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                                                Order Code 97-81 EPW




                CRS Report for Congress
                                    Received through the CRS Web




    Social Security: Recommendations of the
 1994-1996 Advisory Council on Social Security




                                             Updated May 7, 1997




                                                Geoffrey Kollmann
                                   Specialist in Social Legislation
                            Education and Public Welfare Division




Congressional Research Service ~ The Library of Congress
        Social Security: Recommendations of the
      1994-1996 Advisory Council on Social Security

Summary
     In 1994, the Secretary of Health and Human Services (HHS) appointed the last
quadrennial Advisory Council on Social Security. At that time, the Social Security
Act stipulated that every 4 years the Secretary of HHS appoint an Advisory Council
on Social Security for the purpose of reviewing the status of the Old-Age, Survivors
and Disability Insurance (OASDI -- usually regarded as "Social Security") Trust
Funds, as well as the Hospital Insurance and Supplementary Medical Insurance
(Medicare) Trust Funds. When announcing the appointment of the Advisory Council,
the Secretary asked the Council to focus only on the Social Security program, and
specifically requested that it examine the program's long-range financial status, as well
as the adequacy and equity of its benefits and the relative roles of the public and
private sectors in providing retirement income. Although not stated as such, this
charge reflected a general concern about Social Security's long-range solvency and
the growing loss of public confidence in the system.

      These problems are reflected in the long-range projections of Social Security's
income and outgo. Although currently Social Security's income exceeds its outgo,
its board of trustees projects that over the next 75 years its expenditures will exceed
its income on average by 16%. The primary reasons are demographic: an aging post-
World War II "baby boom" generation, declining birth rates, and increasing life
expectancies are creating an older society. It is projected that by 2029 the program's
trust funds would be fully depleted and the system would be technically insolvent.

      On January 6, 1997, the 1994-1996 Advisory Council on Social Security issued
its report on ways to solve the program's long-range financing problems. As the
Council could not reach a consensus on a particular approach, the report contains
three different proposals that are intended to attain the goal of restoring long-range
solvency to the Social Security system. The first proposal, labeled the "maintain
benefits" plan, keeps the program's benefit structure essentially the same by
addressing most of the long-range deficit through revenue increases, including an
eventual rise in the payroll tax, and minor benefit cuts. To close the remaining gap,
it recommends that investing part of the Social Security trust funds in the stock
market be considered. The second, labeled the "individual account" plan, restores
financial solvency mostly with reductions in benefits, and in addition imposes
mandatory employee contributions to individual savings accounts. The third, labeled
the "personal security account" plan, achieves long-range financial balance through
a major redesign of the system that gradually replaces a major portion of the Social
Security retirement benefit with individual private savings accounts.
Contents

The Financial Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The Advisory Council's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        2
    The Maintain Benefits Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         3
    The Individual Account Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          4
    The Personal Security Account Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             5

Commission Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Appendix. Comparison of Advisory Council Plans . . . . . . . . . . . . . . . . . . . . . . 7
        Social Security: Recommendations
       of the 1994-1996 Advisory Council on
                   Social Security

     The 1994-1996 Advisory Council was appointed in 1994 under the requirements
of then-current law,1 which stipulated that every 4 years the Secretary of Health and
Human Services (HHS) appoint an Advisory Council on Social Security for the
purpose of reviewing the status of the Old-Age, Survivors and Disability Insurance
(OASDI -- usually regarded as "Social Security") Trust Funds, as well as the Hospital
Insurance (HI) and Supplementary Insurance (Medicare) Trust Funds. The law also
required that the Council consist of a chairman and 12 other persons, appointed by
the Secretary, representing organizations of employers and employees, the self-
employed and the public. The Secretary, Donna E Shalala, appointed as Chairman,
Edward Gramlich, Dean of the School of Public Policy at the University of Michigan.
He and the other members of the Council are listed on page 6 of this report.

     When announcing the appointment of the Advisory Council, the Secretary of
HHS asked the Council to focus only on the Social Security program, and specifically
requested that it examine the program's long-range financial status, as well as the
adequacy and equity of its benefits and the relative roles of the public and private
sectors in providing retirement income. Although not stated as such, this charge
reflected a general concern about Social Security's long-range solvency and the
growing loss of public confidence in the system.


