Social Security: Recommendations of the 1994-1996 Advisory Council on Social Security

Social Security: Recommendations of the 1994-1996 Advisory Council on Social Security

Order Code 97-81 EPW
CRS Report for Congress
Received through the CRS Web
Social Security: Recommendations of the
1994-1996 Advisory Council on Social Security
Updated May 7, 1997
Geoffrey Kollmann
Specialist in Social Legislation
Education and Public Welfare Division
Congressional Research Service ˜ The Library of Congress

Social Security: Recommendations of the
1994-1996 Advisory Council on Social Security
Summary
In 1994, the Secretary of Health and Human Services (HHS) appointed the last
quadrennial Advisory Council on Social Security. At that time, the Social Security
Act stipulated that every 4 years the Secretary of HHS appoint an Advisory Council
on Social Security for the purpose of reviewing the status of the Old-Age, Survivors
and Disability Insurance (OASDI -- usually regarded as “Social Security”) Trust
Funds, as well as the Hospital Insurance and Supplementary Medical Insurance
(Medicare) Trust Funds. When announcing the appointment of the Advisory Council,
the Secretary asked the Council to focus only on the Social Security program, and
specifically requested that it examine the program’s long-range financial status, as well
as the adequacy and equity of its benefits and the relative roles of the public and
private sectors in providing retirement income. Although not stated as such, this
charge reflected a general concern about Social Security’s long-range solvency and
the growing loss of public confidence in the system.
These problems are reflected in the long-range projections of Social Security’s
income and outgo. Although currently Social Security’s income exceeds its outgo,
its board of trustees projects that over the next 75 years its expenditures will exceed
its income on average by 16%. The primary reasons are demographic: an aging post-
World War II “baby boom” generation, declining birth rates, and increasing life
expectancies are creating an older society. It is projected that by 2029 the program’s
trust funds would be fully depleted and the system would be technically insolvent.
On January 6, 1997, the 1994-1996 Advisory Council on Social Security issued
its report on ways to solve the program’s long-range financing problems. As the
Council could not reach a consensus on a particular approach, the report contains
three different proposals that are intended to attain the goal of restoring long-range
solvency to the Social Security system. The first proposal, labeled the “maintain
benefits” plan, keeps the program’s benefit structure essentially the same by
addressing most of the long-range deficit through revenue increases, including an
eventual rise in the payroll tax, and minor benefit cuts. To close the remaining gap,
it recommends that investing part of the Social Security trust funds in the stock
market be considered. The second, labeled the “individual account” plan, restores
financial solvency mostly with reductions in benefits, and in addition imposes
mandatory employee contributions to individual savings accounts. The third, labeled
the “personal security account” plan, achieves long-range financial balance through
a major redesign of the system that gradually replaces a major portion of the Social
Security retirement benefit with individual private savings accounts.

Contents
The Financial Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Advisory Council’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Maintain Benefits Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Individual Account Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Personal Security Account Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Commission Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Appendix. Comparison of Advisory Council Plans . . . . . . . . . . . . . . . . . . . . . . 7

Social Security: Recommendations
of the 1994-1996 Advisory Council on
Social Security
The 1994-1996 Advisory Council was appointed in 1994 under the requirements
of then-current law,1 which stipulated that every 4 years the Secretary of Health and
Human Services (HHS) appoint an Advisory Council on Social Security for the
purpose of reviewing the status of the Old-Age, Survivors and Disability Insurance
(OASDI -- usually regarded as “Social Security”) Trust Funds, as well as the Hospital
Insurance (HI) and Supplementary Insurance (Medicare) Trust Funds. The law also
required that the Council consist of a chairman and 12 other persons, appointed by
the Secretary, representing organizations of employers and employees, the self-
employed and the public. The Secretary, Donna E Shalala, appointed as Chairman,
Edward Gramlich, Dean of the School of Public Policy at the University of Michigan.
He and the other members of the Council are listed on page 6 of this report.
When announcing the appointment of the Advisory Council, the Secretary of
HHS asked the Council to focus only on the Social Security program, and specifically
requested that it examine the program’s long-range financial status, as well as the
adequacy and equity of its benefits and the relative roles of the public and private
sectors in providing retirement income. Although not stated as such, this charge
reflected a general concern about Social Security’s long-range solvency and the
growing loss of public confidence in the system.
The Financial Picture
Although currently Social Security’s income exceeds its outgo, its board of
trustees projects that over the next 75 years its expenditures will exceed its income
on average by 16%. The primary reasons are demographic: an aging post-World
War II “baby boom” generation, declining birth rates, and increasing life expectancies
are creating an older society. The number of people 65 and older is predicted to
nearly double by 2025, whereas the number of workers whose taxes will finance their
Social Security benefits is projected to grow by only 17%. As a result, the ratio of
1There have been 13 Advisory Councils since the beginning of the program, but this is the last.
As part of P.L. 103-296, which made the Social Security Administration an independent
agency in 1995, Congress created a permanent Advisory Board and abolished future Advisory
Councils.

