Politics – Social Policy Essay Review

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Read “Providing Social Security Benefits in the Future: A Review of the Social Security System and Plans to Reform it” and respond to the following questions.  

• What is the essay’s main point? (for this essay, we might be thinking about an underlying main point)    
• What potential solutions are posited?    
• Which reform plan do you think is most compelling (if any)?  Why? 

Please make your response at least 3/4 page in length (double spaced, size 12 Times New Roman).  Please do not use name, traditional header information, or titles for this assignment.    

CHAPTER 14

Government and Society

68

”Providing Social Security Benefits
in the Future: A Review of the

Social Security System and
Plans to Reform It”

David C. John

There is wide agreement that Social Security requires major reforms if it is to con­
tinue to provide economic security to retirees. The baby boom generation has begun
retiring, and the amount of money paid out in benefits exceeds the amount paid
into the system in payroll taxes. Very soon, the program will start drawing down
a Trust Fund that has been funded by surplus contributions over previous decades,
although paying off the obligations in that fund will require additional revenues,
since the Trust Fund is made up of special Treasury securities that the government,
in effect, owes to itself. By 2035, the Trust Fund will be exhausted, at which
point payroll tax revenues will only be enough to pay 79 percent of scheduled
benefits.

Clearly, something must change. At the heart of the debate over what to do are
two contrasting perspectives of what the Social Security system should accom­
plish, both deeply rooted in American political culture. Should we view Social
Security as a national guarantee of basic income for retirees, no matter what?
Or should Social Security be an individualistic program that permits people to
succeed—or fail—based on the choices that they make? Put another way, is Social
Security a social welfare program or an investment program? David C. John of the
Heritage Foundation, writing about the proposals in 2004, weighs into this debate
by outlining some principles for what Social Security reform should look like from
a conservative perspective. John is a strong proponent of Personal Retirement
Accounts (PRA), which would allow workers to invest a portion of their Social
Security taxes in individual accounts that they alone would control. However, as

he notes, none of the proposed reforms address the “transition problem.” That is,
because Social Security is a “pay as you go” program—the payroll taxes paid by
today’s workers fund the Social Security benefits of today’s retirees—if today’s
workers are allowed to take a portion of their payroll taxes and put it in a PRA, it
means there will be even less money to pay for the current obligations for today’s
retirees than under the current system, at least for the next several decades. John
writes, “neither the current system nor any of the proposed reforms comes close to
closing the gap.”

Social Security is the best-loved American government program, but how it works and is financed is almost completely unknown. Most
Americans have a vague idea that they pay taxes for their benefits and

that their benefits are linked somehow to their earnings. Many also know
that the program is in trouble and needs to be “fixed” sometime soon to
deal with the retirement of the baby boomers. Beyond this, their knowledge
of the facts is severely limited and often colored by rumors and stories.

Most politicians exploit this lack of knowledge and limit their state­
ments on Social Security to platitudes and vague promises. To make mat­
ters worse, reformers tend either to be content with similar platitudes or
to speak in such detail that few outside the policy world can understand
what they are saying. The simple fact is that today’s Social Security is
extremely complex, and any reform plan that is more than fine words will
be similarly complex.

This paper attempts to simplify the reform debate by comparing vari­
ous plans (including the current system) side by side. Each of the six sec­
tions of this paper compares how the current system and the reform plans
handle a specific subject. Only reform plans that have been scored by
Social Security’s Office of the Chief Actuary are included in this compari­
son, using numbers contained in the 2003 Report of the Social Security
Trustees.

* * *

While looking at just one or two sections of special interest may be
tempting, this approach would probably be misleading. For the best effect,
each section should be considered together with the other sections in order
to form a complete picture of the plan. Using simply one section by itself to
judge an entire plan will not yield an accurate result.

