STRUCTURAL REFORM OF
SOCIAL SECURITY
Martin Feldstein
Presented by
Agata Narożnik
Outline:
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Background – Social Security
Social Security in the United States
Drivers for a change
Mixed system - operations
Mixed system – critics
Alternatives to the mixed system
Conclusions
Social Security System:
A Pay-As-You-Go system:
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current taxes pay for current benefits.
A Fully Funded system:
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current fund has balances sufficient to pay the
present value of all future obligations
Social Security in the United States:
Old-Age, Survivors, and Disability
Insurance (OASDI) program:
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Old Age and Survivors 10,6%
Disability Insurance 1,8%
Medicare 2,9%
The surplus is loaned to the government
through trust fund.
Total payroll tax: 15,3%
Drivers for a change:
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the long-term change in the ratio of retirees to
workers
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high life expectancy
low birth rate.
The Social Security Administration estimates
the payroll tax rate would have to increase
48% (from today’s 10.6% to 15.7%) to
finance currently projected benefits with the
present pay-as-you-go structure by year
2075.
Mixed system – description:
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10.6% OASDI tax:
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1.5% to the personal retirement accounts
9.1% payroll tax revenue remains unchanged
(pay-as-you-go)
1.5 % individual contribution out-of-pocket to the
personal retirement accounts on a voluntary basis
Mixed system - “benchmark” benefits
specified in current law:
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60% - a pay-as-you-go benefit
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40% - the personal retirement account
annuities
Mixed system - “benchmark” benefits
specified in current law:
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At retirement age, the individual might be
given the choice of annuitizing the
accumulated fund or taking out all or some in
cash.
Even if the individual took the entire personal
retirement account accumulation in cash payas-you-go annuity would remain.
Mixed system - Requirements:
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Current retirees receive the full pay-as-you-go
benefits specified in current law.
For all future cohorts of retirees, the combination of
pay-as-you-go benefits plus the expected investmentbased personal annuities will equal or exceed the
benefits that current law projects for that cohort.
The tax rate and relative tax base will not be
increased.
The financing solution will be permanent, implying
that the Social Security trust fund in 2075 (the end of
the forecast period of the Social Security actuaries)
will be both positive and growing.
There will be no use of existing general revenue to
finance Social Security benfits.
Expected benefits (Feldstein and
Samwick (2002))1:
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2050 - 121 % of the benchmark benefits
scheduled in current law, consisting of
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61 % from a personal retirement account annuity
60% from a pay-as-you-go benefit
2075 - 135 % of benchmark benefits
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1for
75 % from a personal retirement account annuity
60% from a pay-as-you-go benefit
individuals with average lifetime earnings
Critics:
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administrative costs,
risk,
income distribution
Administrative costs - Transition path:
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First five years - pay-as-you-go benefits are
reduced by 0.3% per year
0.6% for the next five years,
followed by 0.9% and 1.2% and eventually
1.5% per year up to a cumulative maximum
reduction of 40% from the benchmark level of
benefits.
Income distribution:
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„mixed system need not change the overall
distributional character of Social Security but
could offer greater benefits to retiree groups
that remain poor under current Social
Security rules”
Risk:
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continued role of the pay-as-you-go benefits
rules governing personal retirement accounts
investments
private market guarantees for individuals
willing to give up some expected yield for
greater certainty of future benefits.
Alternatives:
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Two percentage point increase in the payroll tax
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eliminate the “75 year deficit” of the program,
increase the deadweight loss due to higher marginal tax
rates
To increase the ceiling on earnings subject to the
payroll tax (e.g. Diamond and Orzag, 2004)
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It would raise the marginal tax rate for the affected
individuals from 33% now to about 43%, causing the
deadweight loss of the tax system to rise by 70%
Alternatives:
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Mixed system in which the investments in
real capital through stocks and bonds would
be in the Social Security trust fund.
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have the same economic advantages on national
saving and labor market deadweight loss as the
personal retirement accounts.
raise a very serious risk of government
interference in the economy.
Conclusion
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Changes are unavoidable
Mixed system
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Permits retirement incomes to be maintained with
less reliance on taxes
Causes problems with administrative costs, risk
and income distribution
Thank you !