Reforming Public Pensions in the U.S. and the U.K.

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Presentation transcript:

Reforming Public Pensions in the U.S. and the U.K.

OASDI Income and Cost Rates Under Intermediate Assumptions (as a percentage of taxable payroll) Source: 2005 Annual Trustees Report, Figure II.D2.

Old Age, Survivors and Disability Insurance (OASDI) Payroll tax rate ….12.4%, up to cap of $90,000 (indexed to average earnings)

AGE PERCENT BENEFIT LEVEL FOR DIFFERENT AGES AT START OF BENEFITS For an age for full benefits (normal retirement age) of 67.

Additional benefit of 10.4% per year of delay

Primary-Insurance-Amount Formula for the 2005 Cohort Source: 2005 Annual Trustees Report, Figure V.C1.

Replacement Rates Replacement Rates (in percent) Lifetime Earnings Replacement of Lifetime Earnings for Single Scaled Workers Retiring at the Age for Full Benefits in Source: Social Security Administration, Office of the Chief Actuary, Actuarial Note , December 2004.

Source: Fast Facts and Figures about Social Security, 2004, SSA Office of Policy Publication No

Pension coverage has shifted to defined contribution – 401(k) – plans. Percent of Wage and Salary Workers with Pension Coverage by Type of Plan, Source: U.S. Department of Labor Private Pension Plan Bulletin: Abstract of 1999 Form 5500 Annual Reports; Alicia H. Munnell’s calculations from Board of Governors of the Federal Reserve System Survey of Consumer Finances.

President Bush STATE OF THE UNION ADDRESS February 2, 2005 “Right now, a set portion of the money you earn is taken out of your paycheck to pay for the Social Security benefits of today's retirees. If you are a younger worker, I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future.”

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% Percent of payroll Diverted revenue Benefit offsets Cash-flow Effect from Administration’s Individual Accounts Plan

Trust Fund Ratio under Administration’s Individual Account Plan (10.0) (8.0) (6.0) (4.0) (2.0) Trust Fund Ratio Current law With accounts

EFFECT OF “PRICE INDEXING” OR “REAL WAGE DEFLATING” ON BENEFITS Age When Implemented Change in Benefits from this Reform % % % % % % % Note: Calculated as 1minus ( age ), assuming real wage growth rate is 1 percent per year.

EFFECT OF “PRICE INDEXING” OR “REAL WAGE DEFLATING” ON BENEFITS Age When Implemented Change in Benefits from this Reform with 1% real wage growth with 1.5% real wage growth % %-14.0% %-26.1% %-36.5% %-45.4% %-53.0% %-56.4% Note: Calculated as 1 minus ( age ), and 1minus ( age ).

Age

BENEFIT LEVEL (in %)

Intercohort Transfers