FIXING SOCIAL SECURITY

February 2005
		President Bush has launched a national campaign to generate support for his plans to reshape Social Security, including the controversial option of personal investment accounts for younger workers. Peter Orszag, senior fellow in economic studies at the Brookings Institution, and Michael Tanner, director of health and welfare studies at the Cato Institute, answer your questions about the voluntary personal accounts and other aspects of the president's plan. Special Report: Social Security Reform

Forum Introduction What are President Bush's plans for Social Security disability? Didn't Great Britain undertake the personal accounts experiment with their version of Social Security to detrimental results? How do the personal accounts affect employers' contributions to Social Security? How would removing the $90,000 income limit on Social Security taxes affect the system's future? What happens if a person's private account runs out? How will the average person who knows nothing about investing fare under President Bush's new plan? How does the federal Thrift Savings Plan differ from Social Security? Under the personal accounts proposal, will there be fees for investing, and who and how will they be paid? If the IOUs in the Social Security trust fund were paid, would the system remain solvent for a much longer time? Why would anyone want to change Social Security, an insurance program, into a savings account? I'm 48, how drastic are my benefit cuts going to be?	Charles Switzer of Alameda, Calif., asks: 1. How would removing the income limit [now set at $90,000] on Social Security taxes affect the shortfall between benefits and revenues? 2. Same question on limiting benefits to those with incomes less than $200,000 or some other figure? Peter Orszag responds: Entirely removing the cap on taxable earnings would eliminate the 75-year deficit in Social Security. In my view, some increase in the cap is justified; in 1983, only 10 percent of total wages were above the cap and therefore untaxed. Now, it's 15 percent. But we don't necessarily need to eliminate the cap and apply the full 12.4 percent payroll tax on all earnings. In our book, Peter Diamond and I propose raising the cap modestly and then applying a partial tax (initially 3 percent) above that higher cap. For further details, see https://www.brookings.edu/press/books/savingsocialsecurity.htm. The second question is harder to answer because it depends on how you limit benefits. But in general, the savings tend to be smaller than many people imagine, simply because so few people have incomes that high. Michael Tanner responds: Eliminating the cap on taxable income all together would bring Social Security only six additional years of cash-flow solvency. Means-testing benefits would not get you much either. While I have no great objection to means-testing, there just aren't enough rich people to dig us out of the $12 trillion hole facing Social Security. The Concord Coalition estimates that you would have to eliminate benefits for everyone earning over about $30,000 per year to bring the system into solvency.