Privatization of Social Security is a highly risky proposition. In order to pay for the costly private accounts, benefits for virtually everyone would be cut because payroll taxes needed to pay the benefits of current retirees would be taken out of the system. Private accounts would also take money that could be used to pay Notch Reform or higher Cost-of-Living Adjustments (COLAs).
The cuts would likely have to go into effect abruptly, since the privatization proposals would take effect right as Baby Boomers are starting to retire and draw more revenues out of the system. An abrupt change could create a Notch or Notch-like effect for millions of beneficiaries. Because of this, TSCL believes that Congress, like it or not, will be forced to revisit Notch Reform as part of Social Security reform. Congress will be confronted with the need to consider steps to prevent another Notch from occurring in the future under privatization proposals.
There are other options to reform Social Security that TSCL is studying — measures that may have less potential to create disparities in benefits — such as very gradually continuing to increase the age at which one may receive full unreduced retirement benefits.
According to the American Academy of Actuaries, since Social Security began in 1935 life expectancy has increased from 61 to 76, and Americans are healthier at older ages. While the growth in longevity is good, it nevertheless contributes to Social Security’s projected shortfall because more retirees are drawing benefits over longer periods of time.
In 1983 Congress gradually raised the “normal” retirement age (NRA) from 65 to 67 — the age at which one becomes eligible for full, unreduced benefits. The change first affected retirees who were born in 1938 and thereafter. The NRA increases two months per year until it reaches age 66 in 2005. It stays 66 until starting to gradually increase again in 2017 until reaching age 67. The age at which one can take early retirement with a reduced benefit, 62, has never been increased.
As we continue to study the options, we urge you, your friends and family to also get involved by becoming familiar with the proposals to reform Social Security. Let your Members of Congress know that privatization won’t “fix” anything, it would only make Social Security worse. Finally, please continue to help us press for Congress to put an end to the Notch.
February 2005
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