Stabilizing Social Security for the Long-Term

Abstract

President Roosevelt founded Social Security in 1935. In 1937, the Federal Insurance Contribution Act (FICA) was signed and mandated that workers contribute 2 % of wages.

Appendix Schedules

1.1 Alternative Detail

Below is the detail of the original fourteen alternatives that were identified and the rationale for either including or excluding the alternative in the final ANP model.

Raise Tax Rate—While not specifying a specific amount, this alternative proposes increasing the withholding percentage for all participants from the current level of 12.4 %. This alternative was not included in the final model do to nearly non-existent support to the idea.

Raise Retirement age—The normal retirement age has been raised in the past and this option is considered viable in the current situation. The life expectancy of Americans continues to increase. The current normal retirement age ranges from 65 to 67 years of age. This alternative is included in the final model.

Eliminate Maximum WH income—This would eliminate the current ceiling on wages that are subject to Social Security withholding. This alternative was included in the final model but was modified to say increase the ceiling.

Reduce Benefits—This is a one time global reduction in benefits. The formula for calculating benefit levels would be reduced. This alternative is in the final model, but is revised to more-broadly incorporate any mechanism that reduces benefits such as temporary freezes on increases, broad benefit level cuts, or a reduction in COLA levels.

Freeze Benefits—This alternative suggests freezing the level of benefits for some period of time, rather than forcing people to deal with a benefit cut. It was deemed more practical than an outright reduction in benefits. This alternative was combined into a broader reduce benefits alternative in the final model.

Cut COLA formula—Rather than reduce current benefits or freeze them for a period of time, this alternative seeks to limit the growth in benefit levels and would at first glance be to most practical of the expenditure containing alternatives. This alternative also was combined into a broader reduce benefits alternative in the final model.

Overhaul/scale back SSI disability—Support for those unable to care for themselves through disability needs to occur regardless. Elimination or reduction of these benefits would just shift to other federal/state programs such as Medicaid or Medicare. This alternative was rejected because while fixing Social Security it would exacerbate issues in other programs.

Divert 4 % to Private accounts—We are using the current proposal by President Bush where certain participants can elect to have 4 % of their wages diverted to a private investment account. This alternative is included in the final model.

Increase immigration—This alternative proposes an increase immigration as baby boomers retire to reduce the level of payees-to-payor ratio. This alternative was not deemed viable due the level of immigration that would be required to influence this ratio in any appreciable manner. It could be a viable part of a plan that incorporated numerous alternatives as a solution.

Subsidize SS fund by cutting spending in other programs—Given current levels of deficits and that Social Security already comprises a large portion of federal budget expenditures, this alternative in itself is not deemed to be feasible. Social Security is already by far the single large expenditure. The cuts in other programs, including Defense and Education would be too severe to make this an economically viable alternative.

Recreate “lock box” (specific SS fund unavailable to the general fund) and invest for higher returns—This alternative is essentially the same as the Divert 4 % to private accounts except for who would bear the risk of loss. There is a great deal of skepticism in making the federal government such a significant force in the capital markets. The federal government in many instances would be both the regulatory body as well as the owner; such conflicts of interest have yet to be overcome. Due to its similarity to another alternative and significant issues yet to be resolved, this alternative was not included in the final model.

Base lifetime payments on lifetime contributions—This alternative suggests a link should be established between contributions and payments, moving social security closer to a 401(k) type program. This alternative was rejected because of its potential conflict with the strategic criteria of adequate means for participants. Additionally, justification for rejection of the alternative rests in the fact that for most people age 45 and younger will not recover 100 % of their contributions during their retirement. In order to achieve this alternative the benefits of retirees and soon-to-be retirees would need to be cut effective immediately and this alternative has been covered in the Reduce Benefits alternative.

Do nothing—This alternative relies on a future positive externality to resolve the current issue. It would also encompass those who believe the current problem is an overstatement or fabrication. These individuals, however minor, do exist. For periods of time, issues with Social Security have been ignored, this too makes this alternative relevant.

Phase program out—This alternative suggests that over time, the US should eliminate the Social Security program in its entirety. This alternative was not included in the final model because there is clearly no significant support for the idea. Americans do not want to potentially see a significant number of senior citizens living on below subsistence levels of income.