In the report of the President's Commission to Strengthen Social Security, issued in December 2001, there are three proposals - each of which involves Personal Retirement Accounts (PRAs). The first plan is simple, straight forward, and beneficial to people at all levels of income. An analysis of plan one can be found on this Web site (click here>>).
Unfortunately, however, the proposal which has gained the most attention and support is plan two - and it is a disaster. It would be better to have no reform than to adopt plan two. Here's why.
Although "low earners" would benefit from plan two, most workers would actually be hurt by the proposal. For the majority, risk would increase, while expected benefits would decrease. The impact of plan two on people of various income levels is depicted in the three figures below. Figure 1 shows that a “low earner” would benefit. For example, a low earner retiring in 2022 would have a monthly benefit of $885, versus the currently-planned benefit of $767. That is an increase of more than 15%.
Figure “Low-earners” are helped
Figure 2, below, shows that medium-earners would not fare as well. Proposal 2 would significantly decrease the benefits of medium-earners retiring during the next 40 years. In other words, anyone presently age 25 or older would be seriously hurt by this proposal.
Figure 2: All “medium-earners” who retire in next 40 years, LOSE
Figure 3, below, shows that so-called high-earners ($56,443 per year) lose big-time. Regardless of the year of retirement, their benefits under plan two would be substantially lower than their currently-planned benefits.
Figure “High earners” lose no matter when they retire
By the way, the above graphs can NOT be found in the Commission's report. The graphs presented by the Commission omit the “existing plan” line, which shows projected benefits as currently scheduled. That omission makes it impossible for the reader to see how badly he or she may be hurt by the proposed changes. The above tables are based upon on tabular information accompanying the Commission's report, and can be found in How Social Security Picks Your Pocket, by Joe Fried (2003, Algora Publishing).
Any proposal which increases risk while decreasing benefits for a majority of Americans is doomed to failure. If properly designed, PRAs could be very beneficial. However, we should not adopt reforms based upon proposal 2 from the report of the President's Commission.