“Providing Social Security Benefits in the Future” 463

Seven Important Rules for Real Social Security Reform

Information in this side-by-side comparison is based on Social Security’s
scoring memos for each plan and conclusions that can be drawn from
information contained in those memos. While there are many good points
in the reform plans examined in this analysis, this is not an endorse­
ment of any proposal by the author or The Heritage Foundation. Instead,
this comparison provides details of specific plans. However, it would be
wise for reformers to follow a set of general principles to ensure that any

464 David C. John

Social Security reform both resolves Social Security’s problems and pro­
vides workers with greater retirement security. Those principles are
listed below.

This comparison of plans makes no effort to examine whether the
Social Security reform plans included in it meet or violate any or all of the
principles.

Principles for Social Security Reform

• The benefits of current retirees and those close to retirement must
not be reduced. The government has a moral contract with those who
currently receive Social Security retirement benefits, as well as with
those who are so close to retirement that they have no other options for
building a retirement nest egg. If the benefits of younger workers can­
not be maintained given the need to curb the burgeoning cost of the
program, then they should have the opportunity to make up the differ­
ence by investing a portion of their Social Security taxes in a personal
retirement account.

• The rate of return on a worker’s Social Security taxes must be
improved. Today’s workers receive very poor returns on their Social
Security payroll taxes. As a general rule, the younger a worker is or
the lower his or her income, the lower his or her rate of return will be.
Reform must provide a better retirement income to future retirees
without increasing Social Security taxes. The best way to do this is
to allow workers to divert a portion of their existing Social Security
taxes into a personal retirement account that can earn significantly
more than Social Security can pay.

• Americans must be able to use Social Security to build a nest egg for
the future. A well-designed retirement system includes three elements:
regular monthly retirement income, dependent’s insurance, and the
ability to save for retirement. Today’s Social Security system provides a
stable level of retirement income and does provide benefits for depen­
dents. But it does not allow workers to accumulate cash savings to ful­
fill their own retirement goals or to pass on to their heirs. Workers
should be able to use Social Security to build a cash nest egg that can be
used to increase their retirement income or to build a better economic
future for their families. The best way to do this is to establish, within
the framework of Social Security, a system of personal retirement
accounts.

• Personal retirement accounts must guarantee an adequate minimum
income. Seniors must be able to count on a reasonable and predictable
minimum level of monthly income, regardless of what happens in the
investment markets.

• Workers should be allowed to fund their Social Security personal
retirement accounts by allocating some of their existing payroll tax
dollars to them. Workers should not be required to pay twice for their

benefits—once through existing payroll taxes and again through addi­
tional income taxes or contributions used to fund a personal retirement
account. Moreover, many working Americans can save little after pay­
ing existing payroll taxes and so cannot be expected to make additional
contributions to a personal account. Thus Congress should allow Amer­
icans to divert a portion of the taxes that they currently pay for Social
Security retirement benefits into personal retirement accounts.

• For currently employed workers, participation in the new accounts
must be voluntary. No one should be forced into a system of personal
retirement accounts. Instead, currently employed workers must be
allowed to choose between today’s Social Security and one that offers
personal retirement accounts.

• Any Social Security reform plan must be realistic, cost-effective, and
reduce the unfunded liabilities of the current system. True Social
Security reform will provide an improved total retirement benefit. But
it should also reduce Social Security’s huge unfunded liabilities by a
greater level than the “transition” cost needed to finance benefits for
retirees during the reform. Like paying points to obtain a better mort­
gage, Social Security reform should lead to a net reduction in liabilities.

“Providing Social Security Benefits in the Future” 465

The Social Security System and Plans for Reform

The Current System

Social Security currently pays an inflation-indexed monthly retirement and
survivors’ benefit, based on a worker’s highest 35 years of earnings. Past
earnings are indexed for average wage growth in the economy before cal­
culating the benefit. The benefit formula is progressive, meaning that
lower-income workers receive a benefit equal to a higher proportion of
their average income than upper-income workers receive. The program is
expected to continue to collect more in payroll taxes than it pays out in ben­
efits until about 2018.

