Revised, May 15, 2000 Impact of 2 Percent Individual Accounts on Social Security Solvency
by Peter OrszagThe purpose of this brief note is to provide estimates of the effects on the Social Security system of allowing 2 percentage points of the current Old-Age Survivors and Disability Insurance (OASDI) payroll tax to be diverted into individual accounts. These estimates assume that the only policy change is this diversion of revenues; they do not incorporate the impact of any benefit changes within the traditional Social Security system that could accompany the creation of individual accounts.
Under current law, the intermediate estimates from the most recent report of the Social Security Trustees suggest that over the next 75 years, the Social Security system faces an actuarial imbalance of 1.9 percent of taxable payroll. Those estimates also suggest that the Social Security Trust Fund will be exhausted in 2037, at which point Social Security revenues will be sufficient to pay for only about 70 percent of current-law benefits. (In addition, the Trustees estimates indicate that Social Security tax revenues, which do not include the interest the Social Security trust funds earn on their holdings, will fall below Social Security benefit costs in 2015 and that total revenues including the trust funds interest earnings will fall below benefit costs in 2025. Full benefits will be able to be paid until 2037, however, because the trust funds will be able to draw down their accumulated reserves until the reserves are exhausted.)1
To improve Social Securitys financial condition, three basic options exist: increase revenue, reduce benefits, or raise the returns on the Social Security Trust Fund. Individual accounts, in and of themselves, do not have an effect along these three dimensions and thus do not improve Social Securitys financial condition. Moreover, one effect of establishing individual accounts funded from current Social Security revenue is to make Social Securitys financial condition more adverse, since such accounts divert revenue from the Social Security trust funds and thereby create a larger actuarial gap. For example, if all workers diverted 2 percentage points of their Social Security contributions into individual accounts, the actuarial imbalance within Social Security would rise from 1.9 percent of taxable payroll to almost 3.9 percent in the absence of other changes. As a result, most plans that direct a portion of payroll tax revenues to individual accounts couple such a step with significant benefit changes within Social Security.
The estimates below use the intermediate projections of the Social Security Trustees and assume that 2 percentage points of taxable payroll are diverted into individual accounts starting in 2002 (with no other policy changes). Table 1 below summarizes the results; the attached spreadsheet provides the year-by-year impact. As the summary table shows, available Social Security tax revenue would be insufficient to pay current-law benefits starting in 2005 rather than 2015 and the Trust Fund would be exhausted starting in 2023, rather than 2037.
Table 1: Summary Current law
2 percent individual accounts, with no other policy changes
Year in which benefits exceed payroll tax revenue 2015 2005 Year in which benefits exceed total income (including interest on Trust Fund) 2025 2014 Year in which Trust Fund is exhausted 2037 2023 Individual accounts can help put the Social Security system on a sounder footing only if they are linked in some way to benefit reductions within the traditional Social Security system. In and of themselves, individual accounts funded by diverting current Social Security revenue make Social Securitys financial problems more serious.
Impact of 2% Individual Accounts (with no other changes) |
