Maintaining Social Security Benefits and Tax Rates through Personal Retirement Accounts: An Update Based on the 1998 Social Security Trustees Report

Abstract

In the original version of this paper, Feldstein and Samwick (1998), PRA contributions of 2 percent of payroll were sufficient to restore solvency to the system.That paper was based on the forecasts in the 1995 Social Security Trustees Report.As a result of changes in forecasted revenues in the 1998 Trustees Report (principally, greater near-term wage growth relative to long-term wage growth), the required PRA contribution is now 2.3 percent of payroll to avoid a zero balance in the Trust Fund.As a consequence of the higher PRA contribution rate, there is also a substantially larger Trust Fund available in the final years of the simulation.3 The deposits to individual accounts could in principle be some combination of an equal lump sum amount for everyone and a proportion of earnings less than 2.3 percent.Our calculations reflect only the fact that the aggregate deposits are equal to 2.3 percent of aggregate earnings.Using a lump sum would make the distribution more favorable to low income earners but would not have the same favorable effect on reducing the marginal tax rate.

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