Unused payroll taxes are borrowed by the federal government and
replaced by special-issue Treasury bonds. After the system begins to pay
out more than it receives, the federal government will cover the resulting
cash flow deficits by repaying the special-issue Treasury bonds out of gen­
eral revenues. When the bonds run out in about 2042, Social Security ben­
efits will automatically be reduced to a level equal to incoming

revenue.

This is projected to require a 27-percent reduction in 2042, with greater
reductions after that.

The DeMint Plan

Representative Jim DeMint (R-SC) has introduced a voluntary personal
retirement account (PRA) plan that would establish progressively funded
voluntary individual accounts for workers under age 55 on January 1,2005.

466 David C. John

The amount that goes into each worker’s account would vary according to
income, with lower-income workers able to save a higher percentage. For
average-income workers, the account would equal about 5.1 percent of
income.

The government would pay the difference between the monthly bene­
fit that can be financed from an annuity paid for by using all or some of
the PRA and the amount that the current system promises. The sum of
the annuity and the government-paid portion of Social Security would be
guaranteed at least to equal benefits promised under the current system,
and 35 percent of PRA assets would be invested in government bonds to
help pay for any Social Security cash flow deficits. This proportion would
be reduced gradually in the future. General revenue money would be
used to pay for additional cash flow deficits.

The Graham Plan

Senator Lindsay Graham (R-SC) has proposed a plan that would give
workers under age 55 (in 2004) three options. (Workers above the age of 55
would be required to remain in the current system and would receive full
benefits.)

Under Option 1, workers would establish PRAs funded with part of
their existing payroll taxes, equal to 4 percent of pay up to a maximum
of $1,300 per year. Workers’ benefits would be reduced by changing the
benefit indexing formula from the current wage growth index to one
based on consumer prices. Over time, this change would reduce benefits
for workers at all income levels, but the effect on lower-income workers
would be eased by a mandated minimum benefit of at least 120 percent
of the poverty level for workers with a 35-year work history. The
government-paid monthly benefit would be further reduced to reflect
the value of the PRA. This reduction would be calculated using the aver­
age earnings of government bonds so that, if the PRA earned more than
government bonds, the total monthly benefit would be higher. Option 1
also raises survivor benefits to 75 percent of the couple’s benefit for
many survivors.

Option 2 is essentially the same as Option 1, but without PRAs. The
government would pay all benefits for workers who choose this option.
Option 2 includes both the basic benefit reduction and the minimum ben­
efit requirement.

Option 3 pays the same level of benefits promised under current law,
but workers who select this option would pay higher payroll taxes in
return. Initially, the payroll tax rate for retirement and survivors bene­
fits would increase from 12.4 percent of income to 14.4 percent of income
(counting both the worker’s and the employer’s shares of the tax). In
subsequent years, the tax rate would continue to climb in 0.25 percent
increments.

“Providing Social Security Benefits in the Future” 467

The Smith Plan

Representative Nick Smith (R-MI) has proposed a voluntary PRA plan
that would create personal retirement savings accounts funded with an
amount equal to 2.5 percent of income, paid out of existing payroll taxes.
This would increase to 2.75 percent of income in 2025 and could become
larger after 2038 if Social Security has surplus cash flows. Retirement and
survivors’ benefits would be reduced by an amount equal to the value of
lifetime account contributions plus a specified interest rate.

The Smith plan would also make many changes in Social Security’s
benefit formula, mainly affecting middle-income and upper-income work­
ers. These changes would eventually result in most workers receiving a
flat monthly benefit of about $550 in 2004 dollars. It would also gradually
increase the retirement age for full benefits and require that all newly
hired local and state workers be covered by Social Security. The Smith plan
transfers $866 billion from general revenues to Social Security between
2007 and 2013 to help cover cash flow deficits and allows additional gen­
eral revenue transfers when needed after that.

