Social Security Reform: Effect on Benefits and the Federal Budget of Plans Proposed by the President’s Commission to Strengthen Social Security

Publication Date: July 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

In 2001, President Bush established the President’s Commission to Strengthen Social Security to make recommendations on ways to “modernize and restore fiscal soundness to the Social Security system” in accordance with six principles, one of which mandated the creation of voluntary personal retirement accounts. The Commission proposed three alternative reform models. Under all three proposals, workers could choose to invest in personal accounts and have their traditional Social Security benefit reduced by some amount. Model 1 would make no other changes to the program. Model 2 would slow program growth through one major provision that would index initial benefits to prices (rather than wages). Model 3 would slow program growth through a variety of measures, including one that would index initial benefits to projected increases in life expectancy. To mitigate the effects of traditional benefit reductions, Models 2 and 3 would guarantee a minimum benefit for low-wage earners and make changes designed to improve benefits for widow(er)s. The Social Security Administration prepared estimates of the effect of the Commission’s reform models on benefit levels for future retirees and on the federal budget. Consistent with these estimates, this report illustrates initial monthly benefits for future retirees under each of the Commission’s reform plans and three alternative measures of current law (benefits promised under current law, benefits payable within the system’s current-law revenue projections and benefits paid to today’s retirees). It also shows the projected effect on debt held by the public.

Under Model 1, if a worker’s account earns a real rate of return higher than 3.5%, benefits would exceed those promised under current law. Model 1 is not projected to restore long-range solvency to the system. Under Model 2, in most cases, projected benefits would be lower than levels promised under current law. Under all yield assumptions, projected benefits for low-wage earners would be higher than benefits payable under current law. Model 2 is projected to restore solvency to the system, although general revenue transfers would be required. Under Model 3, at the lower yield assumption, in most cases projected benefits would be lower than those promised under current law. At the higher yield assumptions, in most cases projected benefits would be higher than current-law promised benefits. Under all yield assumptions, projected benefits for low-wage earners would be higher than benefits payable under current law. Model 3 is projected to restore long-range solvency to the system, although general revenue transfers and a new dedicated revenue source for the program would be required. This new revenue source was not specified by the Commission.

Because the funding approach under the three plans draws from redirected payroll taxes and General Fund revenues, it would increase debt held by the public. For example, assuming either two-thirds or 100% of workers participate in personal accounts, under Model 2 additional borrowing is projected to peak at $2.5 trillion and $4.7 trillion (constant 2001 dollars), respectively.