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Presidential Commission Plan 2
Features
| Feature | Comments | |
| Private Accounts | Yes | |
| Optional/Mandatory | Optional | For most recipients, effect is actually mandatory (see Evaluation, below) |
| Maximum Contribution | Lesser of 4% of payroll, or $1,000 | |
| Limit Inflation Indexed | Yes | |
| Effect on basic benefit | Yes | Reduces basic benefit proportionately, plus 2%, compounded annual |
| Monthly Benefit Calculation | ||
| Wage/Inflation Indexed | Inflation | |
| Bend Points Moved | No | |
| Bend Point Pct changed | No | |
| Subject Income Capped | Yes | $90,000 (no change) |
| Cap Indexed | No | (no change) |
| Minimum Benefit | Yes | 120% poverty |
| Min Benefit Indexed | Yes | |
| Change in Tax Rate | No | Uses undefined "general funds" to cover transition costs |
| Change in Normal Retirement Age | No | |
| Projected change in 1st year benefits | ||
| Low wage earners | -15% | For those born in the 1980's. Figure rises for those born later. (Those just being born will see a 30% reduction) |
| Medium-Wage Earners | -30% | For those born in the 1980's. Figure rises for those born later. (Those just being born will see a 45% reduction) |
| High wage earners | -30% | For those born in the 1980's. Figure rises for those born later. (Those just being born will see a 45% reduction) |
| Transition Costs | Yes | Amount depends on portion electing private accounts, but based on Evaluation (see below), $2 trillion in transition expenses can be expected. |
| Years | 2025-2052 |
Evaluation:
This plan's effort to bring Social Security back into balance is based, entirely on the shift to inflation-based AIME. The only other positive effect is the reduction of benefits not merely by the percentage diverted to private accounts, but by an imputed gain (2%, compounded annually) on that amount as well.
While the use of privatized accounts is "optional", the loss of benefits from shift in the calculation above is the only way to stay even or minimize the loss on overall benefits for those not counting on the minimum benefit. (These individuals would not be wise to divert to private savings, since the calculation of minimum benefit would also be reduced by the percentage diverted to a private account, compounded annually.
While the minimum benefit is pegged at 120% of poverty, a surviving spouse gets only 75% of that amount -- which leaves the individual in poverty (at 90% of poverty level).
The commission did not estimate the actual transition costs, nor did it compute a repayment schedule or interest costs on that amount. The costs are expected to be in the $1 trillion to $2 trillion range.
The Congressional Budget Office's analysis of the plan showed a 50% reduction in the total benefits (both traditional and from individual accounts), once the risks associated with the plan were equalized. (This is done by vakluing the growth of the private accounts at a "no risk" rate of return -- the rate associated with Treasury Bonds.
Risk-Adjusted Plan 2 Benefits |
Sources:
Plan: Report of the
President’s Commission, December 21, 2001 (13.2 MB PDF file)
Financial Impact: CBO Report,
JUly 21, 2004 (1.5MB PDF file)
©Copyright 2004, 2005, Michael Rosenberg. All rights reserved.