For other versions of this document, see http://wikileaks.org/wiki/CRS-RL30397 ------------------------------------------------------------------------------ Order Code RL30397 Report for Congress Received through the CRS Web Social Security Reform: Individual Account Proposals Updated July 26, 2002 James R. Storey Specialist in Social Legislation Domestic Social Policy Division Congressional Research Service ~ The Library of Congress ABSTRACT A number of measures to reform the Social Security system have proposed that individual accounts be incorporated into a reformed system. Proposals introduced in the 106th and 107th Congresses are compared with respect to the role the accounts would play, whether they would be mandatory or voluntary, the level of contributions, how funds would be managed and invested, whether a minimum benefit is promised, and how the accounts would be treated for income tax purposes. This report will be updated as legislative action occurs. Social Security Reform: Individual Account Proposals Summary Many proposals have been advanced to reform Social Security. Some would establish "Social Security individual accounts" (SSIAs) to accumulate contributions for workers, invest their funds, and provide them with retirement income. Key features of 18 SSIA proposals are compared in this report. The proposals vary in regard to: the basic purpose of the accounts; whether participation is mandatory or voluntary; the source and level of contributions; how account assets are managed; what investment choices are available; whether or not a minimum benefit is promised; and how the federal income tax applies. Fourteen of the 18 SSIA proposals would use the new accounts to replace a part (in one case all) of Social Security benefits ("carveout" plans). The other four proposals would use SSIAs as a means for workers to supplement Social Security ("add-on" plans). Five of the 14 carveout plans would mandate participation; the other nine propose voluntary carveouts. Two of the four add-on plans would mandate participation. However, three of the seven mandatory plans would limit the mandate to workers under a certain age. Proposed contributions to SSIAs range from 1% of wages subject to the Social Security payroll tax up to the full 12.4% employee/employer payroll tax. The carveout plans would divert some part (in one case all) of Social Security taxes for contribution to SSIAs. However, eight of the 18 proposals would draw on general federal revenue for some or all of the contributions. Ten of the 18 SSIA proposals would limit investment options for account assets to a few funds approved expressly for that purpose by a board of trustees. The eight exceptions would allow individuals to invest their SSIA assets with a broader range of existing financial institutions. Five of the 14 carveout proposals would guarantee participants some minimum SSIA benefit to protect against adverse investment outcomes, the guarantees being based in most cases on an individual's Social Security benefit entitlement. Of the nine carveout proposals offering no guarantee, five do not mandate participation. Two add-on proposals include a benefit floor. Treatment of SSIAs under the federal income tax would vary, with five of the 18 proposals essentially following current tax policy for private retirement plans. At the other extreme, one plan would make SSIA contributions, investment earnings, and distributions completely tax-exempt. This report will be updated as legislative action occurs. Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Comparison of SSIA Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 List of Tables Table 1. Selected Features of Social Security Individual Accounts Included in Social Security Reform Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Social Security Reform: Individual Account Proposals Introduction Congress has acted many times to promote voluntary individual retirement saving through tax incentives. Landmark legislation includes: authorization of individual retirement accounts (IRAs) for workers with no employer-sponsored pension plan (1974); specification of rules for employer-sponsored salary deferral retirement plans in §401(k) and §457 of the tax code (1978); expansion of IRA eligibility to all workers and their spouses (1981); establishment of Roth IRAs in 1997; and increased contribution limits and more flexible portability rules in 2001. Beginning with the 106th Congress, serious attention was given to