April 20, 2005
WASHINGTON – Wisconsin’s First District Congressman Paul Ryan is reintroducing legislation today to put Social Security on solid footing for the future and ensure that the program will help future generations achieve a more secure retirement, as it has for past and present retirees. This bill – the Social Security Personal Savings Guarantee and Prosperity Act – closely resembles Social Security reform legislation that Ryan introduced last year. Senator Sununu of New Hampshire is introducing an identical measure in the U.S. Senate today.
The plan would maintain Social Security’s safety net, while giving younger workers the opportunity to put part of their payroll tax contributions into a personal account within the Social Security system that would enable them to earn a decent return on their investment in the program. This would reverse the decline in Social Security’s rate of return and help put the program back on track to achieve lasting solvency. According to the Social Security Actuary’s official analysis of this plan, permanent and growing Social Security surpluses would begin in 2038, resulting in permanent solvency in 2051. Currently, Social Security begins permanent deficits in 2017 and becomes insolvent in 2041. The legislation would also accomplish the goal of the lockbox Ryan has continuously fought for which would protect the Social Security trust fund from being spent on unrelated government programs.
“There is no denying that Social Security faces a serious financial crunch as the baby boomers retire and fewer workers are supporting each retiree through their payroll taxes. And every year we delay finding a solution to this problem, roughly $600 billion is added to the debt the government owes to Social Security. By acting now, we can make Social Security solvent for good, preserve its safety net – which has been so important for people of all ages, and make sure today’s young people and their children can count on a respectable rate of return like their grandparents have,” Ryan said.
“Our proposal will also give every American worker the chance to own a substantial part of their Social Security retirement benefit. That’s an investment in their retirement security that the government cannot take away, and it’s something they can pass on when they die to their loved ones,” Ryan said.
In crafting a plan to strengthen Social Security, Ryan was guided by the following principles:
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All Social Security taxes should go to Social Security – not to overspending on unrelated programs.
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Social Security reform should not affect current benefits.
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Social Security reform should be accomplished without raising taxes or the retirement age.
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Social Security reforms should improve the current rate of return on younger workers’ investments to Social Security to ensure that it will be there for them when they retire, without adversely affecting the benefits of current retirees and those approaching retirement.
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Social Security must always maintain a retirement safety net for all workers, including disability and survivors’ benefits.
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Personal accounts must have safeguards so people do not sustain unnecessary risk.
“In order to keep Social Security strong for all generations, we have to address the demographic shift that has occurred and will accelerate when the first of the baby boomers begin to retire in 2008. We also need to reverse the decline in the rate of return workers get on their contributions to Social Security,” Ryan said. “When the program was created, the rate of return on a 40-year-old worker’s investment in the system was about 8 percent. In contrast, today’s young children can expect to get a negative 1 percent return on their tax payments into the system, and that’s not fair. Voluntary personal accounts are the key to improving the rate of return and strengthening Social Security for the long haul.”
Ryan’s legislation would allow workers under the age of 55 to choose whether they wish to stay with traditional Social Security or invest a part of their payroll taxes in a tax-free personal account within specific parameters and with continued oversight by the Social Security Administration. Personal account options would resemble the federal Thrift Saving Plan (TSP) that Members of Congress and federal employees have used for years to help them save for their retirement. (Over the past 10 years, the TSP has averaged about a 7.67% rate of return.)
A worker who opts for a personal account would initially be enrolled in a “life-cycle” fund that automatically adjusts the worker’s portfolio based on his or her age, moving near-retirees into safe, government-backed bond funds. Workers could simply stay with this type of fund or select from a list of five index funds similar to those found in the TSP. Because the accounts would be within the Social Security system and managed like the TSP, they would have very low administrative costs as the TSP does – about $3 for every $1,000 in the account. Moreover, the accounts are backed up by a federal guarantee that workers would receive at least as much as Social Security promises under current law.
Under this legislation, personal accounts would be phased in to help ease the transition. From 2006-2015, younger workers could devote to their tax-free personal accounts 5 percentage points of the current 12.4% Social Security payroll tax on the first $10,000 of wages each year and 2.5 percentage points on taxable wages above that. Starting in 2016, workers would be able to shift 10 percentage points of the current 12.4% on the first $10,000 in wages and 5 percentage points on taxable wages above that. Once the accounts are fully phased in, the average account contribution among workers would be 6.4 percent of their Social Security payroll tax. This progressive account structure allows lower income workers to keep more of their FICA taxes in their personal account than higher income workers.
The plan is voluntary, and workers who decide to stay in traditional Social Security rather than exercising the personal account option would receive the benefits promised under current law. Furthermore, under this legislation, survivors and disability benefits are unchanged and would continue as under the current system.
The federal government would back the personal accounts with a guarantee that workers receive at least as much as Social Security promises under current law, providing an added level of security for workers’ retirement savings.
Ryan’s legislation takes the following steps to finance this plan to strengthen and improve Social Security:
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Puts an end to Washington’s practice of using Social Security surpluses on unrelated spending by separating Social Security and the reform’s transition financing from the rest of the federal budget. Instead of going to finance other projects, the short-term Social Security surpluses projected until 2017 will help finance the transition to a stronger Social Security system.
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Grows federal spending at a slower rate – reducing the rate of growth of federal spending by one percentage point a year for eight years. The savings would be transferred to the Social Security Trust Fund.
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Recaptures a set portion of the projected increase in corporate tax revenue (sparked by increased investment through personal accounts) and dedicates this to the Social Security Trust Fund.
With these three steps in place, no borrowing is needed to finance this transition to a solvent Social Security system. If any of the previous steps fails to take place, the legislation provides that, to the extent needed, excess Social Security trust-fund bonds would be redeemed to continue to pay all promised Social Security benefits, with the funds to redeem them obtained by issuing new federal bonds to the public. Essentially, this would be paying Social Security back for the surpluses it has lent the federal government in the past.
The official analysis of the Social Security Administration’s Chief Actuary projects the Ryan-Sununu bill will produce permanent surpluses in 2038 and achieve permanent solvency for Social Security in 2051. The Ryan-Sununu bill completely pays off the entire $12 trillion unfunded debt owed to Social Security.
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