The Ferrara Plan

Peter Ferrara, Director of the International Center for Law and Economics,
has proposed a plan that would create voluntary PRAs that would be
funded according to a progressive formula that allows lower-income
workers to save a higher proportion of their payroll taxes than upper-
income workers. Average-income workers could save about 6.4 percent of
their income. Workers would be guaranteed that the total of their PRA-
generated benefits and government-paid monthly benefits would at least
equal the benefits promised under the current system.

Any Social Security cash flow deficits that remain would be financed
through general revenue transfers equal to a 1 percent reduction in the
growth rate of all government spending for eight years, the corporate
income taxes deemed to result from the investment of personal account con­
tributions, and issuing about $1.4 trillion in “off-budget” bonds. Under
the Ferrara plan, these bonds would be considered a replacement for the
existing system’s unfunded liability and thus would not increase the fed­
eral debt.

The Orszag-Diamond Plan

Peter Orszag, Senior Fellow at the Brookings Institution,* and Peter
Diamond, Institute Professor of Economics at the Massachusetts Institute
of Technology, have developed a plan that does not include any form of

‘Peter Orszag was President Obama’s Budget Director at the Office of Management and
Budget until July 20’“ He now is at the Council on Foreign Relations [Editors].

468 David C. John

PRA or government investment of Social Security trust fund money in
private markets. Instead, it gradually changes the benefit formula to reduce
benefits for moderate-income and upper-income workers and requires
that all state and local government workers come under Social Security. It
would also gradually reduce benefits by raising the age at which workers
could receive full benefits. Workers could still retire earlier, but at lower
benefits. Benefits would increase for lower-income workers, widows, and
the disabled.

In addition, the plan would gradually increase the payroll tax for all
workers from the current 12.4 percent of income to 15.36 percent of income
in 2078. It would also raise the earnings threshold on Social Security
taxes—thus requiring higher-income workers to pay additional payroll
taxes—and impose a new 3 percent tax on income above the earnings
threshold. Workers would not receive any credit toward benefits for
income covered by this new tax.

* * *

1. Personal Retirement Accounts

What Is This, and Why Is It Important?

Allowing workers to invest a portion of their Social Security taxes is the
only alternative to raising Social Security taxes or reducing Social Secu­
rity benefits. However, personal retirement accounts are not all equal. The
money that goes into the PRAs could come from diverting a portion of
existing Social Security taxes or from some other source.

Similarly, the size of the accounts (usually expressed as a percentage of
the worker’s pay) is important. While larger accounts would temporarily
increase the amount of additional funds required to pay benefits to retir­
ees, they would also accumulate a pool of money faster than smaller
accounts and finance a greater portion of benefits in future years. This can
reduce the amount of additional tax dollars needed in future decades.

Finally, how the PRAs are invested is important. Even though they
show steady growth over time stocks and commercial bonds are gener­
ally more volatile than government bonds. Investing a portion of the
PRAs in government bonds makes the accounts slightly less volatile while
providing some of the additional dollars needed to pay benefits to current
retirees.

2. Retirement and Survivors Benefits

What Is This, and Why Is It Important?

Other than creating personal retirement accounts that allow workers to
self-fund all or a portion of their Social Security retirement benefits, most
reform plans deal with the program’s coming deficits by either changing

“Providing Social Security Benefits in the Future” 469

the level of retirement benefits promised or finding ways to increase pro­
gram revenues. This section examines how various reform plans treat
promised retirement benefits.

Social Security uses a complex formula to calculate an individual
worker’s retirement benefits. Subtle changes in this formula can cause a
large change in benefits over time. For instance, changing how past income
is indexed to a constant purchasing power will have only a minor impact
for the first several years. However, the effect is cumulative and after sev­
eral decades will result in major changes in benefits.

Similarly, seemingly minor changes in “bend points” or other aspects of
the benefit formula can, over the long term, cause major changes in bene­
fits for upper-income and/or moderate-income workers. It is even possible
to use the benefit formula to approximate an increase in the full retirement
age without actually raising it. Thus, a plan could still allow workers to
quality for “full retirement benefits” at 65, 66, or 67 but award them full
retirement benefits (as defined under the current system) only if they wait
to retire until a later age.