making individual retirement saving an integral part of the mandatory Social Security system. Numerous Social Security reform proposals have been offered in light of actuarial projections that indicate the Social Security trust funds may exhaust their financial reserves during the first half of the 21st century. Concern about this possibility of system insolvency is amplified by the demographic context, namely, the approaching swell in the retirement age population as the large "baby boom" age cohorts begin to reach age 65 in 2011. Some of these reform proposals would make "Social Security individual accounts" (SSIAs) an integral part of a reformed Social Security system. Other proposals would establish SSIAs for the purpose of supplementing the retirement benefits paid by Social Security. In 2001, the President's Commission to Strengthen Social Security recommended that any reform of the system include individual accounts as an element. The features of SSIA proposals vary widely. This report summarizes 18 proposals that would establish SSIAs. Nine of them were introduced as bills in the 106th Congress, and nine have been introduced in the 107th Congress. (Several bills in the latter group are revisions of bills introduced by the same sponsors in the 106th Congress.) These 18 proposals are as follows: Introduced in 106th Congress: H.R. 874 (Porter)­Individual Social Security Retirement Accounts Act H.R. 3206 (N. Smith)­Social Security Solvency Act H.R. 4839 (Sanford)­Personal Lockbox Act1 H.R. 5659 (Kasich)­Personal Social Security Account Act S. 21 (Moynihan)­Social Security Solvency Act 1 Earlier in the 106th Congress, Representative Sanford introduced three bills (H.R. 249, H.R. 250, H.R. 251) that also would have created SSIAs. CRS-2 S. 263 (Roth)­Personal Retirement Accounts Act S. 588 (Bunning)­Social Security for the 21st Century Act S. 1103 (Grams)­Personal Security and Wealth in Retirement Act S. 2774 (Gregg)­Bipartisan Social Security Reform Act2 Introduced in 107th Congress: H.R. 849 (Sessions)­Savings Accounts for Every American Act H.R. 2110 (Petri)­Retirement Security Act H.R. 2771 (Kolbe/Stenholm)­21st Century Retirement Act H.R. 3497 (Shaw)­Social Security Guarantee Plus Act H.R. 3535 (DeMint/Armey)­Social Security Ownership and Guarantee Act H.R. 4022 (Matsui)­President's Commission Reform Model 13 H.R. 4023 (Matsui)­President's Commission Reform Model 2 H.R. 4024 (Matsui)­President's Commission Reform Model 3 S. 2693 (Dorgan)­Social Security Plus Account Act4 Table 1 compares several significant elements of the 18 proposals. (Although some of the Social Security proposals that include SSIAs also call for major changes in Social Security benefits and/or financing, these broader reforms are not discussed here, nor are these features of the proposals shown in Table 1. For a general discussion of Social Security reform, see: CRS Issue Brief IB98048, Social Security Reform.) Comparison of SSIA Proposals Some SSIA proposals are designed to replace a part of Social Security benefits ("carveout" plans), with part of Social Security payroll taxes diverted into the SSIAs. Others would use SSIAs as a means for workers to supplement Social Security ("add- on" plans), either through their own contributions or with federal payments to their accounts. Fourteen of the 18 proposals outlined in Table 1 are carveout plans.5 Five of these 14 plans would mandate participation; the other nine propose voluntary 2 An earlier version of this bill, S. 1383, was also introduced by Senator Gregg in the 106th Congress. 3 Representative Matsui's three bills are not detailed proposals. They simply call for implementation of the options set forth in the report of the President's Commission to Strengthen Social Security. These bills were introduced to stimulate a policy debate on SSIAs during the 107th Congress. For more information on the Commission's options, see CRS Report for Congress RS21095, Social Security: Report of the President's Commission to Strengthen Social Security, by Dawn Nuschler, December 21, 2001. 4 This bill advances an approach originally proposed by President Clinton in his FY2000 budget, which advocated Universal Savings Accounts as part of a reform of Social Security. 