Social Security: The Brookings Institute Washington, DC January 13, 2005 The view from

John Rother Director Policy & Strategy

Social Security Reform GOALS

Goals of Social Security Reform Adequacy Equity Solvency

Larger Goals Strengthen retirement security Promote savings and work options Slow “spend down” of trust fund after 2028 Increase certainty as workers’ plan for future Restore confidence of young in stability of Social Security

Preserving Adequacy Current benefits average $955 Minimum benefit Opposition to price-indexing

Ensuring Equity Raising widow(er)s benefits to 75% Provide long lead time for any benefit changes

Social Security Reform OPTIONS

Options for Solvency Raise wage cap to 90% Cover all state/local employees Invest 15% of trust fund in broad equity index fund #1

Options for Solvency BLS may adjust CPI to “superlative” basis #2

Options for Solvency Benefit reduction options Bend Points Additional years counted Longevity-index initial benefit Raise normal retirement age beyond 67 Raise early retirement age beyond 62 #3

Diversion of payroll contributions is not the answer Guaranteed benefits (replacement rates) will be cut drastically Risk entire retirement portfolio sinking at once Cost of transition enormous Cost of administration for millions of small accounts significantly reduces yield Workers will want access to “their” $$$ early Spouses, disabled, and survivors threatened

“Add-on” private accts a positive Make Savers Credit refundable Match contributions below $40k for singles Require all employers to implement payroll deduction Finance with estate tax above $3.5 million

Public Opinion Want current system preserved, stable Favor a balance of small revenue & benefit adjustments When told downsides to private accts, support drops dramatically Agree that low-wage earners should not be asked to sacrifice

Social Security: The view from