Table 3
Equal Tax and Contribution Rates That Increase the Replacement Rate
but Hold the Unfunded Liability Unchanged
Ultimate
OASI Open-
Market-Based
Pre-retirement
Employee
Employer
Combined Tax
Replacement
Group Unfunded
Unfunded
Investment Return*
Saving Rate
Tax Rate
and Saving Rates
Rate
Liability**
Liability**
7%
6.20%
6.20%
12.40%
57%
$ 3.0
$ 3.0
8%
5.95%
5.95%
11.90%
69%
3.0
3.1
9%
5.75%
5.75%
11.50%
86%
3.0
3.0
10%
5.50%
5.50%
11.00%
110%
3.0
3.1
* Investment returns are nominal; inflation is 3.5%.
** All amounts are estimated in trillions of dollars, excluding the initial Trust Fund.
Table 4
Tax and Saving Rates That Retain the 42 Percent Replacement Rate
and the Present Unfunded Liability
Pre-retirement
Employee
Employer
Sum of Employee/
OASI Open-Group
Market-Based
Investment Return*
Saving Rate
Tax Rate
Employer Rates
Unfunded Liability** Unfunded Liability**
7%
4.60%
7.00%
11.60%
$ 3.0
$ 3.0
8%
3.60%
7.25%
10.85%
3.0
3.1
9%
2.80%
7.45%
10.25%
3.0
3.0
10%
2.10%
7.70%
9.80%
3.0
3.1
* Investment returns are nominal, inflation is 3.5%.
** All amounts are estimated in trillions of dollars, excluding the initial Trust Fund.
42 percent replacement rate promised by Social
tribution rate with his or her private account;
Security. With the employer's payroll tax set at
and the amount of unfunded liability within the
a matching 6.2 percent, the unfunded liability in
system. This unfunded liability represents the
a market-based Social Security system would
transition costs of this proposal and is compared
be $3 trillion, the same as in the current system.
with the unfunded liability under the existing
If, however, investments from the individual
Social Security system.
accounts earned a 9 percent return, an employ-
The first assumption is the amount of the ben-
ee contribution of only 5.75 percent would
efits a worker would receive at retirement, that
yield a replacement rate of 86 percent, nearly
is, the replacement rate, will be increased. Table
double Social Security's promise. And the high-
3 shows possible scenarios that raise the
er return would require only a matching 5.75
replacement rate above 42 percent, but do not
percent payroll tax paid by the employer to
increase the unfunded liability and have equal
keep the system's unfunded liability at $3
employer tax and employee contribution rates.
trillion.
In each case, the only contribution rate yielding
However, if the objective is simply to pre-
the desired replacement rate for a particular rate
serve the current 42 percent replacement rate,
of return is calculated. When the employee's
while again not increasing the system's unfund-
contribution is known, one can determine the
ed liability, then Table 4 shows the scenarios that
necessary employer's tax rate to provide any
achieve that outcome.
given level of unfunded liability within the
In this scenario, if investment returns are
system.
7 percent, the employee must contribute 4.6 per-
For example, if workers contributed 6.2
cent of his wages to the individual account to
percent of their wages to an individual account
achieve a 42 percent replacement rate. Under
and the investments from that account earned a
this scenario, to hold the unfunded liability at
7 percent nominal rate of return (a real rate of
$3 trillion, the same as under the current Social
return of 3.5 percent), workers would receive
Security, the employer's tax rate must be
retirement benefits equal to 57 percent of their
7 percent.
pre-retirement income, significantly above the
9