BUSH'S 2% DIVERSION PLAN FOR

OLD AGE SURVIVORS INSURANCE

by

William Larsen

September 9, 2000

George Bush proposes diverting 2 percentage points of a workers OASI tax to a self directed private account. This would reduce OASI revenues in the first year it was initiated. To analyze the effect, the OASI tax rate was reduced from 10.6% in 2001 to 8.6% in 2001 and all other variables remained constant.

Most likely the initial OASI benefit starting with some future year would be reduced gradually as the number of years a worker diverted increased. At this time the rate of decrease in the initial OASI benefit is not known.

This analysis shows the cash flow under the Bush proposal. It shows an insolvency date of 2023. This in and off itself is not necessarily bad or worse off than the current proposal. It is well known the unfunded liability continues to increase faster than revenues and will continue this way indefinitely due to the divergent nature of the OASI benefit formula.

For a worker who would retire in 2037, Bush's plan by far is superior even if OASI benefits were eliminated and were to be based on need only. On average those under age 45 would fair better under Bush's plan even if OASI benefits were eliminated and subesequently based on need only. How many potential voters are under age 40? There are almost 90 million potential voters. If you add in those under 45, it climbs over 113 million potential voters. There are just over 97 million potential voters over the age of 44.

Without changes, one needs to weigh the invertible fact OASI benefits will have to be reduced starting around 2037, retirement age increased or taxes raised against Bush's proposal to allow the worker to retain more of their wages now..

Projected Surpluses (2000 - 2025)
Projected Interest Credited (2000 - 2025)
Projected Social Security OASI fund balance (2000 - 2025)

Assumptions:

Wage Growth 3.50%

Inflation 2.90%

Effective US Treasury Rate 6.9% (year 2000) declining to 5.6% in year 2009

No early retirement (best case for OASI)

Starting fund balance $798.812 Billion (year 1999)

OASI Tax Rate 10.6%

US Average Wage $30,768 (year 2000)

References used

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