Order Code RL32879
CRS Report for Congress
Received through the CRS Web
Social Security Reform: President Bush’s
Individual Account Proposal
April 25, 2005
Laura Haltzel
Specialist in Social Security
Domestic Social Policy Division
Congressional Research Service { The Library of Congress
Social Security Reform: President Bush’s Individual
Account Proposal
Summary
The Old-Age, Survivors, and Disability Insurance (OASDI) program, commonly
referred to as Social Security, is facing a long-term financial deficit. In response to
this challenge, President Bush has made Social Security reform the key focus of his
domestic social policy agenda during his second term. On February 2, the President
issued a document, “Strengthening Social Security for the 21st Century,” which lays
out the specifications for a system of voluntary individual accounts to be phased-in
as part of a reformed Social Security system. Administration officials concede that
the individual accounts themselves do not alleviate the solvency problem. The
individual account proposal would likely make the solvency problem worse over the
next 75 years. The President has not yet specified how the additional shortfall due
to the individual accounts will be financed. The President has stated that these
accounts are just one piece of a comprehensive Social Security reform package and
that additional measures will be needed to achieve long-term solvency. At the time
of this report’s publication, the President has not specified what these additional
measures might be.
Under the President’s individual account proposal, individuals born prior to
1950 would experience no change in their Social Security benefits. Individuals born
in 1950 and later would have the option to participate in Social Security individual
accounts (IAs). Workers who choose to participate in IAs may not opt-out of the IA
system. Workers would be allowed to divert up to 4% of their payroll taxes to IAs,
subject to a dollar limit that increases over time. But on average people would have
to earn at least 3.3% per year after inflation to break even. This occurs because, in
addition to administrative costs, their traditional benefits would be reduced or
“offset” by the amount of their contributions, plus 3% a year in interest. The
proposal does not include a “minimum benefit” guarantee to ensure that participants
would receive a total benefit at least equal to the poverty threshold.
Analyzing the President’s IA proposal using assumptions on investment returns
and administrative costs provided by the Social Security Administration, we find that
the total of the reduced Social Security benefit plus the annuity that would be
available using the actual IA balance would exceed Social Security current-law
promised benefits if the account earns the 4.6% annual real rate of return projected
by the Social Security actuaries. However, if the account earns the 2.7% risk-
adjusted annual real rate of return projected by the actuaries, workers would face a
slight reduction in overall Social Security income relative to current law. Younger
workers and those with higher lifetime earnings would benefit the most from IAs.
Younger workers would be able to contribute to their IA throughout their careers and
would have higher contributions as a result of continued wage growth. Higher
earners would benefit from being able to accrue larger account balances as the dollar
cap on contributions increases over time.
These findings are subject to change if additional provisions are specified at a
later date. This report will be updated as additional details become available.
Contents
The President’s Social Security Individual Account Proposal . . . . . . . . . . . 1
Individual Account Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Account Administration and Investment . . . . . . . . . . . . . . . . . . . . . . . . 2
Offset to Social Security Defined Benefit Based on Hypothetical
Individual Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Individual Account Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Analysis of the President’s IA Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Effect on Social Security Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Effect on the Unified Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Effect on Combined Social Security Income . . . . . . . . . . . . . . . . . . . . 12
Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
List of Figures
Figure 1. Effect of the President’s Individual Account Proposal on
Projected Social Security Surpluses (Billions of current dollars) . . . . . . . . 11
Figure 2. Percent Difference Between Current-Law Payable Social Security
Benefits and Total Social Security Income (Reduced Current-Law
Payable Social Security Benefits Plus the Individual Account Annuity) . . . 14
Figure 3. Total Social Security Income for Scaled Average-Wage Worker,
by Birth Cohort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 4. Effect of the President’s IA Proposal on Combined Social
Security Income, by Earnings Level for Worker Age 21 Today . . . . . . . . . 18
List of Tables
Table 1. Mary’s Actual and “Shadow” Individual Accounts . . . . . . . . . . . . . . . . 5
Table 2. How Mary’s “Shadow” Account Offsets Her Social Security
Defined Benefit and How Her Actual Account Contributes to Her
Social Security Income in 2031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 3. Estimated Account Balances in Year of Retirement for Actual
and “Shadow” Account Under the President’s 2005 Social Security
Personal Account Proposal, by Type of Hypothetical Worker . . . . . . . . . . 23
Table 4. Current-Law Promised Social Security Benefit, Estimated
“Shadow” Annuity Amount in Year of Retirement, and Reduced
Promised Social Security Benefit, by Type of Hypothetical Worker . . . . . 24
Table 5. Current-Law Payable Social Security Benefit, Estimated
“Shadow” Annuity Amount in Year of Retirement, and Reduced Payable
Social Security Benefit, by Type of Hypothetical Worker . . . . . . . . . . . . . . 25
Table 6. Combined Social Security Benefit For Expected and Risk-Adjusted
Account Balances Under President’s Individual Account Proposal
Compared to Current-Law Promised Benefit, by Type of Hypothetical
Worker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Table 7. Combined Social Security Benefit For Expected and Risk-Adjusted
Account Balances Under President’s Individual Account Proposal
Compared to Current-Law Payable Benefit, by Type of Hypothetical
Worker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table 8. Poverty Thresholds in Year of Retirement, Reduced Social Security
Promised Benefit, Required Annuitization Levels, and Remaining
Individual Account Balance, by Type of Hypothetical Worker . . . . . . . . . . 28
Table 9. Poverty Thresholds in Year of Retirement, Reduced Social Security
Payable Benefit, Required Annuitization Levels and Remaining
Individual Account Balance, by Type of Hypothetical Worker . . . . . . . . . . 29
Social Security Reform: President Bush’s
Individual Account Proposal
The Old-Age, Survivors, and Disability Insurance (OASDI) program, commonly
referred to as Social Security, is facing a long-term financial deficit. In 2041, the
Social Security Trust Funds will be depleted and tax revenues will be sufficient to
cover approximately 74% of benefits promised at that time.
Given this challenge, President Bush has made Social Security reform the key
focus of his domestic social policy agenda. On February 2, the President issued a
document, “Strengthening Social Security for the 21st Century,” which lays out the
specifications for a system of voluntary individual accounts funded out of the current
payroll tax to be phased-in as part of a reformed Social Security system.
Administration officials concede that the individual accounts themselves do not
alleviate the solvency problem.1 These accounts would likely worsen the solvency
problem over the next 75 years. The President has not yet specified how the
additional shortfall due to the individual accounts will be financed. The intent of
these accounts is (1) to offset at least a portion of the anticipated benefit reductions
or tax increases that will be necessary to achieve solvency; (2) to make the Social
Security system a better deal for younger workers, who are most likely to be affected
by these changes; and (3) to provide a benefit that each worker would individually
own that the government could not take away. The President has stated that these
accounts are just one piece of a comprehensive Social Security reform package and
that additional measures will be needed to achieve long-term solvency.2 At the time
of this report’s publication, these additional measures have not yet been specified.
Thus, this report focuses solely on the individual account component of the
President’s Social Security reform proposal.
The President’s Social Security Individual Account Proposal
Individual Account Contributions. Under the President’s proposal,
individuals born prior to 1950 would experience no change in their Social Security
benefits. Individuals born in 1950 and later would have the option to participate in
Social Security individual accounts (IAs). Workers born in years 1950 through 1965
could first participate in 2009. Workers born in years 1966 through 1978 could first
participate in 2010. Workers born in years 1979 and later could first participate in
2011. Those who choose to participate would be able to divert up to 4% of their
1 White House Background Press Briefing on Social Security, Feb. 2, 2005.
2 President George W. Bush, State of the Union Address, Feb. 2, 2005.
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Social Security covered wages into an individual account.3 The actual maximum
dollar amount of contributions would be gradually increased, such that low-earners
would be able to immediately contribute a full 4% of earnings to their IA, while
higher earners would initially have their contributions capped. In the first year of
account availability, 2009, the cap on contributions would be $1,000. According to
the Social Security actuaries, this cap would increase by $100 each year and then be
increased by the growth in the national average wage.4 For example, in 2010, the
contribution limit would be equal to $1,100 increased by the growth in average wages
between 2007 and 2008, or $1,145. The actuarial memorandum only covers the years
through 2015, and the contribution limit rises using this method each year until then.
Although it is not specified in the actuarial memorandum, the February 2, document
implies that this dollar contribution limit would continue to rise after 2015, but that
contributions would never exceed 4% of covered wages.
Individuals who do not choose to participate in the IA system would continue
to draw benefits from the traditional Social Security system; however, these benefits
are likely to be reduced to achieve long-term solvency. Individuals who choose to
participate in the IA system would not be permitted to discontinue their participation,
would be subject to benefit reductions based on their participation in the IA, and
would also be subject to benefit reductions to achieve long-term solvency.
Account Administration and Investment. Individual account
contributions would be collected and records maintained by a central administrator.
Private investment managers would be chosen through a competitive bidding process
to manage pooled account contributions. The central administrator would be
responsible for addressing participant questions and issuing periodic account
statements. The Social Security Administration’s actuaries estimate that the ongoing
administrative costs for a centralized system with limited choice of fund investment
would be roughly 0.3 percentage points (or 30 basis points).5
Individuals who opt-in to the IA system would choose from a few broad-based
investment funds: a government bond fund; an investment-grade corporate bond
index fund; a small-cap stock index fund; a large-cap stock index fund; and, an
international stock index fund.6 In addition, workers could choose a government
3 In 2005, Social Security covered wages are capped at $90,000. This cap is indexed
annually to increases in the national average wage.
4 Social Security Administration Memorandum to Charles P. Blahous, Special Assistant to
the President for Economic Policy, National Economic Council from Stephen C. Goss, Chief
Actuary, “Preliminary Estimated Financial Effects of a Proposal to Phase In Personal
Accounts — INFORMATION,” Feb. 3, 2005.
5 Some have argued that this assumption may understate the true administrative costs of such
a system. The actuaries did not provide an estimate of the costs associated with
annuitization.
6 An index fund is a fund composed of securities intended to replicate the movement of a
specific securities index (e.g., the Dow Jones, Standard & Poors 500, etc.). Index funds are
considered to be passive investments since the portfolio manager does not have to decide
among various securities for investment. Rather, the manager knows the securities that make
(continued...)
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bond fund with a guaranteed rate of return above inflation. Workers could also select
a “life-cycle portfolio” that would automatically adjust the level of risk and return of
the investments by gradually reducing the portion of the portfolio invested in stocks
and increasing the proportion invested in bonds as the worker aged in an attempt to
avoid sudden losses closer to retirement. This portfolio would be the default choice
for workers reaching age 47, although the worker could opt-out if the worker and his
or her spouse signed a waiver stating that they are aware of the risks. Workers would
be able to adjust their allocations among these funds annually.
Life-cycle portfolios reduce the probability of a sudden loss of capital due to a
decline in equity values, but they do not eliminate this risk. Furthermore, with the
switch to heavier investment in bonds rather than stocks comes a reduced expected
rate of return in the account balance. The rate of return one earns closer to retirement
has a greater effect on the overall account balance than the rate of return earned at the
start of a working career because that interest rate is applied to every dollar held in
the account at that point in time, not just the account a few years into one’s career.
