A Tale of Two Reforms

Issue Brief | June 13, 2001 | By Marilyn Watkins

Executive Summary

In May 2001, President Bush appointed a commission charged with submitting a Social Security reform plan including individual investment accounts. During his election campaign, Bush’s advisors described a possible reform package that would encourage diversion of 2% of the 12.4% of payroll that currently goes to Social Security into individual investment accounts controlled by workers. A number of economists have calculated the results of such reforms for typical Americans, based on the long range economic assumptions that Bush relied on to justify such sweeping reforms – the intermediate assumptions used by the Social Security trustees in their 2000 annual report. Those assumptions forecast very slow economic growth through the 21st century averaging only 1.6% annually (compared to over 3% average during the 20th century), resulting in a short fall in Social  Security funding by about 2038.

EOI shares the belief of number of analysts across the political spectrum that the Social Security intermediate forecast are unduly pessimistic. The trustees’ alternative set of forecasts based on a long term annual GDP growth rate of 2.4% is more realistic. It projects the system able to finance the retirement of the baby boomers and the expected longer life-spans of Gen Xers without ever running short of funds. Consequently, we have proposed modest reforms to strengthen benefits for lower income recipients within the existing social insurance structure of Social Security. Our proposed reforms are:

  1. Increasing survivors benefits for seniors to 75% of the couples’ combined benefit (currently ranges from 50% to 67%).
  2. Adjusting the benefit formula to replace 100% (instead of 90%) of the first $561 of monthly income.
  3. Restoring the age for full retirement benefits to 65.
  4. Eliminating the cap on taxable income.
  5. Creating a new, universally accessible retirement savings plan in addition to Social Security (currently half of workers do not have access to an employer sponsored retirement plan).

“A Tale of Two Reform Plans” contrasts the future for a typical middle class family under these two reform proposals.


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Posted in Social Security