STRENGTHENING

SOCIAL SECURITY

FOR THE

21ST CENTURY

FEBRUARY 2005
The Problems Facing Social Security 

“One of America’s most important institutions – a symbol of the trust 

between generations – is also in need of wise and effective reform. Social 

Security was a great moral success of the 20th Century, and we must honor 

its great purposes in this new century. The system, however, on its current 

path, is headed toward bankruptcy. And so we must join together to 

strengthen and save Social Security.” 

President George W. Bush 

 State of the Union Address 

February 2, 2005 

3⁄4 A Social Security System designed for a 1935 world does not fit the needs of the 21st

Century. Social Security was designed in 1935 for a world that is very different from 

today. In 1935, most women did not work outside the home. Today, about 60% of women 

work outside the home. In 1935, the average American did not live long enough to collect 

retirement benefits. Today, life expectancy is 77 years. (2004 Report of the Social Security 

Trustees, p. 81). 

3⁄4 Social Security will not be changed for those 55 or older (born before 1950). Today, 

more than 45 million Americans receive Social Security benefits and millions more are 

nearing retirement. For these Americans, Social Security benefits are secure and will not 

change in any way. 

3⁄4 Social Security is making empty promises to our children and grandchildren. For our 

younger workers, Social Security has serious problems that will grow worse over time. 

Social Security cannot afford to pay promised benefits to future generations because it was 

designed for a 1935 world in which benefits were much lower, life-spans were shorter, there 

were more workers per retiree, and fewer retirees were drawing from the system. 

3⁄4 With each passing year, there are fewer workers paying ever-higher benefits to an 

ever-larger number of retirees. Social Security is a pay-as-you-go system, which means 

taxes on today’s workers pay the benefits for today’s retirees. A worker’s payroll taxes are 

not saved in an account with his or her name on it for the worker’s retirement. 

• There are fewer workers to support our retirees. When Social Security 

was first created, there were 40 workers to support every one retiree, and most 

workers did not live long enough to collect retirement benefits from the 

system. Since then, the demographics of our society have changed 

dramatically. People are living longer and having fewer children. As a result 

we have seen a dramatic change in the number of workers supporting each 
retiree’s benefits. According to the 2004 Report of the Social Security 

Trustees (page 47): 

 In 1950, there were 16 workers to support every one beneficiary of Social 

Security. 

 Today, there are only 3.3 workers supporting every Social Security 

beneficiary. 

 And, by the time our youngest workers turn 65, there will be only 2 workers 

supporting each beneficiary. 

• Benefits are scheduled to rise dramatically over the next few decades. Because 

benefits are tied to wage growth rather than inflation, benefits are growing faster 

than the rest of the economy. This benefit formula was established in 1977. As a 

result, today’s 20-year old is promised benefits that are 40% higher, in real terms, 

than are paid to seniors who retire this year. But the current system does not have 

the money to pay these promised benefits. 

• The retirement of the Baby Boomers will accelerate the problem. In just 3 years, 

the first of the Baby Boom generation will begin to retire, putting added strain on a 

system that was not designed to meet the needs of the 21 century. By 2031, there 

will be almost twice as many older Americans as today – from 37 million today to 

71 million. (

st

http://www.ssa.gov/pressoffice/basicfact).

3⁄4 Social Security is heading toward bankruptcy. According to the Social Security 

Trustees, thirteen years from now, in 2018, Social Security will be paying out more than it 

takes in and every year afterward will bring a new shortfall, bigger than the year before. 

And, when today’s young workers begin to retire in 2042, the system will be exhausted and 

bankrupt. (Summary of the 2004 Annual Report of the Social Security Trustees, p. 1). If we 

do not act now to save it, the only solution will be drastically higher taxes, massive new 

borrowing, or sudden and severe cuts in Social Security benefits or other government 

programs. 

3⁄4 As of 2004, the cost of doing nothing to fix our Social Security system had hit an 

estimated $10.4 trillion, according to the Social Security Trustees. (2004 Report of the 

Social Security Trustees, p. 58). The longer we wait to take action, the more difficult and 

expensive the changes will be. 

• $10.4 trillion is almost twice the combined wages and salaries of every working 

American in 2004. 

• Every year we wait costs an additional $600 billion. (2004 Report of the Social 

Security Trustees, p. 58). 

• Today’s 30-year-old worker can expect a 27% benefit cut from the current system

when he or she reaches normal retirement age. (2004 Report of the Social Security 

Trustees, p. 8). And, without action, these benefit cuts will only get worse. 

