bridge financing not yet repaid. It is not a pres-
Table 5 shows that, if everything else were
ent value imbalance of OASI taxes and benefits.
held constant but the employer's tax were
When the bridge financing is repaid, the
increased to 8.05 percent, the unfunded liability
employer tax ends.
under the market-based system would decline to
$1.5 trillion, half that of the current Social
Security system. Table 6 shows that increasing
The 1.8 Percent Solution
the employer's tax rate to 9.55 percent would
Revisited
completely eliminate the unfunded liability
under the market-based system.
Now, the formula discussed above will be
Tables 4, 5, and 6 also show that higher rates
applied to the 1.8 percent solution described ear-
of return would require lower employee contri-
lier. Although many better ways exist to finance
butions to achieve the same results. In short,
the transition bridge than payroll tax increases, it
holding everything else constant, the higher the
is valuable to show that applying the identical
combined employer-employee contribution rate
finance mechanism both to propping the current
or the return on investment, the faster the
system and to making the transition to a market-
decline in the unfunded liability. The reason is
based system yields markedly different long-
that both accelerate the advent of the 42 percent
term results.
replacement rate, the point at which the govern-
To compare the differences, one assumes that
ment no longer has to pay Social Security ben-
in both cases any revenue shortfall is financed
efits. The earlier that date, the less bridge
with debt, the 42 percent replacement rate is
financing.
retained, the pre-retirement nominal investment
In all three scenarios the government benefits
return ranges from 7 percent to 10 percent, and
cease during the 75-year period because for all
inflation is 3.5 percent. As shown in Table 7,
practical purposes the 42 percent replacement
the unfunded liability falls below the present
rate is ultimately achieved for all workers
$3 trillion in all cases. In fact, if the return on
through their individual accounts. The remain-
investments were 10 percent, there would be a
ing market-based unfunded liability is the
significant surplus.
Table 5
Tax and Saving Rates That Retain the 42 Percent Replacement Rate
and Reduce the Unfunded Liability by $1.5 Trillion
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%
8.05%
12.65%
$ 3.0
$ 1.5
8%
3.60%
8.30%
11.90%
3.0
1.5
9%
2.80%
8.50%
11.30%
3.0
1.5
10%
2.10%
8.75%
10.85%
3.0
1.5
* Investment returns are nominal, inflation is 3.5%.
** All amounts are estimated in trillions of dollars, excluding the initial Trust Fund.
Table 6
Tax and Saving Rates That Retain the 42 Percent Replacement Rate
and Eliminate the 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%
9.55%
14.15%
$ 3.0
$ 0.0
8%
3.60%
9.80%
13.40%
3.0
0.0
9%
2.80%
10.00%
12.80%
3.0
0.0
10%
2.10%
10.25%
12.35%
3.0
0.0
* Investment returns are nominal; inflation is 3.5%.
** All amounts are estimated in trillions of dollars, excluding the initial Trust Fund.
10