                            The Financial Picture
     Although currently Social Security's income exceeds its outgo, its board of
trustees projects that over the next 75 years its expenditures will exceed its income
on average by 16%. The primary reasons are demographic: an aging post-World
War II "baby boom" generation, declining birth rates, and increasing life expectancies
are creating an older society. The number of people 65 and older is predicted to
nearly double by 2025, whereas the number of workers whose taxes will finance their
Social Security benefits is projected to grow by only 17%. As a result, the ratio of




1
 There have been 13 Advisory Councils since the beginning of the program, but this is the last.
As part of P.L. 103-296, which made the Social Security Administration an independent
agency in 1995, Congress created a permanent Advisory Board and abolished future Advisory
Councils.
                                        CRS-2

workers to Social Security recipients is projected to fall from 3.2 to 1 today to 2.0 to
1 in 20302.

      Excess Social Security
revenues are invested in U.S.                       The Projected Slide
government securities recorded to                   Towards Insolvency
the OASDI "trust funds" maintained        -- Spending exceeds tax revenues in 2012
by the Treasury Department. In            -- OASDI trust funds peak in 2018
April 1997, the trustees projected        -- OASDI funds insolvent in 2029
that the balance of these trust funds
would peak at $2.9 trillion in 2018.
However, OASDI spending would
begin lagging tax receipts in 2012. At that point general revenues would be needed,
first to pay interest on the securities held by the trust funds, and then beginning in
2019 to redeem them. By 2029 the trust funds would be fully depleted and the system
would be technically insolvent.

      The problem is not unprecedented. In 1977 and 1983, Congress enacted a
variety of measures to address financial problems similar to those currently being
forecast. Among them were increases in payroll taxes, partial taxation of the benefits
received by higher-income recipients, and a gradual increase from 65 to 67 in Social
Security's "full retirement age," which is the age required to receive full benefits.
However, those changes were not sufficient to maintain balance in the system in the
latter part of the next century, and this combined with more pessimistic projections
of factors such as economic growth, birth rates, and the incidence of disability, has led
to the return of long-term deficit forecasts.

      Several bills were introduced in the 103rd and 104th Congresses to deal with the
issue. Bills in the 103rd included raising the full retirement age to 70, modifying cost-
of-living-adjustments (COLAs) and increasing taxes. Several bills in the 104th
included privatizing a portion of the program.


                  The Advisory Council's Report
      The Advisory Council began to meet in 1994. During its deliberations, general
agreement was reached on the need to eliminate the long-range deficit, and on some
specific measures that would help to reduce program costs. However, no consensus
developed on a single approach that would restore long-range solvency. Instead,
three different philosophies emerged, each supported by a different faction of the
Council. One was based on the premise that as much of the program's benefits should
be preserved as possible, and thus part of the solution should include increases in the
payroll tax rate. Another was based on the belief that the system's cost basically must
be held within the current revenue structure, but with mandatory individual savings
added on to help provide adequate future retirement income. The third was based on
the idea that the system basically is unsustainable without fundamental restructuring,

2
 See the 1997 Annual Report of the Board of Trustees of the federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds, Intermediate projections.
                                        CRS-3

and that restructuring should shift more of the role of providing retirement income
from Social Security to individual savings.

      Eventually three proposals emerged. The first, labeled the "maintain benefits"
(MB) plan, supported by six members of the Council, addressed most of the long-
range deficit through revenue increases, including a rise in the Social Security payroll
tax in 2045, and a small cut in benefits. To close the remaining gap, it recommended
that investing part of the Social Security trust funds in the stock market be
considered. The second, labeled the "individual account" (IA) plan, supported by two
members of the Council, restored financial solvency without increasing the payroll tax
but with more significant reductions in benefits, and in addition imposed mandatory
employee contributions to individual savings accounts based on the notion that the
loss in Social Security benefits should be offset by increased individual savings. The
third, labeled the "personal security account" (PSA) plan, supported by five members
of the Council, likewise achieves long-range financial balance through a fundamental
redesign of the system by gradually replacing a major portion of the retirement
program with individual private savings accounts.

      The three proposals share some features. All would mandate Social Security
coverage of newly hired state and local government employees, increase the taxation
of Social Security benefits, reduce initial Social Security benefits by various changes
in the benefit formula, and assume that pending revisions in the Consumer Price Index
(CPI) will result in COLAs in the future that will be lower by 0.21 percentage points.
Both the IA and PSA plans raise the retirement age and modify surviving spouse
benefits.

