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The benefit level is based on the 35 highest years of earnings. Recent COLA were 2. According to the CBO: However, CBO also reported that: Reducing each year's COLA results in an annual compounding effect, with greater effect on those receiving benefits the longest.
There is disagreement about whether a reduction in the COLA constitutes a "benefit cut"; the Center for Budget and Policy Priorities considers any reduction in future promised benefits to be a "cut". However, others dispute this assertion because under any indexing strategy the actual or nominal amount of Social Security checks would never decrease but could increase at a lesser rate.
CBO estimated in that raising the retirement age to 70 gradually would eliminate half the year funding shortfall. The Social Security full payout retirement age in was 66 years of age; it is gradually rising to However, most Americans begin taking reduced early benefits at age While Americans are living longer, much of the increase in life expectancy is among those with higher incomes.
The Social Security Administration estimated that retirees who made above-average incomes in their working years live six years longer than they did in the s. However, retirees in the bottom half of the income distribution live only 1.
In addition, many lower-income workers have jobs that require standing or manual labor, which becomes increasingly difficult for older workers.
The Congressional Research Service reported that: Progressive indexing," would index initial benefits for low earners to wage growth as under current law , index initial benefits for high earners to price growth resulting in lower projected benefits compared to current-law promised benefits , and index benefits for middle earners to a combination of wage growth and price growth.
President Bush endorsed a version of this approach suggested by financier Robert Pozen , which would mix price and wage indexing in setting the initial benefit level.
The " progressive " feature is that the less generous price indexing would be used in greater proportion for retirees with higher incomes. The San Francisco Chronicle gave this explanation:. As under the current system, all retirees would have their initial benefit amount adjusted periodically for price inflation occurring after their retirement.
Thus, the purchasing power of the monthly benefit level would be frozen, rather than increasing by the difference between the typically higher CPI-W and typically lower CPI-U, a broader measure of inflation. CBO estimated in that removing the cap on the payroll tax i. Strengthening Social Security Act of Diamond and Peter R. Orszag proposed in their book Saving Social Security: A Balanced Approach that Social Security be stabilized by various tax and spend adjustments and gradually ending the process by which the general fund has been borrowing from payroll taxes.
This requires increased revenues devoted to Social Security. However, the poll also indicated Americans are skeptical about the future of the program: A January Pew Research Center poll indicated that "Making Social Security system sound" was the 5th highest priority of out 23 topics.
According to a July Gallup poll, many Americans doubt they will get Social Security benefits, although the level of doubt is similar to readings going back to Critics argue that privatizing Social Security does nothing to address the long-term funding concerns.
Diverting funds to private accounts would reduce available funds to pay current retirees, requiring significant borrowing. The Economic Report of the President found that the federal budget deficit would be more than 1 percent of gross domestic product GDP higher every year for roughly two decades; U.
Privatization proponents counter that the savings to the government would come through a mechanism called a "clawback", where profits from private account investment would be taxed, or a benefit reduction meaning that individuals whose accounts underperformed the market would receive less than current benefit schedules, although, even in this instance, the heirs of those who die early could receive increased benefits even if the accounts underperformed historical returns.
Opponents of privatization also point out that, even conceding for sake of argument that what they call highly optimistic numbers are true, they fail to count what the transition will cost the country as a whole.
Gary Thayer, chief economist for A. And this is really a key to understanding the debate, because if, on the other hand, a system which mandated investment of all assets in U. Treasuries resulted in a positive net recapturing, this would illustrate that the captive nature of the system results in benefits that are lower than if it merely allowed investment in U.
Treasuries purported to be the safest investment on Earth. Current Social Security system advocates claim that when the risks, overhead costs and borrowing costs of any privatization plan are taken together, the result is that such a plan has a lower expected rate of return than "pay as you go" systems.
They point out the high overheads of privatized plans in the United Kingdom and Chile. Even some of those who oppose privatization agree that if current future promises to the current young generation are kept in the future, they will experience a much lower rate of return than past retirees have.
The proponents' argument is that projected returns higher than those individuals currently receive from Social Security and ownership of the private accounts would allow lower spending on the guaranteed benefit, but possibly without any net loss of income to beneficiaries.
Both wholesale and partial privatization pose questions such as: For workers, privatization would mean smaller Social Security checks, in addition to increased compensation from returns on investments, according to historical precedent. A technical economic argument for privatization is that, without it, the payroll taxes that support Social Security constitute a tax wedge that reduces the supply of labor, like other tax financed government welfare programs.
Liberal economists like Peter Orszag and Joseph Stiglitz have argued that Social Security is already perceived as enough of a forced savings program to preclude a reduction in the labor supply.
In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted [by economists] from household's earnings and should not be included in the tax wedge. To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes.
In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted from household's earnings and should not be included in the tax wedge. Supporters of the current system maintain that its combination of low risks and low management costs, along with its social insurance provisions, work well for what the system was designed to provide: From their perspective, the major deficiency of any privatization scheme is risk.
Like any private investments, PRAs could fail to produce any return or could produce a lower return than proponents of privatization assert,  and could even suffer a reduction in principal. Advocates of privatization have long criticized Social Security for lower returns than the returns available from other investments, and cite numbers based on historical performance. Supporters of the current system argue that the long-term trend of U. The general upward trend has been punctuated by severe downturns.
Critics of privatization point out that workers attempting to retire during any future such downturns, even if they prove to be temporary, will be placed at a severe disadvantage. Proponents argue that a privatized system would open up new funds for investment in the economy, and would produce real growth. They claim that the treasuries held in the current Trust Fund are covering consumption rather than investments, and that their value rests solely upon the continued ability of the U.
