Working Paper: NBER ID: w8592
Authors: 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.
Keywords: No keywords provided
JEL Codes: H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing national saving through personal retirement accounts (PRAs) (D14) | Higher business investment (G31) |
| Higher business investment (G31) | Greater tax revenue for the social security trust fund (H29) |
| Increasing national saving through personal retirement accounts (PRAs) (D14) | Greater tax revenue for the social security trust fund (H29) |
| Higher business investment (G31) | Sustainable positive balance in the social security trust fund (H55) |
| Increasing national saving through personal retirement accounts (PRAs) (D14) | Sustainable positive balance in the social security trust fund (H55) |
| Transferring a portion of payroll taxes to PRAs + Individual out-of-pocket contributions (H55) | Increased national saving (H69) |
| Combination of pay-as-you-go benefits and investment-based accounts (H55) | Benefits that equal or exceed those projected under current law for all income levels (H55) |
| Expected rate of return on investments > Discount rate (H43) | Supports feasibility of proposed reforms (E69) |
| Political willingness to adjust pay-as-you-go benefits (H55) | Individual participation in plans (G52) |