1. The Brookings Institution, Washington, D.C.www.brookings.edu Saving Social Security Peter R. Orszag Director, Retirement Security Project Joseph A. Pechman Senior Fellow, Brookings January 13, 2005

2. The Brookings Institution, Washington, D.C.www.brookings.edu Social Security’s role Social Security is intended to provide core layer of financial security during particular times of need: 1.Retirement 2.Disability 3.Death of a family wage earner Not designed to be sufficient by itself: 1.Recommended “replacement rate” at retirement: 70 percent 2.SS replacement rate at age 62 (most common age for claiming benefits) for medium earners: 32 percent 3. Average retirement benefit: <$1,000/month

3. The Brookings Institution, Washington, D.C.www.brookings.edu For the bottom tier of financial security, several beneficial attributes Benefits protected against: 1.stock market collapses 2.inflation 3.risk of outliving assets Benefit formula is progressive: 1.Higher replacement rate for lower than higher earners 2.Protects against career not turning out well Benefits provided to family members. Some examples: 1.Children of workers who die 2.Surviving spouses 3.Spouses of disabled workers

4. The Brookings Institution, Washington, D.C.www.brookings.edu Individual Accounts: An Overview Individual accounts, such as 401(k)s and IRAs, provide critical supplements to Social Security – and several common-sense reforms would substantially raise saving in them But individual accounts don’t make sense as part of the core tier

5. The Brookings Institution, Washington, D.C.www.brookings.edu Make It Easier To Save: The Automatic 401(k) Source: Madrian and Shea

6. The Brookings Institution, Washington, D.C.www.brookings.edu But accounts don’t make sense within Social Security As pension system moves toward individuals bearing more risks, individual accounts in Social Security make even less sense Individual account system may respond to political pressure for: early withdrawals no annuitization which would undermine retirement security Significant financing issues

7. The Brookings Institution, Washington, D.C.www.brookings.edu Addressing the long-term deficit in Social Security

8. The Brookings Institution, Washington, D.C.www.brookings.edu Projected Social Security deficit: 0.7% of GDP

9. The Brookings Institution, Washington, D.C.www.brookings.edu Social Security is not the main problem….

10. The Brookings Institution, Washington, D.C.www.brookings.edu Diamond and Orszag, Saving Social Security Restore long-term sustainable solvency Do not destroy program in order to save it No accounting gimmicks or magic asterisks No general revenue transfers, no ignoring risks of stocks Combine benefit reductions and revenue increases, rather than relying solely on either Follow precedent of 1983 Greenspan reforms

11. The Brookings Institution, Washington, D.C.www.brookings.edu A Progressive Reform Protect most vulnerable: disabled workers, young surviving children, lifetime low earners, widows Average earners: modest sacrifices Higher earners: somewhat larger role in reaching long-term balance -- differential earnings growth, life expectancy increases

12. The Brookings Institution, Washington, D.C.www.brookings.edu Bottom line: Benefits for medium earners Benefit reductions less substantial for lower earners and more substantial for higher earners. Real benefit levels continue to increase from one generation to the next because of ongoing productivity growth.

13. The Brookings Institution, Washington, D.C.www.brookings.edu Bottom line: Payroll tax rate If 2045 increase implemented this year, $35,000 earner would pay extra $37 per month in combined employer-employee taxes For 25-year-old average earner, present value of additional lifetime tax is 0.3 percent of career wages

14. The Brookings Institution, Washington, D.C.www.brookings.edu Conclusions Individual accounts do not make sense as part of Social Security Social Security is like a car with a flat tire. Let’s fix the flat tire, not replace the car. Exciting new evidence on ways to boost saving on top of Social Security for low- and moderate-income households Retirement Security Project, funded by Pew Charitable Trusts