Heritage Foundation Leadership for America

1. Stephen C. Goss, Chief Actuary, Social Security Administration, "Estimated Financial Effects of H.R. 3177, the `Social Security Savings Act of 2003,'" memorandum to Representative Jim DeMint, September 26, 2003, at www.ssa.gov/OACT/solvency/DeMint_20030926.html (February 28, 2004).

2. Chris Chaplain, Actuary, and Alice H. Wade, Deputy Chief Actuary, Social Security Administration, "Estimated OASDI Financial Effects of `Social Security Solvency and Modernization Act of 2003' introduced by Senator Lindsey Graham," memorandum to Stephen C. Goss, November 18, 2003, at www.ssa.gov/OACT/solvency/LGraham_20031118 (February 28, 2004).

3. Chris Chaplain, Actuary, and Alice H. Wade, Deputy Chief Actuary, Social Security Administration, "Estimated Long-Range OASDI Financial Effect of a Proposal Developed by Representative Nick Smith," memorandum to Stephen C. Goss, September 10, 2003, at www.ssa.gov/OACT/solvency/NSmith_20030910.html (February 28, 2004).

4. Stephen C. Goss, Chief Actuary, Social Security Administration, "Estimated Financial Effects of `The Progressive Personal Account Plan,'" memorandum to Peter Ferrara, December 1, 2003, at www.ssa.gov/OACT/solvency/PFerrara_20031201.html (February 28, 2004).

5. Stephen C. Goss, Chief Actuary, Social Security Administration, "Estimates of Financial Effects for a Proposal to Restore Solvency to the Social Security Program," memorandum to Peter Diamond and Peter Orszag, October 8, 2003, at www.ssa.gov/OACT/solvency/DiamondOrszag_20031008.html (February 28, 2004).

6. Alternative sources of funds for the PRAs would require either additional savings or additional taxes. In both cases, the result would lower the overall rate of return because the worker would be paying more.

7. Some plans offer additional investment options. All stock investment options would be invested in stock index funds, not individually selected stocks. Similarly, government and commercial bond investments would be in broadly based pools of bonds rather than in individually selected bonds.

8. At least initially, all accounts are managed by a single entity offering limited investment choices. This structure significantly reduces administrative costs. In all cases, the fund management would be contracted out to a private manager by a government supervisory agency, similar to how federal workers' Thrift Savings Plan is managed. Some plans would allow workers to select another funds manager when their accounts reach a certain size.

9. Workers could contribute up to an additional $5,000 to their account. Lower-income workers could receive a matching government contribution of up to $500 for their additional contributions.

10. This is the average account size for median-income workers. Lower-income workers could put a higher percent of their income into a PRA than higher-income workers. This progressive feature approximates the current Social Security system, which gives lower-income workers higher benefits for their taxes than higher-income workers receive.

11. The account is centrally managed at first. When assets reach $5,000, the worker could select additional investment choices.

12. Workers could contribute up to an additional $2,000 and receive a partial tax credit. They could also roll over money from other retirement accounts into their Social Security PRA. Low-income workers could receive an additional $300 from the government to their account.

13. When the account reaches $10,000, the worker could switch to one of several privately managed investment choices approved by the Secretary of the Treasury.

14. If Social Security's finances improve, larger accounts could be allowed after 2038.

15. When an account reaches $2,500, the worker could switch to a private funds manager.

16. While a central administrator would collect and distribute account contributions, all investments would be in privately managed funds.

17. Some experts are concerned that PRAs could result in lower benefits for low-income workers because they may have intermittent work histories. A guaranteed minimum benefit would provide additional protections for these workers.

18. For many years, experts on all sides of the debate have criticized the current system for providing inadequate benefits to a surviving spouse. They have also expressed concern that benefit changes for retirees and their survivors would be unfair to those receiving benefits under Social Security's disability program.

