Create Personal Security Accounts

• Starting in 2000, all workers will be able to invest a potion of their FICA taxes in individual retirement savings accounts. The account accumulations will supplement the worker's traditional Social Security benefit. Individuals own all proceeds from their personal account, and none of the accumulations are "clawed back" by the Trust Fund. This means that they can pass on their account balances to heirs.
• Use the model of the Thrift Savings Plan to administer personal accounts to minimize employer burdens and administrative costs. Individuals could choose to invest their personal accounts in any combination of funds offered along lines similar to the Thrift Savings Plan currently enjoyed by federal employees. The accounts would be administered by the government, managed by private fund managers, but owned and controlled by individual workers.

Strengthen the Safety Net Against Poverty Provided by Social Security

• The proposal would gradually phase in a change in the Social Security bend point factors to increase the progressivity of the guaranteed benefit and reduce poverty among the elderly. The 90%, 32%, and 15% bend point factors would gradually become 90%, 70%, 20%, and 10%. This change would neither save nor cost revenue.
• Protect disability. Because disability benefits are not affected by changes in retirement age, disability benefit levels would be exempt from the legislation's application of indexation factors reflecting changes in life expectancy. Personal account creation would not reduce disability benefits promised, because an individual who becomes disabled would not continue to receive payroll tax refunds into personal accounts, nor the offsetting changes to projected benefits associated with those contributions.

Reduce Future Tax Burdens Through Advance Funding

• Move a portion of promised benefits to a funded basis. Surplus Social Security payroll taxes would be used to advance beneficiaries a portion of future promised benefits. The amount of the advance would be determined using the interest-compounded value of the mandatory 2% tax refund into the personal account. As a consequence, an individual who invested their personal account in a bond that received the Trust Fund interest rate would experience no change in their total Social Security benefit as a consequence of this provision. An individual who wished to seek a higher rate of return through investment in a fund that included equities could do so.
• Reduce future tax burdens. By advance-funding a portion of future benefits through personal accounts, the proposal would vastly reduce pressure on all forms of future tax increases. Such tax increases include the payroll tax increases that would be required under current law to fund full benefits after 2034, as well as the enormous general revenue outlays that would be necessitated beginning in 2014. The bipartisan proposal would eliminate more than half of the pressure upon general revenue outlays under both current law and competing proposals, and eliminate entirely any reason to increase payroll taxes.

Promote Wealth Creation

• A match program for low-income workers. Workers with wages below the national average will receive an additional $100 contribution annually to their personal accounts when they begin voluntary contributions, and a 1:1 match on subsequent contributions, phased out as a function of total annual wages.
• Allow voluntary contributions. All wage-earners will be permitted to save up to an additional $2,000 per year through voluntary contributions to personal accounts.
• Include the Kerrey KidSave plan, using 50% of the accumulated value of KidSave accounts to fund the beneficiary's Social Security benefits.

Reward Work

• Eliminate the earnings test that currently penalizes seniors who work.
• Credit all years of earnings in calculating benefits. Under current law, only an individual's top 35 years are used to determine one's Social Security benefit. Under this proposal, every year of earnings, no matter how small, would add to total benefits received. (The denominator of the AIME formula would gradually phase to 40.) Also, five "dropout years" will be restored to the individual with lower earnings from every two-earner couple, in recognition of the likelihood that a spouse may have taken time away from work to raise children.
• Correct the actuarial adjustment for early and late retirement. Under current law, individuals do not receive back the value of extra payroll taxes contributed if they delay retirement. Under this proposal, both the early and delayed retirement adjustments would be increased to the level appropriate to a recognition of additional tax contributions.

Other changes to restore Social Security to solvency

• Modify the benefit formula to reflect increases in longevity. Under current law, the normal retirement age will ultimately reach 67. This proposal would gradually phase in the change of retirement age to 67 by 2011, and thereafter apply a life expectancy factor to the PIA formula. If projections of life expectancy or other factors cause a significant change in projected solvency, for better or worse, the Social Security Trustees will be required to present Congress with a proposal to alter the life expectancy factors, upon which Congress must act or take an alternate action to restore the system to balance.
• Provide for a more accurate Consumer Price Index. Provide the Bureau of Labor Statistics with the additional resources and the authority necessary to continue to correct current measures of the Consumer Price Index. The total change in CPI would be 0.50% below the assumptions in the 1999 Trustees' Report. In order to focus the impact of all changes in the legislation solely on future retirees, all individuals of age 62 or older by the year 2000 would continue to have their benefits indexed under the current-law CPI measure.
• Reform the indexing of the cap on taxable wages. Under current law, it is projected that average wages will lag behind total national wage growth, causing the share of total wages subject to Social Security taxes to gradually fall. This proposal would continue the proportion of national wages subject to tax at its current level of 86%. The effect of this provision upon total revenues relative to current law would depend upon the future relationship between total and average wages.
• Recapture appropriate revenues for the Social Security system. The proposal would estimate the effects of CPI reform upon income tax collections, and return those collections to individuals in the form of Social Security benefits. Also, between 2010 and 2019, the legislation would slowly phase in the redirection of all Social Security benefit taxation back to the Social Security Trust Fund, consistent with the original intention of taxing Social Security benefits.