Shifting the asset allocation to favor bonds does reduce the down-side risk, but it also
limits the up-side gains.7
In the scenario described in the President’s proposal, the life-cycle portfolio
would specify an asset allocation shift based on a worker’s planned year of
retirement. Thus, all workers retiring in a given year have the same portfolio of
stocks and bonds. The primary appeal of these “targeted retirement date” life-cycle
portfolios is the minimal involvement required by the investor. Once the individual
joins the fund, the assets are on auto-pilot and the individual does not need to decide
when or how to adjust the portfolio. However, this ‘one size fits all’ approach may
not be ideal for those who have investments outside the Social Security IA system as
it could undermine the intended overall asset allocation for that worker’s age. For
example, a worker who already has a great deal invested in bonds in a 401(k) plan
may not want the automatic shift towards bonds specified by a life-cycle portfolio
because it could place too great a portion of his or her assets in fixed income
securities. This approach may also not be ideal for those with different tolerance for
risk. For example, the asset allocation specified for someone at age 35 might be 80%
6 (...continued)
up the index and their relative importance to the overall index and seeks to match it.
Because the management of the investment is less active, the expenses and transaction costs
are low. The advantage of index funds is that, since most funds do not beat the index
anyway, the investor has a greater chance of at least matching industry averages. The
limitation of the index fund is that it must purchase all of the securities in the index even if
the market indicates that a particular security in the index is going to lose value. (Taken
from p. 501, “How the U.S. Securities Industry Works,” by Hal McIntyre).
7 Robert J. Shiller of Yale University recently conducted a computer simulation using
financial data going back to 1871. He found that people enrolled in life-cycle accounts
would have lost money 32% of the time under the President’s IA proposal because the rate
of return earned is less than the 3% real rate of return required to break even in the proposal.
For additional information please see Robert J. Shiller’s study, “The Life-Cycle Personal
Accounts Proposal for Social Security: An Evaluation,” Yale ICF Working Paper No. 05-06,
Apr. 2005, available at [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=703221].
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in stock and 20% in bonds. However, some individuals may be risk averse and prefer
a portfolio with 70% stock and 30% bonds.
Offset to Social Security Defined Benefit Based on Hypothetical
Individual Account. If a worker chooses to participate in an IA, in exchange for
the reduction in contributions to the defined benefit Social Security system, he or she
would accept a future Social Security benefit reduction. The benefit reduction would
apply to the Social Security retirement, spousal or aged widow(er) benefit that would
otherwise be paid to him or her.8 This future benefit reduction is equal to the
contributions made to the worker’s individual account plus 3% per year in interest.
For each actual account that a worker contributes to and receives upon retirement,
there is also a hypothetical “shadow” account that exists only as an accounting
mechanism. The “shadow” account records all of the contributions made to the
actual account and grows them at a fixed annual real rate of return (the rate one
would earn after adjusting for inflation) of 3%, essentially equal to what the Social
Security Administration actuaries project these contributions would have earned had
they continued to be paid into the Social Security system and invested in Treasury
bonds in the Trust Funds.9 Thus, the 3.0% offset is intended to reflect the portion of
the Social Security benefit the worker chooses to forgo and replace with individual
account proceeds by diverting a portion of his or her payroll tax away from the Social
Security system.
Table 1 provides an example of how this would work. In this example, Mary
works and contributes to her individual account for 10 years, between 2021 and 2031.
Each year, Mary contributes an amount equal to 4% of her Social Security covered
wages to her individual account. For example, she earns $15,000 in 2021 and
therefore contributes $600 to her IA, where we assume it grows at a 4.6% annual real
rate of return and results in an end of year account balance of $622. When she makes
her $600 contribution to her actual IA, the “shadow” IA reflects this same
contribution amount, but grows it at a fixed 3.0% annual real rate of return so that at
the end of the first year her “shadow” IA records a balance of $617. This same
process continues every year until she retires in 2031. At that point, her actual IA
balance is $15,648 and her “shadow” IA balance is $14,327. Upon retirement, the
account balance of this hypothetical “shadow account” is converted into a
hypothetical CPI-indexed monthly annuity.10 This hypothetical annuity would be
used to reduce, or offset, the Social Security defined benefit.
8 According to the Social Security actuarial memorandum, disability benefits would not be
reduced.
9 Unlike the actual individual account, which is reduced on an annual basis by 0.3% of
assets and results in an “expected” net 4.6% annual rate of return or a “risk-adjusted” 2.7%
rate of return, the “shadow” account is not reduced for any administrative fees. See the
Methodology section for additional detail.
10 An annuity is an insurance instrument that provides a stream of periodic payments in
return for an up front payment called the “premium.” In this case, the premium would be
the individual’s account balance at retirement.
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Table 1. Mary’s Actual and “Shadow” Individual Accounts
Year
Annual
Actual
Shadow
Actual account
Shadow
wage
account
account
balance
account balance
(nominal)
contributions
contributions
(assuming
(fixed 3.0% real
(nominal)
(nominal)
4.6% real rate
rate of return)
of return)
2021
$15,000
$600
$600
$622
$617
2022
$17,500
$700
$700
$1,395
$1,374
2023
$20,000
$800
$800
$2,329
$2,278
2024
$22,500
$900
$900
$3,438
$3,338
2025
$25,000
$1,000
$1,000
$4,734
$4,564
2026
$27,500
$1,100
$1,100
$6,231
$5,964
2027
$30,000
$1,200
$1,200
$7,944
$7,550
2028
$32,500
$1,300
$1,300
$9,891
$9,332
2029
$35,000
$1,400
$1,400
$12,087
$11,321
2030
$37,500
$1,500
$1,500
$14,552
$13,531
Account balance in 2031
$15,648
$14,327
Source: Created by CRS.
Continuing the example above in Table 2, based on Mary’s 10-year work
history, Mary could expect to receive a Social Security defined benefit equal to about
$654 per month in 2031. Mary’s “shadow” account would produce a CPI-indexed
annuity of $82 per month. This “shadow” annuity is used to reduce, or offset, Mary’s
Social Security benefit, leaving her with a Social Security defined benefit of $572.
Assuming that Mary chooses to annuitize her entire actual IA balance, Mary’s actual
IA would produce a CPI-indexed annuity of $89 per month. The annuity from the
actual IA plus her reduced Social Security defined benefit would provide Mary a
combined Social Security income of $662.
Table 2. How Mary’s “Shadow” Account Offsets Her Social
Security Defined Benefit and How Her Actual Account
Contributes to Her Social Security Income in 2031
Mary’s current-law Social Security defined monthly benefit
$654
Minus “shadow” account monthly annuity (based on fixed 3.0% annual
- $82
real rate of return)
Equals remaining Social Security defined monthly benefit
= $572
Plus actual account monthly annuity (assuming 4.6% annual real rate of
+ $89
return)
Equals combined Social Security monthly income
= $662
Source: Created by CRS.
Note: Example assumes current law provisions remain in place through 2031 and that Mary chooses
to annuitize her entire IA balance.
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Individual Account Distributions. Workers would not be permitted to
have access to their IA balances prior to retirement. Upon retirement, the receipt of
aged widow(er) benefits, or conversion from disabled worker to retirement benefits,
the IA accumulation would be available to the beneficiary. Individuals may be
required to purchase an annuity or take in phased withdrawals a portion of the IA
balance. The portion required to be annuitized or taken in phased withdrawals would
be equal to the dollar amount needed to provide the worker with a total monthly
benefit equal to at least 100% of the federal poverty threshold when combined with
the reduced Social Security defined benefit. For example, looking back at Table 2,
Mary’s reduced Social Security defined benefit would be equal to $572 (in 2005
dollars). In 2031, the year of Mary’s retirement, the monthly poverty level is
projected to be equal to $766 (in 2005 dollars). Thus, Mary would be required to
annuitize or take in phased withdrawals whatever portion of her IA is needed to
provide a monthly stream of income equal to $194 ($766 - $572).
The annuity purchased or phased withdrawals taken would be required to be
CPI-indexed so that the annual amounts increase with inflation and, thus, retain
purchasing power. If after the purchase of this annuity or estimation of phased
withdrawals the worker still has a balance in his or her IA, the remainder may be
withdrawn as a lump-sum or left as an inheritance. There would be no “minimum
benefit” guarantee to ensure that participants would receive a total benefit at least
equal to the poverty threshold.11
Under the system of phased withdrawals, also referred to as programmed
withdrawals or “self-annuitization,” the worker’s account balance is divided in such
a way as to allow the worker to withdraw an equal amount each month (indexed to
inflation) until the retiree dies or until the IA funds are depleted. This amount is
calculated taking into account projected future inflation, interest rates and life
expectancy. It has not yet been specified who will take the role of calculating the size
of these withdrawals. The advantage of phased withdrawals as opposed to an annuity
is that a worker who does not expect to live to projected life expectancy could
withdraw whatever portion of their IA assets are needed to stay above poverty and,
upon death, the remaining balance would be available to pass along as an
inheritance.12
When a worker purchases a CPI-indexed annuity, risks of higher than expected
inflation, lower than expected interest rates, and of living longer than an individual’s
projected life expectancy are borne by the insurance company. When a worker opts
to take phased withdrawals, these risks are borne by the worker. Thus, if inflation
11 The plan does not specify whether the poverty threshold to be used is for the single
worker, for all individuals who are expected to receive benefits off of the worker’s record,
or all household members.
12 Not all individual accounts are likely to have large enough balances to provide a monthly
withdrawal amount that, when combined with the reduced Social Security defined benefit,
is able to provide a combined Social Security income equal to 100% of the federal poverty
threshold, whether provided in the form of an annuity or as a phased withdrawal. The
current-law Social Security program also does not guarantee a benefit amount equal to 100%
of the federal poverty threshold.
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grows faster than originally expected, the amount of money that the worker must
withdraw to remain above poverty would increase, leading the worker to deplete his
or her IA assets faster than planned. Under phased withdrawals, the worker retains
the responsibility for investing the individual account assets in such a way as to
ensure a rate of return that would maintain an account balance sufficient to provide
the appropriate level of withdrawals until the expected date of death. If the worker
fails to invest in such a way as to ensure the rate of return needed to maintain an
account balance until they die, then the withdrawal amounts would eventually exceed
the balance remaining in the IA, leading the worker to have insufficient resources to
remain above poverty. Under a phased withdrawal system, the worker also faces the
risk that they will live beyond the date of life expectancy that was used to calculate
the phased withdrawal amounts. The date of life expectancy is, by definition, the
average remaining number of years prior to death. Thus, on average, about 50% of
those opting for phased withdrawals will die prior to running out of IA funds and
50% will live longer than expected and run out of IA funds. In this case, the worker
would have received larger withdrawal amounts than could be sustained with the IA
balance at retirement and the worker would risk running out of funds prior to death.