2
Strengthening Social Security Permanently 

“We must pass reforms that solve the financial 

problems of Social Security once and for all.” 

 

President George W. Bush 

 State of the Union Address 

February 2, 2005 

3⁄4 In the State of the Union Address, President Bush called for an open, candid review of 

the options to strengthen Social Security permanently for our children and 

grandchildren. 

3⁄4 The President pledged to work with Members of Congress to find the most effective 

combination of reforms. Former and current Members of Congress and a former President 

have suggested a variety of solutions to fix Social Security permanently, including limiting 

benefits for wealthy retirees, indexing benefits to prices rather than wages, increasing the 

retirement age, discouraging early collection of retirement benefits, and changing the way 

benefits are calculated. All of these ideas are on the table. The President recognizes that 

none of these reforms would be easy and has said he will listen to anyone with a good idea 

to offer. 

3⁄4 The President believes that we must move ahead with reform, because our children’s 

retirement security is more important than partisan politics. 

3⁄4 In the State of the Union, the President laid out basic principles to guide reform: 

• We must make Social Security permanently sound, not leave it for another day. 

• We must not jeopardize our economic strength by raising payroll taxes – higher 

taxes would slow economic growth. 

 Increasing payroll taxes is a band-aid, not a permanent solution. Payroll 

taxes have been increased more than 20 times since 1935, and we still have 

not fixed the problem. The Social Security payroll tax, which was once 2%, 

is now 12.4%. To meet the needs of the 21st century, payroll taxes would 

have to be raised over and over and over again on American workers, stifling 

economic growth and job creation. Economists calculate that under the 

current system, the payroll tax would have to rise to more than 18% if our 

children and grandchildren are to receive their scheduled benefits. (2004 

Report of the Social Security Trustees, p. 165). 

• We must ensure that lower income Americans get the help they need to have 

dignity and peace of mind in their retirement. Any reform should maintain the 

system’s progressivity. 

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• We must guarantee that there is no change for those now retired or nearing 

retirement. For those Americans 55 and older (born before 1950), nothing will 

change, and nobody is going to take away or change their check.

• We must take care that any changes in the system are gradual, so that younger 

workers have years to prepare and plan for their future.

• And, we should make Social Security a better deal for younger workers through

voluntary personal retirement accounts. 

4
Personal Retirement Accounts 

“As we fix Social Security, we also have the responsibility to 

make the system a better deal for younger workers. And the 

best way to reach that goal is through 

voluntary personal retirement accounts.” 

President George W. Bush 

 State of the Union Address 

February 2, 2005 

3⁄4 The President believes personal retirement accounts must be part of a comprehensive 

solution to strengthen Social Security for the 21st century.

3⁄4 Under the President’s plan, personal retirement accounts would start gradually. 

Yearly contribution limits would be raised over time, eventually permitting all workers 

to set aside 4 percentage points of their payroll taxes in their accounts. Annual 

contributions to personal retirement accounts initially would be capped, at $1,000 per year 

in 2009. The cap would rise gradually over time, growing $100 per year, plus growth in 

average wages. 

3⁄4 Personal retirement accounts offer younger workers the opportunity to build a “nest 

egg” for retirement that the government cannot take away. 

• Personal retirement accounts provide ownership and control. Personal 

retirement accounts give younger workers the opportunity to own an asset and watch 

it grow over time. 

• Personal retirement accounts could be passed on to children and grandchildren. 

The money in these accounts would be available for retirement expenses. Any 

unused portion could be passed on to loved ones. Permitting individuals to pass on 

their personal retirement accounts to loved ones will be particularly beneficial to 

widows, widowers, and other survivors. According to the non-partisan analysis by 

the Social Security Administration’s Office of Retirement Policy, the ability to 

inherit personal accounts provides the largest gains to widows and other survivors. 

• Personal retirement accounts help make Social Security better for younger 

workers. A personal retirement account gives a younger worker the chance to save 

a portion of his or her money in an account and watch it grow over time at a greater 

rate than anything the current system can deliver. The account will provide money 

for the worker’s retirement in addition to the check he or she receives from Social 

Security. Personal retirement accounts give younger workers the chance to receive 

a higher rate of return from sound, long-term investing of a portion of their payroll 

taxes than they receive under the current system. 

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3⁄4 Personal retirement accounts would be voluntary. At any time, a worker could “opt in” 

by making a one-time election to put a portion of his or her payroll taxes into a personal 

retirement account. 

