In the midst of the Great Depression, Social Security was enacted to help ensure that the elderly would have adequate retirement incomes and would not have to depend on welfare. The program was designed to provide benefits that workers had earned to some degree through their contributions and those of their employers. The benefit amounts would depend in part on how much the worker had earned and therefore contributed. Today, about 10 percent of the elderly have incomes below the poverty line, compared with 35 percent in 1959. However, for about half of today’s elderly, incomes excluding Social Security benefits are below the poverty line. Importantly, Social Security does not just provide benefits to retired workers. In 1939, coverage was extended to the dependents of retired and deceased workers, and in 1956 the Disability Insurance program was added. To restore the long-term solvency and sustainability of the program, reductions in promised benefits and/or increases in program revenues will be needed. Within the program’s current structure, possible benefit changes might include increases in the full retirement age, changes to the benefit formula, or reductions in cost-of-living increases, among other options. Revenue increases might include increases in payroll taxes or transfers from the Treasury’s general fund. Some proposals would change the structure of the program to incorporate a system of individual retirement savings accounts. Many such proposals would reduce benefits under the current system and make up for those reductions to some degree with income from the individual accounts. Individual account proposals also try to increase revenues, in effect, by providing the potential for higher rates of return on the individual accounts’ investments than the trust funds would earn under the current system. Three key distinctions help to identify the differences between Social Security’s current structure and one that would use individual accounts. Insurance versus savings. Social Security is a form of insurance, while individual accounts would be a form of savings. As social insurance, Social Security protects workers and their dependents against a variety of risks such as the inability to earn income due to old age, disability, or death. In contrast, a savings account provides income only from individuals’ contributions and any earnings on them; individuals effectively insure themselves under a savings approach. Defined-benefit versus defined-contribution. Social Security provides a “defined-benefit” pension, while individual accounts would provide a “defined-contribution” pension. Defined-benefit pensions typically determine benefit amounts using a formula that takes into account individuals’ earnings and years of earnings. The provider assumes the financial and insurance risk associated with funding those promised benefit levels. Defined-contribution pensions, such as 401(k) plans, determine benefit amounts based on the contributions made to the accounts and any earnings on those contributions. As a result, the individual bears the financial and insurance risks under a defined- contribution plan until retirement. Pay-as-you-go versus full funding. Social Security is financed largely on a “pay-as-you-go” basis, while individual accounts would be “fully funded.” In a pay-as-you-go system, contributions that workers make in a given year fund the payments to beneficiaries in that same year, and the system’s trust funds are kept to a relatively small contingency reserve. In contrast, in a fully funded system, contributions for a given year are put aside to pay for future benefits. The investment earnings on these funds contribute considerable revenues and reduce the size of contributions that would otherwise be required to pay for the benefits. Defined-contribution pensions and individual retirement savings are fully funded by definition. To evaluate reform proposals, we have suggested that policy makers should consider three basic criteria: 1. the extent to which the proposal achieves sustainable solvency and how the proposal would affect the economy and the federal budget; 2. the balance struck between the twin goals of individual equity (rates of return on individual contributions) and income adequacy (level and certainty of benefits); and 3. how readily such changes could be implemented, administered, and explained to the public. Providing higher replacement rates for lower earners than for higher earners is just one of several aspects of our criterion for balancing adequacy and equity. With regard to adequacy, this criterion also considers the extent to which the proposal changes benefits for current and future retirees; maintains or enhances benefits for low-income workers who are most reliant on Social Security; and maintains benefits for the disabled, dependents, and survivors. In addition, providing higher replacement rates for lower earners than for higher earners does not by itself ensure adequacy. A reform proposal could make replacement rates vary even more by earnings level than under the current system yet provide lower and less adequate benefits. With regard to equity, our criterion for balancing adequacy and equity also considers the extent to which the proposal ensures that those who contribute receive benefits, expands individual choice and control over program contributions, increases returns on investment, and improves intergenerational equity. Moreover, reform proposals should be evaluated as packages that strike a balance among individual reform elements and important interactive effects. The overall evaluation of any particular reform proposal depends on the weight individual policy makers