     Following is a description of the specific features of each proposal. A side-by-
side comparison of the three proposals and current law is in the appendix.

The Maintain Benefits Plan
(Supported by Council Members Ball, Johnson, Jones, Kourpias, Shea, Fierst)

1.   All state and local government employees hired after 1997 would be required to
     participate in Social Security.

2.   The number of years of highest earnings used in computing a worker's basic
     retirement benefit, the "Primary Insurance Amount" (PIA), would increase from
     35 to 36 in 1997, 37 in 1998, and 38 in 1999 and thereafter. (It was suggested
     as an alternative that the payroll tax be increased in 1998 by 0.15 percentage
     points on employers and employees, each.)

3.   Beginning in 1998, Social Security benefits would be taxable like other
     contributory pensions, i.e., fully taxable except for the part of the pension
     attributable to the workers own contributions on which income tax has already
     been paid. Current law subjects a maximum of 85% of benefits to the income
     tax, and only if a recipient's income exceeds certain thresholds. Three-quarters
     of current recipients pay no income tax on their benefits because their income is
     under these thresholds. These thresholds would be phased out between 1998
                                          CRS-4

     and 2007. Also, all of the revenue generated from the taxation of benefits would
     go to Social Security (currently, part goes to Medicare).

4.   The payroll tax would go up by 0.8 percentage points, on employers and
     employees, each, in 2045.

5.   As a final possible measure, it is urged that an option to invest part of the Social
     Security trust funds in stocks (in funds indexed to reflect the overall performance
     of the market) be further studied and evaluated.

The Individual Account Plan
(Supported by Council Members Gramlich, Twinney)

1.   All state and local government employees hired after 1997 would be required to
     participate in Social Security.

2.   Social Security benefits would be taxable as in the MB plan, but there is no
     provision for the redirection of tax revenue from Medicare to Social Security.

3.   The increase in the Social Security full retirement age to age 67 would be moved
     forward to apply to those born in 1949 and later, and further increases in the full
     retirement age would be tied to further increases in longevity. (Current law
     phases in the increase from age 65 in two steps, by increasing the age by 2
     months for each year that a person is born after 1937, until it reaches age 66 for
     those born in 1943. After a 12-year pause, the age is increased again by raising
     the age by 2 months for each year that a person is born after 1954, until it
     reaches age 67 for those born in 1960 and later.) The proposal eliminates this
     hiatus in increasing the full retirement age and indexes the full retirement age
     thereafter (early retirement would still be available, but would be reduced, on an
     actuarial basis, as the full retirement age rises).

4.   Benefits, especially for higher-paid workers, gradually would be reduced (i.e.,
     compared to current law). To do so, the formula for determining the PIA would
     be modified by gradually lowering the 32% and 15% replacement of earnings
     factors to 22.4% and 10.5%, respectively, by 2030.3

5.   The computation of a retired worker's PIA would by 1999 be based on the
     highest 38 years of earnings, as described in the MB plan.

6.   Beginning in 2000, benefits payable to dependent spouses would be gradually
     lowered, from 50% to 33% of the worker's PIA by 2016.


3
 Social Security is designed to replace a higher proportion of earnings for low-paid workers
than for high-paid workers. This is done through a formula that calculates the PIA by
applying three progressively lower replacement factors (90%, 32%, and 15%) to a worker's
average career earnings. For example, for workers attaining age 62 in 1997, the formula is
90% of first $455 of average indexed monthly earnings (AIME), plus 32% of next $2,248,
plus 15% of AIME over $2,741.
                                            CRS-5


7.   Surviving spouse's benefits for two-earner couples would be augmented by
     assuring that aged widows and widowers would receive at least 75 % of the
     Social Security benefits payable to the couple while both were still alive, phased
     in over 1998 to 2037.

8.   Beginning in 1998, workers would mandatorily contribute an additional 1.6 %
     of their Social Security taxable earnings to individual accounts (IAs) that would
     be held by the U.S. government. The accumulated funds would not be available
     to the worker until he or she becomes eligible for retirement, and would be
     converted to a single or joint minimum guarantee indexed annuity4 when the
     worker elects retirement.

The Personal Security Account Plan
(Supported by Council Members Bok, Combs, Schieber, Vargas, Weaver)

1.   For workers under age 55 in 1998, 5 percentage points of the employee share
     of the Social Security tax would be diverted to personal security accounts
     (PSAs), which would be invested at the discretion of the worker subject to
     regulatory restrictions to make sure they were invested in financial instruments
     widely available in financial markets and that they were held solely for retirement
     purposes. The accounts would not be available until the worker is age 62, at
     which point they could be used by the worker for any purpose.