The first question that any plan must answer is whether it would pay
the full level of benefits promised under the current system. If so, it must
deal with how to pay the cost, since the current system cannot afford to
pay for all of the promised benefits. Other important questions include
whether the plan proposes benefit changes (usually reductions) if workers
do not choose to have a personal retirement account, protects lower-
income workers (who more often have an interrupted work history) by
instituting some sort of minimum benefit level, and/or addresses the low
benefits for certain lower-income, widowed, and disabled workers under
the current system.

3. Payroll Taxes

What Is This, and Why Is It Important?

Increasing Social Security payroll taxes would be one way to pay pro­
jected cash flow deficits. This method is closer to the self-funding that has
characterized the system so far, but raising payroll taxes has significant
drawbacks. Alternatives to payroll tax increases include instituting some
form of personal retirement account to increase the return on taxes, reduc­
ing benefits, and using significant amounts of general revenue money to
cover Social Security’s cash flow deficits.

Currently, all workers pay 5.3 percent of their income to pay for Social
Security retirement and survivors benefits. In 2004, this tax will be paid
on the first $87,700 of an employee’s income.* Employers match this tax for
a total of 10.6 percent of each worker’s income. In addition, both employer
and employee pay an additional 0.9 percent of the worker’s income (1.8

This threshold is indexed and changes every year. It was $127,200 in 2017 [Editors].

470 David C. John

percent total) for Social Security disability benefits. Thus, the employer
and employee pay a total Social Security payroll tax of 12.4 percent.

Additional payroll taxes could be collected in three ways:

• The overall tax rate could be increased. However, this imposes higher
taxes on all income groups and could reduce employment in the econ­
omy by making it more expensive to hire additional workers.

• The tax could be imposed on income levels above the threshold, cur­
rently at $87,700. In the short run, this would increase revenues, but
since retirement benefits are paid on all income taxed for Social Secu­
rity, it would also eventually increase the amount of benefits the system
would have to pay each year and offset the amount raised through the
higher taxes.

• Payroll taxes could be disconnected from the benefit formula. This could
take the form of a new tax paid on income above the current $87,700
earnings threshold, collecting taxes on income up to the $87,700 level but
counting only income up to $60,000 or some other level toward benefits,
or some combination of the two. In either case, this type of tax would
break the link between taxes and income that has existed since Social
Security began in 1935. To date, neither the right nor the left has been
willing to break this link for fear that it would be the first step toward
turning Social Security into a welfare system. Both sides have worried
that such a move—or even the perception of such a move—would under­
mine the program’s widespread support among the American people.

4. Social Security’s Unfunded Liability

What Is This, and Why Is It Important?

Both the current Social Security system and every plan to reform it will
require significant amounts of general revenue money in addition to the
amount collected through payroll taxes. This additional money is neces­
sary to reduce the difference between what Social Security currently owes
and what it will be able to pay.

In the reform plans, the transition cost represents a major reduction
from the unfunded liability of the current program. Even though the
reform plans are expensive, all of them would require less additional
money than the current system. However, both the amount and the tim­
ing of this additional money would vary depending on the plan.

The amount of additional money that is needed can be measured
according to two different systems. Both measurements give valuable
information.

Present value reflects the idea that a dollar today has more value to a
person than that same dollar has sometime in the future. It gives an idea
of when the additional money is needed by giving greater weight to
money needed in the near future than to an equal amount needed further

in the future. In addition to showing the amount of money needed, a higher
present value number indicates that money is needed sooner rather than
later. [The present value of the unfunded liability ranges from $929 billion
in the Orszag-Diamond plan to $7.6 trillion in the Ferrara plan.]