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workers to Social Security recipients is projected to fall from 3.2 to 1 today to 2.0 to
1 in 20302.
Excess Social Security
revenues are invested in U.S.
The Projected Slide
government securities recorded to
Towards Insolvency
the OASDI “trust funds” maintained
-- Spending exceeds tax revenues in 2012
by the Treasury Department. In
-- OASDI trust funds peak in 2018
April 1997, the trustees projected
-- OASDI funds insolvent in 2029
that the balance of these trust funds
would peak at $2.9 trillion in 2018.
However, OASDI spending would
begin lagging tax receipts in 2012. At that point general revenues would be needed,
first to pay interest on the securities held by the trust funds, and then beginning in
2019 to redeem them. By 2029 the trust funds would be fully depleted and the system
would be technically insolvent.
The problem is not unprecedented. In 1977 and 1983, Congress enacted a
variety of measures to address financial problems similar to those currently being
forecast. Among them were increases in payroll taxes, partial taxation of the benefits
received by higher-income recipients, and a gradual increase from 65 to 67 in Social
Security’s “full retirement age,” which is the age required to receive full benefits.
However, those changes were not sufficient to maintain balance in the system in the
latter part of the next century, and this combined with more pessimistic projections
of factors such as economic growth, birth rates, and the incidence of disability, has led
to the return of long-term deficit forecasts.
Several bills were introduced in the 103rd and 104th Congresses to deal with the
issue. Bills in the 103rd included raising the full retirement age to 70, modifying cost-
of-living-adjustments (COLAs) and increasing taxes. Several bills in the 104th
included privatizing a portion of the program.
The Advisory Council’s Report
The Advisory Council began to meet in 1994. During its deliberations, general
agreement was reached on the need to eliminate the long-range deficit, and on some
specific measures that would help to reduce program costs. However, no consensus
developed on a single approach that would restore long-range solvency. Instead,
three different philosophies emerged, each supported by a different faction of the
Council. One was based on the premise that as much of the program’s benefits should
be preserved as possible, and thus part of the solution should include increases in the
payroll tax rate. Another was based on the belief that the system’s cost basically must
be held within the current revenue structure, but with mandatory individual savings
added on to help provide adequate future retirement income. The third was based on
the idea that the system basically is unsustainable without fundamental restructuring,
2See the 1997 Annual Report of the Board of Trustees of the federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds, Intermediate projections.