19. Under current law, Social Security will automatically reduce the benefits when the trust fund runs out in 2042. From that point on, Social Security would only pay benefits equal to its cash flow. The SSA estimates that this would immediately reduce benefits by 27 percent in 2042, with larger reductions in subsequent years.

20. Under current law, Social Security uses the same benefit formula to compute both retirement and disability benefits. When a disabled worker reaches full retirement age, the worker's benefits switch from being paid by the disability program to being paid through the retirement and survivors program.

21. The DeMint plan would guarantee future retirees at least the same level of benefits as under the current system.

22. The DeMint plan would guarantee workers at least the same level of benefits as under the current system, but does not provide for a higher minimum benefit.

23. Under the DeMint plan, disability benefits would not changed. The PRA of a deceased spouse would be added to the surviving spouse's PRA account after subtracting the amount needed to pay benefits to any survivors. If there are no survivors, the PRA would go to the worker's estate.

24. The Graham plan allows workers to lock in the current level benefits if they are willing to pay higher payroll taxes. If a worker chooses that option, payroll taxes would climb to 14.4 percent from the current 12.4 percent (counting both the employer and employee shares). It would increase further if a higher rate were necessary to pay benefit levels promised under current law. If a worker chooses another option, the worker's benefits would be reduced below the level promised by the current system.

25. The Graham plan would change how benefits are calculated when the worker retires, from the current method of indexing past earnings to wage growth in the economy to indexing based on inflation and price growth. This would gradually reduce benefits. Workers who choose to pay higher payroll taxes would avoid this reduction.

26. The Graham plan sets a minimum benefit at 120 percent of the poverty level in 2011 for workers with a work history of at least 35 years.

27. Under the Graham plan, disability benefits would not change from the current level. However, when a disabled worker reaches retirement age, the retirement benefits could be reduced to reflect changes in benefit formulas during times when the worker was not on disability. Surviving spouses would receive at least 75 percent of the benefit received when both spouses were alive, subject to some restrictions. If a worker chooses to have a PRA, the balance in that account would be transferred to the spouse's account when the worker died.

28. The Smith plan includes a variety of benefit reductions that would reduce benefits for almost all retirees below the level promised by the current system.

29. The Smith plan would make many changes to Social Security's benefit formula, primarily affecting middle-income and upper-income workers. For most workers, it would eventually result in a flat monthly benefit of about $550 per month (in 2004 dollars). It would also gradually increase the retirement age for full benefits.

30. While there is no set minimum benefit as contained in some other plans, lower-income workers would receive additional credits into their PRA and any benefit reductions that would otherwise affect them would be limited by a maximum reduction.

31. Under the Smith plan, lower-income disabled workers would not be affected by reductions to the benefit formula. Disabled workers with incomes above the threshold would see a minimum benefit level. Benefits could be adjusted.

32. The Ferrara plan would guarantee future retirees at least the same level of benefits as under the current system.

33. The Ferrara plan would not provide for a higher minimum benefit.

34. The Ferrara plan does not address disabled workers in any detail. However, because the plan is based on the combined trust fund of both the retired/survivors program and the disability program, one could assume that disability benefits would be paid out of a PRA and that current disability benefits would also be guaranteed. Spouses are guaranteed current law benefits. Upon the death of one spouse, the balance in the PRA would be transferred to the surviving spouse's PRA.

35. The Orszag-Diamond plan includes a number of benefit reductions that would especially affect upper-income and middle-income retirees. It also effectively increases the retirement age for all income levels by making it impossible for workers to get their full benefits unless they choose to delay retirement beyond the current normal retirement age.

36. The Orszag-Diamond plan would gradually change the benefit formula to reduce benefits for moderate and upper-income workers. Although workers could still retire earlier, they would receive lower benefits.

37. The benefit for minimum wage workers with at least 35 years of work history would be phased in over time, with the benefits reaching at least the poverty level by 2012. This benefit would gradually increase in subsequent years.

