Tuesday, June 20, 2006

Carveouts

I would say that the most contentious issue at yesterday's AEI presentation was the issue of a "carveout," in which some of the revenues that would otherwise go into the Social Security trust fund are allocated instead to personal retirement accounts. You can hear this very clearly in David Certner's comments. It appears that this may be a "line in the sand" from AARP.

I acknowledge that this provision, or any provision that lowers the near-term trajectory of the Trust Fund, is a potential source of concern to AARP. A positive balance in the Trust Fund, though I do not believe it represents an amount by which the government has pre-funded future benefits, does give the Social Security Administration the ability to make benefit payments on time without any additional authorization.

PGL of Angry Bear asks about including a carveout in the LMS plan in a comment on a recent post:

It seems Max Sawicky was present asking his hard question(s) as he decided he was opposed to this plan. No real surprise, I guess - but Max is suggesting your plan would divert resources from the Trust Fund to the General Fund. As you may recall, I oppose any such diversion and I thought you agreed with this general proposition. Is Max confusing this issue - or do we disagree on this?
In the LMS plan, contributions of 3 percent of taxable payroll are made to PRAs, with 1.5 percentage points coming from an increase in the payroll tax and 1.5 percentage points coming from the Social Security system. The latter part is the so-called carveout. However, most (about 2/3 over the 75-year projection period) of that contribution is funded by raising the cap on the maximum taxable earnings level. The rest of it is funded by benefit reductions. We believe that we need PRAs of that size in order to get the right-of-center folks to support the plan.

But it is worth emphasizing that we are making very minor changes to the projected path of the Trust Fund. Tables 2 and 2a in the Actuaries' memo show that the Trust Fund is lower under our plan than present law from 2008 to 2031. During that time, the Trust Fund is always above 250 percent of annual payments. The Trust Fund ratio bottoms out for our plan at 134 percent in 2051 and rises thereafter.

The reductions in the Trust Fund ratios over the next 25 years seem to be a small price to pay to come to a compromise on a plan that, taken as a whole, greatly enhances the retirement security of future generations.

3 comments:

Arun Khanna said...

As a plan to reform Social Security this agenda sounds like a good starting point. Unfortunately, PSA accounts are likely to be a tough sell among centrist Democrats before Nov 2006.

muckdog said...

Unfortunately, bringing up the topic of modifying Social Security is considered "fightin' words." I blame partisanship and folks running for office needing something to galvanize the masses.

TStockmann said...

Did I miss an exemption from PRA contributions for those within, say, 3-5 years of retirement at the point they're established? Since the balance of the accounts are to be annuatized under this plan, the sum of contributions over that short period of time with no further compounding wouldn't be worth the administrative effort, let alone any distortions tha might result. Enhanced catch-up provisions for other retirement programs already provide an avenue for many in this cohort.