5 H.R. 4024 (Commission Reform Model 3) is categorized as a carveout plan in this discussion, but its carveout feature is contingent upon an individual's election to contribute an additional 1% of taxable wages to an account. The discussion of add-on plans refers to those that are purely add-on in nature. CRS-3 carveouts. Two of the four add-on plans would mandate participation. Of the seven mandatory plans (five carveouts, two add-ons), three would limit the mandate to workers under a certain age. Contributions would range from 1% of wages subject to the Social Security payroll tax (H.R. 5659) to the full 12.4% employee/employer payroll tax (H.R. 849). Eight proposals (H.R. 2110, H.R. 2771, H.R. 3497, H.R. 4024, H.R. 4839, S. 263, S. 2774, S. 2693) would augment employee contributions with government transfer payments or income tax credits. Ten of the 18 SSIA proposals would limit the options for investment of contributions to a few funds approved expressly for that purpose by a board of trustees, in a manner similar to the operation of the federal employees' Thrift Savings Plan. The eight exceptions would allow individuals to invest their SSIA assets with a broader range of existing financial institutions that meet certain federal standards. Four of these eight proposals would allow this latter approach only for accounts holding assets in excess of some minimum level. Five of the 14 carveout proposals would guarantee participants some minimum SSIA benefit to protect against adverse investment outcomes. Guaranteed minimums generally are based on some combination of entitlement under Social Security and/or absolute dollar amounts. However, S. 1103 sets a minimum at 150% of the official poverty income level for a single-person household. Of the nine carveout proposals offering no guarantee, six (H.R. 849, H.R. 4022, H.R. 4023, H.R. 4024, S. 21, S. 588) do not mandate participation, leaving H.R. 250, H.R. 2771, and S. 2774 as the only mandatory carveout plans with no promised SSIA minimum. Two add-on proposals (H.R. 2110, H.R. 3497) would provide a benefit floor ­ a benefit equal to at least as much as an individual's Social Security benefit under current law. Treatment of SSIAs under the federal income tax would vary. Five of the 18 proposals essentially follow current tax policy for most private retirement plans; that is, income tax is deferred on contributions and investment earnings and collected when the funds are distributed. Nine proposals would tax all or part of employee contributions, but one of these nine (S. 1103) would exempt investment earnings from taxation. The other eight would apply the tax rules for Social Security benefits to some part of previously untaxed distributions. S. 588 would make contributions, investment earnings, and distributions completely tax-exempt in all circumstances. Tax treatment was not specified in the three options offered by the President's Commission to Strengthen Social Security (H.R. 4022, H.R. 4023, H.R. 4024). CRS-4 Table 1. Selected Features of Social Security Individual Accounts Included in Social Security Reform Proposals [NOTE: abbreviations explained at end of table] Federal income tax treatment of SSIA: SSIA Bill no. contribution SSIA (sponsor), SSIA rate (pct. of SSIA minimum and short relationship to wages subject SSIA fund investment benefit Investment title OASDI to OASDI tax) management choices guarantee Contributions earnings Withdrawals Bills introduced in 106th Congress: H.R. 874 carveout; 5% employee, trusts options lesser of employee share tax-deferred tax-deferred (Porter), participation 5% employer registered offered by 95% of taxable; amounts Individual voluntary match; from with SSA to SSA- PIA or employer taxable, partly Social taxes diverted administer approved 40% of match tax- on same basis Security from OASDI SSIAs trustees AIME deferred as OASDI Retirement benefits Accounts Act H.R. 3206 carveout; 2.5% from Social 3 indexed OASDI one-half tax-deferred taxable on (N. Smith), participation taxes diverted Security funds with benefit completely tax- same basis as Social voluntary for from OASDI, Board of varied asset less deferred, other OASDI Security covered rising to Trustees mixes account's half deferred benefits Solvency workers under 2.75% for standard up to $2,000 Act age 65 on 2026-2038; annuity 1/1/2001 rate thereafter value depends on OASDI funding status H.R. 4839 carveout; pro-rata share SEC- all financial none voluntary tax-deferred for amounts (Sanford), participation of FICA tax approved institutions contributions attributable to Personal required if from surplus Personal that pass taxable, federal Lockbox born after of OASI Retirement SEC risk government contribution, Act 1944, but receipts less