Wisconsin Republican Rep. Paul Ryan, the ranking Member on the House Budget Committee, previews in the Wall Street Journal comprehensive legislation he will introduce regarding health care, Medicare, Social Security and tax reform. Here are the relevant portions on Social Security reform:
Social Security. Workers under 55 will have the option of investing over one-third of their current Social Security taxes into personal retirement accounts. These personal accounts are likely to grow faster than the traditional benefit. They are also the property of the individual, and are thus fully inheritable. The bill includes a guarantee that no one's total Social Security benefits from the personal accounts will be less than if he had chosen to say in the current system.While more details would obviously be needed, I can say at this point that I prefer this formulation to Ryan's previous Social Security reform bill, co-sponsored with Sen. John Sununu of New Hampshire. The current Ryan approach would make (yet unspecified) reductions in the growth of future benefits along with increases in the retirement age to help maintain solvency.
Combined with a more realistic plan for growth in Social Security benefits, and an eventual increase in the retirement age, the Social Security program can thus become sustainable for the long term.
Note: An article on the Ryan plan in National Review Online appears to miss these aspects of the bill, saying "the legislation provides a federal guarantee that workers with personal accounts will get at least as much from the accounts and continuing Social Security benefits as promised by Social Security under current law." That's not the case: the plan would guarantee that individuals choosing person accounts would receive benefits at least as high as those who chose to remain wholly within the current program, in which benefits would be reduced for solvency purposes. Roughly speaking, this would guarantee that account holders would receive a return on their account investments at least equal to the return on the bonds in the Social Security trust fund.
In general I'm not a fan of guarantees against market risk, which can be extremely expensive (see here for analysis of the cost of guarantees under the old Ryan-Sununu bill). However, this guarantee is more modest than in the prior Ryan plan and so is moving in the right direction.
Update: Here's some more details on the Social Security elements of the plan, from an extensive document circulated by Ryan's staff:
TITLE IV: SOCIAL SECURITY REFORMI've attached a copy of the full document circulated by Rep. Ryan's office.
Creation of Personal Accounts. Beginning in 2011, provides workers under 55 the option of dedicating portions of their FICA payroll taxes toward personal accounts, or remaining in the current Social Security system. Automatically enrolls these workers in personal accounts, but provides the option to withdraw. Those who opt out have one opportunity to re-enter the system. Those who originally decide to enter the system will have one opportunity to withdraw.
Account Phase-In. Gradually phases in accounts equivalent to 5.1 percent of the current 12.4-percent payroll tax over a 30-year period. Allows lower-income workers to contribute a higher percentage of their payroll taxes than high-income workers. Phase-in proceeds in four periods, as follows:
- First-Stage Initial Phase-In. For the first 10 years of the program, workers are allowed to invest 2 percent of their first $10,000 of annual payroll into personal accounts, and 1 percent of annual payroll above that up to the Social Security taxable maximum amount of $115,500. The $10,000 level is indexed to inflation. Taxable payroll also is indexed for inflation, as under current law.
- Second-Stage Phase-In. Beginning in 2021, workers are allowed to invest up to 4 percent of payroll of the first $10,000 (indexed to inflation), and 2 percent of payroll above that up to the Social Security taxable maximum amount (indexed to inflation).
- Third-Stage Phase-In. Beginning in 2031, workers are allowed to invest up to 6 percent of payroll of the first $10,000 (indexed to inflation), and 3 percent of payroll up to the Social Security taxable maximum amount (indexed to inflation).
- Fourth-Stage Phase-In. Beginning in 2041, workers are allowed to invest up to 8 percent of payroll of the first $10,000 (indexed to inflation), and 4 percent of payroll up to the Social Security taxable maximum amount (indexed to inflation).
Personal Accounts Deposits. Deposits each personal account contribution into a Social Security Savings Fund, bearing the individual’s name. Converts individual accounts into annuities upon retirement.
Guaranteed Minimum Benefit. Guarantees that those who select personal accounts the minimum benefits they would receive if they stayed in the current system, subject to the changes made to the current system. Should an individual’s account be too small to provide an annual annuity equal to this minimum level, the Social Security Trust Fund would make up the difference.
Property Right. Provides that each account is the property of the individual, allowing holders to pass on accumulated wealth to descendants.
No Change for Those Over 55. Retains the current system for those currently over 55, with no changes.
No Change for Survivors and the Disabled. Retains current survivor and disability benefits as under the current system, without change.
Increased Minimum Benefits for Low-Income Individuals. Provides that all individuals choosing personal accounts receive annuity payments of at least 150 percent of the poverty level. Increases to at least 120 percent of the poverty level the benefits for low-income individuals who choose to remain in the current system and meet certain working requirements.
