News Release

February 24, 2005

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Social Security Administration Scores Rep. Sam Johnson's Social Security Reform Proposal
Measure is modeled on the Cato Institute's plan, "The 6.2 Percent Solution"

WASHINGTON -- According to the official "scoring" by the Social Security Administration of Rep. Sam Johnson's reform legislation, which is based on the Cato Institute's own Social Security plan, the bill "would eliminate Social Security's long-range actuarial deficit" and restore the system to "sustainable solvency." Social Security Administration actuaries predict that over the program's 75-year actuarial window, "the overall effect of the proposal is to transform the projected $3.7 trillion long-range unfunded obligation for the program under current law into an expected positive Trust fund balance of $1.8 trillion at the end of the period."

The legislation is based on Cato's "6.2 Percent Solution." The Cato Institute is widely considered the pioneering force behind Social Security reform through personal retirement accounts. "This is the culmination of our 25 years of scholarship on this issue," says Michael Tanner, who heads Cato's Project on Social Security Choice. "I remember when it was difficult to get a meeting with leaders on Capitol Hill to discuss this issue. Personal retirement accounts is an issue whose time has come."'

Johnson's bill (HR 530), known as the Individual Social Security Investment Program Act, would give workers under age 55 the option of privately investing their half of the Social Security payroll tax (6.2 percent of wages) through individual accounts. Workers who do not choose this option would remain in the current system, but their benefits would be based on a price-indexed formula, rather than the current wage-indexed formula. Workers choosing individual accounts would forgo future accumulation of Social Security retirement benefits, but would receive a tradable "recognition bond" based on those benefits already accrued under the current Social Security system. A new minimum benefit, equal to 100 percent of the poverty level, would ensure that no senior ends up in poverty.

"We worked with Rep. Johnson to create a Social Security reform plan that solves Social Security's long-range fiscal problems, gives people more control over their own future, and takes full advantage of the wealth-creating energy of the American people," says Tanner. "We believe we have accomplished that."

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Additional Highlights Form the Social Security Administrations Actuarial Memo Regarding HR 530

• The "transition cost" (in present value) would be approximately $6.5 trillion. This is just over half the unfunded liability of the current system (using an infinite horizon measure). The legislation also compares very favorably to other Social Security reform plans. In terms of giving workers more control and ownership of their retirement funds, Johnson's bill clearly provides the most "bang for the buck."
• On a cash-flow basis, the legislation does require significant short-term transfers of General Revenue. However, by 2046, the system would begin running a surplus, allowing any short-term debt to be repaid. Indeed, by the end of the 75-year actuarial window, the system would be running surpluses in excess of $1.8 trillion (in constant $2005).
• Much of the short-term cash-flow shortfalls are due to the redemption of recognition bonds, not to the diversion of payroll taxes to the individual accounts. These recognition bonds convey many benefits in terms of ownership as well as speeding the date at which Social Security changes from deficit to surplus. It is essentially a prepayment of future Social Security benefits, and is not a new expense. Johnson's bill is the only Social Security reform bill with recognition bonds. Adding recognition bonds to other bills would considerably increase their short-term cash-flow deficits. The costs of the Johnson bill also include the cost of increasing the minimum Social Security benefit to 100 percent of poverty, a significant increase over the current minimum Social Security benefit.
• Individual accounts would eventually accumulate assets in excess of $38 trillion (in constant $2005). This would lead to substantial new savings, new investment, and economic growth.
• Once short-term debt is paid off, the employer portion of the payroll tax could be reduced to 3.04 percent. This would pay for disability and survivors' benefits.
• The Social Security Administration analysis shows that Rep. Johnson's bill can provide large individual accounts while restoring Social Security to permanent sustainable solvency, and can do so in a fiscally responsible manner. While the up front costs will be significant, they will be less than those for other big-account plans, and eventually those costs will be more than offset by the savings to the system.