• Workers would have the flexibility to choose from several different low-cost, broadbased investment funds and would have the opportunity to adjust investment 

allocations periodically, but would not be allowed to move back and forth between 

personal retirement accounts and the traditional system. If, after workers choose the 

account, they decide they want only the benefits the current system would give them, 

they can leave their money invested in government bonds like those the Social 

Security system invests in now. 

• Those workers who do not elect to create a personal retirement account would 

continue to draw benefits from the traditional Social Security system, reformed to be 

permanently sustainable. 

3⁄4 Personal retirement account options and management would be similar to that of the 

Federal employee retirement program, known as the Thrift Savings Plan (TSP). A 

centralized administrative structure would be created to collect personal retirement account 

contributions, manage investments, maintain records, and facilitate withdrawals at

retirement. The structure would be designed to facilitate low costs, ease of use for new 

investors, and timely crediting of contributions. This centralized investment structure would 

help minimize compliance costs for employers. 

• Contributions would be collected and records maintained by a central administrator. 

Similar to the TSP, private investment managers would be chosen through a 

competitive bidding process to manage the pooled account contributions. 

• The central administrator would answer questions from account participants and 

distribute periodic account statements. 

• The central administrator would also facilitate withdrawals and the purchase of

annuities with account balances. 

• Like TSP, we expect participants to have easy access to investment information and 

to their accounts. Participants could easily check account balances and adjust 

investment allocations. 

3⁄4 Personal retirement accounts would be invested in a mix of conservative bonds and 

stock funds. Guidelines and restrictions would be put in place to provide sound investment 

choices and prevent individuals from spending the money in these accounts on the lottery or 

at the race track. Workers would be permitted to allocate their personal retirement account 

contributions among a small number of very broadly diversified index funds patterned after 

the current TSP funds. 

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• Like TSP, personal retirement accounts could be invested in a safe government 

securities fund; an investment-grade corporate bond index fund; a small-cap stock 

index fund; a large-cap stock index fund; and an international stock index fund. 

• In addition to these TSP-type funds, workers could choose a government bond fund 

with a guaranteed rate of return above inflation. 

• Workers could also choose a “life cycle portfolio” that would automatically adjust 

the level of risk of the investments as the worker aged. The life cycle fund would 

automatically and gradually shift the allocation of investment funds as the individual 

neared retirement age so that it was weighted more heavily toward secure bonds. 

3⁄4 Personal retirement accounts would be protected from sudden market swings on the 

eve of retirement. To protect near-retirees from sudden market swings on the eve of 

retirement, personal retirement accounts would be automatically invested in the “life cycle 

portfolio” when a worker reaches age 47, unless the worker and his or her spouse 

specifically opted out by signing a waiver form stating they are aware of the risks involved. 

The waiver form would explain in clear, easily understandable terms the benefits of the life 

cycle portfolio and the risks of opting out. By shifting investment allocations from high 

growth funds to secure bonds as the individual nears retirement, the life cycle portfolio 

would provide greater protections from sudden market swings. 

3⁄4 Personal retirement accounts would not be eaten up by hidden Wall Street fees. 

Personal retirement accounts would be low-cost. The Social Security Administration’s 

actuaries project that the ongoing administrative costs for a TSP-style personal account 

structure would be roughly 30 basis points or 0.3 percentage points, compared to an average 

of 125 basis points for investments in stock mutual funds and 88 basis points in bond mutual 

funds in 2003. (www.ici.org/issues/fee/fm-v13n5). 

• The low costs are made possible by the economies of scale of a centralized 

administrative structure, as well as limiting investment options to a small number of 

prudent, broadly diversified funds. 

• Most of these administrative costs are for recordkeeping which would be done by the 

government, not investment management done by Wall Street. (Report of the 1994-

1996 Advisory Council on Social Security, p. 171 & January 31, 2002 Memorandum

from the Social Security Actuary in the Final Report of the President’s Commission 

on Social Security, p. 19). 

3⁄4 Personal retirement accounts would not be accessible prior to retirement. American 

workers who choose personal retirement accounts would not be allowed to make 

withdrawals from, take loans from, or borrow against their accounts prior to retirement. 

3⁄4 Personal retirement accounts would not be emptied out all at once, but rather paid out 

over time, as an addition to traditional Social Security benefits. Under a system of 

personal retirement accounts, procedures would be established to govern how account 

balances would be withdrawn at retirement. This would involve some combination of 

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annuities to ensure a stream of monthly income over the worker’s life expectancy, phased 

withdrawals indexed to life expectancy, and lump sum withdrawals. Individuals would not 

be permitted to withdraw funds from their personal retirement accounts as lump sums, if 

doing so would result in their moving below the poverty line. Account balances in excess of 

the poverty-protection threshold requirement could be withdrawn as a lump sum for any 

purpose or left in the account to accumulate interest. Any unused portion of the account 

could be passed on to loved ones. 

