EBRI: Many Workers Do Better with Current Social Security

March 2, 2005 (PLANSPONSOR.com) - Many more US workers would enjoy a higher initial retiree benefit from the current Social Security program than from an individual account plan under certain circumstances, a new research project has found.

The analysis, by the nonpartisan Employee Benefit Research Institute (EBRI), found that would be the case if the existing $90,000 wage cap was eliminated and all local, state, and federal workers were included in the program to fill the projected funding deficit,  an EBRI news release said.

The news release asserted, h owever, that more of today’s younger workers would reap a higher initial retiree benefit from an individual account plan than if no fix was put in place at all. President Bush has proposed allowing younger workers to invest a portion of their Social Security assets in individually managed accounts.

“This new analysis from EBRI underlines the advantages of moving sooner rather than later on reform, while at the same time shedding light on how Americans would fare in terms of benefits under an individual account plan versus three alternative options for addressing the projected Social Security program deficit,” said EBRI president Dallas Salisbury in the news release.

Using a computer model, EBRI compared several possible reform scenarios to the “Model 2” individual account reform option that was presented in the President’s Commission to Strengthen Social Security report four years ago – which EBRI said is the closest to Bush’s current proposal. EBRI’s analysis assumes that everyone would opt for the individual account and is able to simulate a full range of random investment outcomes for the accounts.

According to the news release, the comparisons found that

  • for those born between 1955 and 2015, between 67% and 84% would get higher benefits from the “Tax All Earnings” approach than from the Model 2 individual account plan. This option would involve increasing revenue by removing the current $90,000 annual income cap on taxable Social Security wages and including all currently exempt local, state, and federal government employees in the Social Security system.
  • under a “do nothing” option, beneficiaries born in 1955, 1965, and 1975 would have a similar likelihood of having higher benefits than under Model 2 as those in the “Tax All Earnings” scenario. However the percentage would plunge to less than 3% for those born in 1985. EBRI said that was “a vivid demonstration of the impact on this age group of not addressing the projected deficit sooner.” Under this scenario, there would be no changes made to the Social Security system until 2042. At that point, the Social Security Trust Fund is projected to be exhausted. Benefits would be cut benefits by 38% to bring the program into balance with available revenue. Just over 30% of those born in 2015 would receive higher benefits under the “Do Nothing” scenario, compared with Model 2 benefits.
  • as part of a “gradual reduction” option,of those born in 1985, only 27.5% would have a higher initial retiree benefit than under Model 2, when assuming historical equity market returns.  Those born after 1955 would see a lower likelihood of having higher benefits under this option, with more than half of all those born after 1975 having higher benefits under Model 2, when assuming historical equity returns. This scenario calls for gradual Social Security cuts between now and 2042.

Craig Copeland, director of EBRI’s Social Security Reform Evaluation Research Program, is the chief author of the study.