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The Kolbe-Boyd Social Security Reform Bill Earlier this week Reps. Jim Kolbe and Allen Boyd announced the introduction of their new Social Security reform proposal. The Kolbe-Boyd bill is a model of centrist legislation. Outline: 1. Sustainable Solvency. The legislation has been scored by the actuaries of the Social Security Administration as restoring solvency to the Social Security program for the next seventy-five years and beyond. 2. Fiscally responsible. The Kolbe-Boyd proposal tackles the tough choices that are necessary to control costs and reduce the pressures on future general revenues. It does not rely on unspecified new revenues or optimistic assumptions to achieve balance and brings new revenues into the system to offset the near term costs of advance funding. It honestly accounts for and partially offsets the near-term transition costs of individual accounts while dramatically reducing the long-term unfunded liabilities of the system. 3. Enhances the safety net. The legislation contains several provisions in both the defined benefit program and individual accounts that provide stronger poverty protections and greater assistance to low-income workers than are contained in current law. 4. Empowers all Americans. The legislation establishes individual accounts that provide all Americans the opportunity to create wealth, and provides individuals with ownership of and control over their retirement assets. 5. Progressive benefit changes. The benefit changes in Kolbe-Boyd are targeted at middle and upper income workers who are able to tolerate a higher level of risk in individual accounts and therefore have a greater opportunity to benefit from the prospects for higher returns from individual accounts. 6. Improves Social Security for all Americans. The bill provides all future retirees with a better rate of return than the current system can afford, and it protects all taxpayers from the increased tax burden created by the existing general fund obligations to the Social Security system. 7. Rewards work. The legislation makes several reforms to enhance the work incentives in the current system. A Responsible Personal Account Plan: The Kolbe-Boyd approach uses personal accounts for three purposes: (1) as a more effective mechanism to save current payroll taxes to "pre-fund" Social Security's future costs than the current trust fund, (2) to offset the impact of the tough choices necessary to restore solvency and (3) to provide all Americans with an opportunity for wealth creation. The benefits from the higher returns earned by accounts provide workers with an opportunity to offset some of the reductions in promised benefits in Kolbe-Boyd that were necessary to restore solvency with or without individual accounts. Including individual accounts in addition to the benefit and revenue changes designed to restore solvency provide workers with higher retirement income and a greater rate of return on payroll tax contributions than would be the case if the plan contained only the changes made to restore solvency. The Kolbe-Boyd bill allows workers at all income levels to accumulate real wealth for their retirement by diverting a portion of current payroll taxes into personal accounts that are individually owned and controlled. Individual accounts will extend to low and moderate income workers the investment opportunities that higher income workers with 401(k) plans and mutual funds already enjoy. The individual accounts under the Kolbe-Boyd plan are structured to give low-income workers a greater opportunity to benefit from the accounts. Unlike the current system and some other individual account plans, the Kolbe-Boyd plan will provide individuals with ownership of and control over their retirement assets. Honestly accounting for the transition costs of reform: The bill brings new revenues into the system to replace a portion of the current revenues used to pre-fund future benefits through individual accounts by slightly raising the cap on earnings subject to the Social Security payroll tax and recapturing the saving in the non-Social Security portion of the budget achieved by using the a new "chained" CPI (Consumer Price Index) developed by the Bureau of Labor Statistics to index tax brackets and other revenue and spending provisions. These changes offset nearly half of the near term transition costs of the plan. Over the long term, the costs of the individual accounts would be offset by changes to the benefit formula phased in over time corresponding with the opportunity to benefit from the individual accounts. The changes in the benefit formula would primarily affect the defined benefit levels for middle and upper income workers, who will have a greater opportunity to benefit from individual accounts.
4. Changes to reflect increases in life expectancy through an acceleration of the increase in Social Security's normal retirement age, which would be phased-up to age 67 by 2011 and a "longevity" adjustment designed to keep lifetime benefits constant as life expectancy increases. (These changes would not prevent workers from retiring at reduced benefits as early as age 62.) 5. A small reduction in benefits for workers who retire prior to the normal retirement age, coupled with additional incentives to work past the normal retirement age. 6. Change benefit calculations to reflect longer working lives and credit workers for all years of work. The plan would gradually increase the number of computation years in determining benefit levels from 35 years to 40 years, but would include all years of earnings in the benefit formula in order to give individuals credit for all income that they earn even if not among their highest 40 years of lifetime earnings.
8. Utilizing a more accurate measure of the Consumer Price Index (CPI) for the purposes of Social Security post-retirement benefit indexation, and also the indexation of tax brackets and certain spending programs outside the Social Security program. The bill would use a new "chained" price index developed by the Bureau of Labor Statistics to eliminate the upper level substitution bias in the CPI, which is estimated to grow about 0.2 percentage points slower than the customary CPI.
10. Improvements of widow’s benefits to better target resources to needy women, offset by limiting spousal benefit for high-earner couples.
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Centrist Policy Network, Inc. |