2.   For workers participating in the PSAs, Social Security benefits would gradually
     be reduced. Ultimately, retirement benefits would evolve into two tiers, where
     the Social Security benefit (Tier 1) would be based solely on length of service
     (e.g., workers with a minimum of 35 years of coverage would receive the same
     amount -- about $410 a month in 1996 dollars). The Social Security retirement
     benefit of workers who are ages 25 to 54 in 1998 would be their accrued benefit
     under the current system plus a prorated share of the Tier 1 benefit.

3.   To finance the transition to the new system, the U.S. Treasury would issue
     approximately $2 trillion (in 1996 dollars) in bonds to the public over the next
     40 years. The Treasury bonds would be repaid by the excess of tax revenue that
     is projected to occur in the latter part of the transition period (from about 2035
     to 2069).

4.   Workers and their employers would pay an additional payroll tax of 0.76%,
     each, (1.52% combined) over the period 1998-2069.

5.   The earnings test would be eliminated gradually over 1998-2002 for individuals
     who have attained the full retirement age.


4
 I.e., annuities would be indexed to rise with inflation and there would be a guarantee that, if
the worker died before or slightly after retirement, some portion of the value of the accrued
savings would be payable in all cases. If the worker is married, a joint and survivor annuity
must be paid unless the spouse declines it.
                                       CRS-6

6.   The full retirement age would increase as in the IA plan, but in addition the age
     for earliest retirement would increase by the same amount, until it reaches age
     65. Thereafter, the early retirement age would remain at age 65, but further
     increases in the full retirement age (because it would be indexed to rise with
     increases in longevity) would increase the actuarial reduction applied to early
     retirement benefits.

7.   For persons disabled after 1997, the initial monthly benefit would be reduced by
     the same factor as that of a worker retiring at age 65 in that year (which means
     that disabled workers would receive less than the full PIA if the relevant full
     retirement age is more than age 65), but in no event would they receive less than
     70% of the PIA. Disabled workers would continue to convert to the retirement
     rolls at age 65, when their benefits would be recomputed under the new
     retirement rules.

8.   All state and local government employees hired after 1997 would be required to
     participate in Social Security.

9.   Beginning in 1998, the maximum portion of Social Security benefits subject to
     taxation would be 50%, and no revenue from the taxation of benefits would go
     to Medicare. The income thresholds would be phased out over 1998-2007.
     When Tier 1 Social Security benefits become available, they would be 100%
     taxable, but withdrawals from the PSA would be tax-free.

10. Social Security surviving spouse benefits would be modified as in the IA plan.


                     Commission Membership
Edward Gramlich, Dean, School of Public Policy, University of Michigan (Chairman
     of the Advisory Council).
Robert Ball, Chair of the Board, National Academy of Social Insurance, former
     Commissioner of Social Security.
Joan Bok, Chairman, New England Electric System.
Ann Combs, Principal, William M. Mercer, Inc.
Edith Fierst, Attorney at Law, Fierst and Moss, P.C.
Gloria Johnson, Director, Dept. of Social Action, International Union of Electronic,
     Salaried, Machine and Furniture Workers, AFL-CIO.
Thomas Jones, Vice Chairman, President and Chief Operating Officer, Teacher
     Insurance and Annuity Association-College Retirement Equities Fund (TIAA-
     CREF).
George Kourpias, President, International Association of Machinists and Aerospace
     Workers, AFL-CIO.
Sylvester Schieber, Vice President, Watson Wyatt Worldwide Company.
Gerald Shea, Assistant to the Director for Governmental Affairs, AFL-CIO.
Marc Twinney, Director of Pensions (retired), Ford Motor Co.
Fidel Vargas, Mayor, Baldwin Park, CA.
Carolyn Weaver, Director, Social Security and Pension Issues, American Enterprise
     Institute (AEI).
                                               CRS-7

       Appendix. Comparison of Advisory Council Plans

                                     Maintain               Individual              Personal security
 Feature       Present law         benefits (MB)           accounts (IA)             accounts (PSA)

