Thursday, January 14, 2010

New OACT analysis of four proposals to restore Social Security to sustainable solvency

The SSA's Office of the Chief Actuary released a new analysis of four reform proposals put forward by the National Research Council and the National Academy of Public Administration's working group on "Choosing the Nation's Fiscal Future." The proposals are intended as illustrative of ways in which tax increases and benefit reductions may be combined to put Social Security's finances back on a sustainable track. The proposals include:

  • Proposal: Option 1, Reductions in the Growth of Benefits Only - Reforms the program by only decreasing scheduled benefits.
  • Proposal: Option 2, Two-Thirds Benefit-Growth Reductions & One-Third Payroll Tax Increases - Reforms the program by reducing scheduled benefits $2 for every $1 increase in payroll taxes.
  • Proposal: Option 3, One-Third Benefit-Growth Reductions & Two-Thirds Payroll Tax Increases- Reforms the program by increasing payroll taxes $2 for every $1 reduction in scheduled benefits.
  • Proposal: Option 4, Payroll Tax Increases Only - Reforms the program by increasing payroll taxes only.

Obviously they're not the only solutions, but as bookends they give an idea of the scale of changes needed.

You can click here to download the whole OACT report. The whole National Academies report is available here.


Arne said...

For options 1 and 2 Figure 4 shows tax income as a decreasing percentage of GDP (in the out years). As people are living longer in a society with a higher standard of living, I expect them to want/need more in retirement - not less. I understand that progressive indexing maintains that for the lower income workers, but it seems wrong to think that reducing the size of SS as a percent of GDP is the right thing to do.

Andrew G. Biggs said...

That's a very fair point. The question is whether middle to higher income people in the future (in which average incomes will in any case be higher) wish to pay their marginal retirement savings dollar into Social Security or into personal savings. My guess is they'd prefer to save it on their own for a number of reasons, but I guess you could make some other arguments. But the simple fact that people will want/need more retirement income in the future doesn't necessarily imply they'll want it to come from Social Security.

Also, the reason the payroll/GDP ratio declines is the increase in the health share of total compensation. I'm not sure how that fact plays into the points above -- would have to think about it more.

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