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and that restructuring should shift more of the role of providing retirement income
from Social Security to individual savings.
Eventually three proposals emerged. The first, labeled the “maintain benefits”
(MB) plan, supported by six members of the Council, addressed most of the long-
range deficit through revenue increases, including a rise in the Social Security payroll
tax in 2045, and a small cut in benefits. To close the remaining gap, it recommended
that investing part of the Social Security trust funds in the stock market be
considered. The second, labeled the “individual account” (IA) plan, supported by two
members of the Council, restored financial solvency without increasing the payroll tax
but with more significant reductions in benefits, and in addition imposed mandatory
employee contributions to individual savings accounts based on the notion that the
loss in Social Security benefits should be offset by increased individual savings. The
third, labeled the “personal security account” (PSA) plan, supported by five members
of the Council, likewise achieves long-range financial balance through a fundamental
redesign of the system by gradually replacing a major portion of the retirement
program with individual private savings accounts.
The three proposals share some features. All would mandate Social Security
coverage of newly hired state and local government employees, increase the taxation
of Social Security benefits, reduce initial Social Security benefits by various changes
in the benefit formula, and assume that pending revisions in the Consumer Price Index
(CPI) will result in COLAs in the future that will be lower by 0.21 percentage points.
Both the IA and PSA plans raise the retirement age and modify surviving spouse
benefits.
Following is a description of the specific features of each proposal. A side-by-
side comparison of the three proposals and current law is in the appendix.
The Maintain Benefits Plan
(Supported by Council Members Ball, Johnson, Jones, Kourpias, Shea, Fierst)
1.
All state and local government employees hired after 1997 would be required to
participate in Social Security.
2.
The number of years of highest earnings used in computing a worker’s basic
retirement benefit, the “Primary Insurance Amount” (PIA), would increase from
35 to 36 in 1997, 37 in 1998, and 38 in 1999 and thereafter. (It was suggested
as an alternative that the payroll tax be increased in 1998 by 0.15 percentage
points on employers and employees, each.)
3.
Beginning in 1998, Social Security benefits would be taxable like other
contributory pensions, i.e., fully taxable except for the part of the pension
attributable to the workers own contributions on which income tax has already
been paid. Current law subjects a maximum of 85% of benefits to the income
tax, and only if a recipient’s income exceeds certain thresholds. Three-quarters
of current recipients pay no income tax on their benefits because their income is
under these thresholds. These thresholds would be phased out between 1998

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and 2007. Also, all of the revenue generated from the taxation of benefits would
go to Social Security (currently, part goes to Medicare).
4.
The payroll tax would go up by 0.8 percentage points, on employers and
employees, each, in 2045.
5.
As a final possible measure, it is urged that an option to invest part of the Social
Security trust funds in stocks (in funds indexed to reflect the overall performance
of the market) be further studied and evaluated.
The Individual Account Plan
(Supported by Council Members Gramlich, Twinney)
1.
All state and local government employees hired after 1997 would be required to
participate in Social Security.
2.
Social Security benefits would be taxable as in the MB plan, but there is no
provision for the redirection of tax revenue from Medicare to Social Security.
3.
The increase in the Social Security full retirement age to age 67 would be moved
forward to apply to those born in 1949 and later, and further increases in the full
retirement age would be tied to further increases in longevity. (Current law
phases in the increase from age 65 in two steps, by increasing the age by 2
months for each year that a person is born after 1937, until it reaches age 66 for
those born in 1943. After a 12-year pause, the age is increased again by raising
the age by 2 months for each year that a person is born after 1954, until it
reaches age 67 for those born in 1960 and later.) The proposal eliminates this
hiatus in increasing the full retirement age and indexes the full retirement age
thereafter (early retirement would still be available, but would be reduced, on an
actuarial basis, as the full retirement age rises).
4.
Benefits, especially for higher-paid workers, gradually would be reduced (i.e.,
compared to current law). To do so, the formula for determining the PIA would
be modified by gradually lowering the 32% and 15% replacement of earnings
factors to 22.4% and 10.5%, respectively, by 2030.3
5.
The computation of a retired worker’s PIA would by 1999 be based on the
highest 38 years of earnings, as described in the MB plan.
6.
Beginning in 2000, benefits payable to dependent spouses would be gradually
lowered, from 50% to 33% of the worker’s PIA by 2016.
3Social Security is designed to replace a higher proportion of earnings for low-paid workers
than for high-paid workers. This is done through a formula that calculates the PIA by
applying three progressively lower replacement factors (90%, 32%, and 15%) to a worker’s
average career earnings. For example, for workers attaining age 62 in 1997, the formula is
90% of first $455 of average indexed monthly earnings (AIME), plus 32% of next $2,248,
plus 15% of AIME over $2,741.

