“Reform Model 1” would create personal accounts, but does not specify other changes in the program. It would allow workers to invest 2% of their Social Security taxes into personal accounts, but would reduce future benefits under the traditional program by the total value of the principal invested compounded at a 3.5% interest rate. Because the option would not solve future funding problems, benefit cuts and tax increases or additional revenues would eventually be required.

“Reform Model 2” would allow workers to invest 4% of payroll taxes up to $1,000. It would cut traditional benefits by the total value of the principal invested compounded at an interest rate of 2%. It would also cut traditional benefits by changing the way regular benefits are calculated beginning in 2009. In addition, it would require temporary transfers of general revenues to keep the Social Security Trust Fund (SSTF) solvent from 2025–2054. The SSTF would achieve a positive cash flow under this plan.

“Reform Model 3” would allow workers to invest 2.5% of payroll taxes plus an additional 1% up to $1,000 per year. The government would partially subsidize the additional 1% by a refundable tax credit. Future benefits would be reduced under the traditional program by the total value of the principal invested compounded at a 2.5% interest rate. Traditional benefits would further be reduced by raising the eligibility age. It would increase the penalty for early retirement but would provide greater incentive to stay in the work force. The benefits for late retirement would increase. This plan would also make changes to the benefit formula, affecting higher income workers. Additional general revenue transfers would be required to keep the Trust Fund solvent from 2028–2057.

The Commission recommended a period of debate for at least one year before legislative action is taken. 

Source: “Strengthening Social Security and Creating Personal Wealth For All Americans,” Report of the President’s Commission to Strengthen Social Security, December 11, 2001. “Social Security Plans Considered,” Leigh Strope, The Associated Press, December 11, 2001.

For more on this see “Social Security Commission Eyes Multiple Reform Options” in the January/February 2002 issue of The Social Security & Medicare Advisor.

February 2002