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Source of Raw Data: Table III.B3. Estimated Operations of the Combined OASI and DI Trust Funds, Intermediate Cost Assumptions, 2000 Social Security Trustees Report |
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Current law |
With individual accounts | ||||||||||
Calendar year |
Income excluding interest |
Interest income |
Total income |
Outgo |
Assets at end of year |
Taxable payroll |
Cost of individual accounts = 2% of payroll |
Income without interest, with 2% individual accounts and no other changes |
Trust Fund if ind. account contributions start in 2002 |
||
2000 |
500.7 |
64.9 |
565.7 |
410.3 |
1,051.5 |
3,969 |
|||||
2001 |
528.1 |
75.6 |
603.7 |
432.2 |
1,223.0 |
4,173 |
|||||
2002 |
552.8 |
86.4 |
639.2 |
455.6 |
1,406.7 |
4,371 |
87.4 |
465.4 |
1319.3 |
||
2003 |
577.9 |
96.8 |
674.8 |
480.6 |
1,600.8 |
4,571 |
91.4 |
486.5 |
1416.1 |
||
2004 |
604.8 |
108 |
712.8 |
508.2 |
1,805.3 |
4,785 |
95.7 |
509.1 |
1512.6 |
||
2005 |
635.1 |
120.1 |
755.3 |
538.6 |
2,022.0 |
5,017 |
100.3 |
534.8 |
1609.3 |
BENEFITS EXCEED NON-INTEREST INCOME |
|
2006 |
665.1 |
133.3 |
798.4 |
571.5 |
2,248.8 |
5,257 |
105.1 |
560.0 |
1703.5 |
||
2007 |
698.9 |
147.3 |
846.2 |
607.2 |
2,487.8 |
5,511 |
110.2 |
588.7 |
1795.9 |
||
2008 |
733.1 |
162.1 |
895.2 |
646 |
2,737.0 |
5,781 |
115.6 |
617.5 |
1883.5 |
||
2009 |
770.4 |
177.5 |
947.9 |
689.2 |
2,995.8 |
6,071 |
121.4 |
649.0 |
1964.1 |
||
2010 |
810.3 |
194 |
1,004.30 |
737.2 |
3,262.9 |
6,380 |
127.6 |
682.7 |
2035.0 |
||
2011 |
851.9 |
211 |
1,062.90 |
788.7 |
3,537.1 |
6,701 |
134.0 |
717.9 |
2093.5 |
||
2012 |
895 |
228.4 |
1,123.40 |
845.1 |
3,815.3 |
7,032 |
140.6 |
754.4 |
2135.0 |
||
2013 |
939.6 |
246 |
1,185.60 |
906.6 |
4,094.4 |
7,374 |
147.5 |
792.1 |
2154.5 |
||
2014 |
986 |
263.5 |
1,249.50 |
973.3 |
4,370.6 |
7,728 |
154.6 |
831.4 |
2146.7 |
BENEFITS EXCEED TOTAL INCOME |
|
2015 |
1,034.50 |
280.5 |
1,315.00 |
1,045.20 |
4,640.4 |
8,097 |
161.9 |
872.6 |
2106.3 |
||
2016 |
1,084.90 |
297 |
1,382.00 |
1,122.80 |
4,899.6 |
8,480 |
169.6 |
915.3 |
2027.0 |
||
2017 |
1,137.60 |
312.8 |
1,450.40 |
1,206.30 |
5,143.6 |
8,879 |
177.6 |
960.0 |
1902.3 |
||
2018 |
1,192.60 |
327.4 |
1,520.00 |
1,295.50 |
5,368.1 |
9,294 |
185.9 |
1006.7 |
1725.4 |
||
2019 |
1,250.00 |
340.6 |
1,590.60 |
1,390.70 |
5,568.0 |
9,726 |
194.5 |
1055.5 |
1489.0 |
||
2020 |
1,309.90 |
352.2 |
1,662.10 |
1,491.50 |
5,738.7 |
10,175 |
203.5 |
1106.4 |
1185.9 |
||
2021 |
1,371.90 |
361.9 |
1,733.80 |
1,596.40 |
5,876.0 |
10,640 |
212.8 |
1159.1 |
809.6 |
||
2022 |
1,437.20 |
369.4 |
1,806.60 |
1,705.90 |
5,976.7 |
11,130 |
222.6 |
1214.6 |
353.8 |
||
2023 |
1,504.90 |
374.5 |
1,879.30 |
1,820.50 |
6,035.6 |
11,637 |
232.7 |
1272.2 |
-189.6 |
TRUST FUND EXHAUSTED |
|
2024 |
1,575.70 |
376.8 |
1,952.50 |
1,940.40 |
6,047.6 |
12,167 |
243.3 |
1332.4 |
|||
2025 |
1,649.80 |
376 |
2,025.90 |
2,065.70 |
6,007.7 |
12,721 |
254.4 |
1395.4 |
|||
2026 |
1,727.40 |
372 |
2,099.50 |
2,195.90 |
5,911.3 |
13,302 |
266.0 |
1461.4 |
|||
2027 |
1,808.70 |
364.3 |
2,172.90 |
2,331.30 |
5,752.9 |
13,909 |
278.2 |
1530.5 |
|||
2028 |
1,894.00 |
352.5 |
2,246.50 |
2,470.80 |
5,528.6 |
14,548 |
291.0 |
1603.0 |
|||
2029 |
1,983.70 |
336.6 |
2,320.30 |
2,614.40 |
5,234.5 |
15,219 |
304.4 |
1679.3 |
|||
2030 |
2,077.90 |
316.2 |
2,394.00 |
2,762.40 |
4,866.2 |
15,924 |
318.5 |
1759.4 |
|||
2031 |
2,176.60 |
291 |
2,467.60 |
2,915.40 |
4,418.4 |
16,664 |
333.3 |
1843.3 |
|||
2032 |
2,280.00 |
260.7 |
2,540.80 |
3,074.10 |
3,885.1 |
17,439 |
348.8 |
1931.2 |
|||
2033 |
2,388.30 |
225 |
2,613.30 |
3,237.10 |
3,261.3 |
18,252 |
365.0 |
2023.3 |
|||
2034 |
2,501.70 |
183.6 |
2,685.30 |
3,403.00 |
2,543.6 |
19,105 |
382.1 |
2119.6 |
End Notes:
1. For further discussion of the Social Security Trustees report, see Robert Greenstein and Kilolo Kijakazi, "What the Trustees Report Indicates About the Financial Status of Social Security," Center on Budget and Policy Priorities, March 30, 2000.