Account screen contribution half not taxed, individual expenditures; trustees not taxed half taxable contributions limited on same basis up to $10,000 contribution as OASDI are voluntary from federal benefits; other revenue for amounts not low-income taxed individuals CRS-5 Federal income tax treatment of SSIA: SSIA Bill no. contribution SSIA (sponsor), SSIA rate (pct. of SSIA minimum and short relationship to wages subject SSIA fund investment benefit Investment title OASDI to OASDI tax) management choices guarantee Contributions earnings Withdrawals Bills introduced in 106th Congress (continued): H.R. 5659 carveout; from 1% to Personal range of none tax-deferred tax-deferred taxable (Kasich), participation 3.5%, depend- Social funds similar Personal voluntary for ing on wage Security Fund to those of Social Se- those born level, from under Board TSP curity Ac- after 1944 taxes diverted of Trustees count Act from OASDI S. 21 (Moy- carveout; 1% employee, Voluntary options none taxable; tax-deferred tax-deferred nihan), participation 1% employer Investment offered by employer amounts Social voluntary; em- match; from Fund under approved match tax- taxable Security ployee payroll taxes diverted SSA, or institutions deferred Solvency tax cut even if from OASDI private IRAs Act nonparticipant S. 263 add-on; government Personal G,F,C funds none tax-deferred tax-deferred taxable (Roth), participation puts in $250 + Retirement like TSP, Personal required share of Accounts other funds Retirement budget surplus Board Board Accounts proportional recommends Act to employee's payroll tax S. 588 carveout; government Retirement options none tax-exempt tax-exempt tax-exempt (Bunning), participation contributes by Security Fund selected by Social voluntary diverting taxes Investment Board Security for from OASDI, Board the 21st rising to 50% Century of tax after 20 Act years CRS-6 Federal income tax treatment of SSIA: SSIA Bill no. contribution SSIA (sponsor), SSIA rate (pct. of SSIA minimum and short relationship to wages subject SSIA fund investment benefit Investment title OASDI to OASDI tax) management choices guarantee Contributions earnings Withdrawals Bills introduced in 106th Congress (continued): S. 1103 carveout; 5% employee Federal options 150% of employee share tax-exempt tax-exempt (Grams), participation (up to 25% Personal offered by poverty- taxable; Personal voluntary max.), 5% Retirement Board- level employer Security employer Investment approved income for match tax- and Wealth match; from Board trustees single exempt in Retire- taxes diverted person ment Act from OASDI S. 2774 carveout; 2% from taxes Individual same options none tax-deferred tax-deferred tax-deferred (Gregg), participation diverted from Savings Fund as TSP; amounts Bipartisan required OASDI; up to Board under Board to taxable Social $2,000 volun- SSA recommend Security tary, matched other options Reform Act by govern- to Congress ment pay- ments if low income; one- time govern- ment pay- ments to Kid- save account if born after 1994 Bills introduced in 107th Congress: H.R. 849 new accounts 6.2% from SAFE options none tax-deferred tax-deferred taxable before (Sessions), offered in lieu employee plus accounts offered by age 59˝ Savings of OASDI if 6.2% from approved by Treasury- unless funds Account for held at least 15 employer; no Sec'y of approved used for Every years; tax paid to Treasury trustees; life certain American participation OASDI by insurance purposes; tax- Act (SAFE) voluntary either contracts free after 59˝ employee or excluded employer CRS-7 Federal income tax treatment of SSIA: SSIA Bill no. contribution SSIA (sponsor), SSIA rate (pct. of SSIA minimum and short relationship to wages subject SSIA fund investment benefit Investment title OASDI to OASDI tax) management choices guarantee Contributions earnings Withdrawals Bills introduced in 107th Congress (continued): H.R. 2110 add-on; $1,000 one- Social G,F,C funds OASDI up to $5,000 tax-deferred benefits (Petri), participation time payment Security like TSP's, benefit tax-deferred; equivalent to Retirement required if when account Investment other funds paid to other OASDI Security born after is established, Trust Fund Board extent it contributions benefits Act 6/30/2002, but from federal (under Fed. recommends exceeds taxable taxable on employee/em- revenue from Ret. Thrift benefit same basis as ployer contri- tax on OASDI Investment from Re- OASDI; other butions are benefits; up to Board) tirement