Social Security: Recommendations of the 1994-1996 Advisory Council on Social Security
CRS Report for Congress
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.
workers to Social Security recipients is projected to fall from 3.2 to 1 today to 2.0 to
Excess Social Security
The Projected Sliderevenues are invested in U.S.
Towards Insolvencygovernment securities recorded to
-- Spending exceeds tax revenues in 2012the OASDI “trust funds” maintained
-- OASDI trust funds peak in 2018by the Treasury Department. In
-- OASDI funds insolvent in 2029April 1997, the trustees projected
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.
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
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).
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
plus 15% of AIME over $2,741.
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.
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).
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.
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.
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).
Appendix. Comparison of Advisory Council Plans
MaintainIndividualPersonal security
FeaturePresent lawbenefits (MB)accounts (IA)accounts (PSA)
Main Features
OverviewPays earnings-Maintains currentScales back benefits toEvolves to a two-tier
related benefitsbenefit structurefit within projectedsystem: (1) a flat
to retired andwith somerevenues. Adds a newbenefit and (2) a
disabled workerschanges ingovernment-mandatory personal
and their familiesbenefits andadministeredsecurity account
and to survivorsrevenues, andmandatory individual(PSA) to be managed
of deceasedrecommends forsavings plan toby individuals. All
workers;further study asupplement the lowerworkers under 55 in
financed bynew investmentfuture benefits,1998 would have
dedicated payrollpolicy for trusteffective for all workersPSAs. The two-tier
taxes and incomefund reserves. beginning in 1998.system would apply
taxes on benefits.fully to workers under
age 25 in 1998 (age
Financing:Social SecurityIncrease tax rateWorkers would pay anFive percentage points
deductionstax rate is 6.2%by 0.8 percentageadditional 1.6% ofof worker’s current
fromfor employerspoints forcovered earnings intopayroll tax rate would
worker’sand employees,employers andindividual accounts. be redirected into
earningseach.employees each,PSAs. Workers and
in 2045.their employers would
pay an additional
payroll tax of 0.76%,
each, over the period
Financing:Not applicableNot applicableNot applicableTransition financed by
borrowing borrowing
from theapproximately $2
publictrillion (1996 dollars)
over 40 years.
InvestmentNot applicableNot applicableWorker would allocateWorkers would invest
of savingsfunds among a choicein financial
accountsof government-instruments widely
administered indexedavailable in the
funds and must holdmarket. PSAs would
them until retirement. be available to worker
only at retirement.
MaintainIndividualPersonal security
FeaturePresent lawbenefits (MB)accounts (IA)accounts (PSA)
Trust fundTrust funds areRecommends forNo change from presentNo change from
investmentinvested solely infurther study thatlaw.present law.
policyU.S. governmentup to 40% of
or U.S.trust fund
government-reserves be
backedinvested in private
securities.market, phased in
2000-2015. An
independent board
would select a
broad market
index for trust
fund investment.
Generic Changes
Benefits areNo change in law. (Same as MB plan)(Same as MB plan)
Cost ofadjusted eachAssumes the BLS
Livingyear to rise inrevision to the
Adjustmentproportion to theCPI will result in
(COLA)increase in theCOLAs that are
consumer pricelower by -0.21
index (CPI)percentage points.
compiled by the
Bureau of Labor
and Statistics
(BLS).
SocialStates have theMandates that all(Same as MB plan)(Same as MB plan)
Securityoption to choosestate and local
coverageSocial Securityworkers hired
coverage forafter 1997 would
State & localbe covered by
governmentSocial Security.
employees.
MaintainIndividualPersonal security
FeaturePresent lawbenefits (MB)accounts (IA)accounts (PSA)
Old Age Benefits
FullFRA willNo changeAccelerates the rise inSame as IA, except
retirementgradually riseFRA so it reaches 67that projected
age (FRA)from 65 to 66 forfor those born afterincreases in the FRA
those born in1948. Thereafter,after reaches age 67 in
1938 throughindexes FRA to rise2011 would be put
1943, remain atwith longevityinto the law, subject to
66 for those born(estimated to be 1review every 10 years
in 1944 throughmonth every 2 years).by the Social Security
gradually rise to
67 for those born
in 1955 through
1960 and
thereafter.
EarliestEEA is 62, withNo changeEEA remains 62 andEEA rises with the
eligibilitya 20% actuarialreduction increasesFRA. Reduction in
age (EEA)reduction, risingbeyond 30% as FRATier 1 benefit at EEA
forto 30% whenrises beyond age 67.is 20% until EEA
retirementFRA is 67.reaches 65.
benefitsThereafter EEA
remains 65 and the
reduction increases as
FRA rises.
CalculationAverage indexedLengthen the(Same as MB plan)For transitional
of averagemonthly earningscomputationretirement benefits,
lifetime(AIME) basedperiod from 35 tothe computation
earningson highest 3538 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.
MaintainIndividualPersonal security
FeaturePresent lawbenefits (MB)accounts (IA)accounts (PSA)
BenefitPIA= 90% ofNo changeGradually lowers theBasic benefit evolves
formulafirst $455 oftop two percentageto a flat "Tier 1"
AIME, plus 32%rates of the PIAamount ($410 a month
of next $2,248,formula from 32% andin 1996$ for a worker
plus 15% of15% to 22.4% andwith 35 or more years
AIME over10.5%, respectively. of earnings). Workers
$2,741, for(The 32% and 15%with 10 years
workers reachingfactors are reduced forcoverage 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 areeach year during 1998-is between 10-35
adjusted each2011, and by 1.5%years). Tier 1 benefit
year to rise in{multiplied by 0.985}is indexed by wage
proportion to theeach year during 2012-growth before
growth in2030.) The changeeligibility and by CPI
average wages.ultimately lowers basicthereafter. Workers
benefits by 17% forages 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.