                                            Main Features
Overview     Pays earnings-       Maintains current   Scales back benefits to     Evolves to a two-tier
             related benefits     benefit structure   fit within projected        system: (1) a flat
             to retired and       with some           revenues. Adds a new        benefit and (2) a
             disabled workers     changes in          government-                 mandatory personal
             and their families   benefits and        administered                security account
             and to survivors     revenues, and       mandatory individual        (PSA) to be managed
             of deceased          recommends for      savings plan to             by individuals. All
             workers;             further study a     supplement the lower        workers under 55 in
             financed by          new investment      future benefits,            1998 would have
             dedicated payroll    policy for trust    effective for all workers   PSAs. The two-tier
             taxes and income     fund reserves.      beginning in 1998.          system would apply
             taxes on benefits.                                                   fully to workers under
                                                                                  age 25 in 1998 (age
                                                                                  62 in 2035).
Financing:   Social Security      Increase tax rate   Workers would pay an        Five percentage points
deductions   tax rate is 6.2%     by 0.8 percentage   additional 1.6% of          of worker's current
from         for employers        points for          covered earnings into       payroll tax rate would
worker's     and employees,       employers and       individual accounts.        be redirected into
earnings     each.                employees each,                                 PSAs. Workers and
                                  in 2045.                                        their employers would
                                                                                  pay an additional
                                                                                  payroll tax of 0.76%,
                                                                                  each, over the period
                                                                                  1998-2069.
Financing:   Not applicable       Not applicable      Not applicable              Transition financed by
borrowing                                                                         borrowing
from the                                                                          approximately $2
public                                                                            trillion (1996 dollars)
                                                                                  over 40 years.
Investment   Not applicable       Not applicable      Worker would allocate       Workers would invest
of savings                                            funds among a choice        in financial
accounts                                              of government-              instruments widely
                                                      administered indexed        available in the
                                                      funds and must hold         market. PSAs would
                                                      them until retirement.      be available to worker
                                                                                  only at retirement.
                                                CRS-8

                                     Maintain                Individual           Personal security
 Feature       Present law         benefits (MB)            accounts (IA)          accounts (PSA)
Trust fund   Trust funds are      Recommends for        No change from present   No change from
investment   invested solely in   further study that    law.                     present law.
policy       U.S. government      up to 40% of
             or U.S.              trust fund
             government-          reserves be
             backed               invested in private
             securities.          market, phased in
                                  2000-2015. An
                                  independent board
                                  would select a
                                  broad market
                                  index for trust
                                  fund investment.

                                           Generic Changes
             Benefits are         No change in law.     (Same as MB plan)        (Same as MB plan)
Cost of      adjusted each        Assumes the BLS
Living       year to rise in      revision to the
Adjustment   proportion to the    CPI will result in
(COLA)       increase in the      COLAs that are
             consumer price       lower by -0.21
             index (CPI)          percentage points.
             compiled by the
             Bureau of Labor
             and Statistics
             (BLS).

Social       States have the      Mandates that all     (Same as MB plan)        (Same as MB plan)
Security     option to choose     state and local
coverage     Social Security      workers hired
             coverage for         after 1997 would
             State & local        be covered by
             government           Social Security.
             employees.
                                               CRS-9

                                     Maintain               Individual            Personal security
  Feature       Present law        benefits (MB)           accounts (IA)           accounts (PSA)
                                          Old Age Benefits
Full          FRA will            No change           Accelerates the rise in   Same as IA, except
retirement    gradually rise                          FRA so it reaches 67      that projected
age (FRA)     from 65 to 66 for                       for those born after      increases in the FRA
              those born in                           1948. Thereafter,         after reaches age 67 in
              1938 through                            indexes FRA to rise       2011 would be put
              1943, remain at                         with longevity            into the law, subject to
              66 for those born                       (estimated to be 1        review every 10 years
              in 1944 through                         month every 2 years).     by the Social Security
              1954, and then                                                    Board of Trustees.
              gradually rise to
              67 for those born
              in 1955 through
              1960 and
              thereafter.

