Class Notes 042308 Social Security Reform

Class Notes 042308 Social Security Reform - 4/23/08 Social...

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Unformatted text preview: 4/23/08 Social Security Reform Last time: Social Security is a three-dimension problem: 1. Aggregate budget/fairness across generations 2. Progressivity-system how progressive; how much to change? 3. Uncertainty--do not know exactly how future will unfold What reforms are possible? Current system Raise tax rate or taxable maximum Cut benefits; across the board or progressively Price indexing cuts across generation Fundamental Reform Creating either "carve out" or "add on" individual accounts o Carving it out of what the existing taxes are Tonight Project: He gives us the aggregate budget rule; 10% benefit cut or 12.5% tax increase Compare & contrast how various benefit cuts/tax increases affect progressivity & benefit levels Ignore uncertainty CBO Analysis: Bush Add individual account (4% carve-out with offset) Switched from wage indexing to price indexing Few other changes Diamond-Orszig Increase payroll tax rates; 12.4% now, 12.7% by 2025, 13.9% by 2050, 15% by 2075 Raise taxable maximum Impose new 3.5% tax with no benefits on earnings above the tax max Benefit cuts, top rate falls to 10%, others not as much Bush Plan--Sneaky 1. Accounts "offset" at retirement so that they did not cost the government a. How? You only get to keep amount earned above 3% real rate of return 2. Price indexing a. In any year, wage growth = price growth (inflation) + productivity growth b. In current system, benefit rises with wages c. Bush plan subtracted productivity piece, benefits grow 1.5% more slowly--in 50 years, 50+% cut!!! ...
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Class Notes 042308 Social Security Reform - 4/23/08 Social...

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