Social Security:
Challenges & Opportunities
Jeffrey R. Brown
January 13, 2005
Outline
What is the problem?
1.
What solutions are available?
2.
•
•
3.
Approaches that do not solve the problem
Approaches that do solve the problem
The role of personal accounts
Workers per Beneficiary
18
16
14
16 in 1950
12
10
8
6
5 in 1960
3.3 today
2.0 in 2040
4
2
19
50
19
61
19
68
19
75
19
82
19
89
19
96
20
03
20
10
20
17
20
24
20
31
20
38
20
45
20
52
20
59
20
66
20
73
20
80
0
Social Security Finances as % of
Covered Earnings
20
Expenditures
18
16
CASH DEFICITS
14
Tax Revenue
12
10
2018
2042
20
04
20
09
20
14
20
19
20
24
20
29
20
34
20
39
20
44
20
49
20
54
20
59
20
64
20
69
20
74
20
79
8
Options for Restoring Fiscal Balance
On pay-as-you-go basis
1.
•
•
Increase taxes
Reduce benefits (or benefit growth)
Pre-fund
2.
•
•
Save more today to reduce future burden
Trust Funds vs. Personal Accounts
Four Different Approaches
Two that do NOT restore fiscal balance


The “Do Nothing” approach
The “Free Lunch” approach
Two that DO restore fiscal balance


Reduce benefit growth (President’s Commission)
Increase taxes (Diamond-Orszag)
The “Ostrich Strategy,” aka,
The “Do Nothing” Plan





“There is no problem”
“No immediate danger”
“We can grow our way out”
“The forecasts are
unreliable”
“Minor tweaks will solve it”
The “Free Lunch” Plan
Free



“The higher return on
stocks will save the
system”
“No cuts in benefit
growth are necessary”
“We can guarantee
present law benefits with
no new revenue”
Slowing Benefit Growth:
The President’s Commission


Don’t touch benefits of today’s seniors
Price index future starting benefits
–

Future retirees would get at least as much as
today’s retirees, adjusted for inflation
Puts system on permanently sustainable path
within existing payroll tax rates
Raising Taxes:
Diamond-Orszag

Reduce benefit growth
–

Increase taxes
–
–
–
–

Longevity indexing
Tax rate increase for longevity
Increase maximum earnings subject to tax
“Universal legacy charge,” aka, tax increase
“Legacy tax above earnings cap”
Tax increases account for approximately 85% of
improvement in actuarial balance
2075
2071
2067
2063
2059
2055
2051
2047
2043
2039
2035
2031
2027
2023
2019
7.0%
2015
2011
2007
2003
Cost rate as percent of GDP
Cost of D-O versus Current Law
(as % of GDP)
7.5%
D-O Cost
CL Cost
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
CBO Estimates of Economic Impact
(as of 2080 relative to TF financed baseline)

President’s Commission Plan would:
–
–
–

Increase GDP by 3 – 4%
Increase national wealth by10 – 12%
(Minimal effect on labor supply)
Diamond-Orszag Plan would:
–
–
–
Reduce GDP by 1.5%
Lower national capital stock by 0.8% - 1.4%
Reduce labor supply by 1.8 – 1.9%
Why Personal Accounts?

Provide opportunity for ALL Americans to
participate in financial markets and build wealth

Improve work incentives

Provider superior mechanism for the country to
save for the future and reduce future burden