Phased withdrawals do not guarantee that those with IA balances projected to be
sufficient at retirement (when the monthly phased withdrawal amount is calculated)
will avoid falling into poverty.
If a worker decides not to use inflation-indexed phased withdrawals of a portion
of his or her IA to maintain above poverty level retirement income, he or she would
be required to purchase a CPI-indexed annuity to achieve this goal. Although the
President’s plan requires the purchase of CPI-indexed annuities, there is currently a
very limited market for these annuities in the United States. Although the Treasury
has issued Treasury Inflation Protection Securities (TIPS) since 1997, the demand for
inflation-indexed annuities remains small, possibly because many workers feel that
they already have some form of inflation protection from current-law Social Security
benefits. If, however, these types of annuities were to be mandatory and
accompanied by the required reduction in Social Security benefits for IA participants,
the experience in the United Kingdom indicates that it is likely that such a market
would develop.13
Analysis of the President’s IA Proposal
Although the President’s IA proposal would worsen Social Security solvency
within the next 75 years, in the long-run, the shadow accounts and the resulting
offsets in Social Security defined benefits would reduce benefit costs to the current-
law program. Because of the short-run costs, and barring other benefit reductions or
tax increases, the IA proposal is likely to increase publicly held debt and increase the
unified budget deficit. Under the President’s IA proposal, younger workers and
higher earners who can contribute to the IA for longer periods of time or contribute
larger amounts to the IA would have larger IA balances and annuities than those who
contribute over fewer years or contribute fewer dollars. As a result of the larger IA
13 Brown, Jeffrey, Olivia Mitchell and James Poterba, The Role of Real Annuities and
Indexed Bonds in an Individual Accounts Retirement Program, National Bureau of
Economic Research, Working Paper no. 7005, Mar. 1999.
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balances, younger workers and higher earners would have a lower Social Security
defined benefit. Whether a worker does better under the individual account proposal
depends on whether he or she is able to obtain a higher annual rate of return (net of
administrative expenses) than the 3.0% real rate of return used to calculate the
shadow account.
While we know the individual accounts are likely to make the solvency problem
worse, the President has not yet specified how this additional shortfall will be
financed. It could be financed through (1) increased government borrowing (to be
paid off eventually through general revenues); (2) increased payroll taxes or other tax
increases; or (3) additional benefit reductions. We have provided estimates of
combined Social Security income under two scenarios: one where we assume that
trust fund revenues are found and the trust fund can provide “scheduled” current law
Social Security benefits, and one where we assume that trust fund revenues are not
found and the current-law benefit is reduced to a “payable” level based on estimated
current-law revenues. However, because the Social Security Administration
actuaries were not provided with the plan specifications needed to produce a 75-year
analysis of how the President’s IA proposal would affect solvency, we do not know
the size of the annual benefit reductions that would be required to maintain trust fund
solvency under a payable baseline. Therefore, the results below do not take into
account the benefit reductions on top of those required under current-law and under
the “shadow” account offset that would be necessary under the President’s IA
proposal to achieve solvency. Thus, this analysis tends to overstate the combined
Social Security income that would be available under the IA proposal compared to
a current-law payable baseline. However, the total Social Security income possible
for a scaled average-wage worker using the ‘expected’ 4.6% annual real rate of return
would be 31% higher than current-law payable benefits for younger cohorts.14 Thus,
if the additional benefit reductions required to achieve solvency under the IA plan
reduce benefits by less than 31%, scaled average-wage workers under the IA plan
would still come out ahead. One important limitation of using these assumed
constant annual interest rates is that historical rates of return have not followed such
a pattern. Interest rate fluctuations over time and where these fluctuations occur in
a worker’s career can have a large effect on the estimated account balances of
workers under an IA system.
Effect on Social Security Solvency. Administration officials acknowledge
that the proposed individual accounts alone do not improve the Social Security
solvency problem. In the short-run, these individual accounts are likely to make the
solvency problem worse. The President’s plan permits individuals to contribute up
to 4 percentage points (up to a dollar contribution limit) of the current 12.4% payroll
tax into individual accounts, thus diverting current revenues away form the
traditional Social Security system. By itself, this step would worsen the Social
Security solvency problem because these dollars are taken from the Social Security
surpluses and therefore the Trust Funds don’t accrue the same balances that they
otherwise would have and they also earn less interest on these reduced balances. Not
including the lost interest earnings, the cost to the Trust Funds between 2005 and
14 For details on “scaled” wage workers, please refer to the Methodology section.
CRS-9
2015 would be approximately $541 billion in constant 2004 dollars.15 By the end of
2015, the IA proposal would increase publicly-held debt by $587 billion in 2004
dollars. The second piece of the President’s IA proposal, the reduction in Social
Security benefits based on the “shadow” account, has the effect of offsetting the cost
of the IA proposal and potentially improving the solvency problem in the long run.
However, because this reduction only takes place upon a worker’s retirement, but the
contributions to the IA begin almost immediately and continue up to the worker’s
year of retirement, the savings from the benefit offset takes many years to counter the
loss of revenue to the Trust Funds from the IA itself. Between 2005 and 2015, these
offsets reduce Social Security benefits by only $3 billion constant 2004 dollars. The
Social Security actuaries estimate that the year in which Social Security costs exceed
Social Security tax revenue would be 2012 under the President’s proposal instead of
2017 under current law.
If, as indicated in the actuarial memorandum, disability recipients are not subject
to the “shadow” account offset (presumably because disabled workers would not
have access to their accounts until their disability benefits convert to aged retirement
benefits at the full retirement age), then the Trust Funds would be made worse off
because they would still have the burden of paying full Social Security benefit
amounts to disability recipients (who are by definition under the retirement age) even
though these individuals may have participated in the IA system, thereby reducing
the revenues available to pay these benefits. The actuarial memorandum implies that
disabled individuals would be subject to the offset upon conversion from disability
benefits to retirement benefits at the full retirement age, reducing the cost of their
benefit payments from that point on.
The actual effect of the President’s proposal on solvency is dependent upon the
number of individuals who participate in the system of individual accounts and upon
their level of earnings. The Social Security actuaries assume that approximately two-
thirds of all eligible workers will opt-in to the account system. The actuaries do not
attempt to predict what types of workers (e.g., high wage, low wage, etc.,) would
participate in the IA system, but instead rely on estimates of the aggregate dollar
amounts that would likely be diverted from current payroll taxes. The larger the
number of individuals who participate in the accounts, the greater the dollar amount
diverted away from the current Social Security system, and the greater the up-front
negative impact on Social Security solvency. Of course, the greater the number of
individuals who choose to participate in the IA system, the greater the eventual
reduction in benefits promised to these individuals under the current Social Security
system and the greater the potential long-term enhancement to Social Security
solvency.
The Social Security actuaries, who estimate the effect of Social Security reform
proposals on solvency, were unable to produce the standard 75-year estimate of the
effect of the President’s proposal because they were only given specifications through
15 Social Security Administration Memorandum to Charles P. Blahous, Special Assistant
to the President for Economic Policy, National Economic Council from Stephen C. Goss,
Chief Actuary, “Preliminary Estimated Financial Effects of a Proposal to Phase In Personal
Accounts — INFORMATION,” Feb. 3, 2005.
CRS-10
2015. However, based on a similar individual account structure introduced by
Senator Lindsey Graham as part of a larger reform proposal in the 108th Congress (S.
1878) and analyzed by the Social Security actuaries, it seems likely that over a 75-
year period the President’s individual account proposal would not pay for itself
through benefit offsets, nor reduce the existing solvency problem.16 In present value
terms, Senator Graham’s individual account proposal alone would have added $2.7
trillion in constant 2004 dollars to the $4.0 trillion current-law Social Security
shortfall.17
Some individual account proposals, such as that introduced by Representative
Shaw (H.R.750 in the 109th Congress), use the actual individual account to provide
revenue to the Social Security Trust Fund to pay Social Security benefits. The
individual is still responsible for investing the IA assets, but instead of reducing the
Social Security benefit based on contributions to the IA, the actual IA is handed over
to the government for use in paying for the individual’s Social Security benefits. The
Social Security benefit payments are fixed, but the rate of return earned by each
individual worker on his or her account, and thus the account balance, is subject to
fluctuation. Thus, the Trust Fund is subject to the risk that the individual accounts
will not be invested in a way that produces sufficient revenue to pay for an
individual’s lifetime benefits. Alternatively, the President’s proposal provides the
Trust Funds with a guaranteed source of revenue in the form of reduced benefit
costs, which is equal to the individual’s IA contributions grown at a real annual 3%
interest rate. Therefore, the Trust Funds are not subject to any investment risk. With
the lower “traditional” Social Security benefits, the President’s proposal also lowers
the impact on the Trust Funds from the costs of unexpected increases in inflation or
longevity. Individuals are responsible for purchasing an annuity (in which case these
risks are shifted to the insurance company that sold the annuity) or making phased
withdrawals (in which case these risks are borne by the individual).
Effect on the Unified Budget. The unified budget (the combined on- and
off-budget) could be affected by this proposal in two ways. First, if the government
relies on general revenues to reimburse Social Security for the loss of revenue due
to the diversion of funds for the IA, the Treasury would need to either increase tax
revenues, reduce other government spending, or increase government debt.
According to the Office of Management and Budget, the President’s IA proposal will
require transition financing of $664 billion over the next 10 years, or $754 billion
16 The default option under Sen. Graham’s plan was an individual account funded by a
carve-out equal to 4% of the current payroll tax, with contributions capped at $1,300 in 2006
and increased with the percent increase in the national average wage thereafter. The benefit
offset was calculated using account contributions grown at a real annual interest rate of
2.7%.
17 The Congressional Research Service (CRS) calculation based on Social Security
Administration Memorandum from Chris Chaplain and Alice H. Wade to Stephen C. Goss
on the “Estimated OASDI Financial Effects of ‘Social Security Solvency and Modernization
Act of 2003' introduced by Senator Lindsey Graham — INFORMATION,” Nov. 18, 2003.
For details on how CRS calculated this estimate, please refer to CRS Report RS22010,
Social Security: ‘Transition Costs’, by Laura Haltzel.






























































































































































































































































































































































































































































































































































































































































































































