Social Security Reform
Peter A. Diamond
The Philadelphia Fed Policy Forum
December 2, 2005
OASDI Income and Cost Rates Under
Intermediate Assumptions
(as a percentage of taxable payroll)
Source: 2005 Annual Trustees Report, Figure II.D2.
UNFUNDED OASDI OBLIGATIONS FOR 1935 (PROGRAM INCEPTION)
THROUGH THE INFINITE HORIZON
(Present values as of January 1, 2005; dollar amounts in trillions)
75 Year
Horizon
Infinite
Horizon
DOLLARS
4.0$
11.1$
TAXABLE PAYROLL
1.8%
3.5%
PERCENT OF GDP
0.6%
1.2%
Source: 2005 OASDI Trustees Report, Table IV.B6
Replacement Rates (in percent)
Replacement Rates
60
51
50
44
41
40
38
33
30
20
10
0
$20,000
$30,000
$40,000
Lifetime Earnings
$50,000
$60,000
Replacement of Lifetime Earnings for Single Scaled Workers Retiring at the Age for Full Benefits in
2004. Source: Social Security Administration, Office of the Chief Actuary, Actuarial Note 2004.4,
December 2004.
Ratio of Social Security to Total
Income, 2002
70
60
50
40
30
20
10
0
66
34
22
50% or more of
Income
90% or more of
income
100% of income
Source: Fast Facts and Figures about Social Security, 2004, SSA Office of Policy Publication No. 13 11785
Poverty and Near Poverty Status Based on
Family Income, 2002
30
24
25
21
18
20
15
10
14
11
10
7
5
5
7
9
9
11
6
3
0
All
Married
Non
Married
Men
Non
Married
Women
Poor
White
Black
Near Poor
Source: Fast Facts and Figures about Social Security, 2004, SSA Office of Policy Publication No. 13 11785
Hispanic
Vulnerable groups
•
•
•
•
Long-career low earners
Widows and widowers with low benefits
Disabled workers
Surviving children
President Bush
STATE OF THE UNION ADDRESS
February 2, 2005
“Right now, a set portion of the money
you earn is taken out of your paycheck
to pay for the Social Security benefits of
today's retirees. If you are a younger
worker, I believe you should be able to
set aside part of that money in your own
retirement account, so you can build a
nest egg for your own future.”
Pension coverage has shifted to
defined contribution – 401(k) – plans.
Percent of Wage and Salary Workers with Pension Coverage by Type of Plan, 1981-2001
70%
60%
1981
50%
1991
2001
40%
30%
20%
10%
0%
Defined benefit only
Defined contribution only
Both
Source: U.S. Department of Labor. 2004. Private Pension Plan Bulletin: Abstract of 1999 Form 5500 Annual
Reports; Alicia H. Munnell’s calculations from Board of Governors of the Federal Reserve System. 2003. 2001
Survey of Consumer Finances.
Cash-flow Effect from Administration’s
Individual Accounts Plan
5.0%
4.5%
Percent of payroll
4.0%
3.5%
3.0%
2.5%
Diverted revenue
2.0%
1.5%
1.0%
Benefit offsets
0.5%
0.0%
Trust Fund Ratio under Administration’s Individual Account Plan
8.0
6.0
Current law
Trust Fund Ratio
4.0
2.0
-
With accounts
(2.0)
(4.0)
(6.0)
(8.0)
(10.0)
REDUCTION (-) / INCREASE (+) IN THE 75 YEAR
SOCIAL SECURITY SHORTFALL (in percent)
Over and Above the Levels that Would Otherwise Exist
BUSH
-24%
POZEN
-51%
HAGEL
-8%
GRAHAM
-49%
JOHNSON
30%
KOLBE / BOYD
-66%
DEMINT (2003)
120%
SHAW
7%
SUNUNU / RYAN
DIAMOND / ORSZAG
129%
-100%
-92%
BALL
-150%
-100%
-50%
0%
50%
100%
Source: “Private Accounts Would Substantially Increase Federal Debt and Interest Payments” by
James Horney and Richard Kogan, Center on Budget and Policy Priorities, July 27, 2005.
