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| Briefing Book |
| Options for Reform |
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| Briefing Book |
| Options for Reform |
| Options for Social Security Reform. |
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This is a sample of some of the many options for Social Security
reform. Americans Discuss Social Security
does not endorse any
options or take a position in the Social Security debate.
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| 1- Retirement Age |
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Current Law: Full benefits are currently available at age 65. A
reduced benefit can be collected starting at age 62, with an amount
equal to 80% of the full benefit. The age of retirement for full
benefits will increase at the rate of two months a year, starting in
the next century. It will rise to the age of 66 for those born between
1943 and 1954, and rise to 67 for those born in 1960 or later. People
will still be allowed to take early retirement at 62, but the benefit
will be reduced to 75%, and eventually 70% of the full benefit.
Option: Increase the age at which one can receive full benefits. |
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Pro: Since Social Security was enacted, life expectancy at birth has
risen from 63 to 76. It makes sense to keep pace with that increase by
asking people to work longer before claiming full retirement benefits.
Con: This increase could hurt people who have physically demanding jobs, those who have serious health problems, and those who cannot find work because of age discrimination or lack of suitable work. |
| Return to list of options. |
| 2-Payroll Tax Rates |
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Current Law: Social Security payroll tax rate for employers and employees each is 6.2% (total of 12.4%) on earned income up to $72,600 in 1999; no increases in the rate are scheduled in present law. Option: Increase the payroll tax rate. |
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Pro: A modest increase in the payroll tax is a small price to pay to
keep Social Security strong.
Con: Payroll taxes are already too high, and increasing them further will worsen the rate of return that all future beneficiaries receive. |
| Return to list of options. |
| 3-Investment of Trust Fund Assets in Stocks |
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Current Law: Surplus funds collected by the Social Security system are invested in special issues of Treasury securities, backed by the full faith and credit of the U.S. government. The average interest rate earned in 1997 was 7.5%. Option: A portion of the Social Security surplus would be invested in the stock market, with an independent board selecting portfolio managers to operate indexed funds. |
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Pro: Social Security could receive a higher rate of return on its
investments, and the Social Security system would bear the risks
involved, rather than the individual.
Con: Social Security trust funds would have to absorb risks of market downturns. Investment decisions could become highly politicized as the Social Security trust funds are invested in the market. Social Security could become indirectly involved in businesses operations. |
| Return to list of options. |
| 4-Individual Accounts |
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Current Law: There is no provision for individual accounts. Option: Individuals keep some of the money from Social Security payroll taxes, and invest this cash in individual accounts. The money would be invested in stocks and bonds. Some proposals would divert part of the Social Security taxes into individual accounts, while retaining a basic benefit under Social Security. Other plans would eventually privatize the entire system, with individual accounts replacing Social Security. |
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Pro: Each individual would have a personal nest egg in addition to
Social Security benefits. Workers would make a higher rate of return
from this money than they would receive from their Social Security
contributions, because they would be benefitting from the better
returns in the stock market. Individuals would have more control over
their retirement income.
Con: Individuals would be at risk if the stock market suffers a steep or extended decline. The separate accounts for 145 million workers would have high administrative costs. If current Social Security taxes are going into individual accounts, the money would have to be replaced to pay for current beneficiaries. This transition would be costly, forcing the government to raise taxes or borrow large sums. |
| Return to list of options. |
| 5-Cost-of-Living Adjustments (COLA) |
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Current Law: Social Security benefits are changed each year to keep pace with the federal government's Consumer Price Index, which measures the change in the cost of a market basket of goods and services purchased by a typical worker. The annual cost-of-living adjustment (COLA) is automatic and guarantees that the buying power of the benefit check will not lag behind the rate of inflation. Option: Reduce cost-of-living adjustments. |
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Pro: Many experts believe that the method used to calculate
cost-of-living adjustments overstates the increase in the
cost-of-living, resulting in unwarranted, automatic overpayments.
Con: Many experts believe that the present method of calculating the COLA is correct, and that no change is appropriate in calculating this benefit which is extremely important to most beneficiaries. |
| Return to list of options. |
| 6-Benefit Reduction |
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Current Law: Social Security benefits are based on a person's earnings and work history. Option: Reduce benefits across the board. |
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Pro: We have overpromised the amount of future benefits. All
beneficiaries, no matter what their economic circumstances, should
share the responsibility for strengthening Social Security.
Con: Since many future beneficiaries, particularly those with low incomes, will need their Social Security benefits, we should look at other options first. |
| Return to list of options. |
| 7-Increase Amount of Earnings Subject to Payroll Tax |
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Current Law: Social Security tax rate is 6.2% for employers and employees each, on earned income up to $72,600 in 1999; increases in maximum taxable amount will be made automatically on the basis of increases in national average earnings. Option: Raise the amount of earnings subject to the payroll tax more than merely by the increase in the national average earnings. |
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Pro: Since all earnings are not subject to the payroll tax, more
highly compensated workers and their employers pay payroll taxes on
proportionately less earnings.
