FRAA is concerned that the Social Security program as it is currently constituted may not be doing an adequate job, and it may not be fiscally sound for the foreseeable future. Develop and evaluate a reform proposal.

Evaluate this proposal in terms of the existing problems from the perspective of Social Security:

a$.$ There is a temporary imbalance because of the demographics from the post WWII Baby Boom. Taxes from the current workers are now inadequate to finance benefits to the current beneficiaries.

b$.$ There is concern that the US needs to increase national savings, as at some point the debt of the US government will begin to absorb too much domestic financing that would otherwise go for capital investment of firms.

The proposal is a partial privatization of Social Security. Instead of paying the employee's share of the social security tax, the individual could instead pay an amount equivalent to the tax into an IRA account, called the Private Social Security Account $($PSSA$).$ The PSSA contributions would be free of personal income tax until withdrawn. Under this proposal, a person's Social Security benefits would be reduced proportionately to the reduction in social security tax paid $($so if the individual paid all of the tax into their PSSA, they would receive no government benefits$).$ Further, no credit would be given for the employer$$s share of the Social Security tax, instead the firm will continue to pay into the Social Security trust fund $($and thus help finance the publicly provided benefits$).$

The idea behind the proposal is that current workers could supplement their otherwise private retirement savings by using the employees$$ share of the Social Security tax. In effect, they would be trading half of their future Social Security benefit for the certainty that they would get something $($since anyone contributing to their PSSA will not get the benefit of their employer$$s tax contribution$).$

Analyze the proposal from the perspective of both the current problems afflicting the Social Security system, and the goals for which it was originally established. Clearly the first question is how many people would choose to direct their Social Security tax to the PSSA accounts. What are the likely characteristics of people that would choose to do so compared to those that are less likely to choose? One way to think about this is$,$ what is the probability that people that contribute to their PSSA will be short of retirement funds, or not? What is the probability that the people that choose to remain fully within the Social Security system will have sufficient retirement funds? Draw indifference curves for this

Assume half of current US workers choose PSSAs, and the other half does not. How will these choices impact the long run viability of Social Security? Essentially, the trade off is that current taxes will be cut by $25\%,$ by future liabilities will be cut by $50\%.$ Would that be sufficient to solve the set of problems? That is$,$ for about how many years will Congress have to supplement retirement contributions out of regular funds $($income taxes on firms and consumers$)$ before the system gets back into balance.

Finally, consider the equity consequences of this proposal. People are being asked to choose lower Social Security benefits in the future, but with a benefit now that they take control of their own retirement contributions. Consider the inter$-$generational fairness. To do so$,$ be explicit about which types of people benefit, and which types are burdened. Also speculate as to the vertical equity $($that is$,$ on average will higher or low income be more likely to disproportionately benefit, or pay costs.$)$