Social Security Personal Savings Account Board. Creates a Board to administer the Savings Fund into which contributions to the personal accounts are deposited. Makes the Board responsible for paying administrative expenses and regulating investment options offered by nongovernment firms. Provides that the Board consist of five members – required to have substantial experience, training, and expertise in the management of financial investments and pension benefit plans – appointed by the President, two of whom are appointed after consideration of the recommendations by the House and Senate. Establishes 4-year terms for Board members.
Three-Tier Structure. Structures individual accounts in three tiers, with investment options similar to the Thrift Savings Plan [TSP].
- Tier One. Originally, the Board would invest the contributions in regulated, low-risk instruments until the personal account reached a low threshold.
- Tier Two. Once this threshold is reached, individuals are automatically enrolled into a “life cycle” fund that adjusts for risk and automatically invests the portfolio in a blend of equities and bonds appropriate for the individual’s age. An individual could remain in the “life cycle” fund or choose from five different options that are the same as offered under the TSP: 1) a Government Securities Investment Account; 2) a Fixed Income Investment Account; 3) a Common Stock Investment Account; 4) a Small Capitalization Stock Index Investment Account; and 5) an International Stock Index Investment Account.
- Tier Three. Once an account accumulated over $25,000 in inflation adjusted dollars, an individual could choose an option provided by a nongovernment firm certified by the Board. The Board certifies only those firms meeting a set of standards. These nongovernment funds also are subject to regulation by the Board to ensure their safety and soundness.
Purchase of Annuity. Provides that, when an individual either reaches the normal retirement age or decides to retire early, the individual will purchase an annuity to provide monthly payments equivalent to at least 150 percent of poverty. An individual may purchase a larger annuity if they choose. As described above, if the individual’s personal account is inadequate to purchase an annuity that would provide a monthly payment as large as would be received under the traditional system, the government will make up the difference. If an individual has excess money in their account, they may receive it in a lump sum payment and use it as they choose.
Early Retirement for Personal Account Participants. Allows an individual to retire and begin receiving an annuity at any time that their personal account has accumulated enough funds to purchase an annuity equivalent to at least 150 percent of poverty.
Annuity Purchase and Regulation. Establishes within the Office of the Board, an Annuity Issuance Authority [AIA], which will provide annuity options to be purchased by retiring individuals.
Provision for Early Death. Provides that, if an individual dies before their full annuity has been paid, the amount of funds left over in their annuity or personal account will be made available to their designated beneficiaries or estate.
No Taxation of Personal Account Benefits. No tax will be paid on the receipt of Social Security benefits generated from personal account payments either as a part of an individual’s Federal income tax or estate tax.
Progressive Price Indexing. Excluding those now over 55, employs, starting in 2016, a mix of wage indexing and “progressive price indexing” for calculating initial Social Security benefits under the traditional system, with adjustments for income levels as follows:
- Low-Income. Individuals who make less than a certain threshold level (approximately $25,000 per year in 2016) will continue to receive initial benefits based on wage indexing. Threshold will be indexed for inflation.
- Middle-Income. Individuals who make between the minimum threshold and the maximum taxable amount (approximately $25,000 and $113,000 in 2016) will have initial benefits adjusted upward by a combination of wage and price indexing that becomes more oriented toward price indexing as they move up the income scale. For example, an individual whose income is half way between $25,000 and $113,000 (in 2016 dollars) will have his initial benefit adjusted upward approximately 50 percent by wage indexing and 50 percent by price indexing. These amounts will also be adjusted for inflation.
- Upper-Income. Individuals who make more than the taxable maximum amount (approximately $113,000 in 2016) will have initial benefits adjusted upward by price indexing, also adjusted for inflation.
- No Effect on COLAs. The proposal does not affect the cost-of-living adjustment [COLA] that Social Security beneficiaries receive each year once they have already begun receiving benefits. Further, it does not affect any individuals over 55, as it is not applied to Social Security beneficiaries until 2016.
Acceleration of Ongoing Retirement Age Increase. Advances by 1 year the current retirement age adjustment, which, under current law, gradually rises to 67 years of age for those who reach that age in 2027.
Modernizes the Retirement Age. After the normal retirement age of 67 is reached in 2026, indexes further adjustments in the retirement age in accordance with the Social Security Administration’s projected life expectancy, which is expected to gradually increase the normal retirement age by 1 month every 2 years. At this rate, the normal retirement age would remain below 70 years until 2098. Does not affect the ability of an individual to retire early if he or she elects to retire early and has accumulated enough wealth to retire early.