EBRI Study Finds Wide Variety of SS Accounts Effects

May 5, 2005 (PLANSPONSOR.com) - Even though low-income workers could expect higher annual Social Security benefits under a system of individual accounts, individual account benefit levels would vary widely even among people of the same age, according to a new study.

According to the the Employee Benefit Research Institute (EBR)I announcement, study conclusions included that individuals in their 20s and younger (born in and after 1985) would benefit the most from action to correct Social Security’s solvency problem now, as opposed to waiting until the Trust Fund is exhausted.

EBRI focused on four policy options to study the effects of individual accounts as proposed in the Bush Administration’s Social Security reform plan. The full report, Comparing Social Security Reform Options, is published in the May 2005 EBRI Issue Brief and is available online .

According to an EBRI news release , the options researchers studied included:

  • creating voluntary individual accounts as part of Social Security
  • maintaining benefits at the level provided in current law
  • maintaining current benefits until the Social Security Trust Fund is exhausted and then cutting benefits sharply to restore the federal retirement program to balance (The study used the Social Security Trustees’ 2004 assumptions, which placed this date at 2042).
  • gradually reducing current-law benefits to account over time for the program’s funding deficit

The EBRI study includes a chart showing 42 examples of possible Social Security benefit levels for the four policy options. The study uses “Model 2” of the 2001 President’s Commission to Strengthen Social Security as the basis for comparing the impact of individual accounts with the other three options. Even though Bush has not spelled out the details of his individual account proposal, Model 2 embraces the basic principles the administration favors and is closest to what Bush has proposed, EBRI said.

“This study shows there is no simple answer to the question of whether individual accounts or any other policy option would be best for all Social Security recipients,” said Dallas Salisbury, EBRI president. “Social Security is the largest entitlement program in the nation and affects the lives of millions of Americans. As this study demonstrates, any changes to the program-whatever they are-will affect different people in different ways, based on age, income, and other factors.”

Effects on a 30-Something

One of the examples in the study shows that an individual who is 30 years old today and is earning $16,000 a year could expect these differing levels of Social Security benefits starting at age 65:

  • $11,200 a year for the option of maintaining benefits provided under current law by removing the current $90,000 annual wage cap on Social Security taxes.
  • $11,200 a year for the option of maintaining benefits provided under current law until the Trust Fund is exhausted and then cutting benefits to the level that money being paid into the system would support (because a 30-year-old today will begin drawing benefits before the sharp benefit cut is imposed)
  • $9,600 a year if benefits were cut gradually over time to account for the shortfall in the Trust Fund.
  • $12,500 a year under the Model 2 individual account plan, assuming historic investment returns for a mix of stock and bonds. However, if an individual decided to invest only in Treasury bonds to avoid stock market risk, the amount would be $10,400 a year.

The study also provides results detailing the percentage of a worker’s pre-retirement income that Social Security would replace under the different policy options. In addition, the study contains information about the probability that the benefit levels from Model 2 individual accounts would be higher than the other three policy options.