be reflected as borrowing or taxes elsewhere in the budget.
Sorry for the length of the "cut and pastes"... I'd just post the links, but, this is important stuff...
Last edited by ipscshooter; 04-06-2011 at 10:33 AM.
Ryan's budget proposal