38. Surviving spouses would be guaranteed a benefit of at least 75 percent of the amount that the couple received when both were still living. Benefits for disabled workers would not be affected by changes to retirement and survivor's benefits.

39. The benefit formula used by the current Social Security system develops an "average indexed monthly earnings" for each worker by indexing his or her highest 35 years' earnings covered by Social Security taxes according to the growth in wages that has occurred between the date they were earned and the date that the benefit calculation is being made. In the next step, the actual retirement benefit is calculated. In 2003, the formula paid benefits equal to 90 percent of the first $606 of a worker's average indexed monthly earnings, 32 percent of the amount between $606 and $3,653, and 15 percent of any indexed earnings above $3,653. The divisions between the 90 percent, 32 percent, and 15 percent levels are called bend points.

40. This threshold is indexed and changes each year.

41. Although the federal government considers the employer's matching share as a separate item, most employers add their portions of the Social Security tax to a worker's salary when calculating the true cost of an employee.

42. Under the current system, workers pay taxes on the first $87,700 of income, which is indexed and changed each year. Plans marked with "yes" would impose an additional tax increase.

43. Benefits are currently calculated using all of the income upon which the worker paid Social Security taxes. Plans marked "yes" would break this link. Many analysts on both the left and the right believe that breaking this link would be the first step toward changing Social Security into a welfare system.

44. Workers would have the option of maintaining the current level of promised benefits in exchange for a payroll tax increase.

45. Total payroll tax rates (including the tax for disability benefits) would increase from the current 12.4 percent of income (the employee and employer shares combined) to 15.36 percent by 2078.

46. Between 2005 and 2063, the Orszag-Diamond plan would gradually raise the amount of income subject to Social Security taxes by 0.5 percent points annually, in addition any increases under the current formula.

47. The Orszag-Diamond plan would impose a new tax of 3 percent on all income above the current taxable earnings limit; however, workers would not receive any credit toward Social Security benefits for income subject to this tax. The plan's authors estimate that this tax would increase to 3.5 percent by 2080.

48. All dollar amounts are in billions of 2003 dollars.

49. Present value is a measurement of the amount of money that if invested today would finance future benefit payments. For example, if Social Security will owe $1,000 in 30 years and assuming that an investment would earn an average of 3 percent every year after inflation (a growth rate equal to what government bonds pay), the present value of the $1,000 due in 30 years is $412. (Invested at a 3 percent interest rate, $412 will grow to $1,000 in 30 years.) Because the money is assumed to grow over time, a dollar needed in the future counts as less in present value terms than a dollar needed today.

50. This is another measurement of the amount of additional money needed. In this case, the "additional amount" is the total amount of additional federal revenues required to fund the transaction. Surpluses (if any) are not included since current law does not allow the government to do anything with excess cash except spend it. Under this method, if Social Security needed $1 billion in 2005 to make benefits payments and another $1 billion in 2025, the additional amount would be the total of $2 billion.

51. The current Social Security system will require additional revenues in excess of $100 billion annually for 57 years, in excess of $300 billion annually for 45 years, and in excess of $400 billion annually for 33 years.

52. The DeMint plan will require additional general revenues in excess of $100 billion annually for 35 years. It will not require additional general revenues in excess of $300 billion annually in any year.

53. The Graham plan will require additional general revenue in excess of $100 billion annually for 32 years. It will not require additional general revenues in excess of $300 billion annually in any year.

54. This scoring assumes that 100 percent of eligible workers would choose to have a personal retirement account. The plan was also scored for 67 percent and 0 percent participation, both of which require less additional general revenue dollars.

55. The Smith plan will require additional general revenues in excess of $100 billion annually for 24 years. It will not require additional general revenues in excess of $300 billion annually in any year

56. Supporters of the Ferrara plan believe that the maximum annual deficit would be $49 billion in 2005 if the various methods that it uses to finance the transition are taken into consideration. However, this section of the paper deals only with the size of the necessary general revenue transfers, not how the plans propose to finance them. The next section discusses how plans propose to find the necessary general revenues.