3⁄4 Personal retirement accounts would be phased in. To ease the transition to a personal 

retirement account system, participation would be phased in according to the age of the 

worker. In the first year of implementation, workers currently between age 40 and 54 (born 

1950 through 1965 inclusive) would have the option of establishing personal retirement 

accounts. In the second year, workers currently between age 26 and 54 (born 1950 through 

1978 inclusive) would be given the option and by the end of the third year, all workers born 

in 1950 or later who want to participate in personal retirement accounts would be able to do 

so.

3⁄4 The President’s personal retirement account proposal is fiscally responsible. The 

President's proposal is consistent with his overall goal of cutting the deficit in half by 2009. 

Based on analysis by the Social Security Administration Actuary, the Office of Management 

and Budget estimates that the President’s personal retirement account proposal will require 

transition financing of $664 billion over the next ten years ($754 billion including interest). 

This transition financing will not have the same effect on national savings, and thus the 

economy, as traditional government borrowing. Personal retirement accounts will not reduce 

the pool of savings available to the markets because every dollar borrowed by the Federal 

government to fund the transition is fully offset by an increase in savings represented by the 

accounts themselves. Moreover, the transition financing for personal retirement 

accounts should be viewed as part of a comprehensive plan to make the Social Security system

permanently sustainable. Publicly released analysis by the Social Security Administration has 

found that several comprehensive proposals including personal accounts would dramatically 

reduce the costs of permanently fixing the system. (www.ssa.gov/OACT/solvency/index). 

3⁄4 Establishing personal retirement accounts does not add to the total costs that Social 

Security faces. Personal retirement accounts effectively pre-fund Social Security benefits 

already promised to today's workers and do not represent a net increase in Federal 

obligations. The obligation to pay Social Security benefits is already there. While personal 

retirement accounts affect the timing of these costs, they do not add to the total amount 

obligated through Social Security. 

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Thrift Savings Plan Background 

3⁄4 The Thrift Savings Plan (TSP) is a voluntary retirement savings plan offered to Federal 

employees, including members of Congress. 

3⁄4 It offers comparable benefits and features to those available to private sector employees 

in 401(k) retirement plans, including pre-tax contributions through convenient payroll 

withholding. 

3⁄4 The TSP currently has 3.4 million participants, and their investments have grown to 

$152 billion. Participants voluntarily add $1.3 billion per month in new contributions to 

their accounts. 

3⁄4 Participants have the choice to invest in any or all of five broad-based investment funds: 

• A stable value fund invested in U.S. Treasury securities 

• An index fund comprising investment grade bonds 

• Small and mid-cap stock index fund 

• Large cap stock index fund 

• International stock index fund 

3⁄4 These funds have the following 10-year compound annual rates of return: 

• G Fund (government securities fund) 6.04% (3.67% real) 

• F Fund (bond index fund) 6.95% (4.58% real) 

• C Fund (common stock index fund) 10.99% (8.62% real) 

• S Fund (small capitalization stock index fund) 9.70% (7.33% real) 

• I Fund (international stock index fund) 4.32% (1.95% real) 

3⁄4 Beginning this summer, the TSP will offer lifecycle portfolios, each with a designated

ratio of investments among the five TSP funds. This balanced, diversified portfolio will 

automatically reallocate as the participant’s retirement date approaches. 

3⁄4 Administration and investment costs for the TSP are low at 6 basis points, or 60 cents 

per $1,000 of account balance. A Senate hearing in 2004 discovered that many “lowcost” funds have expense ratios between 20 and 65 basis points. Other funds’ costs are 

significantly higher. 

3⁄4 The TSP is administered by the Federal Retirement Thrift Investment Board. 

Governance of the Board is carried out by five independent part-time Presidential 

appointees and a full-time Executive Director whom they select. TSP funds are held in 

trust. As fiduciaries, the Board Members and the Executive Director are required to act 

prudently and solely in the interest of TSP participants and beneficiaries. 

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3⁄4 The Board provides training and develops educational materials including publications, 

forms and videos. It maintains an interactive web site (www.tsp.gov) and a toll free 

telephone center for participants to obtain these materials, check account balances, 

change contribution levels, adjust investment allocations or request withdrawals. 

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