Social Security Modernization

Q: What are the alternatives for modernization and reform?

A: The four basic alternatives that are being discussed -- singularly or in combination with each other -- are (1) increasing payroll taxes, (2) decreasing benefits, (3) using general revenues or (4) prefunding future benefits through either personal savings accounts or direct investments of the trust funds.

The independent, bipartisan Social Security Advisory Board examined many options that addressed Social Security's long-range solvency problem. Its July 2001 report [PDF] is available online.

Q: Does President Bush have a specific plan to modernize and reform Social Security?

A: No, but the President has established six guiding principles for any reform of Social Security:

• Preserve Social Security benefits for retirees and near-retirees
• Use Social Security surplus for Social Security
• Keep Social Security payroll taxes level
• Do not have the government invest Social Security funds in the stock market
• Preserve Social Security's disability and survivors insurance programs
• Create individually controlled, voluntary personal retirement accounts to augment Social Security

The bipartisan Commission he appointed put forward three models based on these principles. These models are in the process of being discussed, as are other alternatives

Q: Will Social Security be replaced by a private sector retirement plan ("privatization")?

A: No. There are no credible plans to replace Social Security as the foundation for the retirement of American workers.

Q: What is a voluntary personal retirement account?

A: There are many possible ways to structure personal accounts. Several proposals recommend that a personal savings account plan for Social Security be modeled after the federal government's Thrift Savings Plan. This very popular plan for federal employees and members of Congress allows a choice of five highly diversified, low-cost mutual funds. In the Thrift Savings Plan, no direct investments in individual stocks are allowed.

Q: I understand that some reform plans require larger transfers from general revenues to fund personal Social Security savings accounts. Is that true?

A: Yes. Many of the plans put forth, including those by the Commission and by some members of Congress, require significant transfers from general revenues. Depending on the underlying assumptions, these transfers generally range from less than $1 trillion to more than $2 trillion, in today's present-value dollars. However, it is also true that if no changes are made, revenue transfers totaling $3.7 trillion, in today's present-value dollars, would be needed to pay currently scheduled benefits over the next 75 years.

Q: Would a "lock box" fix Social Security's problems in and of itself?

A: No. As Social Security's Chief Actuary has stated, "The implementation of a Social Security 'lock box' would not alter the U.S. Treasury commitment and thus would have no direct effect on the future solvency of Social Security. However, if the effect of a 'lock box' were to require that the non-Social Security Federal budget be in balance or surplus for the years in which Social Security makes investments, then the amount of borrowing from the public might be reduced. In this case the difficulty of generating General Revenue for the redemption of Trust Fund investments in the future would likely be diminished."