CRS-11
including interest if additional debt is issued to cover these costs.18 Second, as
Figure 1 below illustrates, diverting Social Security revenues into individual
accounts reduces the Social Security surplus, thereby reducing the off-budget surplus.
Social Security surplus dollars are not held by the Social Security Trust Funds.
Figure 1. Effect of the President’s Individual Account Proposal on
Projected Social Security Surpluses
(Billions of current dollars)
350
Current law social security
surplus
300
Social security surplus under
s
IA plan
llar 250
o
Reduction in the Social Security
D
Surplus Under the President's
Individual Account Plan
200
rrent
u
f C 150
s o
ion 100
ill
B
50
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Year
Source: Congressional Research Service (CRS) Calculations based on the 2004 Social Security
Trustees Report, Table VI.F.9 and the Feb. 3, 2005 Social Security Actuarial Memorandum to Charles
Blahous, Table 1.b.2.
Note: The 2004 Social Security Trustees Report is used because this was the basis for the estimates
provided in the Social Security memorandum to Charles Blahous.
Rather, according to law, surplus receipts are credited to the Social Security Trust
Funds in the form of special-issue non-marketable Treasury bonds. The actual
surplus dollars are held by the U.S. Treasury where they become part of the general
revenue pool and can be used to increase spending, reduce taxes, or reduce the
18 “Strengthening Social Security for the 21st Century,” White House, Feb. 2005, available
at [http://www.whitehouse.gov/infocus/social-security/200501/strengthening-socialsecurity
.html]. For additional information on transition costs, see CRS Report RS22010, Social
Security: Transition ‘Costs’, by Laura Haltzel.
CRS-12
government debt.19 In recent years, Social Security surpluses have been used to
offset increased spending or reduced taxes since the rest of the government’s budget
(on-budget) has been in deficit. Thus, any reduction in the Social Security surplus
(off-budget) would, barring other changes, lead to an increased unified budget deficit.
Effect on Combined Social Security Income. Based on the assumptions
and methodology described below, we find that the total of the reduced Social
Security defined benefit plus the annuity that would be available using the actual IA
balance would exceed Social Security current-law promised benefits if the account
earns the 4.6% annual real rate of return projected by the Social Security actuaries.
However, if the account earns the 2.7% risk-adjusted annual real rate of return
projected by the actuaries, workers would face a slight reduction in overall Social
Security income relative to current law.20 Younger workers and those with higher
lifetime earnings would benefit the most from IAs. Younger workers would be able
to contribute to their IA throughout their careers and would have higher contributions
as a result of continued wage growth. Higher earners would benefit from being able
to accrue larger account balances as the dollar limit on contributions increases over
time until it reaches the full 4% of covered wages.
How an individual worker would fare under the IA proposal would depend
entirely upon how the actual rate of return earned by the worker’s IA compared to the
fixed “benefit offset” rate of 3%. The worker would bear all of the investment risk.
If a worker’s actual account attained an annual real rate of return greater than 3%, the
balance of the actual account would be higher than that of the “shadow” account.
Thus, while the Social Security benefit would be reduced by the annuity based on the
“shadow” account, an annuity from the actual account would be larger and would
more than offset the reduction to the defined benefit. Therefore, the combined actual
individual account annuity plus the Social Security benefit reduced by the “shadow”
account would be larger than what the worker is scheduled to receive under current
law. On the other hand, if a worker’s actual account attained an annual real rate of
interest lower than 3%, the balance of the actual account would be lower than that of
the shadow account. Thus, while the Social Security benefit would be reduced by the
annuity based on the “shadow” account, an annuity from the actual account would
be smaller and would not offset the reduction to the worker’s Social Security benefit.
Therefore, the combined actual IA annuity plus the Social Security benefit reduced
by the “shadow” account would be smaller than what the worker is promised to
19 For additional information on how Social Security financing works, please refer to CRS
Report 94-593, Social Security: Where Do Surplus Taxes Go and How Are They Used?, by
Geoffrey Kollmann.
20 The higher rate of return one expects to earn from investing in stocks is due to the higher
risk such an investment carries. The difference between the rate of return on stocks and the
rate of return on government bonds is known as the “risk premium,” the amount of
compensation the market demands for taking on the additional risk of investing in stocks
relative to the lower risk of investing in government bonds. In this case, because stocks are
assumed to earn a real rate of return of 6.5% while government bonds are assumed to earn
a real rate of return of 3% the risk premium is 3.5 percentage points. Thus, the “risk-
adjusted” rate of return used in this analysis represents the stock rate of return adjusted
downward by this risk premium. This rate of return omits any expected return over that of
government bonds.
CRS-13
receive under current law. Because the hypothetical account rate of return (3.0%) is
not reduced by administrative fees while the actual risk-adjusted rate of return is
reduced by administrative fees (to 2.7%), the hypothetical account balance will
exceed that of the risk-adjusted actual account in every case where the worker invests
exclusively in government bonds as a way to “opt-out” of the IA system.
According to the actuarial memorandum, disability beneficiaries would not be
subject to the offset and would not have access to their IA until conversion from
disability benefits to aged retirement benefits at the full retirement age. The
memorandum also indicates that the offset applies to all aged retirement benefits. If
disability recipients were subject to the offset upon conversion, then these workers
would experience a sudden change in the composition of their benefit from one of a
guaranteed benefit to one that is partially guaranteed and partially dependent on the
proceeds from the IA.
Limitations of This Analysis. According to the 2004 Trustees Report (the
source of the assumptions used for this analysis), under current law, Social Security
will be unable to fully pay promised benefits after 2042.21 We have provided
estimates of combined Social Security income under two scenarios: one where we
assume that trust fund revenues are found and the trust fund can provide “scheduled”
current law Social Security benefits, and one where we assume that trust fund
revenues are not found and the current-law benefit is reduced to a “payable” level
based on estimated current-law revenues. In the “scheduled” benefits scenario, the
benefit estimates for both the current-law benefit and the Social Security benefit
under the President’s IA assume the use of yet unidentified sources of revenue. A
comparison of the ‘payable’ baseline to the scheduled baseline shows to what degree
the current-law scheduled benefits are overstated compared to current-law revenue
sources. Because the individual accounts would actually make the Social Security
solvency problem worse in the short run, to achieve solvency without revenue
increases the President’s proposal would require larger benefit reductions than those
that would be required to achieve solvency under current law unless the entire
transition cost were financed through increased debt or higher taxes. However,
because the Social Security Administration actuaries were not provided with the plan
specifications needed to produce a 75-year analysis of how the President’s IA
proposal would affect solvency, we do not know the size of the annual benefit
reductions that would be required to maintain trust fund solvency. Thus, a serious
limitation of the “payable” analysis is that it overstates the value of the total Social
Security income available under the IA plan because it fails to take into account the
additional solvency-driven reductions (on top of the “shadow account” offset) to the
Social Security defined benefit that forms the base of Social Security combined
income.
Figure 2 shows that the total Social Security income possible for a scaled
average-wage worker using the assumed 4.6% annual real rate of return would be
21 The 2005 Social Security Trustees Report indicates that the year of exhaustion of the
OASDI Trust Funds in 2041. To maintain consistency with the underlying assumptions
used in this analysis, we have continued using 2042 as the date of exhaustion for the
“payable” baseline estimates.
CRS-14
31% higher than current-law payable benefits for younger cohorts. Thus, if the
additional benefit reductions required to achieve solvency under the IA plan reduce
benefits by less than 31%, scaled average-wage workers who achieve the “expected”
4.6% annual rate of return under the IA plan would still come out ahead. However,
if the ultimate benefit reductions are greater than 31%, workers would have higher
benefits under current-law. Figure 2 also shows that the total Social Security income
possible for a scaled average-wage worker using the risk-adjusted 2.7% annual real
rate of return would be about 4% lower than current-law payable benefits for younger
cohorts. Thus, any additional benefit reductions required to achieve solvency under
the IA plan would make these scaled average-wage workers worse off than under
current-law.
Figure 2. Percent Difference Between Current-Law Payable Social
Security Benefits and Total Social Security Income (Reduced
Current-Law Payable Social Security Benefits Plus the Individual
Account Annuity)
35%
30%
25%
Percent Difference Between
Current-Law PAYABLE and Total
20%
Social Security Income Assuming
'Expected' 4.6% Annual Real Rate of
15%
Return on IA
cent
Percent Difference Between
Per 10%
Current-Law PAYABLE and Total
Social Security Income Assuming
'Risk-Adjusted' 2.7% Annual Real
5%
Rate of Return on IA
0%
Age 41
Age 31
Age 21
Age 11
Born Today
Born 2012
-5%
-10%
Birth Cohort
Source: Congressional Research Service estimates.
Although we do not yet know how the additional shortfall due to the IAs will
be financed, we know that it would require at least the same solvency-driven
reductions that would be required under a “do-nothing” scenario where only those
benefits that can be paid with incoming tax revenues would be paid. In this analysis,
these estimates are presented as “payable” benefits. According to the 2004 Trustees
Report (the source of the assumptions used for this analysis), under current law,
CRS-15
Social Security will be unable to fully pay promised benefits after 2042.22 At that
time, payroll tax revenues and revenues from the income taxation of Social Security
benefits are projected to be sufficient to pay approximately 74% of scheduled
benefits and a gradually declining percentage thereafter. Thus, under current law a
benefit reduction of approximately 26% would be required in 2042, with gradually
increasing reductions thereafter. In the examples presented below, only the worker
age 21 today would have any change in Social Security benefits under the payable
baseline as this worker’s year of retirement (2051) occurs after the Trust Funds have
been depleted and annual Social Security revenues are sufficient to pay only 74% of
promised benefits. Thus, under the payable baseline, the 21-year-old’s Social
Security promised benefits are reduced by 26%.
For a series of hypothetical workers that vary by age and earnings history, the
following section provides estimates of
! the worker’s actual and “shadow” individual account balances;
current-law promised Social Security benefits;
! benefit offsets based on the “shadow account” annuities; reduced
promised Social Security benefits;
! the total reduced Social Security/IA benefit relative to the Social
Security benefit promised under current law;
! the total reduced Social Security/IA benefit relative to the Social
Security benefit payable under current law;
! required annuitization or phased withdrawal levels with reduced
Social Security promised benefits;
! maximum amounts available at retirement as lump-sum or
inheritance amounts with reduced Social Security promised benefits
once the required annuitization or phased withdrawals have been
deducted;
! required annuitization or phased withdrawal levels with reduced
Social Security payable benefits;
! and, maximum amounts available at retirement as lump-sum or
inheritance amounts with reduced Social Security payable benefits
once the required annuitization or phased withdrawals have been
deducted.
