Kolbe-Boyd Meets the Criteria for Reform Set Forth by the President’s Commission to Save Social Security

1.       Encouragement of workers’ and families’ efforts to build personal retirement wealth, giving citizens a legal rather than merely a political right to a portion of their benefits:

·        The Bipartisan Retirement Security Act 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.

·        Workers would have a variety of options for distribution of the funds in their individual account.   Individuals would be able to leave the remaining assets in their individual account to their heirs upon death.  The ability to leave assets to their heirs would be especially beneficial for low-income workers who have shorter life expectancies. 

2.      Equity of lifetime Social Security taxes and benefits, both between and within generations:

·        By addressing the unfunded liabilities of the Social Security without shifting new obligations onto general revenues, the Kolbe-Boyd plan will protect future generations from increasing tax burdens.  Using a portion of current payroll taxes to advance fund   retirement benefits for future retires through individual accounts will distribute the burden of financing retirement benefits across generations in a more equitable manner.

·        The costs of diverting a portion of payroll taxes into individual accounts would be offset by changes to the benefit formula to correspond with the opportunity to benefit from individual accounts and would not affect workers who are within ten years of retirement. 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. 

·        The plan would improve the equity of total lifetime benefits paid as retirees live longer after reaching retirement age by indexing the benefit formula to life expectancy.

·        This plan adjusts the taxable wage base to set the wage cap at a level which ensures that 87% of taxable payroll is covered by FICA taxes.  Since 1983 this level has fallen from 90% to 83.1% of taxable payroll and the Social Security actuaries predict that the level will continue to fall in the future

3.      Adequacy of protection against income fluctuations, such as those caused by retirement, disability, death of an earner, or unexpected longevity:

·        The Kolbe-Boyd plan preserves and strengthens the safety net features of the existing defined benefit system.   The minimum benefit provision and enhanced progressivity of the defined benefit formula provides protections to the low and moderate income earners who are most vulnerable to income fluctuation and least likely to have other income in retirement.

·        Workers would have a variety of options for distribution of the funds in their individual account to reflect the different needs of each worker.   Retirees will be able to choose between a number of annuity plans that reflect the life needs of the individual.  Concerns about shorter life expectancies among the poor can be addressed by purchasing either a life annuity, period certain annuity or a refund annuity.

·        The changes in the defined benefit formula would not apply to disabled workers until they convert to retired worker status at the normal retirement age.  When a disabled individual converts to retired worker status and gains access to their individual account, their defined benefit would be to reflect the number of years the worker was able to contribute to an individual account before becoming disabled.

·        Survivors would be eligible for the same fraction of the retired worker’s benefit as under current law.  In addition, survivors could inherit their spouse’s individual account balance.

4.      Encouragement of increased personal and national saving:

·        The Bipartisan Retirement Security Act will increase private savings by encouraging individuals to save for their own retirement.  In particular, the plan will enhance the ability of low-income workers to save by providing a federal match for voluntary contributions.

·        The Kolbe-Boyd plan ensures that current excess payroll taxes are saved to advance fund future retirement benefits by creating individual accounts.   The amounts saved in these accounts are used to reduce the unfunded benefit promises that create tremendous liabilities on the rest of the budget. Diverting payroll taxes into individual accounts ensures that they will be saved instead of being used to run up trust fund surpluses that can be used to finance spending or tax cuts outside of the Social Security system.

·        The Kolbe-Boyd plan will dramatically reduce government dis-savings by reducing the publicly held debt by $15 trillion over the next 75 years.

·        The reductions in the defined benefits for the middle and upper income workers who have the means to save for their own retirement will encourage these workers to increase their private retirement savings.  

5.      Rewarding individuals for actively participating in the workforce.

·        The Bipartisan Retirement Security Act 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.

·        In addition, this plan would gradually increase the number of computation years in determining benefit levels from 35 years to 40 years to reflect longer working lives.  For two-earner couples, however, this legislation would cap the benefit computation period for the lower wage earner at 35 years.  This will benefit spouses who leave the workforce for child rearing or other purposes.

·        Improves the delayed retirement credit to compensate workers for the years of additional payroll taxes individuals pay while working past the Normal Retirement Age. 

6.      Movement of the Social Security system toward a fiscally sustainable course that can withstand unforeseen economic and demographic changes:

·        The Bipartisan Retirement Security Act has been scored by the Social Security Administration Actuaries as restoring solvency to the Social Security system for 75 years and beyond.  This bill would also reduce the cash shortfall under current law by nearly two thirds in present value terms, from $5 trillion under current law to $1.65 trillion, therefore relieving pressure on the federal budget.

·        Unlike some individual account plans, the Kolbe-Boyd plan will remain in balance regardless of the returns earned by individual accounts from the markets and does not create new general fund liabilities based on projected budget surpluses that may not materialize.

·        The life expectancy adjustment will ensure that the system remains in balance with retirees as life expectancy increases by automatically adjusting the benefit formula to reflect changes in the amount of time retirees are expected to live in retirement

·        The plan establishes a “fail‑safe” mechanism which protects the program from once again falling out of balance by requiring Congress and the President to consider changes to the program on a timely basis whenever projections show deteriorating fiscal health for the trust fund.

7.      Practicality and suitability to successful implementation at reasonable cost:

·        To minimize employer burdens and administrative costs, the individual accounts would be modeled on the federal government Thrift Savings Plan.   Funds would be managed by the Individual Security Fund Board through a competitive bidding process. The Individual Security Fund Board will be responsible for all account recordkeeping and maintenance.  The TSP model will allow individually owned accounts to benefit from economies of scale and minimize employer burdens and administration costs of individual accounts.

Investment options in the TSP plan would include a stock index fund, a bond index fund, a Treasury securities index fund, a small cap stock index fund and an international stock index fund.  Individual accounts could be invested in any combination of the five funds.   Workers would have the option of keeping individual account funds in the same low-risk Treasury securities where Social Security funds are invested currently. However, workers could choose to place their individual account contributions in one of the investment funds that offer the potential of a higher rate of return.

Once a worker’s account balance reaches $7,500, they would have the option to choose a private investment institution invest their individual account funds. Workers would have to affirmatively choose to leave the TSP model plan and join the private alternative.  A worker who is happy with their investment options in the TSP model plan would simply do nothing to continue in their current investments.  The central Individual Security Board would continue to be responsible for recordkeeping for accounts and aggregating contributions to private investment firms.

In order to minimize risk in the private investment alternative, financial institutions would be regulated by the SEC to ensure strict financial soundness and financial reporting requirements.  Financial institutions would offer broad based, diversified investment funds with low administrative costs.  The SEC’s regulatory approval would be based on the fund’s administrative fee structure, risk profile, and appropriateness as a retirement investment vehicle. The TSP-Plus model offers workers the option of expanded investment opportunities but does not force anyone to take on additional risks.

·        The transition costs of reform are honestly accounted for in the plan.    The plan does not mask the costs of the program by shifting costs to other areas of the budget or the private economy. 

·        The Kolbe-Boyd plan does not use Social Security surpluses already credited to the Social Security Trust Fund to justify a second round of credits to the Trust Fund or pay for individual accounts with funds that already have been credited to the Trust Fund, as some "free lunch" plans do.