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7.
Surviving spouse’s benefits for two-earner couples would be augmented by
assuring that aged widows and widowers would receive at least 75 % of the
Social Security benefits payable to the couple while both were still alive, phased
in over 1998 to 2037.
8.
Beginning in 1998, workers would mandatorily contribute an additional 1.6 %
of their Social Security taxable earnings to individual accounts (IAs) that would
be held by the U.S. government. The accumulated funds would not be available
to the worker until he or she becomes eligible for retirement, and would be
converted to a single or joint minimum guarantee indexed annuity4 when the
worker elects retirement.
The Personal Security Account Plan
(Supported by Council Members Bok, Combs, Schieber, Vargas, Weaver)
1.
For workers under age 55 in 1998, 5 percentage points of the employee share
of the Social Security tax would be diverted to personal security accounts
(PSAs), which would be invested at the discretion of the worker subject to
regulatory restrictions to make sure they were invested in financial instruments
widely available in financial markets and that they were held solely for retirement
purposes. The accounts would not be available until the worker is age 62, at
which point they could be used by the worker for any purpose.
2.
For workers participating in the PSAs, Social Security benefits would gradually
be reduced. Ultimately, retirement benefits would evolve into two tiers, where
the Social Security benefit (Tier 1) would be based solely on length of service
(e.g., workers with a minimum of 35 years of coverage would receive the same
amount — about $410 a month in 1996 dollars). The Social Security retirement
benefit of workers who are ages 25 to 54 in 1998 would be their accrued benefit
under the current system plus a prorated share of the Tier 1 benefit.
3.
To finance the transition to the new system, the U.S. Treasury would issue
approximately $2 trillion (in 1996 dollars) in bonds to the public over the next
40 years. The Treasury bonds would be repaid by the excess of tax revenue that
is projected to occur in the latter part of the transition period (from about 2035
to 2069).
4.
Workers and their employers would pay an additional payroll tax of 0.76%,
each, (1.52% combined) over the period 1998-2069.
5.
The earnings test would be eliminated gradually over 1998-2002 for individuals
who have attained the full retirement age.
4I.e., annuities would be indexed to rise with inflation and there would be a guarantee that, if
the worker died before or slightly after retirement, some portion of the value of the accrued
savings would be payable in all cases. If the worker is married, a joint and survivor annuity
must be paid unless the spouse declines it.

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6.
The full retirement age would increase as in the IA plan, but in addition the age
for earliest retirement would increase by the same amount, until it reaches age
65. Thereafter, the early retirement age would remain at age 65, but further
increases in the full retirement age (because it would be indexed to rise with
increases in longevity) would increase the actuarial reduction applied to early
retirement benefits.
7.
For persons disabled after 1997, the initial monthly benefit would be reduced by
the same factor as that of a worker retiring at age 65 in that year (which means
that disabled workers would receive less than the full PIA if the relevant full
retirement age is more than age 65), but in no event would they receive less than
70% of the PIA. Disabled workers would continue to convert to the retirement
rolls at age 65, when their benefits would be recomputed under the new
retirement rules.
8.
All state and local government employees hired after 1997 would be required to
participate in Social Security.
9.
Beginning in 1998, the maximum portion of Social Security benefits subject to
taxation would be 50%, and no revenue from the taxation of benefits would go
to Medicare. The income thresholds would be phased out over 1998-2007.
When Tier 1 Social Security benefits become available, they would be 100%
taxable, but withdrawals from the PSA would be tax-free.
10. Social Security surviving spouse benefits would be modified as in the IA plan.
Commission Membership
Edward Gramlich, Dean, School of Public Policy, University of Michigan (Chairman
of the Advisory Council).
Robert Ball, Chair of the Board, National Academy of Social Insurance, former
Commissioner of Social Security.
Joan Bok, Chairman, New England Electric System.
Ann Combs, Principal, William M. Mercer, Inc.
Edith Fierst, Attorney at Law, Fierst and Moss, P.C.
Gloria Johnson, Director, Dept. of Social Action, International Union of Electronic,
Salaried, Machine and Furniture Workers, AFL-CIO.
Thomas Jones, Vice Chairman, President and Chief Operating Officer, Teacher
Insurance and Annuity Association-College Retirement Equities Fund (TIAA-
CREF).
George Kourpias, President, International Association of Machinists and Aerospace
Workers, AFL-CIO.
Sylvester Schieber, Vice President, Watson Wyatt Worldwide Company.
Gerald Shea, Assistant to the Director for Governmental Affairs, AFL-CIO.
Marc Twinney, Director of Pensions (retired), Ford Motor Co.
Fidel Vargas, Mayor, Baldwin Park, CA.
Carolyn Weaver, Director, Social Security and Pension Issues, American Enterprise
Institute (AEI).

