Revised, May 15, 2000

Impact of 2 Percent Individual Accounts on Social Security Solvency
by Peter Orszag

The 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 Security’s 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 Security’s financial condition. Moreover, one effect of establishing individual accounts funded from current Social Security revenue is to make Social Security’s 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 Security’s financial problems more serious.

 

Table 2

Impact of 2% Individual Accounts (with no other changes)
(billions of dollars)

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

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.