CIEBA Report Addressing Social Security in America April 2000, Madrid

2 The Current Condition of Social Security  Social Security surplus is currently $800 billion and projected to grow to $3.2 trillion by 2020  Social Security surplus is not invested and is expected to be depleted to 2032 –Majority of surplus funds are used to support other government programs –Long-term government practice indicates that surplus’ are spent, not saved PositiveNegative

3 The Current Condition of Social Security  Current payroll taxes will exceed Social Security claims until 2013 –Current worker to retiree ratio is 3.2/1 –16% of population will be over 62 in 2008  Payroll taxes will not fully cover claims after 2013; surplus will also be required –Current worker to retiree ratio is dropping to 2/1 –23% of population will be over 62 in 2026 PositiveNegative

4 The Current Condition of Social Security  Financial shortfall could be corrected by: –Immediate tax increase of 2.2% –Log term aggregate benefit reduction of 25% –High national productivity (e.g. real incomes rising by 1.5%/year)  Simple sounding solutions create other serious problems: –Higher taxes will reduce corporate competitiveness, increase unemployment and/or transfer additional power to government –Social Security benefits exceed 80% of the income of the bottom two quintiles of retired Americans –Maximum anticipated productivity increase is 1.2% Positive Negative

5 The Current Condition of Social Security  Current economic backdrop is strong  Economic growth is above trend –Inflation is low –Financial markets are strong –Unemployment rate is low  Economic cycle is extended –Long-term forecasts for GDP growth are below recent trend –Inflation could accelerate –Equity market valuation levels are at a historical high –Historical average unemployment levels are well above current status PositiveNegative

6 The Current Condition of Social Security  4.6% of U.S. GDP currently required to support Social Security –Lowest among industrialized countries  Expected to rise to 6.8% by 2040 –2.1% transfer of national resources to the government PositiveNegative

7 The Current Condition of Social Security  “Monies Worth” ratio was approximately 18% for previous generations  “Monies Worth” ratio has fallen to approximately 2% for most Americans PositiveNegative

8 The Current Condition of Social Security  Window of opportunity for change is 1999 or 2002 to 2007 –President Clinton wants a legacy –Consensus seems strong for change  “Social Security remains the “third rail” of politics –Traditionalists have yet to aggressively enter the debate PositiveNegative

9 Proposed Social Security Solutions Maintain Benefits  Study the effects of the government investing 40% of the Social Security assets in U.S. stocks  Increase payroll taxes in 2045 by 1.6%, split evenly between workers and employers  Redirect taxes paid elsewhere to Social Security  Reduce benefit levels

10 Proposed Social Security Solutions Personal Security Accounts  Divert 5% of 12.4% payroll tax to mandatory personal retirement accounts  Establish a floor benefit of $410/month  Grandfather present benefits for those 55 and older  Raise payroll tax by 1.52% for 72 years  Increase the retirement age to 67 in 2011 and adjust with longevity

11 Proposed Social Security Solutions Individual Accounts  Increase workers share of payroll tax by 1.6% to fund government-run individual retirement accounts  Reduce benefit for some middle and high-income recipients  Increase the retirement age to 67 in 2011 and adjust with longevity

12 Proposed Social Security Solutions CIEBA supports the following Principles:  Social Security must preserve the integrity of employer- sponsored plans and their sponsoring corporations  Effectively addressing the identified Social Security issues soon is preferable to continued delay  Advance funding of long-term obligations is preferable to pay-as-you-go mechanisms  The “monies worth” ratio must be reasonable for all contributors