The sum of the deficits indicates the total amount of additional money
that will be needed. This measure gives $100 needed today the same
weight as $100 needed in 15 years. This measure adds up only the future
cash flow deficits; it does not include cash flow surpluses because the
government does not have any way to save or invest that money for
future use. Using both of these measurements gives a better picture of
the situation than using just one. [The sum of the deficits of the unfunded
liability ranges from $7.1 trillion in the Graham plan to $16.4 trillion in
the Ferrara plan.]

Paying for the current system or any of the reform plans will require
Congress to balance Social Security’s needs against those of the rest of the
economy. In general, as more additional dollars are needed for the current
system or a reform plan, less money will be available for other govern­
ment programs and the private sector.

As this burden on the general federal budget increases and persists.
Congress would find it increasingly more difficult to come up with that
money, and it would become increasingly less likely that such a plan
would really be paid for on schedule. This is especially true for the cur­
rent system, which will incur the massive deficits to pay all of the prom­
ised benefits.

“Providing Social Security Benefits in the Future” 471

* St- 5(-

5. Paying for Social Security’s Unfunded Liability

What Is This, and Why Is It Important?

Both the current Social Security program and all of the proposed reform
plans will require large amounts of general revenue money to cover the
annual cash flow deficits. Exactly when that money is first needed, how
many years it will be needed, and the total amount that will be needed
varies from plan to plan. Avoiding use of general revenue money would
require either reducing Social Security benefits enough to eliminate the
annual deficits or imposing new taxes to generate sufficient revenue. Nei­
ther the current system nor any of the proposed reform plans comes close
to closing the gap.

Some plans do specify sources for the needed general revenues, but
these are handicapped by the fact that no Congress can bind the hands of
a future Congress. Thus, even if Congress did pass a plan that specified
the source of the needed general revenues, a future Congress could change
the plan by a majority vote. The only way to avoid this uncertainty would
be for Congress to pass and the states to ratify the plan as a constitutional
amendment—which would be prohibitively difficult.

472 David C. John

In short, both the current system and all known reform plans would
have to find the necessary general revenues from some combination
of four sources: borrowing additional money collecting more taxes than
needed to fund the rest of the government, reducing other government
spending, or reducing Social Security benefits more than is called for
under either current law or any of the reform plans.

The most important thing to remember is that the existing Social
Security system and the reform plans all face this problem. This is not
a weakness that is limited to PRA plans or any other reform plan. The
only question is when the cash flow deficits begin and how large they
will be.

Current Law
Current law makes no provision for funding Social Security’s unfunded
liability. The program has no credit line with the U.S. Treasury, and when
its trust fund promises are exhausted, current law will require it to reduce
benefits.

The DeMint Plan
While some press releases connected with Representative DeMint’s plan
suggest that some of its general revenue needs could be generated by
reducing the growth of federal spending, no language specifying where
the general revenues would come from is included in his legislation.

The Graham Plan
Senator Graham’s plan includes a commission that would recommend
reductions in corporate welfare and redirect the savings to reduce his
plan’s unfunded liability. At best, a reduction in corporate welfare
would generate only part of the needed general revenue. The commis­
sion would produce a legislative proposal that would then be consid­
ered by Congress.

Because the commission would be created by the same legislation that
implements Graham’s Social Security reforms, its recommendations could
not even be considered until after the plan is enacted. As a result, passage
of the Graham plan does not guarantee that these revenues would be
available. Regardless of what the commission recommended, a future
Congress could reject the proposed cuts in corporate welfare. In that case.
Congress would have to come up with another method to raise the needed

revenue.

“Providing Social Security Benefits in the Future” 473

The Smith Plan

Other than the proposed benefit changes that would partially reduce
Social Security’s unfunded liability, the Smith plan does not specify how
it would pay cash flow deficits.

The Ferrara Plan

The Ferrara plan includes three mechanisms designed to create the
needed general revenues.

