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Potential Paths of Social Security Reform

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  • Martin Feldstein
  • Andrew Samwick

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8592.

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Date of creation: Nov 2001
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Publication status: published as Potential Paths of Social Security Reform , Martin Feldstein, Andrew Samwick. in Tax Policy and the Economy, Volume 16 , Poterba. 2002
Handle: RePEc:nbr:nberwo:8592

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Cited by:
  1. 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.
  2. Andrew Mason & Ronald Lee & An-Chi Tung & Mun-Sim Lai & Tim Miller, 2009. "Population Aging and Intergenerational Transfers: Introducing Age into National Accounts," NBER Chapters, in: Developments in the Economics of Aging, pages 89-122 National Bureau of Economic Research, Inc.
  3. World Bank, 2005. "Colombia : Public Expenditure Review," World Bank Other Operational Studies 8559, The World Bank.
  4. Walter Fisher & Christian Keuschnigg, 2010. "Pension reform and labor market incentives," Journal of Population Economics, Springer, Springer, vol. 23(2), pages 769-803, March.
  5. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Working Paper Series, Research Institute of Industrial Economics 580, Research Institute of Industrial Economics.
  6. Martin Feldstein, 2005. "Structural Reform of Social Security," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 19(2), pages 33-55, Spring.
  7. AndrĂ¡s Simonovits, 2006. "Social Security Reform in the US: Lessons from Hungary," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0602, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, revised 24 Apr 2006.
  8. 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.
  9. Martin S. Feldstein, 2010. "Preventing a National Debt Explosion," NBER Working Papers 16451, National Bureau of Economic Research, Inc.
  10. Peter A. Diamond & Peter R. Orszag, 2005. "Saving Social Security," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 19(2), pages 11-32, Spring.
  11. Marie-Eve Lachance & Olivia S. Mitchell, 2003. "Understanding Individual Account Guarantees," Working Papers, University of Michigan, Michigan Retirement Research Center wp035, University of Michigan, Michigan Retirement Research Center.
  12. 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.

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