Because account balances and benefit reductions will differ by age and lifetime
earnings, we provide estimates for hypothetical low, average and high-wage earners
born in various years (i.e., of various birth cohorts).
Analysis by Birth Cohort. Assuming a 4.6% annual real rate of return,
younger birth cohorts participating in the IA system would receive a larger total
Social Security income (comprised of the reduced Social Security benefit plus the IA
annuity) compared to older cohorts of similar earnings levels (e.g., scaled low-wage
22 The 2005 Social Security Trustees Report indicates that the year of exhaustion of the
OASDI Trust Funds in 2041. To maintain consistency with the underlying assumptions
used in the Social Security actuarial analysis of the President’s IA proposal, we have
continued using 2042 as the date of exhaustion for the “payable” baseline estimates.
CRS-16
worker). Figure 3 shows combined Social Security income for scaled average-wage
workers of different birth cohorts.
Figure 3. Total Social Security Income for Scaled Average-Wage
Worker, by Birth Cohort
$3,500
$3,000
$2,500
llars
o
D
$2,000
005
$1,500
nt 2
nsta $1,000
o
C
$500
$-
Age 41
Age 31
Age 21
Age 11
Born Today
Born 2012
Birth Cohort
Monthly Current-law Social Security Promised Benefit
TOTAL Social Security Income (Reduced Social Security PROMISED Benefit and IA Annuity
Assuming 'Risk-Adjusted' 2.7% Annual Real Rate of Return)
TOTAL Social Security Income (Reduced Social Security PROMISED Benefit and IA Annuity
Assuming 'Expected' 4.6% Annual Real Rate of Return)
Source: Congressional Research Service estimates.
Younger workers will have higher individual account balances than will older
workers of similar earnings levels. As is evident from Table 3, those workers who,
as a result of their age, are able to contribute to their IA throughout their careers have
much larger account balances upon retirement than do those who contribute at the
same earnings level, but over fewer years. For example, upon retirement, the
“expected” individual account balance of the average worker age 41 today is only
27% of that of the average worker age 21 today. Based on the assumptions used in
this analysis, the increased account balance for younger generations is due to three
variables: (1) the rise in real wages for individuals of similar earnings levels, and thus
real contributions to the accounts; (2) the higher value of interest accumulated due
to these higher wages; and, (3) the increasing number of years of contributions to the
accounts and the effect of more years of interest (up to the point where each future
cohort would have contributed to the IA for each of their 44 work years, the 1990
birth cohort). First, under the assumptions used by the Social Security actuaries, each
future generation will earn real wages (i.e., an increase in earnings that is greater than
the increase in inflation) larger than those of the generation before it.23 Thus, the real
23 The Social Security actuaries assume long-term average real wage growth of 3.9% per
(continued...)
CRS-17
contributions to the IA of each future generation will also be larger than those of the
current generation. Second, these larger real contributions create a larger real
account base for investment. Even with the same annual real rate of return applied
(e.g., 4.6%) to the IA between different generations, the dollar value of the interest
is higher with the higher real account base. Third, the 41-year-old worker
participates in the account for only 22 years (2009-2030) while the 21-year-old
participates for 40 years (2011-2050). The younger worker’s greater of number of
years participating in the IA leads both to greater aggregate contributions and greater
interest earnings as a result of the increased years of investment of those
contributions.
Because younger workers will have both larger actual accounts as well as larger
“shadow” accounts, younger workers face a larger offset to their Social Security
promised benefits relative to older workers. Table 4 illustrates that depending on
age, the “shadow” account annuity reduces Social Security promised benefits by
between 17% and 41% for the scaled average-wage worker.
The effect of the benefit offset in reducing the Social Security benefit is larger
for younger cohorts whose Social Security benefits could be reduced to achieve long-
term solvency. Table 5 provides the same information as for Table 4, but for a
baseline of current-law Social Security payable benefits instead of promised benefits.
Only the worker age 21 today would have any change in Social Security benefits
under the payable baseline as this worker’s year of retirement (2051) occurs after the
Trust Funds have been depleted and annual Social Security revenues are sufficient
to pay only 74% of promised benefits. Thus, under the payable baseline, Social
Security promised benefits are reduced by 26%. Because the Social Security benefit
is lower under the payable baseline, but the “shadow” account offset remains the
same, the percent reduction in Social Security benefits is larger than under the
promised baseline. Thus, in the long-run, workers would receive an increasingly
smaller portion of their Social Security defined benefit.
Younger workers would experience the largest percent increase in total Social
Security income if a 4.6% annual real rate of return is achieved. Table 6
demonstrates that the total of the reduced Social Security benefit plus the annuity that
would be available using the actual IA balance would exceed Social Security current-
law promised benefits if the account earns the “expected” 4.6% annual real rate of
return. Depending on age, the percent increase in combined Social Security income
is estimated to be between 3% and 18% for the scaled average-wage worker. The
percent increase in the total benefit amount is larger for younger workers who
contribute to the IA for their entire careers and thus have more years for the
difference in interest rates between the hypothetical account and the actual account
to work in their favor. If, on the other hand, the account is only able to achieve a
2.7% annual real rate of return (the annual real annual rate of 3.0% minus 0.3%
administrative costs), then the total of the reduced Social Security benefit plus the
annuity would be less than that promised under current-law. The advantages for
younger workers would be removed under this “risk-adjusted” interest rate as there
23 (...continued)
year.
CRS-18
is no percentage point difference to be utilized to enhance the longer IA participant’s
account balance.
Younger workers would experience an even larger percent increase in combined
Social Security income when compared to what would be possible under a current-
law payable scenario. Table 7 provides the same information as Table 6, but for a
benefits payable baseline. Again, the only worker that would be affected by the
payable baseline is the worker age 21 today. Because the current-law payable benefit
would be lower than the current-law promised benefit, the same dollar amount from
the IA annuity (assuming a 4.6% annual real rate of return), would lead to a larger
percent increase in combined Social Security income for this worker.
Analysis by Earnings Level. Assuming a 4.6% annual real rate of return,
higher-wage workers would experience a greater percent increase in combined Social
Security income than lower-wage workers. Figure 4 below demonstrates the levels
of current-law promised benefits, the combined Social Security income assuming an
annual real rate of return of 4.6%, and the combined Social Security income
assuming an annual real rate of return of 2.7% for a worker age 21 today with three
different lifetime earnings levels.
Figure 4. Effect of the President’s IA Proposal on Combined Social
Security Income, by Earnings Level for Worker Age 21 Today
$3,500
$3,107
$3,000
$2,652 $2,585
$2,365
$2,500
$2,008 $1,957
$2,000
$1,379
$1,500
$1,216 $1,192
$1,000
Constant 2005 Dollars
$500
$-
Scaled Low-Wage Worker
Scaled Average-Wage Worker
Scaled High-Wage Worker
Type of Hypothetical Worker, Age 21Today
TOTAL Social Security Income Assuming an 'Expected' 4.6% Annual Real Rate of Return
(Reduced Social Security PROMISED Benefit and IA Annuity)
Current-Law Promised Social Security Benefit
TOTAL Social Security Income Assuming a 'Risk-Adjusted' 2.7% Annual Real Rate of Return
(Reduced Social Security PROMISED Benefit and IA Annuity)
Source: Congressional Research Service estimates.
Note: Compares benefit amounts assuming funding is located to pay Social Security promised
benefits.
CRS-19
IA participants with higher earnings over their lifetime will have larger account
balances when they retire than those of lower earners. Those with higher wages are
able to contribute larger dollar amounts to their IAs leading to larger account
balances. For example, in Table 3 the scaled low-wage earner age 41 today has only
44% of the account balance of the scaled high-wage earner age 41 today. Even
though these workers contribute to the IA over the same number of years, and even
though the high-wage earner is subject to the contribution cap for 15 years out of the
22 spent participating in the IA, 4% of the high-wage worker’s salary is larger than
4% of the low-wage worker’s salary. The disparity in account balances between
individuals with different earnings levels increases over time as the cap on IA
contributions rises to the point where the hypothetical high-wage worker could
contribute a full 4% of wages to the IA. By the time a worker age 21 today retires,
the account balance of a low-wage worker equals only 34% of that of a high-wage
worker of the same age.
Because of their larger account accumulations, higher earners would face a
larger percent reduction in their Social Security scheduled benefits as a result of the
benefit offset. Table 4 illustrates that depending on earnings level, the “shadow”
account annuity reduces Social Security promised benefits by between 31% and 43%
for a worker age 21 today. Low earners face smaller percent reductions to their
Social Security promised benefits than do higher earners because the underlying
Social Security benefit structure is progressive (i.e., it replaces a larger percentage of
wages of low-wage workers compared to high-wage workers). Thus, a flat
percentage of each workers wages (4%), grown at a flat percentage rate each year
(3%) to arrive at the “shadow” offset, still maintains the progressive benefit structure
by allowing low-wage workers to keep a larger percentage of their Social Security
benefit (e.g., 69% for the age 21-year-old) than high-wage workers (e.g., 57% for the
age 21-year-old).
Higher earners (scaled high and scaled average wage workers) would experience
the largest percent increase in total Social Security income if a 4.6% annual real rate
of return is achieved. Table 6 demonstrates that the total of the reduced Social
Security benefit plus the annuity that would be available using the actual IA balance
would exceed Social Security current-law promised benefits if the account earns the
“expected” 4.6% annual real rate of return. Depending on earnings level, the percent
increase in combined Social Security income is estimated to be between 13% and
18% for a worker age 21 today. Under the 4.6% rate of return scenario, the percent
benefit increase would be larger for scaled high-wage workers than for scaled low-
wage workers. This difference would occur because the 4% of earnings that high
earners would be able to contribute to their IAs has a larger dollar value and would
be able to take advantage of the 1.6 percentage point difference between the 4.6%
rate of return on the IA and the 3.0% rate of return used to calculate the IA benefit
offset. If, on the other hand, the account is only able to achieve a 2.7% annual real
rate of return (the annual real annual rate of 3.0% minus 0.3% administrative costs),
then the total of the reduced Social Security benefit plus the annuity would be less
than that promised under current-law. The advantages for higher earners would be
removed under this “risk-adjusted” interest rate as there is no percentage point
difference to be utilized to enhance the higher earner’s account balance.