tax-deferred voluntary $10,000 by Security benefits fully employee/em- Act taxable ployer combined H.R. 2771 carveout; 3% of 1st Individual options none taxable tax-deferred tax-deferred (Kolbe/ participation $10,000 of Security Fund selected by amounts Stenholm), required; wages + 2% Board under Board taxable on 21st Century voluntary of other wages SSA; account same basis as Retirement contributions diverted from can be OASDI Act allowed for OASDI; up to transferred to benefits OASDI add- $2,000 volun- private firm ons tary, matched when balance by govern- reaches ment pay- $7,500 ments if low income H.R. 3497 add-on; 2%-3% of pay Social qualified OASDI tax-deferred tax-deferred taxable on (Shaw), participation contributed Security mutual benefit same basis as Social voluntary from Guarantee funds; OASDI Security government Board under stock/bond benefits Guarantee payments SSA mix of 60/40 Plus Act generally required CRS-8 Federal income tax treatment of SSIA: SSIA Bill no. contribution SSIA (sponsor), SSIA rate (pct. of SSIA minimum and short relationship to wages subject SSIA fund investment benefit Investment title OASDI to OASDI tax) management choices guarantee Contributions earnings Withdrawals Bills introduced in 107th Congress (continued): H.R. 3535 carveout; 3%-8% Personal options OASDI taxable tax-deferred tax-deferred (DeMint/ participation diverted from Savings selected by benefit amounts Armey), voluntary OASDI; Board Board; taxable on Social Se- additional appointed by stock/bond same basis as curity Own- voluntary President mix of 60/40 OASDI ership and contributions generally benefits Guarantee allowed required Act H.R. 4022 carveout; 2% from taxes government broadly none taxable tax-deferred tax-deferred (Matsui), participation diverted from board like diversified amounts President's. voluntary OASDI TSP's or Fed- portfolio; taxable on Commis- eral Reserve only annual same basis as sion Board; can reallocation OASDI Reform invest private- allowed benefits Model 1 ly once ac- count balance above min. threshold H.R. 4023 carveout; 4% from taxes government broadly none taxable tax-deferred tax-deferred (Matsui), participation diverted from board like diversified amounts President's voluntary OASDI, not to TSP's or Fed- portfolio; taxable on Commis- exceed $1,000 eral Reserve only annual same basis as sion Board; can reallocation OASDI Reform invest private- allowed benefits Model 2 ly once ac- count balance above min. threshold CRS-9 Federal income tax treatment of SSIA: SSIA Bill no. contribution SSIA (sponsor), SSIA rate (pct. of SSIA minimum and short relationship to wages subject SSIA fund investment benefit Investment title OASDI to OASDI tax) management choices guarantee Contributions earnings Withdrawals Bills introduced in 107th Congress (continued): H.R. 4024 both carveout participant government broadly none taxable tax-deferred tax-deferred (Matsui), and add-on may contri- board like diversified amounts President's features; bute TSP's or Fed- portfolio; taxable on Commis- participation additional 1%, eral Reserve only annual same basis as sion voluntary matched by Board; can reallocation OASDI Reform 2.5% (up to invest private- allowed benefits Model 3 $1,000) from ly once ac- taxes diverted count balance from OASDI; above min. partial rebate threshold of 1% through tax credit for lower-wage workers S. 2693 add-on; up to $2,000, private IRAs all securities none employee share tax-deferred tax-deferred (Dorgan), participation offset in part eligible for taxable; amounts Social voluntary by 20% IRA government taxable on Security refundable tax investments share tax- same basis as Plus credit; deferred OASDI Account matched by benefits Act government payments if low income; sum of indi- vidual and matching contributions limited to $2,000 Notes: Dollar amounts in table for contribution limits and tax rules are annual amounts. Abbreviations used in table are as follows: AIME­average indexed monthly earnings G,F,C ­ funds invested in government securities, fixed income securities, and corporate stocks, respectively CRS-10 IRA ­ Individual retirement account OASDI ­ Old Age, Survivors and Disability Insurance PIA ­ Social Security primary insurance amount SAFE ­ proposed Savings Account for Every American SEC ­ Securities and Exchange Commission SSA ­ Social Security Administration SSIA ­ Social Security Individual Account TSP ­ Thrift Savings Plan ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL30397