First, it would mandate a 1 percent reduction in the growth of all fed­
eral spending (including entitlements such as Social Security) for at least
eight years and redirect that revenue to Social Security. Since Congress
cannot legally force a subsequent Congress to follow a set course of action,
the only enforcement mechanism available is a constitutional amendment.
As a result, the Ferrara plan simply appropriates to Social Security the
amount of revenue that would result if Congress were to reduce spending
growth. In practice, a future Congress could choose not to reduce spending
growth and, instead, just let the deficit grow larger or generate the neces­
sary revenue in some other way.

Second, the Ferrara plan would transfer to Social Security the amount
of corporate income taxes that could potentially result from the invest­
ment of personal accounts in corporate stocks and bonds. This is not a
new or higher tax. This transfer is intended to reflect the taxes that would
be paid at the current 35 percent corporate tax rate. Since SSA does not
conduct dynamic scoring, this transfer is based on the static assumption
that two-thirds of the stocks and bonds held through personal accounts
reflect domestic corporate investment.

Third, the Ferrara plan would borrow about $1.4 trillion in special off-
budget bonds. However, there is no practical way to create off-budget
bonds that would not count against the federal debt. Even if there were,
such a move would reduce the amount of transparency in the federal
budget.

The Orszag-Diamond Plan

While the Orszag-Diamond plan includes both some benefit reductions
and benefit increases for widows, the disabled, and low-income workers,
the two elements of the plan are roughly equal. It reduces Social Security’s
unfunded liability using tax increases contained in the plan, including an
increase in the payroll tax rate, a gradual increase in the amount of income
subject to Social Security taxes, and a new 3 percent tax on any salary
income not subject to Social Security taxes.

474 David C. John

6. Making Social Security a Better Deal for Workers

What Is This, and Why Is It Important?

In the long run, a reform plan should do more than just preserve the cur­
rent Social Security system with its many flaws. While a key requirement
of any reform plan is to provide a stable, guaranteed, and adequate level
of benefits at an affordable cost, it should do more.

The current system fails to allow workers to build any form of nest egg
for the future. Instead, it is the highest single tax for about 80 percent of
workers. In return, each worker receives a life annuity that ends with the
death(s) of the worker, the surviving spouse (if there is one), or young
children (if any). In today’s world, where two-earner families are increas­
ingly the norm, the current system even limits survivor benefits to the
higher of either the deceased spouses benefits or the surviving spouse’s
benefits. Whichever account is lower, no matter how long that spouse
worked, is marked paid in full and extinguished.

At a minimum, a reform plan should allow workers to pass on some
of what they earned and paid in Social Security taxes to improve their
spouse’s retirement benefits. It should also allow workers the flexibility
to use their entire account for retirement benefits or take a smaller retire­
ment benefit and use the balance to pay for a grandchild’s college educa­
tion, start a small business, or pass on money to a later generation.

In judging whether each proposed reform would be better for America’s
workers, readers may differ sharply. However, while most summaries
and studies examine Social Security reform from the viewpoint of federal
budget impact, tax rates, and the survivability of the system, few consider
the overall impact of reform on the workers it was designed to benefit in
the first place. Social Security should not be reformed or “saved” for its
own sake, but only if it more effectively provides the benefits workers
need at a price they can afford.

Discussion Questions

1. The payroll tax of 6.2 percent that workers pay into Social Secu­
rity is only applied to the first $127,200 of income in 2017, and
increases each year based on inflation. This makes the payroll tax
regressive, since someone making $20,000 a year pays a larger per­
centage of their income (6.2 percent) than someone making $200,000
a year (3.9 percent, since only the first $127,200 is taxed). Is this a
valid reason for raising the payroll cap, or even eliminating it
altogether?

2. Are the broad objectives initially established for Social Security—
income security for old age, risk sharing across the population and
across generations—still appropriate today? Are individuals better

“Providing Social Security Benefits in the Future” 475

able to plan for and manage their retirement today than in the 1930s
or even the 1990s? What do you see as the major advantages and
disadvantages of the current Social Security system and proposals
for partial privatization?