CRS-20
As Table 8 illustrates, the reduced Social Security promised benefit is still large
enough compared to the monthly aged poverty thresholds to allow each hypothetical
worker the option of withdrawing the entire IA balance as a lump-sum at retirement,
rather than being required to purchase an annuity or take programmed withdrawals,
or passing it on as an inheritance. If, however, additional benefit reductions are
eventually introduced as part of a comprehensive Social Security proposal, some
portion of the IA balance would probably need to be annuitized or taken as a phased
withdrawal in order to achieve a combined monthly stream of income equal to the
federal poverty threshold. This outcome is best demonstrated in Table 9, which
takes into account the effect of a reduction in promised benefits for the 21 year old
to provide only those benefits payable at retirement. In this case, the low-wage and
average-wage worker’s payable benefits fall below the poverty threshold after being
reduced by the “shadow” account annuity. As a result, this worker would be required
to annuitize or take in programmed withdrawals enough of the individual account to
guarantee a combined Social Security income equal to 100% of the federal poverty
threshold. Once this portion of the individual account has been annuitized or set
aside for programmed withdrawals, the worker would have the option to take the
remainder of the account balance as a lump sum or pass it along as inheritance. The
high-wage 21-year-old worker would not be required to annuitize or set aside for
programmed withdrawals any portion of his or her account balance because even the
26% reduction in Social Security benefits under the payable baseline leaves this
worker with a large enough Social Security benefit to remain above the federal
poverty threshold. Thus, if benefit reductions are the primary method of achieving
long-term solvency, lower- and average-wage workers would be less able to increase
family wealth under the President’s IA plan than would high-wage workers.
Methodology
All individual account estimates are based on the proposal specifications
outlined above. To estimate the account balances of the actual and hypothetical
“shadow” accounts for those retiring many years in the future, we assume that the IA
contribution limit continues to increase over the full work history of each worker
according to the method outlined in the actuarial memorandum. If further details
emerge that alter this contribution rate, these estimates would need to be recalculated
accordingly. We estimate the account balances for the actual IA, which the worker
will receive in full, using both the “expected” annual real rate of return specified by
the Social Security actuaries (4.9%) as well as the “low-yield” or “risk-adjusted”
annual real rate of return specified by the actuaries (3.0%), both reduced by the
estimated administrative fee of 30 basis points per year. Thus the annual real rate of
return net of administrative costs is 4.6% and 2.7%, respectively. The hypothetical
account balance is estimated using the 3.0% rate of return specified in the proposal.
This account balance is used to calculate the offset to the Social Security defined
benefit. Because the hypothetical account rate of return is not reduced by
administrative fees while the actual risk-adjusted rate of return is reduced by
administrative fees, the hypothetical account balance will exceed that of the risk-
adjusted actual account in every case. To calculate the CPI-indexed annuity for both
the actual and hypothetical “shadow” accounts, we rely on annuity factors provided
to us by the Social Security Administration.
CRS-21
One important limitation of using these assumed constant annual interest rates
is that historical rates of return have not followed such a pattern. Interest rate
fluctuations over time and where these fluctuations occur in a worker’s career can
have a large effect on the estimated account balances of workers under an IA system.
For example, a negative rate of return in the years prior to an individual’s retirement
can significantly reduce the value of the assets in the IA. Similarly, the rate of return
prevalent at the time of retirement can alter the monthly annuity payment that a
worker would receive based on the same dollar amount in the individual account.
The higher the interest rate assumed when calculating the annuity amount, the greater
the assumed earnings on the assets used to fund the annuity, and the larger the
annuity payment to the worker. For example, based CRS analysis, at an interest rate
of 6.0%, a 68-year-old person who purchased a level, single-life annuity for $200,000
would receive income from the annuity of $1,852 per month. At an interest rate of
4.0%, the same sum of money would buy a level, single-life annuity worth $1,584 per
month, a difference of $268 in monthly income.
Some have argued that the establishment of individual accounts, as well as the
tax increases, benefit reductions or government borrowing needed to achieve
solvency, may affect the macroeconomy and, thus, affect the interest rates that
individuals could expect to obtain on their IAs. These estimates do not incorporate
any such potential macroeconomic feedbacks.
We estimate the effect of the proposal both on workers who would contribute
to the IA for their entire career as well as those whose careers would be split between
the current-law system and the IA system. To estimate the effect of the IA proposal
on a worker age 21 today, we assume that the worker is born in 1984, begins work
at age 21 in 2005, and retires at the full retirement age of 67 in 2051. As a result, this
worker spends 40 years of his or her 46 year work history contributing to the IAs and
reflects what the system could provide to a worker once the plan is fully phased-in.
To estimate the effect of the IA proposal on a worker age 31 today, we assume that
the worker is born in 1974, begins work at age 21 in 1995, and retires at the full
retirement age of 67 in 2041. As a result, although this worker also has a career of
46 years, only 30 of them are spent contributing to the IA. Finally, to estimate the
effect of the IA proposal on a worker age 41 today, we assume that the worker is born
in 1964, begins work at age 21 in 1985, and retires at the full retirement age of 67 in
2031. Thus, this worker also has a career of 46 years, but only 22 of them are spent
contributing to the IA.
We provide account balance estimates for scaled low-wage workers, scaled-
average wage workers, and scaled high-wage workers, as defined by the Social
Security Office of the Chief Actuary.24 It is assumed that these workers follow
typical lifetime earnings patterns that would produce a Social Security benefit
equivalent to that of workers with career earnings of either: (1) a “low”wage (45%
24 Social Security Administration, Office of the Actuary, Internal Rates of Return Under the
OASDI Program for Hypothetical Workers, Actuarial Note No. 144, June 2001. The pattern
in these “scaled” earnings histories shows relatively low earnings at the beginning of the
career, fairly rapid growth through the middle of the career, and a gradual tapering off of
earnings at the end of the career.
CRS-22
of a wage equal to Social Security’s “average wage series”); (2) an “average wage”(a
wage equal to Social Security’s “average wage series”); or, (3) a “high” wage (160%
of a wage equal to Social Security’s “average wage series”). For example, based on
projections in the 2004 Social Security Trustees Report, a worker retiring in 2005
would have had career average earnings of $15,776 for a scaled “low” earner,
career average earnings of $35,057 for a scaled “average” earner, and career average
earnings of $56,091 for a scaled “high” earner.25 These scenarios are for illustration
only and are not meant to fully represent every possible scenario that actual workers
may experience. For example, by relying on stylized workers, we have assumed no
gaps in employment. If present, these gaps would reduce both the Social Security
benefit and the IA balance of these workers. However, because under a system of
individual accounts the earlier contributions are made the more interest they accrue,
the timing of gaps in employment has a greater effect on individual account balances
than they would on the traditional Social Security benefit level. Although the plan
does not require annuitization, but allows individuals to take programmed
withdrawals from their IAs, we have followed the Social Security Administration’s
practice of assuming universal annuitization as it is not clear which type of worker
might opt for programmed withdrawals. Because we are using hypothetical workers
with no spouses or other dependents, the annuity levels calculated for both the actual
and hypothetical accounts are based on the purchase of a unisex CPI-indexed single-
life annuity assuming an inflation rate of 2.8% per year and a nominal interest rate
of 5.884% per year. Furthermore, the poverty level estimates for the year of
retirement are also based on a single-person household. The aged poverty level in
2004 was $9,060. This level was indexed to the year of retirement using the CPI.
Unless otherwise specified, all assumptions are based on the 2004 Social Security
Trustees Report. Unless otherwise specified, all dollar amounts are presented in real
2005 dollars.
25 Career average earnings levels are defined for retired workers as the highest 35 years of
earnings, indexed for growth in average wages to the year prior to benefit entitlement. This
concept is similar to that of the AIME, except that career average earnings for these scaled
workers are indexed to the year prior to entitlement instead of two years prior to eligibility
and earnings are averaged on an annual rather than a monthly basis. Thus, the indexing year
for the 2005 retiree is 2004, and the 2004 average wage index is the basis for the career
average earnings levels for each hypothetical worker.
t
en
Age 21
today
$268,788
$180,723
$192,046
retirem
of
ear
y
e
Age 31
today
$139,246
$103,782
$108,590
e 41, th
er ag
Scaled High Earner
rk
o
e w
Age 41
today
$64,148
$52,624
$54,266
r th
o
ccount Under the President’s
F
” A
2041.
is
pothetical Worker
Age 21
today
7
$198,541
$129,568
$138,328
e 6
t at ag
en
pe of Hy
erage Earner
v
Age 31
today
$80,617
$84,732
$111,257
Ty
retirem
tual and “Shadow
c
Scaled A
ear of
e y
Age 41
today
$52,798
$42,427
$43,895
23
e 31, th
er ag
CRS-
rk
o
Age 21
today
$90,173
$58,710
$62,700
e w
ccount Proposal, by
(Constant 2005 dollars)
Earner
2051. For th
Age 31
today
$54,441
$38,885
$40,960
e 67 is
Personal A
Scaled Low
ice.
t at ag
$28,149
$22,184
$23,022
en
Age 41
today
Serv
retirem
esearch
ear of
al R
“Low-
e y
sion
ccount Balances in Year of Retirement for A
, th
res
g
2005 Social Security
n
o
Account
e C
e 21 today
usted” 2.7% Annual
th
dual
by
er ag
vi
Adj
rk
ates
o
Indi
tim
e w
2031.
)
)
Es
rn
rn
tu
tu
For th
e 67 is
Table 3. Estimated A
Actual Account Balance (Using
“Expected” 4.6% Annual Real Rate of
Re
Actual Account Balance (Using
Yield”/ “Risk
Real Rate of Return)
“Shadow” Account Balance (Accrues
at Specified 3.0% Annual Real Rate of
Re
Source:
Note:
at ag
t
en
- 43%
Age 21
today
$2,652
$1,138
$1,515
retirem
ear of
$657
e y
- 28%
Age 31
today
$2,384
$1,728
e 41, th
Scaled High Earner
$336
er ag
- 16%
rk
Age 41
today
$2,144
$1,808
o
e w
r th
o
mount in Year of Retirement,
$820
$2,008
$1,189
- 41%
A
Age 21
today
2041. F
7 is
nnuity
pothetical Worker
erage Earner
$512
e 6
v
$1,805
$1,293
- 23%
ag
” A
Age 31
today
at
t
en
pe of Hy
Scaled A
$271
- 17%
Ty
Age 41
today
$1,623
$1,352
retirem
of
ear
y
$371
$844
e
th
$1,216
- 31%
Age 21
today
24
e 31,
Benefit, by
Earner
er ag
CRS-
$248
$846
rk
- 23%
o
Age 31
today
$1,093
e w
(Constant 2005 dollars)
Benefit, Estimated “Shadow
Scaled Low
$983
$142
$840
- 14%
Age 41
today
2051. For th
Social Security
e 67 is
ear,
Benefit
)
ice.
t at ag
en
Social Security
Promised
Serv
ised Benefit
ent (First y

retirem
esearch
Prom
ear of
etirem
al R
Social Security
e y
Promised
sion
, th
ised Social Security
at R
ear of life expectancy
Law
res
and Reduced
g
n
o
rrent-
e C
Annuity
Social Security
u
e 21 today
I each y
“Shadow” Annuity
Law Prom
P
th
by
er ag
e in C
rk
ith C
ates
o
w
Monthly
ang
h
e w
Current-
tim
2031.