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Appendix. Comparison of Advisory Council Plans
Maintain
Individual
Personal security
Feature
Present law
benefits (MB)
accounts (IA)
accounts (PSA)
Main Features
Overview
Pays earnings-
Maintains current
Scales back benefits to
Evolves to a two-tier
related benefits
benefit structure
fit within projected
system: (1) a flat
to retired and
with some
revenues. Adds a new
benefit and (2) a
disabled workers
changes in
government-
mandatory personal
and their families
benefits and
administered
security account
and to survivors
revenues, and
mandatory individual
(PSA) to be managed
of deceased
recommends for
savings plan to
by individuals. All
workers;
further study a
supplement the lower
workers under 55 in
financed by
new investment
future benefits,
1998 would have
dedicated payroll
policy for trust
effective for all workers
PSAs. The two-tier
taxes and income
fund reserves.
beginning in 1998.
system would apply
taxes on benefits.
fully to workers under
age 25 in 1998 (age
62 in 2035).
Financing:
Social Security
Increase tax rate
Workers would pay an
Five percentage points
deductions
tax rate is 6.2%
by 0.8 percentage
additional 1.6% of
of worker’s current
from
for employers
points for
covered earnings into
payroll tax rate would
worker’s
and employees,
employers and
individual accounts.
be redirected into
earnings
each.
employees each,
PSAs. Workers and
in 2045.
their employers would
pay an additional
payroll tax of 0.76%,
each, over the period
1998-2069.
Financing:
Not applicable
Not applicable
Not applicable
Transition financed by
borrowing
borrowing
from the
approximately $2
public
trillion (1996 dollars)
over 40 years.
Investment
Not applicable
Not applicable
Worker would allocate
Workers would invest
of savings
funds among a choice
in financial
accounts
of government-
instruments widely
administered indexed
available in the
funds and must hold
market. PSAs would
them until retirement.
be available to worker
only at retirement.

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Maintain
Individual
Personal security
Feature
Present law
benefits (MB)
accounts (IA)
accounts (PSA)
Trust fund
Trust funds are
Recommends for
No change from present
No change from
investment
invested solely in
further study that
law.
present law.
policy
U.S. government
up to 40% of
or U.S.
trust fund
government-
reserves be
backed
invested in private
securities.
market, phased in
2000-2015. An
independent board
would select a
broad market
index for trust
fund investment.
Generic Changes
Benefits are
No change in law. (Same as MB plan)
(Same as MB plan)
Cost of
adjusted each
Assumes the BLS
Living
year to rise in
revision to the
Adjustment
proportion to the
CPI will result in
(COLA)
increase in the
COLAs that are
consumer price
lower by -0.21
index (CPI)
percentage points.
compiled by the
Bureau of Labor
and Statistics
(BLS).
Social
States have the
Mandates that all
(Same as MB plan)
(Same as MB plan)
Security
option to choose
state and local
coverage
Social Security
workers hired
coverage for
after 1997 would
State & local
be covered by
government
Social Security.
employees.

