PART ONE
Guiding Principles for Social Security and Its Reform
1 A Blueprint for Reform
2 Social Security Principles and Rationales
Principles for Judging Reform
- Redistribution from the Better-Off to the Less Well-Off (Progressivity)
- Ensuring a Fair Return on Contributions (Individual Equity)
- Equal Treatment of Equals (Horizontal Equity)
- Achieving Maximum Benefit to Society from Available Resources (Economic Efficiency)
- Opportunity Cost
The Overarching Concept of Social Insurance
Rationales for a Broad Public Annuity Program
- Need for Public Support
- Correcting for Market Failure
- Avoiding the Inequities and Inefficiencies Associated with "Means Testing"
- The Problem of Dissolving a Pay-As-You-Go System
- Other Rationales
Implications for Social Security Reform
PART TWO
An Examination of the Social Security System
3 The Inevitable Reform of an Imbalanced System
Demographic Trends
- Living Longer and Retiring Earlier
- Baby Bust, Baby Boom, Baby Bust
- Working Women Save the Day--But Only for Awhile
- More Retirees per Worker
Fiscal Imbalance
- Social Security Deficits and the Trust Funds
- Social Security and the Federal Budget
- Social Security and Economic Growth
Conclusion
4 Basic Features of the Social Security System
Social Security Payroll Tax
How OASI Benefits Are Related to Past Earnings
- Average Indexed Monthly Earnings (AIME)
- Primary Insurance Amount (PIA)
Other Important Adjustments to Benefits
- Adjustments for Early or Delayed Retirement
- Spousal and Survivors' Benefits
- Taxation of Benefits
Medicare
Other Relevant Programs
- Disability Insurance
- Supplemental Security Income (SSI)
- Medicaid
5 How Social Security Redistributes IncomeAnnual Benefits
- Real Value of Benefits
- Replacement Rates
Moving to a Lifetime Perspective
- Assumptions and Methods
- Annuity Value of Benefits and Taxes: An Example
- Growth in Lifetime Benefits
- Growth in Lifetime Tax Contributions
- Net Transfers
- Net Transfers as Percentage of Lifetime Income
Adjusting for Survival Differences among Income Groups
Medicare Benefits
Conclusion
6 Well-Being and Diversity among the Elderly
Economic Status of the Elderly
- Median Incomes
- Other Sources of Economic Well-Being
- Poverty Rates
- Expenses for Long-Term Care
- Economic Resources Decline as Needs Increase
- Role of Pensions
Health and Ability to Work
Implications for the Social Security System
PART THREE Options for Reform
7 Options for Reforming the Social Security Payroll Tax
Changing the Tax Rate
- Tax Rate Increases
- Reducing the Payroll Tax
Changing the Limit on Taxable Earnings
Expanding the Tax Base by Eliminating Tax Preferences
Alternative Methods of Financing Social Security
- How Much General Revenue Financing?
- Increasing Progressivity in the Tax Rate Schedule
Conclusion
8 Benefit Options
Changes in Indexing
- Cost-of-Living Adjustments
- Indexing of Measure of Lifetime Wages (AIME)
- Indexing of Benefit Formula for Real Wage Growth
Dropout Years
Other Changes in Benefit Formula
- Two-Tier or Double-Decker Social Security System
- Minimum Benefits
Taxation of Benefits
- Justifications for Taxation of Benefits
- Further Reforms in Taxation of Benefits
- Taxing Benefits versus Other Benefit Changes
Raising the Retirement Age
- Retirement Age and Labor Force Participation
- Easing Potential Impact on Needy and Impaired
- Partial Benefits and Other Barriers to Early
- Retirement
Conclusion
9 Spousal Benefits and Rules for Early and Delayed Retirement
Spousal Benefits and Returns to Secondary Workers
- Spousal Benefits
- Returns to Secondary Workers
- Treatment of Divorce
- Earnings Sharing and Other Options
- Survivors' Benefits and the Very Old
Early and Delayed Retirement
- Basic Rules for Early and Delayed Retirement
- Does Social Security Provide an Incentive to Retire Early?
- How Do People Perceive these Rules and Incentives?
- Do these Incentives Affect Behavior?
