The current system is unsustainable – only a private account system can solve for debt crisis

The 2001 President’s Commission to Strengthen Social Security suggested that private accounts offset some of the accumulated debt. More importantly, however, the Commission also suggested that rather than replace a constant share of wage indexed earnings, the defined benefit part of Social Security provide a fixed level of purchasing power. This change alone reduces the outstanding debt to existing generations, the 100-year closed group liability, and significantly reduces funding requirements for both new and current generations. Such a change is one way of recognizing the fact that the existing system is not sustainable and therefore, is not the appropriate target when deciding whether a transition is Pareto. The private account portion of the President’s Commission would allow workers who are 55 years of age and above to contribute roughly 31.7% of their payroll taxes, 4 percentage points of the total 12.4% payroll tax, up to $1,000 per year, to a private account. With the restriction of $1,000, the total contributions to private accounts ultimately reach 2.39% of taxable payroll. This reform also replaces the wage indexed benefits formula with a price indexed formula beginning in 2009. Price indexing effectively sets the defined benefit after 2008 to the real purchasing power of the 2009 benefit. 5 In exchange for the opportunity to divert one’s payroll taxes to a private account, the price indexed benefit is offset by the annuity resulting from one’s private account, assuming the private account earns 2%. Future benefits are first reduced by the new benefit formula and are then further reduced by the benefit offset, assuming the 2% rate of return. Any accumulations earned in excess of the 2% are added to the reformed benefits to arrive at a retirees’ total benefit. Assuming that the private accounts are invested in a portfolio that yields a rate of return of 4.6% during the accumulation phase, and a 3% return during the decumulation phase, the Commission estimated that the ultimate benefits from this reformwould be roughly comparable to those that are currently scheduled