57. The Ferrara plan will require additional general revenues in excess of $100 billion annually for 47 years, in excess of $300 billion annually for 30 years, and in excess of $400 billion annually for 20 years.

58. The Orszag-Diamond plan will require additional general revenues in excess of $100 billion annually for 45 years. It will not require additional general revenues in excess of $300 billion annually in any year.

59. This is the most subjective measure in this paper. It compares the retirement benefits offered under the reform plan to the amount of general revenue money that is needed to finance it, while taking into consideration both changes in taxes (if any) and the ability to build a nest egg. It compares these to what the current system would be able to pay rather than what it promises.

60. Upon a worker's death, any remaining PRA balance would be transferred to the PRAs of any survivors or the worker's estate if there are no survivors.

61. Under the DeMint plan, workers may annuitize either all of their PRAs or 35 percent. However, the total income generated from a combination of the annuity and any government-paid benefit must total at least a poverty level income. If annuitizing 35 percent of the PRA does not reach this level when combined with a government-paid benefit, then enough of the PRA must be annuitized to reach that level. Any money not annuitized may be used for any purpose,

62. The DeMint plan would allow workers to improve their retirement benefits over the current system. While it has somewhat higher general revenue costs than other plans, it also guarantees a higher level of benefits and allows workers to build a nest egg for the future. The plan contains an innovative method to reduce general revenue costs by requiring workers with personal accounts to invest a certain proportion of their account in government bonds, and it contains the most progressive personal account contribution rate of any of the plans. This would allow it to closely match the current system's progressive benefit levels through its account structure alone.

63. The Graham plan requires workers to annuitize enough of the personal retirement account to provide a poverty-level income for their households, when combined with the government-paid monthly benefit. Any remaining amount may be used for any purpose.

64. The flexibility contained in the Graham plan offers workers much more control over their futures. Each worker would have the opportunity to decide the level of benefits, cost, and risk. The plan offers benefits above the current system at a relatively low general revenue cost. It also allows workers the opportunity to build a nest egg.

65. Under the Smith plan, the treatment of a deceased worker's PRA is less clear. It appears that upon a worker's death, any remaining PRA balance would be transferred to the PRAs of any survivors or the worker's estate if there are no survivors.

66. The Smith plan requires workers to annuitize enough of the personal retirement account to provide a poverty-level income for their households, when combined with the government-paid monthly benefit. However, unlike most other personal account plans, workers must either annuitize the full PRA or make regular withdrawals from amount remaining in the PRA after annuitization, although the worker may only draw enough so that the total lasts throughout retirement. The worker does not have the option of using remaining money for other purposes than retirement.

67. Overall, the Smith plan's benefit to workers is questionable. While general revenue costs are comparatively low, the eventual severe reduction in benefits will transform Social Security into a low flat-rate benefit that is substantially less than the current system's average benefit level. The plan also offers only very limited opportunities to build a nest egg. If the Smith plan were enacted, some form of almost mandatory occupational pension savings plan would be needed to provide workers--and especially lower-income workers--with a decent standard of living during retirement.

68. Under the Ferrara plan, workers must buy an annuity that pays a monthly amount equal to the worker's Social Security benefits under the current system. If the account is not large enough to buy the annuity, the federal government would make up the difference. Any money not annuitized may be used for any purpose.

69. The Ferrara plan could potentially improve workers' retirement benefits, but its substantial costs and financing mechanism may offset these benefits. While workers would be guaranteed at least the same level of retirement benefits as under the current system and would have the opportunity to build a nest egg, the higher general revenue taxes necessary to finance the plan make an overall improvement questionable.

70. The Orszag-Diamond plan does not create any form of personal retirement account.

71. Under the Orszag-Diamond plan, workers would pay higher payroll taxes for lower Social Security benefits, with no opportunity to build a nest egg. Furthermore, workers would receive no benefit for the substantial and perpetual general revenue transfers required to finance this plan.