The plan contains four primary elements: a gradual reduction in future benefits; an increase in the payroll tax cap; an increase in the retirement age; and the establishment of personal retirement accounts. The plan puts great emphasis on fiscal responsibility – there are no transfers from general revenues to achieve sustainable solvency. Specifically:
1) Pay-as-you-go benefits would be gradually reduced to keep the costs of the traditional system to what can be afforded by the 12.4 percent payroll tax. The cuts are structured such that cuts are larger for high earners than for low earners.
2) The plan would establish mandatory personal retirement accounts (PRA) in the amount of 3 percent of taxable payroll. The accounts would be funded by a combination of diverting 1.5 percent of taxable payroll from the Social Security trust fund and requiring workers to contribute an additional 1.5 percent of payroll into their PRAs.
3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.
4) The plan would gradually increase the normal retirement age (currently scheduled to reach 67 in 2017) to 68 and the earliest age at which retirees could collect Social Security benefits from its current 62 to 65. People would be able to tap into their PRA assets beginning at age 62.
5) In order to minimize risks and administrative costs, accounts would be tightly regulated and full annuitization of account balances would be required.
6) Total replacement rates from the remaining traditional benefits and the new PRAs are comparable for most workers to those promised but currently underfunded in present law.