Earliest      EEA is 62, with     No change           EEA remains 62 and        EEA rises with the
eligibility   a 20% actuarial                         reduction increases       FRA. Reduction in
age (EEA)     reduction, rising                       beyond 30% as FRA         Tier 1 benefit at EEA
for           to 30% when                             rises beyond age 67.      is 20% until EEA
retirement    FRA is 67.                                                        reaches 65.
benefits                                                                        Thereafter EEA
                                                                                remains 65 and the
                                                                                reduction increases as
                                                                                FRA rises.
Calculation   Average indexed     Lengthen the        (Same as MB plan)         For transitional
of average    monthly earnings    computation                                   retirement benefits,
lifetime      (AIME) based        period from 35 to                             the computation
earnings      on highest 35       38 years by 1999.                             period would expand
              years.                                                            to 38 years as the
                                                                                earliest eligibility age
                                                                                rises to 65 (see
                                                                                below), but the
                                                                                associated later date
                                                                                for wage indexing
                                                                                roughly offsets the
                                                                                benefit reduction.
                                              CRS-10

                                     Maintain            Individual             Personal security
 Feature        Present law        benefits (MB)        accounts (IA)            accounts (PSA)
Benefit       PIA= 90% of         No change        Gradually lowers the       Basic benefit evolves
formula       first $455 of                        top two percentage         to a flat "Tier 1"
              AIME, plus 32%                       rates of the PIA           amount ($410 a month
              of next $2,248,                      formula from 32% and       in 1996$ for a worker
              plus 15% of                          15% to 22.4% and           with 35 or more years
              AIME over                            10.5%, respectively.       of earnings). Workers
              $2,741, for                          (The 32% and 15%           with 10 years
              workers reaching                     factors are reduced for    coverage would get
              62 in 1997.                          new eligibles by 0.5%      half the Tier 1 benefit
              AIME bend                            {multiplied by 0.995}      (prorated if coverage
              points are                           each year during 1998-     is between 10-35
              adjusted each                        2011, and by 1.5%          years). Tier 1 benefit
              year to rise in                      {multiplied by 0.985}      is indexed by wage
              proportion to the                    each year during 2012-     growth before
              growth in                            2030.) The change          eligibility and by CPI
              average wages.                       ultimately lowers basic    thereafter. Workers
                                                   benefits by 17% for        ages 25-54 in 1998
                                                   average earners, 22%       would receive a
                                                   for high earners, 8%       partial PIA-based
                                                   for low earners.           benefit for work
                                                                              before 1998.
Income        Not applicable      Not applicable   It is required that IAs    PSA becomes
from                                               would be converted to      available at age 62.
savings                                            an inflation-indexed       Worker would use it
accounts                                           annuity when the           as he or she chooses.
                                                   worker retires. If
                                                   married, a joint and
                                                   survivor annuity would
                                                   be paid unless spouse
                                                   declines it.

Treatment     Not applicable      Not applicable   IA would be held for       Any funds in the PSA
of savings                                         the surviving spouse       at the worker's death
account if                                         and be available (in the   would become part of
worker dies                                        form of an annuity) at     the estate. Surviving
before or                                          age 60. If no              spouses would have
slightly                                           widow(er), IA would        access to the PSA
after                                              become part of the         when he or she
retirement                                         estate. Annuities for      reaches age 62.
                                                   workers would have a
                                                   minimum guarantee to
                                                   assure that some
                                                   portion of the value of
                                                   the accrued savings
                                                   would be payable in all
                                                   cases.
                                             CRS-11

                                    Maintain              Individual             Personal security
  Feature      Present law        benefits (MB)          accounts (IA)            accounts (PSA)
Aged         50% of spouse's     No change          Over 2000-2016,            Higher of 50% of the
spouse       PIA, offset by                         gradually lowers aged      worker's PIA, or 50%
benefit      100% of their                          spouse benefit from        of the full Tier 1
             own PIA earned                         50% to 33% of the          benefit when the
             as a worker.                           worker's PIA.              system is fully phased
                                                                               in.

Aged         Surviving           No change          Assures that the           Same as IA.
surviving    spouses are                            surviving spouse
spouse       eligible for 100%                      benefit is at least 75%
benefit      of the deceased                        of the couple's
             spouse's PIA,                          combined benefits
             offset by 100%                         while both were alive.
             of their own PIA
             earned as a
             worker.

Earnings     Reduces benefits    No change          No change in               Eliminates test at
test         of recipients                          application to Social      FRA over 1998-2002.
             under age 70                           Security benefits.         Earnings test would
             who earn above                         Earnings test would not    not apply to PSA
             a certain amount.                      apply to IA annuities.     withdrawals.

