back

H.R. 4851, The Social Security Personal Savings Guarantee and Prosperity Act of 2004

This bill empowers workers with the freedom to choose a large personal account option for Social Security, with no benefit cuts or tax increases.

Summary of the Bill:

·    Workers will be able to shift to their personal accounts 10 percentage points of the current 12.4% Social Security payroll tax on the first $10,000 of wages each year, and 5 percentage points on all taxable wages above that.  This creates a progressive structure with an average account contribution among all workers of 6.4 percentage points.

·    Workers choose investments by picking a fund managed by a major private investment firm, from a list officially approved for this purpose and regulated for safety and soundness, similar to the operation of the Thrift Saving Plan for federal employees.

·    Benefits payable from the tax-free accounts would substitute for a portion of Social Security benefits based on the degree to which workers exercised the account option over their careers.  Workers exercising the personal accounts would receive traditional Social Security retirement benefits based on the past taxes they have already paid into the program.  Workers would then also receive in addition the money payable through the personal accounts.

·    The accounts are backed up by a safety net guaranteeing that workers would receive at least as much as Social Security promises under current law.

·    This program is voluntary.  Anyone who chooses to stay in Social Security would receive the benefits promised under current law.  Survivors and disability benefits would continue as under the current system.

·    Social Security and the reform’s transition financing are placed in their own separate Social Security budget, apart from the rest of the Federal budget. 

Financing the Transition:

ü   The short-term Social Security surpluses now projected until 2018 are devoted to financing the transition – instead of fueling other government spending;

ü   A national spending limitation measure would reduce the rate of growth of federal spending to an average of 3.6% for eight years, rather than the current 4.6% projection.  In comparison, spending grew at an average rate of 2.6% during the Clinton Administration.  The spending savings for those years are maintained until all short-term debt issued to fund the transition is paid off in full;

ü   The revenue feedback from increased saving and investment in the accounts due to taxation of increased investment returns at the corporate level (concept developed by Harvard economics professor Martin Feldstein), would help fund the transition;

ü   To the extent needed, excess Social Security trust-fund bonds would be redeemed to continue to pay all promised Social Security benefits, with the funds to redeem them obtained by issuing new federal bonds to the public.  Under the current system, these bonds will be redeemed for cash from the federal government anyway after 2018. 

This proposal has been scored by the Chief Actuary of Social Security.[1]  That official score shows:

n   The large personal accounts in the plan are sufficient to completely eliminate Social Security deficits over time, without any benefit cuts or tax increases. That is because so much of Social Security’s benefit obligations are ultimately shifted to the accounts.  As the Chief Actuary stated, under the reform plan, “the Social Security program would be expected to be solvent and to meet its benefit obligations throughout the long-range period 2003 through 2077 and beyond.”[2]  Indeed, the eventual surpluses from the personal accounts are large enough to eliminate the long-term deficits of the disability insurance program as well, even though the reform plan does not otherwise provide for any changes in that program.

n   Not only do the accounts achieve this without benefit cuts or tax increases, but over time the accounts would provide substantially higher benefits, as well as tax cuts.  The official score shows that by the end of the 75-year projection period, instead of increasing the payroll tax to over 20% as would be needed to pay promised benefits under the current system, the tax would be reduced to 4.2%, enough to pay for all of the continuing disability and survivors’ benefits.  This would be the largest tax cut in U.S. history.  The bill includes a payroll tax cut trigger providing for this eventual tax reduction once all transition financing and debt obligations have been paid off.

n   Moreover, at standard, long-term market investment returns, the accounts would produce substantially more in benefits for working people across the board than Social Security now promises, let alone what it can pay.  This is the only reform proposal that achieves that result.  With personal accounts of this size, at standard long-term market investment returns, an account invested consistently half in corporate bonds and half in stocks would provide workers with roughly two thirds more in benefits than Social Security promises but cannot pay.  An account invested two thirds in stocks and one third in bonds would pay workers over twice what Social Security promises today.

n   The reform also achieves the largest reduction in government debt in U.S. history, by eliminating the unfunded liability of Social Security, which is almost three times the current reported national debt.

n   The reform would also greatly increase and broaden the ownership of wealth and capital through the accounts.  All workers would participate in our nation’s economy as both capitalists and laborers.  Under the Chief Actuary’s score, workers would accumulate $7 trillion in today’s dollars in their accounts by 2019.  Wealth ownership throughout the nation would become much more equal, and the concentration of wealth would be greatly reduced. 

n   With the above transition financing, Social Security achieves permanent and growing surpluses by 2030 under the Chief Actuary’s score.  Before that time an average of about $38.5 billion in new federal bonds are sold each year for 24 years, for a total of $923 billion, all in today’s dollars.

n   Within 15 years after 2030, the reform produces sufficient surpluses to pay off all the bonds sold to the public during the early years of the reform.  So this surplus completely eliminates the Federal debt sold to the public in the earlier years of the reform, leaving the net impact of the reform on debt held by the public at zero.  Indeed, as mentioned above, the reform goes on to completely eliminate Social Security’s current unfunded liability of $10.5 trillion, close to three times the reported national debt.

n   Finally, the reform plan would greatly increase economic growth, through reduced taxes and increased saving and investment.  The result would be more jobs, higher wages, and faster growing incomes and national GDP.