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Maintain
Individual
Personal security
Feature
Present law
benefits (MB)
accounts (IA)
accounts (PSA)
Old Age Benefits
Full
FRA will
No change
Accelerates the rise in
Same as IA, except
retirement
gradually rise
FRA so it reaches 67
that projected
age (FRA)
from 65 to 66 for
for those born after
increases in the FRA
those born in
1948. Thereafter,
after reaches age 67 in
1938 through
indexes FRA to rise
2011 would be put
1943, remain at
with longevity
into the law, subject to
66 for those born
(estimated to be 1
review every 10 years
in 1944 through
month every 2 years).
by the Social Security
1954, and then
Board of Trustees.
gradually rise to
67 for those born
in 1955 through
1960 and
thereafter.
Earliest
EEA is 62, with
No change
EEA remains 62 and
EEA rises with the
eligibility
a 20% actuarial
reduction increases
FRA. Reduction in
age (EEA)
reduction, rising
beyond 30% as FRA
Tier 1 benefit at EEA
for
to 30% when
rises beyond age 67.
is 20% until EEA
retirement
FRA is 67.
reaches 65.
benefits
Thereafter EEA
remains 65 and the
reduction increases as
FRA rises.
Calculation
Average indexed
Lengthen the
(Same as MB plan)
For transitional
of average
monthly earnings
computation
retirement benefits,
lifetime
(AIME) based
period from 35 to
the computation
earnings
on highest 35
38 years by 1999.
period would expand
years.
to 38 years as the
earliest eligibility age
rises to 65 (see
below), but the
associated later date
for wage indexing
roughly offsets the
benefit reduction.

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Maintain
Individual
Personal security
Feature
Present law
benefits (MB)
accounts (IA)
accounts (PSA)
Benefit
PIA= 90% of
No change
Gradually lowers the
Basic benefit evolves
formula
first $455 of
top two percentage
to a flat "Tier 1"
AIME, plus 32%
rates of the PIA
amount ($410 a month
of next $2,248,
formula from 32% and
in 1996$ for a worker
plus 15% of
15% to 22.4% and
with 35 or more years
AIME over
10.5%, respectively.
of earnings). Workers
$2,741, for
(The 32% and 15%
with 10 years
workers reaching
factors are reduced for
coverage would get
62 in 1997.
new eligibles by 0.5%
half the Tier 1 benefit
AIME bend
{multiplied by 0.995}
(prorated if coverage
points are
each year during 1998-
is between 10-35
adjusted each
2011, and by 1.5%
years). Tier 1 benefit
year to rise in
{multiplied by 0.985}
is indexed by wage
proportion to the
each year during 2012-
growth before
growth in
2030.) The change
eligibility and by CPI
average wages.
ultimately lowers basic
thereafter. Workers
benefits by 17% for
ages 25-54 in 1998
average earners, 22%
would receive a
for high earners, 8%
partial PIA-based
for low earners.
benefit for work
before 1998.
Income
Not applicable
Not applicable
It is required that IAs
PSA becomes
from
would be converted to
available at age 62.
savings
an inflation-indexed
Worker would use it
accounts
annuity when the
as he or she chooses.
worker retires. If
married, a joint and
survivor annuity would
be paid unless spouse
declines it.
Treatment
Not applicable
Not applicable
IA would be held for
Any funds in the PSA
of savings
the surviving spouse
at the worker’s death
account if
and be available (in the
would become part of
worker dies
form of an annuity) at
the estate. Surviving
before or
age 60. If no
spouses would have
slightly
widow(er), IA would
access to the PSA
after
become part of the
when he or she
retirement
estate. Annuities for
reaches age 62.
workers would have a
minimum guarantee to
assure that some
portion of the value of
the accrued savings
would be payable in all
cases.