Es
aining
ised Benefit Due to “Shadow” Account Offset
For th
e 67 is
Table 4. Current-Law
Monthly
“Shadow” Monthly
increasing
Rem
After Reduction by
Percent C
Prom
Source:
Note:
at ag
t
f
it
e
g
en
ef
iev
in
y
ear o
$825
- 58%
ben
s y
pan
Age 21
today
$1,963
$1,138
retirem
er’
rk
tional
o
ear of
order to ach
addi
$657
e y
is w
in
- 28%
e
er to accom
Age 31
today
$2,384
$1,728
t th
n
t plan
e ref
e 41, th
) as th
n
ld
o
leas
Scaled High Earner
b
$336
er ag
- 16%
rk
in
to accou
al accou
Age 41
today
$2,144
o
n
al. P
w
e in
e w
o
idu
r th
t tak
div
o
e (sh
o
propos
$820
e in
mount in Year of Retirement,
$667 $1,808
$1,486
- 55%
s IA
do n
t’
A
Age 21
today
aselin
er th
lts
d
2041. F
u
n
le b
u
7 is
ab
residen
e 6
ay
ese res
sary
nnuity
pothetical Worker
erage Earner
$512
h
e P
v
- 23%
ag
p
Age 31
today
$1,805
$1,293
at
T
eces
” A
t
er a
er th
d
d
en
n
fits.
n
ene
ld be n
u
pe of Hy
Scaled A
$271
o
efits u
b
able u
$1,623
$1,352
- 17%
d
retirem
Ty
Age 41
today
en
of
at w
b
ise
m
) th
ear
ro
y
rity
e
f p
ld be pay
u
$900
$371
$528
ecu
t law
o
- 41%
th
o
Age 21
today
%
4
rren
25
at w
e 31,
cial S
o
7
ly
th
Benefit, by
er cu
Earner
S
n
d
er ag
o
n
els
CRS-
$248
$846
rk
ay
u
- 23%
o
t-law
p
cy
t lev
Age 31
today
$1,093
fi
e w
rren
en
u
t to
lv
ne
(Constant 2005 dollars)
e
c
o
n
ien
b
Scaled Low
e s
e
Benefit, Estimated “Shadow
e i
$983
$142
$840
th
- 14%
g
iev
Age 41
today
an
2051. For th
h
re suffic
tate
c
s a
ers
Social Security
y
n
s to ach
e 67 is
e a
nue
able
av
ction
d to ov
nefit
ear,
h
reve
)
ice.
t at ag
sed.
Pay
ld
ten
en
u
rity
u
Payable
Be
o
d redu
lts
y
Serv
cu
w
u
og
Social Security
ay
fset an
ent (First y
able Benefit
d
e res

retirem
o
odol
cial Se
es
esearch
t
eth
Pay
1
So
it of
ear of
l
ef
s, th
m
etirem
al R
e 2
g
u
Social Security
e y
h
of
Payable
n
sion
, th
er a
e ben
at R
e. T
tio
rk
p
and Reduced
able Social Security
ear of life expectancy
Law
res
g
o
ere annua
to th
n
h
elin
cri
o
e
e w
w
rrent-
h
du
e C
t
int
e
Annuity
Social Security
u
e 21 today
I each y
“Shadow” Annuity
ly
o
os
led des
Law Pay
P
th
p
th
able bas
ai
by
er ag
t a
e in C
On
of
rk
ith C
r det
ates
o
rs a
top
o
w
Monthly
ang
f
h
e w
er a pay
Current-
tim
ccu
d
m
s 2031.
n
t o
s (on
du
Es
i
u
aining
7
en
For th
cy
ran
e 6
em
ction
en
o
Table 5. Current-Law
g
Monthly
“Shadow” Monthly
increasing
Rem
After Reduction by
Percent C
Benefit Due to “Shadow” Account Offset
lv
em
Source:
Note:
at a
retir
redu
so
m
.
d
ear
be
an
use
y
17%
- 3%
21-y
at c
h
Age 21
$2,652
$1,515
$1,593
$3,107
$1,071
$2,585
the
rner
a
l to w
, only
ethodolog
8%
qua
m
$842
$628
- 1%
hus
e
Age 31
$2,384
$1,728
$2,570
$2,355
fits
ne
ription of
2031. T
be
sc
Scaled High E
3%
0%
t is
ed
de
$397
$325
is
en
d
Age 41
$2,144
$1,808
$2,205
$2,134
m
ile
pothetical Worker
ta
tire
prom
re
r de
o
18%
$768
- 3%
f
rner
Age 21
$2,008
$1,189
$1,176
$2,365
$1,957
ear of
a
y
portion of
ndum
pe of Hy
the
ra
y
o
31
Ty
9%
em
$673
$488
- 1%
e 41, the
pa
$1,805
m
$1,293
$1,966
$1,781
g
ccount Balances Under President’s
Age
er ag
only
in
y
rk
an
o
c
an
p
3%
w
m
Scaled Average E
$326
$262
- 1%
rity
the
cu
Age 41
$1,623
$1,352
$1,678
$1,614
Se
acco
l
djusted A
Benefit, by
For
ia
fer to
$844
13%
$348
- 2%
Soc
2041.
en
Age 21
$1,216
$1,379
$1,192
is
t
h
lease re
rner
w
a
en
m
te
. P
E
Promised
w
7%
tire
fits
26
o
$846
$329 $534
$235
- 1%
re
ne
Age 31
$1,093
$1,175
$1,081
2042 da
be
CRS-
ear of
r the
rity
y
cu
Scaled L
3%
fte
$983
$840
$174
$137
$977
- 1%
the
s a
l Se
Age 41
$1,014
ia
(Constant 2005 Dollars)
tire
e 31,
Soc
)
er re
%
er ag
rk
ity
rk
o
u
.7
o
n
2
w
ation of
n
w
x
otal
g
otal
4.6%
A
-
g
t law
s this
e ta
isk
elative to
a
fter
in
e (T
e (T
r
om
it
d IA
rren
d R
Benefit For Expected and Risk-A
ce (Usin
ef
com
cu
com
seline
inc
efit A
ce (Us
it an
In
alan
In
2051. For the
en
ef
e to
annuity
’ ba
B
efit an
le
nd the
alan
rity
t is
en
rity
A
ED Ben
I
ab
B
en
y
es a
al IA
ervice.
m
x
ED Ben
relativ
S
justed
tire
a ‘pa
OMIS
al IA
ity
ctu
u
d
re
r
roll ta
OMISED B
n
A
y
PR
R
ctu
OMIS
-A
OMISED B
pa
ty
P
l Social Secu
an
sted
l Social Secu
ear of
unde
ri
R
PR
ta
ta
o
ju
o
al Research
y
rity
ty
s IA
d
P
n
d by
tions
ecu
T
T
te
ity
ected”A
ri
lu
-A
lus Risk
, the
S
u
p
rity
y
ra
n
x
e in
)
e in
efit)
duc
ccount Proposal Compared to Current-Law
al
n
E
ecu
n
en
ressio
re
ene
ci
S
efit p
g
o
“
Risk
n
fit
cial Secu
g
al
en
g
tur
enefit p
s g
S
” A
in
ci
ne
ly
So
)
o
e Co
e 21 toda
f Re
g
be
enue
th
ly
adow
rn
ity
th
v
efit)
o
u
y
idual A
th
h
le Usin
SED b
er a
re
n
S
etu
ced S
e or Decreas
te
n
e or Decreas
ct to
ced Social Secu
OMISED b
rk
of
Mon
“
f r
R
o
ailable Us
edu
OMISED b
ailab
An
OMI
P
ates b
w
aw
Mo
g
by
v
creas
R
v
al Ra
edu
A
creas
R
subje
out
Indiv
n
A
ate o
(R
A
R
I
stim
be
lly
t-L
in
io
P
P
l r
L
t In
l Re
L
t In
t law
ain
ct
ity
ity
E
u
A
ced
u
A
sted
ced
For the
ould
Table 6. Combined Social Security
rren
n
T
u
OMISED ben
n
T
ju
u
annua
u
edu
n
O
ercen
R
n
nnua
O
ercen
rren
rce:
w
C
Rem
R
A
annua
T
P
red
P
A
A
T
Ad
P
red
cu
u
o
id
S
Note:
old
pa
id
to
lts
ay
pa
su
$825
23%
- 3%
ear-old
be
e due
Age 21
tod
$1,963
$1,593
$2,417
$1,071
$1,896
se re
an
rner
21-y
the
a
at c
thos
,
the
h
hus
ay
8%
.
$842
$628
- 1%
. T
ed
, only
l to w
Age 31
tod
$2,384
$1,728
$2,570
$2,355
(on top of
us
y
hus
qua
e
seline
tions
ba
Scaled High E
fits
ay
3%
0%
$397
$325
$2,13
ne
duc
2031. T
able
y
ethodolog
Age 41
tod
$2,144
$1,808
$2,205
be
t is
ed
fit re
pa
m
en
is
ne
r a
pothetical Worker
m
ay
be
$667
24%
$768
- 3%
tire
prom
unde
rner
Age 21
tod
$1,486
$1,176
$1,843
$1,434
re
cy
scription of
a
en
lv
ear of
additional
o
d de
pe of Hy
%
y
ay
9%
portion of
e s
ile
$673
$488
- 1
the
v
ta
ie
Ty
the
Age 31
tod
$1,805
$1,293
$1,966
$1,781
y
ch
r de
o
ccount Balances Under President’s
e 41,
pa
f
r to a
%
ay
3%
er ag
only
Scaled Average E
$326
$262
- 1
rk
o
an
andum
e into account the
Age 41
tod
$1,623
$1,678
$1,614
or
w
c
ty
tak
n in orde
em
the
ri
la
m
djusted A
Benefit, by
cu
g
ay
For
Se
in
$900
do not
$528 $1,352
18%
$348
$876
-3%
l
y
ia
lts
Age 21
tod
$1,063
an
su
account p
p
m
rner
2041.