150%
INCREASE / REDUCTION OF FEDERAL DEBT IN 2050
(as Percent of GDP) RESULTING FROM
PROPOSED SOCIAL SECURITY PLANS
Over and Above the Levels that Would Otherwise Exist
BUSH
19.3%
POZEN
3.8%
HAGEL
26.5%
20.8%
GRAHAM
JOHNSON
65.3%
KOLBE / BOYD
1.2%
DEMINT (2003)
79.7%
SHAW
40.1%
SUNUNU / RYAN
DIAMOND / ORSZAG
BALL
93.7%
-25.9%
-28.2%
-40%
-20%
0%
20%
40%
60%
80%
100%
Source: “Private Accounts Would Substantially Increase Federal Debt and Interest Payments” by
James Horney and Richard Kogan, Center on Budget and Policy Priorities, July 27, 2005.
EFFECT OF “PRICE INDEXING” OR
“REAL WAGE DEFLATING”
ON BENEFITS
Age When
Implemented
Change in Benefits
from this Reform
55
-0.0%
45
-9.6%
35
-18.2%
25
-26.0%
15
-33.1%
5
-39.5%
0
-42.5%
Note: Calculated as 1minus (0.99 55-age), assuming real wage growth rate is 1 percent per year.
BENEFIT LEVELS WITH NORMAL
RETIREMENT AGES OF 67 AND 70
BENEFIT LEVEL (in %)
140
120
100
80
60
40
20
0
62
63
64
65
66
67
AGE
retire at 67
retire at 70
68
68
70
BENEFIT REDUCTION (%)
BENEFIT REDUCTION FROM INCREASE IN
NORMAL RETIREMENT AGE FROM 67 TO 70
25.0
20.0
15.0
10.0
5.0
0.0
62
63
64
65
66
AGE
67
68
69
70
Benefit Reductions vs. Revenue Increases
Blinder-Krueger survey: Eliminate SS deficit
Mainly by raising the
payroll tax
30%
Mainly by reducing
Social Security benefits
5%
Both
34%
No answer
9%
Neither
22%
Alan S. Blinder and Alan B. Krueger, “What Does the Public Know about Economic
Policy, and How Does It Know It?” Brookings Papers on Economic Activity 1:2002,
pp. 327-87.
2077
2075
2073
2071
2069
2067
2065
2063
2061
2059
2057
2055
2053
2051
2049
2047
2045
2043
2041
2039
2037
2035
2033
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
2003
TRUST FUND RATIO (In Percent)
600
500
With proposal
400
300
Current law
200
100
0
SOCIAL SECURITY BENEFITS UNDER PROGRESSIVE INDEXING FOR WORKERS
RETIRING AT AGE 65 IN VARIOUS YEARS
(inflation-adjusted 2005 dollars)
Current-law Formula
Proposal
Change
Replacement Rate
Replacement Rate
% Age Reduction
Scaled Low Earner (45 percent of the average wage, or $16,428 in 2005)
2025
2045
2075
2100
49%
49%
49%
49%
49%
49%
49%
49%
0%
0%
0%
0%
Scaled Medium Earner (average wage, or $36,507 in 2005)
2025
2045
2075
2100
36%
36%
36%
36%
34%
30%
26%
23%
-6%
-16%
-28%
-38%
Scaled High Earner (160 percent of the average wage, or $58,411 in 2005)
2025
2045
2075
2100
30%
30%
30%
30%
27%
23%
18%
14%
-10%
-25%
-42%
-53%
Steady Maximum Earner (taxable maximum, or $90,000 in 2005)
2025
2045
2075
2100
24%
24%
24%
24%
21%
17%
12%
9%
-11%
-29%
-49%
-61%
Source: "How Would the President's New Social Security Proposals Affect Middle-Class Workers and Social
Security Solvency", Jason Furman, Center on Budget and Policy Priorities, April 2005.