Michael Kinsley has said that there would be no net new funds for investment, because any money diverted into private accounts would produce a dollar-for-dollar increase in the federal government's borrowing from other sources to cover its general deficit. Meanwhile, some investment-minded observers among those who do not support privatization, point out potential pitfalls to the Trust Fund's undiversified portfolio, containing only treasuries.
Many of these support the government itself investing the Trust Fund into other securities, to help boost the system's overall soundness through diversification , in a plan similar to CalPERS in the state of California.
Among the proponents of this idea were some members of President Bill Clinton 's Social Security commission that studied the issue; the majority of the group supported partial privatization, and other members put forth the idea that Social Security funds should themselves be invested in the private markets to gain a higher rate of return.
Another criticism of privatization is that while it might theoretically relieve the government of financial responsibility, in practice for every winner from moving risk from the collective to the individual there will be a loser, and the government will be held politically responsible for preventing those losers from slipping into poverty. Proponents of the current system suspect that for the individuals whose risks turn out badly, these same individuals will support political action to raise state benefits, such that the risks such individuals may be willing to take under a privatized system are not without moral hazard.
There are also substantive issues that do not involve economics , but rather the role of government. Conservative Nobel Prize -winning economist Gary S.
Becker , currently a graduate professor at the University of Chicago , wrote in a February 15, article that "[privatization] reduce[s] the role of government in determining retirement ages and incomes, and improve[s] government accounting of revenues and spending obligations". Opponents of privatization also decry the increased management costs that any privatized system will incur.
Dishonest schemes can be sold to naive buyers in which pension values are bled through fees and commissions such as happened in the UK in — Advocates of privatization at the Cato Institute , a libertarian think tank, counter that, "Based on existing private pension plans, it appears reasonable to assume that the costs of administering a well-run system of PRAs might be anywhere from a low of roughly 15 basis points 0.
Opponents also claim that privatization will bring a windfall for Wall Street brokerages and mutual fund companies, who will rake in billions of dollars in management fees. Other analysts argue that dangers of a Wall Street windfall of such magnitude are being vastly overstated. This amount would represent only 1. He concludes that privatization is "hardly likely to be a bonanza for Wall Street". A range of other proposals have been suggested for partial privatization, such as the 7.
One, suggested by a number of Republican candidates during the elections, would set aside an initially small but increasing percentage of each worker's payroll tax into a fund, which the worker would be allowed to invest in securities. Another eliminated the Social Security payroll tax completely for workers born after a certain date, and allowed workers of different ages different periods of time during which they could opt to not pay the payroll tax, in exchange for a proportional delay in their receipt of payouts.
Most state pension plans invest a portion of employer and employee contributions in a mixture of stocks, bonds, real estate, etc. Bush discussed the "partial privatization" of Social Security since the beginning of his presidency in But only after winning re-election in did he begin to invest his " political capital " in pursuing changes in earnest.
In May , he announced establishment of a member bipartisan commission "to study and report specific recommendations to preserve Social Security for seniors while building wealth for younger Americans", with the specific directive that it consider only how to incorporate "individually controlled, voluntary personal retirement accounts".
He outlined, in general terms, a proposal based on partial privatization. After a phase-in period, workers currently less than 55 years old would have the option to set aside four percentage points of their payroll taxes in individual accounts that could be invested in the private sector, in "a conservative mix of bonds and stock funds".
Workers making such a choice might receive larger or smaller benefits than if they had not done so, [ citation needed ] depending on the performance of the investments they selected. Although Bush described the Social Security system as "headed for bankruptcy ", his proposal would not affect the projected shortfall in Social Security tax receipts. Partial privatization would mean that some workers would pay less into the system's general fund and receive less back from it.
Administration officials said that the proposal would have a "net neutral effect" on the system's financial situation, and that Bush would discuss with Congress how to fill the projected shortfall. As illustrated by the CBO analysis, one possible approach to the shortfall would be benefit cuts that would affect all retirees, not just those choosing the private accounts. Bush alluded to this option, mentioning some suggestions that he linked to various former Democratic officeholders.
He did not endorse any specific benefit cuts himself, however. He said only, "All these ideas are on the table. Later that month, his press secretary, Scott McClellan , ambiguously characterized raising or eliminating the cap on income subject to the tax as a tax increase that Bush would oppose.
In his speech, Bush did not address the issue of how the system would continue to provide benefits for current and near-future retirees if some of the incoming Social Security tax receipts were to be diverted into private accounts. On April 28, , Bush held a televised press conference at which he provided additional detail about the proposal he favored.
For the first time, he endorsed reducing the benefits that some retirees would receive. He endorsed a plan from Robert Pozen , described below in the section regarding suggestions for Social Security that do not involve privatization.
Although Bush's State of the Union speech left many important aspects of his proposal unspecified, debate began on the basis of the broad outline he had given. The political heat was turned up on the issue since Bush mentioned changing Social Security during the elections , and since he made it clear in his nationally televised January speech that he intended to work to partially privatize the system during his second term.
A group backed by labor unions called "Americans United to Protect Social Security" "set its sights on killing Bush's privatization plan and silencing his warnings that Social Security was 'headed toward bankruptcy.
On January 16, , the New York Times reported internal Social Security Administration documents directing employees to disseminate the message that "Social Security's long-term financing problems are serious and need to be addressed soon", and to "insert solvency messages in all Social Security publications".
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