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Potential Paths of Social Security Reform

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  • Samwick, Andrew
  • Feldstein, Martin

Abstract

This paper presents several alternative Social Security reform options in which the projected level of benefits for every future cohort of retirees is as high or higher than the benefits projected in current law. These future benefits can be achieved without any increase in the payroll tax or in other tax rates. Under each option, the Social Security Trust Fund is solvent and ends with a sustainable positive and growing balance. Each option combines the current pay-as-you-go system of defined benefits with an investment-based personal retirement account (PRA). Assets in the PRA can be bequeathed if the individual dies before normal retirement age. We also consider the option in which an individual can take all or part of his accumulated PRA balanced as a lump sum at normal retirement age. The basic plan that we present in greatest detail combines a transfer to the personal retirement account of a portion of the individual's payroll tax equal to 1.5 percent of earnings if the individual agrees to deposit an equal out-of-pocket amount. The additional national saving that results from this option leads to increased business investment and therefore to increased general tax revenue; a portion of that revenue, equal to 1 percent of the PRA balances , is transferred to the Social Security Trust Fund. The other options that we present include plans with no out-of-pocket contributions by individuals and others with no transfer of general revenue to the Trust Fund. We also discuss the implications of different rates of return on the PRA balances and, more generally, the issue of risk, including a market-based method of guaranteeing the real principal of all PRA deposits.

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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 2920119.

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Date of creation: 2001
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Publication status: Published in Tax Policy and the Economy
Handle: RePEc:hrv:faseco:2920119

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Cited by:
  1. Peter A. Diamond & Peter R. Orszag, 2005. "Saving Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 11-32, Spring.
  2. Walter H. Fisher & Christian Keuschnigg, 2007. "Pension Reform and Labor Market Incentives," CESifo Working Paper Series 2057, CESifo Group Munich.
  3. Muermann, Alexander & Mitchell, Olivia S. & Volkman, Jacqueline M., 2006. "Regret, portfolio choice, and guarantees in defined contribution schemes," Insurance: Mathematics and Economics, Elsevier, vol. 39(2), pages 219-229, October.
  4. World Bank, 2005. "Colombia : Public Expenditure Review," World Bank Other Operational Studies 8559, The World Bank.
  5. Karen E. Smith & C. Eugene Steuerle & Pablo Montagnes, 2004. "Providing Guarantees in Social Security," Working Papers, Center for Retirement Research at Boston College 2004-21, Center for Retirement Research.
  6. Assar Lindbeck & Mats Persson, 2003. "The Gains from Pension Reform," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 74-112, March.
  7. Gary V. Engelhardt & Anil Kumar, 2004. "Social Security Personal-Account Participation with Government Matching," Working Papers, Center for Retirement Research at Boston College 2004-22, Center for Retirement Research.
  8. Marie-Eve Lachance & Olivia S. Mitchell, 2003. "Understanding Individual Account Guarantees," Working Papers wp035, University of Michigan, Michigan Retirement Research Center.
  9. Martin Feldstein, 2005. "Structural Reform of Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 33-55, Spring.
  10. Andrew Mason & Ronald Lee & An-Chi Tung & Mun-Sim Lai & Tim Miller, 2006. "Population Aging and Intergenerational Transfers: Introducing Age into National Accounts," NBER Working Papers 12770, National Bureau of Economic Research, Inc.
  11. AndrĂ¡s Simonovits, 2006. "Social Security Reform in the US: Lessons from Hungary," IEHAS Discussion Papers 0602, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, revised 24 Apr 2006.
  12. Martin Feldstein, 2010. "Preventing a National Debt Explosion," NBER Chapters, in: Tax Policy and the Economy, Volume 25, pages 109-144 National Bureau of Economic Research, Inc.

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