I       Seniors currently on Social Security will see no changes in their benefits or annual cost of living adjustments either today or in the future. 

I       Americans nearing retirement, age 55 and over, would remain with the current Social Security system with no changes.  They will be ineligible to participate in the new system even if they wish to do so.

I       Americans age 54 and below will be given a choice of how they wish to strengthen Social Security and build a nest egg for their retirement.

I       All disabled workers would be protected from any changes in disability insurance benefits.

I       Personal Retirement Account Option

I       Basic Benefit Option

I       Additional Contribution Option

Current workers would default into the personal retirement account option, with the choice to return to the current program if they wish. Young workers entering the workforce would be enrolled automatically in the Personal Retirement Account option. At age 26, workers would make an irrevocable decision to stay in the personal retirement account option or to return to the current system.

I       Benefit Provided through Traditional Social Security System:

·        Workers would receive benefits from the traditional system based on a price-indexed benefit formula.

-        Beginning in 2009, average benefits paid to new retirees would increase by the rate of inflation rather than the rate of wage growth -- gradually slowing the growth in initial benefit levels. Annual Cost of Living Adjustments (COLA) would continue unchanged after retirement.

-        The price indexed system ensures that the real purchasing power of traditional Social Security benefits for future retirees would be at least as large as benefits received by retirees today.

I       Benefit Provided through Personal Retirement Account:  

·        Workers would have the option to invest 4 percentage points of their payroll taxes (up to $1300 annually) in a personal retirement account.

·        Investment Structure: Workers would be enrolled automatically in a two-tiered investment program modeled after the Thrift Savings Plan for federal employees.

-        Tier I:  Individually owned and controlled, managed by independent governmental board.

~        Workers who did not choose an investment option would be invested automatically in a balanced medium growth fund.  Alternately, workers may divide their account contributions among 5 low-cost “index funds”: large cap stocks (S&P 500); small cap stocks; corporate bonds; government bonds; and international stocks.

-        Tier II: Individually owned and controlled, privately managed.

~        Once their account balance reaches $10,000, a worker could opt to participate in private-sector managed funds. Private financial institutions could offer funds similar to Tier I or innovative new options meeting strict financial criteria set by the independent governmental board. Exotic or high risk investment options would not be allowed.

·        Traditional Benefit Offset For Personal Account Holders:

-        Workers opting for personal accounts would receive a reduced traditional benefit from Social Security based on a real “offset interest rate” of 2.7 percent.

-        The procedure works as follows: Contributions to the personal account would be compounded at 2.7 percent creating a hypothetical lump sum at retirement.

-        SSA would calculate a hypothetical annuity payment using the lump sum. This amount would be deducted from the worker’s defined benefit from Social Security.

-        As long as the worker’s personal account earned a return higher than 2.7 percent, the increase in benefits from the account would outweigh the reduction in benefits through the offset and the worker would receive higher total retirement benefits.

-        A 2.7 percent offset rate ensures that even a worker invested entirely in government bonds would not do worse with an account – even after accounting for administrative expenses.

·        Additional Voluntary Contributions: 

-        All workers would be permitted to make additional voluntary contributions up to $5,000 per year (without any offset to traditional benefits).

·        Account Withdrawals:

-        At retirement, workers would be required to purchase an annuity that, in combination with their traditional Social Security benefit, guarantees them an income equal to 100 percent or more of the federal poverty line.

-        Any remaining account balance could be withdrawn at the discretion of the account holder or passed on to heirs.

-        Disbursements from personal accounts would be considered Social Security benefits for income tax purposes.

I       Enhanced Safety Net:

·        Savings subsidy for low-income workers:

-        For workers earning less than $30,000 per year, the federal government would match $100 for first $1of additional voluntary contributions and 50 percent of each additional dollar up to a cap of $500 per year. Workers would be permitted to set aside funds out of their Earned Income Tax Credit.

·        Widow’s benefits would be increased to 75 percent of couple’s previous benefit (versus only 50-67 percent under current law).

·        New minimum benefit:

-        The minimum benefit would guarantee an annual retirement income equal to 120 percent of the poverty level for workers with at least a 35-year career.  The minimum benefit would gradually decline to $0 for workers with less than 10 years of work (the minimum required to qualify for Social Security benefits).

-        Benefits received from personal retirement accounts would be paid on top of the minimum benefit.  This provision ensures that no matter how a worker’s investments perform, they won’t retire in poverty.

I       Disability:

·        No changes would be made to Disability Insurance benefits.

·        When a disabled worker converts to retired worker status (at the normal retirement age), their retired worker benefit would be adjusted by a “disability factor” to reflect the number of years the beneficiary was disabled and unable to contribute to their personal account.

-        For example, a beneficiary with 20 years of work and 20 years of disability would be subject to half the reduction in their traditional Social Security benefit that a full career worker would receive. Beneficiaries would also gain access to their personal account at retirement.

·        Disabled workers would be able to make voluntary contributions to their personal account during periods of disability and may benefit from the savings subsidy.

I       Benefit Provided through Traditional Social Security System:

·        Workers would receive benefits from the traditional system based on a price-indexed benefit formula.

-        Beginning in 2009, average benefits paid to new retirees would increase by the rate of inflation rather than the rate of wage growth -- gradually slowing the growth in initial benefit levels. Annual Cost of Living Adjustments (COLA) would continue unchanged after retirement.

-        The price indexed system ensures that the real purchasing power of traditional Social Security benefits for future retirees would be at least as large as benefits received by retirees today.

I       Benefit Provided through Personal Account:

·        None

I       Benefit Provided through Traditional Social Security System:

·        This option would allow workers who wish to remain in the current system to do so, while receiving full promised benefits. However, this option recognizes the reality that full promised benefits cannot be paid from the current system without additional resources.

·        Workers would elect to pay additional payroll taxes to stay in traditional Social Security system.  Social Security payroll tax rate would be increased by 2 percentage points (to 14.4 percent from 12.4 percent).

·        Tax rate would continue to grow in order to meet the financing needs of the traditional Social Security system.

·        Benefits would be calculated based on today’s benefit formula.

I       Benefit Provided through Personal Account:

·        None

I       BRAC-type commission would be created to recommend cuts in corporate welfare programs to help pay for transition costs.

·        Corporate welfare programs would include any action by the federal government that gives a corporation or an industry a benefit not offered to others. (Low interest loan, tax break, grant, subsidy, etc.)

·        Estimates place total federal corporate welfare at $138 billion per year. The commission would have to reduce corporate welfare by $50 billion per year. Savings would be transferred to Social Security. 

·        Recommendations would be considered by Congress on a fast track basis. If actual transfers are more than $50 billion, workers would receive a bonus in their personal account.

I       Beginning in 2006, income taxes levied on Social Security benefits would be redirected from Medicare to Social Security.

I       The Social Security Administration estimates that under the Graham plan, Social Security will be solvent and sustainable.  When the system begins to run large surpluses, a commission would be appointed to review benefits, taxes, and the financial condition of the system. This commission could recommend increasing the size of the personal accounts, increasing the traditional benefit, or cutting payroll taxes.

I       However, a failsafe provision which would require the Social Security Trustees to recommend specific program changes if projected trust fund balance falls below a critical level. A fast-track procedure would be established to implement these recommendations.

I       A Commission to Strengthen Financial Education Programs would be created to evaluate and determine the steps necessary to coordinate existing federal and non-federal financial education efforts, and recommend new public initiatives to increase the financial literacy of all Americans.