Con: Payroll taxes are too high already, and if we raise them further, more highly paid workers are less likely to recover their contributions. |
| Return to list of options. |
| 8-Reduction of Benefits for More Affluent Recipients |
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Current Law: Benefits are linked to earnings, and there is no reduction in benefits for anyone above a particular income level. Option: Reduce benefits for those whose incomes exceed a certain threshold. |
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Pro: This reduction preserves benefits for those most in need and
reduces them for those who are less dependent on Social Security
because they have other income.
Con: This reduction punishes those who saved to add to their Social Security - a behavior we want to encourage - and moves the program from a nearly universal one based on financing by contributions to one based on need. |
| Return to list of options. |
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Current Law: Up to 85 percent of Social Security benefits are subject to income tax if income is above certain thresholds. Option: Tax Social Security benefits like a private pension. |
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Pro: Employer pensions are taxed on every dollar in excess of a
worker's contributions. We should not treat Social Security income
differently, particularly since the progressive nature of the income
tax will protect low-income retirees.
Con: Social Security is different from a private pension because it is a government-based program and its benefits are absolutely essential to low- and moderate-income beneficiaries. |
| Return to list of options. |
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10-Use the Budget Surplus to Help Social Security Indirectly |
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Current Law: For the first time in 30 years, the federal government is running a budget surplus. There are no provisions detailing how to spend a surplus. Option: The money from the budget surplus can be used to pay down some of the massive national debt. |
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Pro: This will help the economy reduce the government's spending on
interest payments, and will strengthen the government for future
actions to bolster Social Security.
Con: The surplus, which reflects determined action by both the President and the Congress to bring spending under control, should now be used for the benefit of the citizens. The public may want to use the surplus of money for tax cuts or increases in federal programs. |
| Return to list of options. |
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Current Law: For the first time in 30 years, the federal government is running a budget surplus. There are no provisions detailing how to spend a surplus. Option: Take money from the surplus, and open special new retirement accounts for each American. The accounts would be invested in stocks and bonds, and would provide extra cash at retirement, in addition to Social Security benefits. |
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Pro: This would give individuals extra money for retirement, making
them less dependent on Social Security. The new money would add to
national savings, providing additional capital for business
investments to make the economy more productive.
Con: It does nothing to solve the long-range financing problems of the Social Security system: after 2032, according to the intermediate estimate, the trust fund will be able to pay only 75% of the benefits promised under current law. |
| Return to list of options. |
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Current Law: The Social Security retirement benefit is pegged to earnings during an individual's work history. For current retirees Social Security calculates the benefit using the highest 35 years of income. Option: Increase the number of years for determining benefits to 38 years or 40 years. |
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Pro: This would help the system's finances by making a slight
reduction in overall benefit payments. It would help toward the
desired goal of assuring the long-range solvency of Social Security
without imposing major tax increases or significant benefit cuts.
Con: This would hurt workers who do not have 38 or 40 years of full employment during their career. The low earnings years, or years of zero earnings would reduce the benefit. Women would be particularly impacted, because they are more likely to leave the work force for a number of years to stay home raising their children. |
| Return to list of options. |
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13-Cover All New Workers Hired by State and Local Governments |
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Current Law: A number of state and local governments were allowed to choose years ago to remain outside the Social Security system. Option: Require any new workers hired by these governments to enroll in the Social Security system. |
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Pro: This provides an additional source of revenue for Social
Security. These workers will be contributing payroll taxes, and most
of them will not collect benefits for decades.
Con: This restricts freedom of choice for these newly hired workers. They may prefer to be enrolled exclusively in the retirement programs operated by the state or local agencies. This option creates transition costs for state and local governments. |
| Return to list of options. |
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Current Law: A worker has the choice of collecting benefits based on the worker's own earnings record, or collecting an amount equal to 50 percent of the spouse's retirement benefit. An individual can choose whichever benefit is larger. When a retiree dies, the survivor has the choice of taking a benefit linked to the survivor's own earnings, or 100 percent of the deceased worker's benefit. The survivor can pick the larger of the two benefits. Option: The benefit going to a dependent spouse would be set at 33 percent of the working spouse's benefit, instead of the current 50 percent. Survivor benefits would be increased. The survivor would be guaranteed to receive an amount equal to 75 percent of the couple's combined benefit. This would be an increase over current law. |
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Pro: Married couples have the lowest rate of poverty among
Social Security recipients. Often, the combination of private
pensions, savings and investments, and Social Security provides
adequate income. But the biggest threat of poverty comes after
a spouse dies, and the elderly widow is left with a significantly
reduced income. It usually costs the survivor about 75 percent
as much to live as it cost the married couple. The increase in the
survivor's benefit is needed to combat poverty among elderly
women.
Con: The combination of trimming spousal benefits, while boosting the survivor benefit, would add to the financial obligations of the Social Security Trust Fund. This would be inadvisable at a time when efforts should be made to cut the long-range deficit of the trust fund. |
| Return to list of options. |
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Current Law: There are no provisions for individual accounts. Option: Establish individual accounts in addition to Social Security. |
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Pro: Workers would have an opportunity to build on top of their
assured Social Security benefits by investing a portion of their
earnings into individual accounts. This would help low-income
workers improve their retirement income.
Con: Workers already pay too much in payroll taxes. Supplemental accounts would just be another tax that reduces individuals' income. |
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