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Maintain
Individual
Personal security
Feature
Present law
benefits (MB)
accounts (IA)
accounts (PSA)
Aged
50% of spouse’s
No change
Over 2000-2016,
Higher of 50% of the
spouse
PIA, offset by
gradually lowers aged
worker’s PIA, or 50%
benefit
100% of their
spouse benefit from
of the full Tier 1
own PIA earned
50% to 33% of the
benefit when the
as a worker.
worker’s PIA.
system is fully phased
in.
Aged
Surviving
No change
Assures that the
Same as IA.
surviving
spouses are
surviving spouse
spouse
eligible for 100%
benefit is at least 75%
benefit
of the deceased
of the couple’s
spouse’s PIA,
combined benefits
offset by 100%
while both were alive.
of their own PIA
earned as a
worker.
Earnings
Reduces benefits
No change
No change in
Eliminates test at
test
of recipients
application to Social
FRA over 1998-2002.
under age 70
Security benefits.
Earnings test would
who earn above
Earnings test would not
not apply to PSA
a certain amount.
apply to IA annuities.
withdrawals.
Disability Insurance (DI) Benefits
Disability
Same as for full
No change
Reduction in benefits
DI benefits are
benefit
retirement
due to change in
calculated under
formula
benefits at FRA.
replacement rates in the
current law PIA
formula used to
formula, but, as the
determine PIAs. (See
FRA rises, new DI
above.)
benefits would be
reduced to the percent
of PIA paid to age-65
retirees (now 100%).
In no event would DI
benefits be lower than
70% of the PIA.
Treatment
Not applicable
Not applicable
IA would not be
PSA would not be
of savings
available at disability.
available at disability.
accounts
Funds would remain in
Funds would remain
for disabled
the IA and continue to
in the PSA and
workers
be invested in
continue to be
government
invested by the
administered accounts.
worker. No new
No new contributions
contributions would
would be made during
be made during
disability.
disability.

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Maintain
Individual
Personal security
Feature
Present law
benefits (MB)
accounts (IA)
accounts (PSA)
Benefit at
Disabled
No change
Disabled workers
Disabled workers
conversion
workers shift to
would continue to
would continue to
to
retirement
receive basic benefit.
convert to the
retirement
benefits at FRA,
IA would become
retirement rolls at age
but their benefit
available.
65, when their benefits
amounts do not
would be recomputed
change.
under the new
retirement rules and
the PSA becomes
available.
Benefits for
Non-aged
No change
Beginning in 2000,
Higher of 50% of the
spouses of
spouses with
benefits payable to
worker’s PIA, or 50%
disabled
children under
eligible spouses would
of the full Tier 1
workers
age 16 in care
be gradually lowered,
benefit when the
receive 50 % of
from 50% to 33% of
system is fully phased
the worker’s
the worker’s PIA, by
in.
PIA, subject to a
2016.
family
maximum.
Young Survivor Benefits
Benefit
Surviving
No change
Reduction in benefits
Young survivor
Formula
children and
due to change in
benefits would be
spouse each
replacement rates in the
calculated under the
receive 75% of
formula used to
present-law PIA
PIA, subject to a
determine the worker’s
formula.
family
PIA. (See above.)
maximum.

CRS-13
Maintain
Individual
Personal security
Feature
Present law
benefits (MB)
accounts (IA)
accounts (PSA)
Tax Treatment of Benefits
Tax
Up to 50% of
Beginning in
Same as in MB plan,
Beginning in 1998,
treatment of benefits are
1998, all benefits
except no provision for
50% of benefits
Social
subject to income
in excess of
shifting income tax
would be subject to
Security
tax if income is
employee
revenues on Social
tax for recipients,
benefits
between certain
contributions
Security benefits from
workers over age 54
thresholds
would be subject
Medicare to Social
in 1998, the disabled,
(revenues go to
to income
Security.
and for past service
Social Security
taxation (i.e., in
credits for workers
trust funds).
the same manner
over age 24. When
However, at
prescribed for
Tier 1 benefits
higher income
private and
become available, they
levels up to 85%
government
would be 100%
of benefits are
defined benefit
taxable. The income
taxed (additional
pension plans),
thresholds for benefit
revenues go to
and the income
taxation would be
Medicare’s
thresholds would
phased out over 1998-
Hospital
be phased out
2007.
Insurance (HI)
over 1998-2007.
trust fund).
Effective in 1998, no
Redirects benefit
revenue from the
taxation revenue
taxation of benefits
from the HI trust
would go to Medicare.
fund to the Social
Security trust
funds (phased-in
over 2010-2019).
Tax
Not applicable
Not applicable
Two options are
Contributions to the
treatment of
presented: (1)
PSA would be fully
mandated
contributions to IA tax-
taxable, the proceeds
savings
deductible, withdrawals
from PSAs would be
fully taxable; (2)
tax-free. Investment
contributions to IA
returns would not be
fully taxable,
taxed.
withdrawals tax-free.