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full benefits. This cost is not disputable. What is

tion of this proposal is that if the tax rate were

disputable is whether this cost is more or less

immediately raised from 10.6 percent to 12.4

than that required to finance the transition to a

percent, and if the positive cash flow were

market-based alternative that ultimately solves

invested, then the system could pay benefits for

the problem.

just 75 years without any further tax rate

increase until the 76th year. Proponents of this

solution argue that increasing the payroll tax rate

A Market-Based Alternative

by this amount is a small price to pay to keep the

Because eliminating the cash flow dilemma

system intact.

by either cutting benefits or raising taxes creates

Another interpretation is that within the 75-

other and significant socioeconomic problems,

year period the 12.4 percent tax rate would have

reducing the unfunded liability should be

to be raised whenever benefits exceed payroll

accomplished differently, if at all possible. As a

taxes because the surpluses, as discussed earlier,

guide to considering different solutions, three

are not invested. Table 1 shows OASI benefits

principles of retirement finance that are valued

and payroll taxes from a 10.6 percent and a 12.4

by civil societies should be considered. They are

percent rate. According to these data, the tax rate

as follows:

would have to start rising again in 2020 (actual-

ly 2019), continue rising through the 75-year

· The elderly are able to retire with financial

period, and end at a rate of about 17 percent.23

security and dignity.

· Younger workers are able to keep more of

And this interpretation may be conservative.

the fruits of their labor.

According to a study by Kotlikoff, the rates

· The economy is not unreasonably or unnec-

most likely would have to be substantially high-

essarily burdened by achieving the first two

er in order to pay promised benefits.24

principles.

What is very clear, and presented in detail by

The ultimate objective of retirement finance

Social Security's Trustees, is that keeping the

is to achieve all three principles and simultane-

system as it is currently financed will require

ously eliminate both the cash flow problem and

workers to pay more than the currently stipulat-

the unfunded liability permanently. A market-

ed payroll taxes if retirees are to receive their

based system can achieve these goals. However,

the plan design is critical to success because dif-

Table 1

ferent market-based structures can yield entirely

different results, some of which may be inferior

Estimated Old Age & Survivors Benefits and Tax Revenue

to pay-as-you-go financing. The following plan

at 10.6 Percent and 12.4 Percent Tax Rates

structure is consistent with the three principles,

OASI  10.6%Payroll 10.6%Tax Less 12.4%Payroll 12.4%Tax Less

ultimately eliminates the unfunded liability and

Year

Benefit

Tax

OASI Benefit

Tax

OASI Benefit

the payroll tax, and increases retirement benefits

1998

$ 326

$ 368

$ 42

$ 427

$ 100

significantly.

2000

351

393

42

459

109

2005

443

489

46

572

129

Choice

2010

592

629

37

736

144

2015

837

798

(39)

934

96

Each worker, regardless of age, would be free

2020

1,202

999

(203)

1,168

(34)

to stay with Social Security or move to the mar-

2025

1,662

1,242

(420)

1,453

(209)

ket-based structure. No one would be required

2030

2,229

1,551

(678)

1,814

(415)

to leave Social Security.

2035

2,886

1,949

(937)

2,280

(607)

2040

3,618

2,448

(1,170)

2,863

(755)

Benefit Integrity

2045

4,502

3,063

(1,439)

3,583

(919)

2050

5,658

3,822

(1,836)

4,471

(1,187)

For those staying with Social Security, bene-

2055

7,203

4,763

(2,440)

5,571

(1,632)

fits would not be reduced below what they may

2060

9,210

5,936

(3,274)

6,944

(2,266)

otherwise be because of the availability of the

2065

11,693

7,405

(4,289)

8,662

(3,031)

market-based alternative. This point is critical

2070

14,768

9,234

(5,534)

10,802

(3,966)

especially to the present elderly because they

2072

16,208

10,083

(6,125)

11,795

(4,413)

may be unable to adjust to change. "What they

Note: All amounts are in billions of nominal dollars.

may otherwise be ..." is worth pondering. In all

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