President Bush says reforming social security will be a top priority during his second term. He wants workers to be able to divert some of their payroll taxes into private accounts. They could invest that money in stocks and bonds to save for their own retirement. NPR's Kathleen Schalch reports on what privatization could mean, and how it might be done.
Three Reform Models
In December 2001, a bipartisan, 16-member commission issued its recommendations for reforming and strengthening Social Security. Their report included three reform proposals, summarized below:
Reform Model 1
· Establishes a voluntary personal account option but does not specify other changes in Social Security's benefit and revenue structure to achieve full long-term sustainability.
· Workers can voluntarily invest 2 percent of their taxable wages in a personal account.
· In exchange, traditional Social Security benefits are offset by the worker's personal account contributions, compounded at an interest rate of 3.5 percent above inflation.
· No other changes made to traditional Social Security.
Reform Model 2
Currently, workers and their employers pay 12.5 percent of their income as payroll tax. Under Reform Model 2, the leading plan drafted by President Bush's Commission on Social Security, up to a third of that money could go into private accounts. This model establishes a voluntary personal account without raising taxes or requiring additional worker contributions.
· Workers can voluntarily redirect 4 percent of their payroll taxes up to $1,000 annually to a personal account. No additional worker contribution required.
· In exchange, traditional Social Security benefits are offset by the worker's personal account contributions, compounded at an interest rate of 2 percent above inflation.
· Plan establishes a minimum benefit payable to 30-year minimum wage workers of 120 percent of the poverty line.
· Benefits under traditional component of Social Security would be price indexed, beginning in 2009.
· Temporary transfers from the general budget would be needed to keep the Social Security Trust Fund solvent between 2025 and 2054.
Reform Model 3
Establishes a voluntary personal account option aimed at matching or exceeding scheduled benefits under current law. Achieves solvency by adding revenues and by slowing benefit growth less than price indexing.
· Personal accounts are created by a match of part of the payroll tax — 2.5 percent up to $1,000 annually (indexed annually for wage growth) — for any worker who contributes an additional 1 percent of wages subject to Social Security payroll taxes.
· Add-on contribution is partially subsidized by a refundable tax credit.
· Traditional Social Security benefits are offset by the worker's personal account contributions, compounded at an interest rate of 2.5 percent above inflation.
· Plan establishes a minimum benefit payable to 30-year minimum wage workers of 100 percent of the poverty line (11 percent for a 40-year worker). This minimum benefit would be indexed to wage growth.
· Benefits under traditional Social Security would be modified by: 1) adjusting the growth rate in benefits for actual future changes in life expectancy; 2) increasing work incentives by decreasing the benefits for early retirement and increasing the benefits for late retirement; and 3) changes to the benefit formula.
· New sources of dedicated revenue are added in the equivalent amount of .6 percent of payroll over the 75-year period.
· Additional temporary transfers from the general budget would be needed to keep Social Security trust fund solvent between 2034and 2063.
Source: 2001 report of the President's Commission to Strengthen Social Security.