- Rationales for Earnings Test
- Repealing the Earnings Test
Winners and Losers when Resources Are Shifted
10 Medicare Reform: Some Basic Requirements
Open-Ended Medicare Expenditures
Combining Health Care Systems for the Elderly
Cash versus In-Kind Benefits
- Inefficiency of In-Kind Benefits
- Health Cost Inflation
- Cost Awareness
- Future Choices between Cash and In-Kind Benefits
Medicare Eligibility Test
Health Earnings Test
Conclusion
11 Conclusion: Toward Common Ground
Appendix
References
About the Authors
Index
Tables
3.1 Historical and Projected Improvements in Life Expectancy
3.2 Trend Toward Earlier Retirement
3.3 Civilian Labor Force Participation Rate of Total Population Aged 16 and Over
3.4 Growth in Elderly Population and Its Impact on Social Security System
3.5 OASDI and Medicare Spending as Percentage of GDP
4.1 Payroll Tax Rates and the Earnings Base, 1940-94
4.2 Earnings Histories for Hypothetical Workers Turning 65 in 1995
5.1 Lifetime OASI Benefits and Taxes for Cohort Turning 65 in 1995
5.2 OASI Benefits for Average-Wage, One-Earner Couples
5.3 Lifetime OASI Benefits, Taxes, and Transfers
5.4 Estimated Life Expectancy for White Males and Females at Age 25, by Family Income
5.5 Lifetime OASI Benefits, Taxes, and Transfers, Assuming Income Has a Strong Effect on Mortality
5.6 Annual and Lifetime Medicare Benefits
5.7 Lifetime Medicare Benefits, Taxes, Premiums, and Transfers
5.8 Lifetime Combined OASI and Medicare Net Transfers
6.1 Median Money Income Adjusted for Unit Size and Age, by Age of Unit Head
6.2 Effective Federal Tax Rates by Quintile and Age of Unit Head
6.3 Ratio of Average Income of Elderly to Average Income of Nonelderly under Alternative Measures, 1979
6.4 Mean and Median Net Worth of Households by Age of Head, 1988
6.5 Civilian Labor Force Participation Rates at Age 55 and Over
7.1 Federal Tax Receipts, 1950-91
7.2 Effective Rates of Social Security Tax and Federal Income Tax for Four-Person Families at Various Income Levels, 1955-91
7.3 Projected Social Security Tax Rates Required under Pay-As-You-Go Financing
7.4 Wages, Salaries, and Employee Benefits as Percentage of Total Employee Compensation
8.1 Scheduled Changes in Normal Retirement Age and Adjustments for Early and Late Retirement
9.1 Marginal Returns from OASI for Wage-Earning Women Turning 65 in 2030
9.2 Two Sample Couples with Identical Contributions
9.3 Effects of Alternative Retirement Decisions on Value of OASI
9.4 Effect of Alternative Retirement Decisions if the DRC Were Raised Immediately to 8 Percent per Year
A.1 OASI Benefit in First Year of Retirement
A.2 OASI Replacement Rates
A.3 Actuarial Present Value at Age 65 of Lifetime OASI Benefits and Taxes
A.4 Actuarial Present Value at Age 65 of Lifetime OASI Benefits
A.5 Actuarial Present Value at Age 65 of Lifetime OASI Taxes
A.6 Net Lifetime OASI Transfer (Benefits Minus Taxes)
A.7 Net OASI Transfer as Percentage of Lifetime Earned Income
A.8 OASI Lifetime Benefit-to-Tax Ratio
A.9 Real Lifetime Internal Rate of Return from OASI Program
A.10 Lifetime Medicare Benefits, Taxes, and Premiums
A.11 Effect of Various Retirement Decisions on Value of OASI for Cohort Turning 65 in 1995: Average-Wage Male
A.12 Lifetime OASI Benefits, Taxes, and Transfers under 1992 Tax Law
A.13 Basic Features of Old-Age and Survivors' Insurance in Selected Industrialized Nations: January 1, 1991
Figures
3.1 Total Fertility Rates, 1920-2020
3.2 OASDI Tax Revenues and Spending as Percentage of Taxable Payroll
3.3 Future Growth in Social Security and Medicare Means Higher Taxes, Larger Deficits, or Lower Spending on Everything Else
3.4 Change in Composition of Federal Budget, 1950-98
5.1 OASI Benefit in First Year of Retirement
5.2 OASI Replacement Rates
5.3 Net Lifetime OASI Transfer
5.4 Net OASI Transfer as Percentage of Lifetime Income
6.1 Percentage of Persons below Poverty and near Poverty Thresholds, by Age, 1990
6.2 Value of Unindexed Pension Relative to OASI Benefits and Nursing Home Costs
