EPi briEfing PaPEr #204
novEmbEr 20, 2007
post-tax dollars. Te contributions o husbands and wivesare combined and divided equally between their individualaccounts.
Reundable tax credit
. Employee contributions are o-set through a $600 reundable tax credit, which takes theplace o tax breaks or 401(k)s and similar individualaccounts and is indexed to wage ination. Eligibility orthe tax credit is extended to part-time workers, caregiverso children under age six, and those collecting unemploy-ment benets. I an individual’s annual contributionsamount to less than $600, some or all o the tax credit isdeposited directly into the account in order to ensure aminimum annual deposit o $600 or all participants.
. Te accounts are administered by the Social Security Administration and unds are managedby the Trit Savings Plan or similar body. Tough undsare pooled, workers are able to track the dollar valueo their accumulations, as with 401(k)s and otherindividual accounts.
Te pooled unds are conservatively invested in nancial markets. However, participants earn axed 3% rate o return adjusted or ination, guaranteedby the ederal government. I the trustees determine thatactual investment returns have been consistently higherthan 3% over a number o years, the surplus will bedistributed to participants, though a balancing und willbe maintained to ride out periods o low returns.
Participants begin collecting retirementbenets at the same time as Social Security, and thereoreno earlier than the Social Security Early Retirement Age.Funds cannot be accessed beore retirement or any reason other than death or disability.
Account balances are converted toination-indexed annuities upon retirement to ensurethat workers do not outlive their savings. However,individuals can opt to take a partial lump sum equal to10% o their account balance or $10,000 (whichever ishigher), or to opt or survivor benets in exchange ora lower monthly check. A ull-time worker who works40 years and retires at age 65 can expect a benet equalto roughly 25% o pre-retirement income, adjusted orination, assuming a 3% real rate o return (see
).Since Social Security provides the average such worker with an ination-adjusted benet equal to roughly 45%o pre-retirement income, the total replacement rate orthis prototypical worker will be approximately 70%.
Participants who die beore retiring canbequeath hal their account balances to heirs; those whodie ater retiring can bequeath hal their inal accountbalance minus benets received.
ovvw h y
Social Security, pensions and personal savings are otenreerred to as the three pillars o the U.S. retirement system.
G r a (Gra) (2006$)
* ae wke wk 40 e d ee 65. i-djed ed 5% e, 3% e e e, 3.5% -, 3.5% e, d expeed e he rP2000 m te rep.
Jh W. Ehhd d sze t, e m,
Analysis of Guaranteed Retirement Accounts
Hgh avg lw
Earnings at Retirement
GRA accumulation at retirement
Annuity rom the above GRA*
GRA annuity as a percent o pre-retirement earnings
Social Security benefts as a percent o pre-retirement earnings
Total replacement ratio with GRA and Social Security