                                 Disability Insurance (DI) Benefits
Disability   Same as for full    No change          Reduction in benefits      DI benefits are
benefit      retirement                             due to change in           calculated under
formula      benefits at FRA.                       replacement rates in the   current law PIA
                                                    formula used to            formula, but, as the
                                                    determine PIAs. (See       FRA rises, new DI
                                                    above.)                    benefits would be
                                                                               reduced to the percent
                                                                               of PIA paid to age-65
                                                                               retirees (now 100%).
                                                                               In no event would DI
                                                                               benefits be lower than
                                                                               70% of the PIA.
Treatment    Not applicable      Not applicable     IA would not be            PSA would not be
of savings                                          available at disability.   available at disability.
accounts                                            Funds would remain in      Funds would remain
for disabled                                        the IA and continue to     in the PSA and
workers                                             be invested in             continue to be
                                                    government                 invested by the
                                                    administered accounts.     worker. No new
                                                    No new contributions       contributions would
                                                    would be made during       be made during
                                                    disability.                disability.
                                               CRS-12

                                      Maintain            Individual             Personal security
  Feature        Present law        benefits (MB)        accounts (IA)            accounts (PSA)
Benefit at     Disabled            No change        Disabled workers           Disabled workers
conversion     workers shift to                     would continue to          would continue to
to             retirement                           receive basic benefit.     convert to the
retirement     benefits at FRA,                     IA would become            retirement rolls at age
               but their benefit                    available.                 65, when their benefits
               amounts do not                                                  would be recomputed
               change.                                                         under the new
                                                                               retirement rules and
                                                                               the PSA becomes
                                                                               available.

Benefits for   Non-aged            No change        Beginning in 2000,         Higher of 50% of the
spouses of     spouses with                         benefits payable to        worker's PIA, or 50%
disabled       children under                       eligible spouses would     of the full Tier 1
workers        age 16 in care                       be gradually lowered,      benefit when the
               receive 50 % of                      from 50% to 33% of         system is fully phased
               the worker's                         the worker's PIA, by       in.
               PIA, subject to a                    2016.
               family
               maximum.

                                       Young Survivor Benefits
Benefit        Surviving           No change        Reduction in benefits      Young survivor
Formula        children and                         due to change in           benefits would be
               spouse each                          replacement rates in the   calculated under the
               receive 75% of                       formula used to            present-law PIA
               PIA, subject to a                    determine the worker's     formula.
               family                               PIA. (See above.)
               maximum.
                                                 CRS-13

                                      Maintain               Individual              Personal security
  Feature        Present law        benefits (MB)           accounts (IA)             accounts (PSA)
                                       Tax Treatment of Benefits
Tax            Up to 50% of        Beginning in         Same as in MB plan,        Beginning in 1998,
treatment of   benefits are        1998, all benefits   except no provision for    50% of benefits
Social         subject to income   in excess of         shifting income tax        would be subject to
Security       tax if income is    employee             revenues on Social         tax for recipients,
benefits       between certain     contributions        Security benefits from     workers over age 54
               thresholds          would be subject     Medicare to Social         in 1998, the disabled,
               (revenues go to     to income            Security.                  and for past service
               Social Security     taxation (i.e., in                              credits for workers
               trust funds).       the same manner                                 over age 24. When
               However, at         prescribed for                                  Tier 1 benefits
               higher income       private and                                     become available, they
               levels up to 85%    government                                      would be 100%
               of benefits are     defined benefit                                 taxable. The income
               taxed (additional   pension plans),                                 thresholds for benefit
               revenues go to      and the income                                  taxation would be
               Medicare's          thresholds would                                phased out over 1998-
               Hospital            be phased out                                   2007.
               Insurance (HI)      over 1998-2007.
               trust fund).                                                        Effective in 1998, no
                                   Redirects benefit                               revenue from the
                                   taxation revenue                                taxation of benefits
                                   from the HI trust                               would go to Medicare.
                                   fund to the Social
                                   Security trust
                                   funds (phased-in
                                   over 2010-2019).

Tax          Not applicable        Not applicable       Two options are            Contributions to the
treatment of                                            presented: (1)             PSA would be fully
mandated                                                contributions to IA tax-   taxable, the proceeds
savings                                                 deductible, withdrawals    from PSAs would be
                                                        fully taxable; (2)         tax-free. Investment
                                                        contributions to IA        returns would not be
                                                        fully taxable,             taxed.
                                                        withdrawals tax-free.

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For other versions of this document, see http://wikileaks.org/wiki/CRS-97-81