RE: Question for Ron Gebhardtsbauer

["Steven H. Johnson" <info@sscommonsense.org>]

re Ron Gebhardtsbauer

"Lots of good ideas here. As you noted, your suggestion is a
temporary "add on". I assume you are suggesting that additional
money goes to the Personal Accounts. However, if the funds you were
depending on for interest income are in personal accounts, they
will eventually be paid out to their owners over their lifetimes.
So eventually that money would no longer be around. I think you
would need to continue your add on forever if it goes to individual
accounts (if I'm understanding you correctly)."

"To modify your idea a little, the add on money could go to Social
Security. Then it would be preserved for everyone. Could it be
temporary then? I don't think so, unless we stop living longer and
longer, which I don't think will happen. Eventually we have to
index the retirement age to life spans, or we have to index the
contriubtion to life spans."

I think we're very close to agreement.  To recap my suggestion:
1) Expand the tax base, by raising the earned income cap, and
adding state and local new hires
2) Make very modest benefit cuts, averaging roughly 4% over the
next 75 years.
3) Carve out 1.5% of the 12.4% to fund PRA's.  The 12.4% stays
permanently at that level, with 10.9% going to Social Security
and 1.5% going into PRA's.
4) Add on the Clinton subsidy - $2.8 trillion for 15 years.
5) When PRA owners retire, they convert their PRA's into ten year
annuities.  During those ten years, their normal Social SEcurity
benefit is adjusted downward using a Feldstein-like formula.
("For every dollar received from one's PRA annuity, one's Social
Security benefit is cut by ninety cents.") From the 11th year
onward, after PRA benefits expire, normal Social Security 
benefits are paid.

Whether the numbers work or not depends on the assumption one 
makes about real rates of return.  If one assumes a real return
of 5% from the stock market and 3% from bonds, with PRA and
Trust Fund portfolios divided evenly between stocks and bonds, 
and if one assumes the Social SEcurity Trustees' projections, 
then the numbers work.  

The Trust Fund grows to about 25% of GDP and then remains at
that level.  PRA's grow to about 22% of GDP and remain at that
level.  The earnings from PRA's and Trust Funds are sufficient
to "fund the gap", i.e. to make up the difference between what's
coming in and what's going out.

The key point is the impact of combining the two strategies.
The PRA portion is financed by a modest carve out.
The carve out is permanent.  Every new worker pays 1.5% (employer-
employee combined rate) into his/her PRA.
The add-on is temporary, continued only till the Trust Fund 
reaches its target percent-of-GDP level.  Then stopped.
After the add-on ends, Social SEcurity stabilizes at a 12.4% payroll
tax rate.

This approach gets us away from the polarity you articulated 
so accurately.  In the one-track PRA scenario, a carve-out 
strategy requires deep benefit cuts, or expensive transition
financing.  An add-on PRA strategy is inherently permanent.
A two-track strategy doesn't suffer from these defects.  It also
makes it much easier to avoid both the risks associated with heavy
Trust Fund investments, and the risks associated with PRA's.

-Steve Johnson