Create Individual Security Accounts

• Cut payroll taxes. Provides a payroll tax cut for all working individuals under the age of 55, by diverting 2% of payroll taxes into personal Individual Security Accounts.
• Allow voluntary contributions. Individuals would be permitted to save up to an additional $2,000 per year through voluntary contributions to individual accounts.
• Enhance the progressivity of Individual Security Accounts by providing an additional tax credit for low-income workers. Workers who make voluntary contributions would receive a tax credit -- to be deposited into their personal account - equal to $150 plus 50% of all voluntary contributions up to a cap of $600 per individual per year. This credit is phased out for wages between $22,500 and $30,000 a year.

Since the working poor largely are unable to save out of disposable income, this legislation would allow workers to divert a portion of their Earned Income Tax Credit (EITC) into an individual account and qualify for the additional tax credit.

• Use the Thrift Saving Plan model for administering individual accounts. To minimize employer burdens and administration costs, the individual accounts would be modeled on the federal government Thrift Savings Plan. Initially, investment options would include a stock index fund, a bond index fund and a Treasury securities index fund. Individual accounts could be invested in any combination of the three funds.

• Impose progressive changes in the current benefit formula. Slowly phase in bend point changes to reduce initial guaranteed benefit levels for middle and upper income workers. It is expected that these workers will generate balances in their individual accounts that will at least compensate for the reduction in guaranteed benefit. Because general revenues offset a portion of the transition costs, the changes in the bend points are more modest in the early years of the plan than they were in the 1998 legislation.

Strengthen the government safety net

• Establish a new minimum benefit provision. Create a guaranteed minimum benefit for low-income workers more robust than current law. Social Security beneficiaries with at least 20 years of covered earnings would receive a benefit equal to 60% of the poverty level. This benefit would increase by 2% of poverty for each year of covered earnings, until the guaranteed minimum benefit reaches 100% of the poverty level for individuals who worked 40 years.

• Gradually increase in eligibility age for full benefits. Eliminate the hiatus in the scheduled increase the normal eligibility age, allowing the Normal Retirement Age (NRA) to reach age 67 by 2011. Both the Normal Retirement Age and Early Eligibility Age would be indexed thereafter to keep pace with longevity.
• Modify benefit formula to reflect increases in longevity. Create an additional actuarial adjustment based on increases in longevity. This adjustment would reflect the increased number of years individuals will live after reaching the Normal Retirement Age.
• Change the benefit formula to reflect the longer working lives. Gradually increase the number of computation years in determining benefit levels from 35 years to 40 years. For two-earner couples, however, this legislation would cap the benefit computation period for the lower wage earner at 35 years. This will benefit spouses who leave the workforce for child rearing or other purposes.

• Eliminate the earnings test. Allow seniors who have reached the Normal Retirement Age to earn income without suffering a loss in their Social Security benefits.
• Count all years of earnings in calculating benefits. Include all years of earnings in the benefit formula in order to reward individuals for all income that they earn even if not among their highest 40 years of lifetime earnings.

• Provide for a more accurate Consumer Price Index. Provide the Bureau of Labor Statistics with the additional resources and authority necessary to continue to improve the Consumer Price Index. Use the superlative index that BLS will begin publishing in 2002 to adjust indexation based on CPI.

This legislation also would make a temporary change in the CPI to compensate for the remaining CPI bias until BLS is able to eliminate it. The legislated adjustment in CPI would be phased out as BLS implements changes to eliminate the bias. The total reduction in CPI would be 0.33% below the 1999 trustees report.

The impact of this provision would be to reduce the rate of growth in cost-of-living adjustments and income tax-related parameters of the federal budget. This would create net savings in the non-Social Security budget -- savings that will be used to offset part of the transition costs to a new, partially funded system.

• Recapture lost revenues. Credit all revenue from taxation of benefits to Social Security. The 1993 budget reconciliation bill diverted a portion of the tax revenue levied on Social Security income to the Hospital Insurance Trust Fund. Between 2010 and 2019, this legislation would slowly phase in the redirection of these taxes back to the Social Security Trust Fund where they belong.