Monday, February 21, 2005

Personal Accounts Fix Social Security Permanently

The Chief Actuary of Social Security has now scored four different personal account proposals as achieving full and permanent solvency for Social Security with no tax increases or benefit cuts. These are:

1. Ryan/Sununu Bill - The companion bills introduced in the House and the Senate by Rep. Paul Ryan (R- WI) and Sen. John Sununu (R-NH), members respectively of the House Ways and Means and Senate Finance Committees

2. The Clay Show Bill - The bill developed by Rep. Clay Shaw (FL), senior Republican on the Ways and Means Social Security Subcommittee

3. The Jim DeMint Bill - The bill introduced in the House last year by now Sen. Jim DeMint (R-SC)

4. The Ferrara Plan - The proposal I authored in 2003 for the Institute for Policy Innovation

All four of these scores except the one for Clay Shaw's bill are on the official website of the Social Security Administration. (www.ssa.gov)

Clearly, whoever told the President that personal accounts alone would not solve the problem was quite wrong.

How this would work for the Ryan-Sununu bill is shown in the table below. The table shows the percentage reduction in annual Social Security expenditures due to the large personal accounts in the Ryan-Sununu bill, according to the official score of the bill by the Chief Actuary of Social Security. Those accounts on average allow workers to shift 6.4 percentage points of the 12.4% Social Security payroll tax to the accounts each year, with 6 percentage points of the tax continuing to go into the old Social Security system.As workers shift their payroll taxes into the accounts, the responsibility for paying their future promised benefits shifts to the accounts as well under a specific formula in the bill, resulting in the reductions in Social Security retirement benefit expenditures each year shown in the table below.Because capital market returns are so much higher than what the non-invested, purely redistributive, Social Security system can pay, workers will get much higher benefits through the personal accounts than the old Social Security benefits they replace.

Percent of Annual Social Security Retirement Benefit Expenditures Shifted to Personal Accounts Under Ryan Sununu (Assumes Option Started in 2004)

2004 -- 0.0%
2005 -- 0.0%
2006 -- 0.0%
2007 -- 0.0%
2008 -- 0.0%
2009 -- 0.0%
2010 -- 0.0%
2011 -- 0.0%
2012 -- 0.0%
2013 -- 0.0%
2014 -- 0.5%
2015 -- 1.0%
2016 -- 1.5%
2017 -- 2.2%
2018 -- 3.2%
2019 -- 4.3%
2020 -- 5.4%
2021 -- 6.7%
2022 -- 8.1%
2023 -- 9.5%
2024 -- 10.9%
2025 -- 12.4%
2026 -- 13.9%
2027 -- 15.5%
2028 -- 17.2%
2029 -- 18.9%
2030 -- 20.7%
2031 -- 22.4%
2032 -- 24.2%
2033 -- 26.0%
2034 -- 27.9%
2035 -- 29.8%
2036 -- 31.7%
2037 -- 33.3%
2038 -- 35.3%
2039 -- 37.8%
2040 -- 39.9%
2041 -- 42.1%
2042 -- 44.3%
2043 -- 46.7%
2044 -- 49.0%
2045 -- 54.0%
2046 -- 56.6%
2047 -- 59.3%
2048 -- 61.9%
2049 -- 64.5%
2050 -- 67.1%
2051 -- 69.4%
2052 -- 72.1%
2053 -- 74.3%
2054 -- 76.4%
2055 -- 78.4%
2056 -- 80.2%
2057 -- 81.9%
2058 -- 83.4%
2059 -- 84.7%
2060 -- 85.9%
2061 -- 86.9%
2062 -- 87.9%
2063 -- 88.7%
2064 -- 89.5%
2065 -- 90.2%
2066 -- 90.8%
2067 -- 91.3%
2068 -- 91.8%
2069 -- 92.2%
2070 -- 92.7%
2071 -- 93.0%
2072 -- 93.4%
2073 -- 93.8%
2074 -- 94.0%
2075 -- 94.3%
2076 -- 94.5%
2077 -- 94.6%
2078 -- 94.8%

The table shows that as a result of the personal accounts as described above Social Security expenditures for retirement benefits are reduced from current projections by 40% in 2040, 67% in 2050, 80% in 2056, and 95% by the end of the projection period. With almost half the payroll tax still going into Social Security, this puts the program into a permanent surplus, which is why the Ryan Sununu bill includes a payroll tax cut trigger that would eventually reduce the payroll tax when the surpluses reach a certain level. What the numbers in the table establish is that large enough accounts roughly equal to the employee share of the tax would ultimately shift so much of Social Security's benefit expenditures to the accounts that the old Social Security system would be left in permanent surplus. This is not a matter of conjecture, philosophy, or economic theory. It is an established mathematical fact, shown by the calculations of the Chief Actuary of Social Security.Moreover. these results are not tied to the particulars of the Ryan-Sununu bill. Any account roughly equal to the employee share of the tax would have this result, with any kind of reasonable formula for shifting benefit payment responsibilities to the accounts in return for personal account contributions. The results in the table are also not tied to any particular method of transition financing. These results would occur regardless of how the transition is financed.

Finally, and most importantly, the large personal accounts do not need to be adopted all at once to achieve these results. The large accounts can be phased in through two or more steps. That will delay the achievement of full solvency depending on how long the phase in is. But full solvency will still be achieved. Consequently, the Administration and Republicans in Congress should just propose the largest account they think can be reasonably handled now. Otherwise, the proposal should include no cuts in future promised Social Security benefits and no tax increases.The transition can be financed however the Administration currently plans to finance the transition. The policy would then be that we will start here and we will eventually solve all the problems of Social Security by expanding the accounts to the full Ryan Sununu level. This allows reformers to focus solely on the populist postives of the personal accounts -- personal ownership and control, better benefits, substantial personal accumulations of wealth, freedom of choice -- and leave behind all of the political negatives of cutting future promised Social Security benefits, delaying the retirement age, tax increases, etc. This is a battle the reformers can win, to the ultimate great political loss of obstructionist Democrats. Otherwise, we will at best end up with a compromise package including a large tax increase, and maybe little or no real personal accounts, or no reform at all. The current message of personal accounts don't really solve the problem and we need benefit cuts and tax increases is certainly not going to win politically for the Republicans.