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NBER: New Paper on Social Security REform
Subject: New Paper on Social Security REform
From: Martin Feldstein (msfeldst@nber.org)
Date: Mon Jun 12 2000 - 15:23:57 EDT
I am attaching a paper that Andrew Samwick and I wrote in response to
those who claim that a Bush-type plan cannot work because it reduces the
revenue going into the Trust Fund. This new paper shows that the
combination of the traditional pay-as-you-go benefits and Personal
Retirement Account annuities funded with 2% of payroll can maintain the
retirement income projected in current law even if those PRA deposits are
taken from the existing payroll tax, reducing the net additions to the
Trust Fund to 10.4% of payroll.
After we wrote this, a new such critique was published, authored by Henry
Aaron, Alan Blinder and others. There are three reasons that they conclude
that benefits would have to be cut. First, they assume that at retirement
individuals shift from a portfolio based on a mix of stocks and bonds to a
lower yielding fixed interest annuity. Second, they do not credit the
Trust Fund with the additional corporate tax revenue that results from the
increased national saving. And, third, they do not allow the Trust Fund to
borrow during those years when it is temporarily in need of funds. The
enclosed paper shows that the Trust Fund could borrow, repay the loans with
interest, and eventually have both a substantial positive balance and the
ability to fund larger total benefits than those projected in current law.
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