Should We Retire Social Security?
Aaron, Henry J., Reischauer, Robert D., Brookings Review
Grading the Reform Plans
Most Americans understand that Social Security faces a long-term imbalance between the cost of benefits promised under current law and the program's projected income. They realize that the looming deficits arise from the coming retirement of the large baby boom cohort, the steady increase in life expectancies, and the reduction in fertility rates, not from program mismanagement.
Nevertheless, many wonder whether Social Security, devised during the Great Depression, amidst double-digit unemployment, pervasive poverty, and the inability of all but a few to save for retirement, is suitable for today's vastly changed economic, social, and financial conditions.
Today, policymakers and the public face a bewildering array of proposals to reform or replace the nation's public pension system. Fortunately for the interested citizen, most proposals take one of three approaches to reform. Some replace the current public system with private accounts. Others supplement the current system with private accounts. Still others strengthen and modernize the current system. In what follows we evaluate several prominent plans from each of the three major reform approaches, as well as sketch out one of our own. All the plans would restore financial balance to the nation's basic retirement system.
Criteria for Reform
We evaluate each plan on four criteria: benefit adequacy, protection against risk, administrative efficiency, and effect on national saving.
In our view a successful plan should, first, ensure adequate benefits that are equitably distributed to maintain protection for low earners and other vulnerable people. Current Social Security benefits are not unduly generous. Benefits of average earners who retire in the United States at age 65 are less than 1.5 times the U.S. poverty threshold. U.S. benefits replace significantly less of pre-retirement earnings than do public pension benefits in Europe. Large benefit cuts would leave retirees, the disabled, and survivors inadequately protected. At the same time, overall benefit increases are also undesirable because they would push costs, which will grow as baby boomers retire, to very high levels.
Second, the plan should spread broadly the unavoidable risks of long-term pension commitments, not place them on the shoulders of individual workers. Third, administrative costs should be low, and the plan should not be unduly complex for private businesses, workers, and the government. Finally, the plan should raise national saving by adding to reserves held in the Trust Fund or individual accounts (less any reductions in private saving or government surpluses outside of the retirement system).
Retiring Social Security
Two prominent plans would replace the current Social Security system with individual retirement accounts.
The Personal Security Accounts Plan
The Personal Security Accounts (PSA) plan, advanced by five members of the 1994-96 Advisory Council on Social Security, would gradually replace Social Security with a two-tier system--a flat benefit based on years worked and the age at which benefits are first received and a benefit based on balances accumulated in mandated personal savings accounts. The flat benefit for workers and their spouses, as well as disability and survivor benefits that would be retained but scaled back, would be financed by a payroll tax of 6.2 percent for employers and 1.2 percent for employees; 5 percent of each worker's earnings, up to the maximum subject to the payroll tax, would go into his or her personal account. (The Social Security payroll tax is 12.4 percent of taxable wages--6.2 percent on the employer, 6.2 percent on the worker.)
The PSA plan would be phased in over many years. Retirees and workers over age 55 would remain under the Social Security system. Workers between 25 and 55 would receive a blend of benefits under the new and old systems. …