IncomeNot applicableNot applicableIt is required that IAsPSA becomes
from would be converted toavailable at age 62.
savingsan inflation-indexedWorker would use it
accountsannuity when theas he or she chooses.
worker retires. If
married, a joint and
survivor annuity would
be paid unless spouse
declines it.
TreatmentNot applicable Not applicableIA would be held forAny funds in the PSA
of savingsthe surviving spouseat the worker’s death
account ifand be available (in thewould become part of
worker diesform of an annuity) atthe estate. Surviving
before orage 60. If nospouses would have
slightlywidow(er), IA wouldaccess to the PSA
afterbecome part of thewhen he or she
retirementestate. Annuities forreaches 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.
MaintainIndividualPersonal security
FeaturePresent lawbenefits (MB)accounts (IA)accounts (PSA)
Aged50% of spouse’sNo changeOver 2000-2016,Higher of 50% of the
spouse PIA, offset bygradually lowers agedworker’s PIA, or 50%
benefit100% of theirspouse benefit fromof the full Tier 1
own PIA earned50% to 33% of thebenefit when the
as a worker.worker’s PIA.system is fully phased
in.
AgedSurvivingNo changeAssures that theSame as IA.
survivingspouses aresurviving spouse
spouse eligible for 100%benefit is at least 75%
benefitof the deceasedof the couple’s
spouse’s PIA,combined benefits
offset by 100%while both were alive.
of their own PIA
earned as a
worker.
EarningsReduces benefitsNo changeNo change inEliminates test at
testof recipientsapplication to SocialFRA over 1998-2002.
under age 70Security benefits. Earnings test would
who earn aboveEarnings test would notnot apply to PSA
a certain amount.apply to IA annuities. withdrawals.
Disability Insurance (DI) Benefits
DisabilitySame as for fullNo changeReduction in benefitsDI benefits are
benefitretirementdue to change incalculated under
formulabenefits at FRA.replacement rates in thecurrent law PIA
formula used toformula, but, as the
determine PIAs. (SeeFRA 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
TreatmentNot applicableNot applicableIA would not bePSA would not be
of savingsavailable at disability. available at disability.
accountsFunds would remain inFunds would remain
for disabledthe IA and continue toin the PSA and
workersbe invested incontinue to be
governmentinvested by the
administered accounts. worker. No new
No new contributionscontributions would
would be made duringbe made during
disability. disability.
MaintainIndividualPersonal security
FeaturePresent lawbenefits (MB)accounts (IA)accounts (PSA)
Benefit atDisabledNo changeDisabled workersDisabled workers
conversionworkers shift towould continue towould continue to
toretirementreceive basic benefit. convert to the
retirementbenefits at FRA,IA would becomeretirement rolls at age
but their benefitavailable. 65, when their benefits
amounts do notwould be recomputed
change.under the new
retirement rules and
the PSA becomes
available.
Benefits forNon-agedNo change Beginning in 2000,Higher of 50% of the
spouses ofspouses withbenefits payable toworker’s PIA, or 50%
disabledchildren undereligible spouses wouldof the full Tier 1
workers age 16 in carebe gradually lowered,benefit when the
receive 50 % offrom 50% to 33% ofsystem is fully phased
the worker’sthe worker’s PIA, byin.
PIA, subject to a2016.
family
maximum.
Young Survivor Benefits
BenefitSurvivingNo changeReduction in benefits Young survivor
Formulachildren anddue to change inbenefits would be
spouse eachreplacement rates in thecalculated under the
receive 75% offormula used topresent-law PIA
PIA, subject to adetermine the worker’sformula.
familyPIA. (See above.)
maximum.
MaintainIndividualPersonal security
FeaturePresent lawbenefits (MB)accounts (IA)accounts (PSA)
Tax Treatment of Benefits
TaxUp to 50% ofBeginning inSame as in MB plan,Beginning in 1998,
treatment ofbenefits are1998, all benefitsexcept no provision for50% of benefits
Socialsubject to incomein excess ofshifting income taxwould be subject to
Security tax if income isemployeerevenues on Socialtax for recipients,
benefitsbetween certaincontributionsSecurity benefits fromworkers over age 54
thresholds would be subjectMedicare to Socialin 1998, the disabled,
(revenues go toto incomeSecurity.and for past service
Social Securitytaxation (i.e., incredits for workers
trust funds). the same mannerover age 24. When
However, atprescribed forTier 1 benefits
higher incomeprivate andbecome available, they
levels up to 85%governmentwould be 100%
of benefits aredefined benefittaxable. The income
taxed (additionalpension plans),thresholds for benefit
revenues go toand the incometaxation would be
Medicare’sthresholds wouldphased out over 1998-
Hospitalbe phased out2007.
Insurance (HI)over 1998-2007.
trust fund). Effective in 1998, no
Redirects benefitrevenue from the
taxation revenuetaxation of benefits
from the HI trustwould go to Medicare.
fund to the Social
Security trust
funds (phased-in
over 2010-2019).
TaxNot applicableNot applicableTwo options areContributions to the
treatment ofpresented: (1)PSA would be fully
mandatedcontributions to IA tax-taxable, the proceeds
savingsdeductible, withdrawalsfrom PSAs would be
fully taxable; (2)tax-free. Investment
contributions to IAreturns would not be
fully taxable,taxed.
withdrawals tax-free.