place on each criterion. In 2001, the President created the Commission to Strengthen Social Security to develop reform plans that strengthen Social Security and increase its fiscal sustainability while meeting certain principles: no changes to benefits for retirees or near retirees, dedication of entire Social Security surplus to Social Security, no increase in Social Security payroll taxes, no government investment of Social Security funds in the stock market, preservation of disability and survivor components, and inclusion of individually controlled voluntary individual retirement accounts. The commission developed three reform models, each of which represented a different approach to including voluntary individual accounts as part of Social Security. Under all three models, individuals could have a portion of their Social Security contributions deposited into individual accounts, and their Social Security defined benefits would be reduced relative to those account contributions. A governing board would administer the accounts in a fashion similar to the Thrift Savings Plan for federal employees. To continue paying benefits while also making deposits to the accounts, funds would need to be transferred from the Treasury’s general fund. The models varied in the size of the account contributions. Models 2 and 3 had additional provisions for reducing certain benefits overall and enhancing benefits for surviving spouses and selected low earners. To assess the extent to which the Social Security program or reform options are progressive—distributes in a way that favors lower earners— researchers first select a number of measures and then compare how different groups of earners fare according to those measures. The choice of measures reflects a particular perspective on the goals of the program. For example, those who analyze Social Security from an adequacy perspective are primarily concerned with the program’s role in securing adequate income and consequently tend to use measures of how much income Social Security provides. In contrast, those who view Social Security from an equity perspective focus on whether beneficiaries receive a fair return on their contributions and tend to choose measures balancing lifetime taxes against lifetime benefits. For each perspective, assessing progressivity involves determining how lower earners fare relative to higher earners on appropriate measures. In the context of Social Security reform, those scenarios in which the well-being of lower earners increased proportionally more, or decreased proportionally less, would be considered more progressive. Because of the different kinds of benefits that Social Security provides, many researchers agree that to investigate the distributional effect of the program, aggregating workers and their dependents into households better captures well-being, but doing so poses certain methodological challenges. Since its inception, Social Security’s primary goal has been to provide adequate income, upon entitlement, so as to reduce dependency and poverty among its participants. Studies emphasizing this goal reflect the adequacy perspective; they view the program more as a safety net that helps ensure a minimum level of subsistence. Consequently, such studies use measures of how much income Social Security benefits provide. These measures include absolute benefit levels at a point in time and benefit-to- earnings ratios. Benefit levels are useful for estimating whether Social Security offers adequate protection for people covered by the system. Benefit-to-earnings ratios, which reflect how much of past earnings Social Security benefits replace, help gauge the extent to which the program allows people to maintain their past standard of living. One way to assess the distributional effect of the current Social Security program or of various reform options is to look at how these adequacy measures are distributed across earners. Regarding benefit levels, one possibility is to compute the ratio of benefits received by lower earners to benefits received by higher earners, at a particular point in time. Comparing these benefit ratios under different policies helps determine how the well-being of lower earners changes relative to that of higher earners across reform proposals. If, for example, benefits collected by individuals in the 20th percentile of the earnings distribution relative to benefits collected by those in the 80th percentile increased from one Social Security system to the next, the adequacy perspective would conclude that, other things being equal, the second is more progressive, that it is tilted toward lower earners. Alternatively, one could compute the proportion of total benefits various groups of earners receive relative to the proportion the median gets and determine the manner in which these relative proportions change across proposals. For all groups below the median, for instance, an increase in this ratio would indicate a more progressive system. The distribution of replacement rates also helps assess progressivity. The change in the replacement rate of lower earners relative to that of high earners across reform options shows the extent to which lower earners are able to maintain their pre-entitlement standard of living relative to higher earners. Under the current Social Security system, for instance, the monthly benefit lower earners receive upon entitlement replaces a larger portion of their monthly earnings; from an adequacy perspective, the system is therefore tilted in their favor. A reform proposal that increased the replacement rate of lower earners relative to higher earners would be deemed more progressive than one that did not.