Soc
a
is
%
t
en
idual
E
7%
h
ese re
Payable
ay
en
h
w
$846
$235
-1
m
w
o
$329 $534
te
indiv
27
Age 31
tod
$1,093
$1,175
$1,081
. T
er to acco
tire
da
re
fits
ne
CRS-
%
2042
Scaled L
3%
be
lease ref
ay
under the
$983
$840
$174
$137
$977
-1
ear of
y
the
r
rity
Age 41
tod
cu
ssary
(Constant 2005 dollars)
s afte
l Se
e 31, the
ia
g
tire
n
proposal. P
) $1,014
%
er a
Soc
ctio
ity
.7
sted
er re
u
u
u
rk
rk
ould be nece
t’s IA
n
2
dj
o
o
n
otal
g
otal
w
4.6%
w
g
A
-A
ation of
t law
t law
x
in
e (T
isk
e (T
) that w
residen
fter Red
s this
e ta
d IA
rren
rren
Benefit For Expected and Risk-A
it
a
com
ce (Usin
d R
com
ef
om
cu
cu
r the P
efit A
ce (Us
it an
In
alan
In
rrent law
2051. For the
seline
inc
en
ef
rity
e to
B
efit an
rity
e to
E Ben
alan
t is
en
’ ba
E B
B
en
le
nd the
BL
able unde
L
E Ben
al IA
ervice.
m
ab
under cu
B
relativ
E B
relativ
S
y
es a
cy
YA
al IA
BL
ctu
L
tire
ity
x
B
ity
YA
u
A
u
re
‘pa
en
be pay
lv
PA
A
ctu
YA
n
n
YA
r a
ty
P
l Social Secu
l Social Secu
roll ta
an
sted
an
y
e so
ould
ri
A
PA
ta
ta
ear of
o
ju
o
al Research
rity
ty
d
P
n
y
unde
pa
iev
ecu
ected”A
ri
T
s IA
T
s IA
-A
by
S
p
lu
rity
lu
, the
d
ccount Proposal Compared to Current-Law
x
y
tions
al
e in
e in
E
ecu
)
n
ressio
te
els that w
ci
S
g
duc
ra
o
“
Risk
n
cial Secu
g
al
efit p
g
tur
efit p
S

in
ci
en
en
ene
tions to ach
fit lev
ly
So
e Co
fit re
ity
)
o
f Re
e 21 toda
g
s g
th
ly
u
rn
E b
E b
th
ne
idual A
o
y
th
n
L
le Usin
L
er a
n
n
etu
ced S
e or Decreas
B
efit)
te
e or Decreas
B
efit)
enue
ced Social Secu
rk
v
Mon
en
en
and reduc
” A
f r
ates b
o
ct to be
re
Mo
ailable Us
YA
ailab
YA
v
edu
v
al Ra
edu

w
Indiv
aw
g
creas
A
E b
ty
creas
A
E b
of
fset
A
ate o
(R
L
A
R
L
stim
ubje
t-L
in
P
P
adow
erstate the bene
l r
L
t In
B
l Re
L
t In
B
s
out
it of
ain
h
ity
ity
E
S
u
A
ced
u
A
nnui
ced
For the
lly
Table 7. Combined Social Security
rren
n
T
u
YA
n
T
u
YA
u
“
n
O
A
ercen
A
n
nnua
O
ercen
A
rce:
C
Rem
by
A
annua
T
P
red
P
A
A
T
IA
P
red
P
u
o
ould be
S
Note:
w
annua
the benef
tend to ov
t
$0
$0
en
ay
$766
$1,515
Age 21
tod
$268,788
$180,723
retirem
rner
a
ear of
$0
$0
e y
ay
$766
$1,728
Age 31
tod
$139,246
$103,782
e 41, th
Scaled High E
er ag
$0
$0
rk
o
ay
$766
Benefit, Required
$1,808
e w
Age 41
tod
$64,148
$52,624
pothetical Worker
r th
o
$0
$0
ay
$766
$1,189
2041. F
Promised
pe of Hy
Age 21
tod
$198,541
$129,568
7 is
6
rner
e
Ty
a
ag
$0
$0
at
t
ay
$766
en
$1,293
$80,617
Age 31
tod
$111,257
retirem
of
sed.
Scaled Average E
$0
$0
u
ay
ear
y
$766
y
$1,352
e
Age 41
tod
$52,798
$42,427
odolog
28
ccount Balance, by
e 31, th
eth
$0
$0
m
ay
$766
$844
er ag
CRS-
of
rk
Age 21
tod
$90,173
$58,710
o
idual A
e w
rner
cription
(Constant 2005 dollars)
a
E
$0
$0
w
ay
$766
$846
o
Age 31
tod
$54,441
$38,885
2051. For th
r detailed des
o
Scaled L
$0
$0
f
e 67 is
ay
$766
$840
m
du
Age 41
tod
$28,149
$22,184
ice.
t at ag
ran
en
o
Serv
em
D
E

te
m
g
f
IS
e
-
retirem
in
efit
ected”
y
els, and Remaining Indiv
M
ev
th
itized
p
w
al Ra
esearch
nnuity
en
u
x
o
ear o
O
chi
n
E
L
R
n
ear of
pan
“
“
l Re
al R
P
” A
A
g
g
e y
Thresholds in Year of Retirement, Reduced Social Security
w
o
ed Wi
e A
in Y
o
t
in
b
)
sion
ld
rity
ed
b
n
nnua
, th
cu
had
m
to
A
res
erty
S
tur
eed
o
OMISED B
g
ce (Usin
ce (Usin
%
n
resho
“
C
R
ired
y
.7
o
er to accom
h
y
N
en
P
u
ert
f Re
T
cial Se
n b
unt
alan
o
alan
” 2
e C
e 21 today
e ref
o
B
te
B
d
rty
So
rity
m
Req
Pov
th
ste
ve
uctio
el Wh
er ag
leas
nnuitization Lev
o
A
by
ev
of
ju
al IA
al IA
al Ra
al IA
d
rk
A
P
nthly
ty
o
L
ates
o
ed
Red
y
ctu
ctu
l Re
ctu
g
t
nnui
ert
A
A
tim
e w
Table 8. Pov
fter
e 100%
2031. P
A
f A
g
g
)
en
A
y
o
in
nnua
in
rn
Pov
n
iev
Es
aining M
hl
ced Social Secu
ain
A
ain
”/ “Risk A
nthly
nt
ch
etu
For th
o
%
e 67 is
etirem
m
enefit A
o
edu
rtio
o
A
em
.6
ield
R
M
R
Re
B
M
100%
R
P
to
R
4
Rem
Y
of
Source:
Note:
at ag
l
r
id
”
w
le
$0
$0
pa
o
idua
ab
ay
$766
$825
ear-old
ad
unde
ay
be
cy
l account
an
e p
Age 21
tod
$268,788
$180,723
en
21-y
e “sh
l indiv
b
at c
h
lv
idua
ld
h
t
o
u
rner
the
m
ctua
o
a
e s
ro
r a
v
ndiv
w
nnuitization
$0
$0
f
ie
at
, only
l to w
n
h
ay
$766
ch
s t
$1,728
hus
qua
ctio
or he
e
u
Age 31
tod
$139,246
$103,782
his
to a
evel
fits
d under the i
ne
e red
h
tions
efit l
Scaled High E
2031. T
be
f t
en
$0
$0
duc
t is
o
ay
ed
e b
$766
en
is
portion of
h
$1,808
m
fect
e a
nd re
ere require
e t
Age 41
tod
$64,148
$52,624
at
tire
prom
e ef
w
h
re
of
fset a
erst
nnuitiz
v
efit, t
o
fit of
o
ear of
en
t
Benefit, Required A
ay
$766
$667
$100
y
ne
d
portion
b
er to a
$16,822
ty
rk
be
it reductions
en
pothetical Worker
Age 21
tod
$181,719
$112,747
the
ri
o
nef
lts t
rner
y
w
a
e 41, the
ecu
to the
g
pa
S
al
this
er a
ci
ese resu
Payable
$0
$0
only
o
ing
e due
ay
$766
rk
o
rc
o
s, th
pe of Hy
$1,293
w
can
er S
thos
additional be
u
Age 31
tod
$80,617
r, f
h
$111,257
ty
w
If
ri
lo
ne
d
Ty
cu
. T
For the
ld
Se
the
-ear
o
use
l
w
y
Scaled Average E
$0
$0
ia
(on top of
ay
lt of
lo
resh
$766
su
$1,352
2041.
Soc
th
tions
Age 41
tod
$52,798
$42,427
t is
able baseline.
en
re
erty
ethodolog
en
h
s a
e scaled
duc
v
m
w
o
m
te
r th
29
e p
tire
fit re
da
ts. A
o
fi
f
ne
th
ay
$766
$528
$238
re
e
n
ld
o
be
under a pay
cy
each
ription of
CRS-
Age 21
tod
$40,185
$49,989
$18,525
2042
ear of
be
resh
en
sc
y
rity
lv
rner
r the
th
ccount Balance, by
d de
a
fte
cu
erty
additional
e so
ile
(Constant 2005 dollars)
E
$0
$0
v
ta
w
s a
l Se
o
iev
o
ay
$766
$846
e 31, the
g
ia
tire
r de
Age 31
tod
$54,441
$38,885
er a
Soc
the p
fo
idual A
rk
er re
idual accounts to r
o
rk
o
account the
Scaled L
w
ndum
$0
$0
w
to
ation of
ra
ay
ir indiv
o
$766
$840
x
in order to ach
falls below
s this
e ta
the
em
Age 41
tod
$28,149
$22,184
a
it
m
om
t take in
g
ere
o
h
n
ount plan
in
y
2051. For the
seline
inc
w
o
d
an
t is
el
p
to
’ ba
v
lts
er portion of
m
E
en
le
nd the
L
ervice.
m
idual acc
f
e 100%
ab
B
ced
ected”
S
acco
-
)
y
es a
A
iev
u
itized
p
n
tire
x
ese resu
nnuity
u
x
re
‘pa
h
indiv
ear o
Y
ch
n
E
tur
it to the le
A
n
fer to
Red
“
Risk
r a
. T
P
” A
roll ta
w
g
g
e A
f Re
ear of
y
ld
nnuitize a larg
in Y
o
ith
)
al Research
benef
o
rity
b
n
o
n
y
unde
pa
els and Remaining Indiv
ld
W
efit
te
under the
lease re
cu
had
to
rity
resh
S
ed
en
tur
, the
d by
ce (Usin
ce (Usin
y
tions
th
l. P
resho
“
in
ired
ressio
te
Secu
Thresholds in Year of Retirement, Reduced Social Security
Lev
h
y
t Needed to A
b
E B

f Re
al Ra
g
ra
m
L
u
y
n
duc
erty
T
cial Se
n
n b
alan
o
alan
v
ou
B
ert
te
l Re
ene
cial
o
necessary
Co
Req
B
B
e Co
fit re
p
proposa
erty
rty
So
m
e 21 toda
So
YA
g
s g
ve
uctio
en
th
ne
e
o
A
h
A
Pov
al IA
al Ra
al IA
nnua
y
er a
each
ould be required to a
P
nthly
P
al IA
A
enue
ould be
t’s IA
o
ity
of
u
rk
v
ce th
n
ed
Red
n
el W
ctu
ctu
l Re
ctu
%
u
ates b
o
ct to be
re
g
rity
ers w
t
n
.7
w
fter
ev
A
A
red
rk
A
f A
g
g
en
A
2
stim
ubje
) that w
o
reside
ly
L
o
in
nnua
in
d
n
e 100%
s
out of
P
aining M
th
ain
A
ain
ste
E
is to
nthly
erty
iev
For the
lly
o
%
ju
ity
r the
etirem
m
enefit A
v
rtio
o
o
ch
em
ario, w
.6
d
rce:
u
u
Table 9. Pov
M
R
Re
B
Mon
P
Social Secu
P
A
R
4
Rem
A
o
ould be
n
rrent law
S
Note:
w
annua
an
account balance to r
cu
scen
unde