Duffy, Patricia A.

Gentle, Paul F.

Keefe, Alison M.

Novak, James L.

English

Research Papers in Economics

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2nd Quarter 2005 • 20(2) CHOICES 157
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Farmers and Social Security Reform
By James L. Novak, Paul Gentle, Patricia Duffy, and Alison Keefe
For several years, reports from the Trustees of the Social
Security system have warned us that at the current rate of
benefits and given the current age structure of our popula-
tion, the Social Security system will go broke sometime
between 2038 and 2042. To address Social Security Trust-
ees’ concerns, President Bush, in his postelection speech,
reported that one of the legacies of his administration
would be to reform the Social Security system. Farm oper-
ators tend to be older, on average, than people in other
populations, meaning that changes in Social Security
would more likely be of near-term concern to them.
Although there is still considerable debate on whether
reform is necessary or desirable, this article reports on
what a changed Social Security system might look like,
and how changes in the system might affect farmers’ need
for additional savings.
Social Security Today
Trustees of the Social Security system are appointed to
oversee the four separate funds that make up the current
Social Security Trust Fund Account. These funds are Social
Security (Old Age and Survivors Insurance, OASI), Dis-
ability Insurance (DI), Medicare’s Hospital Insurance (HI),
and Supplementary Medical Insurance (SMI). OASI is what
most people consider when they talk about Social Security
retirement income.
Social Security is a pay-as-you-go system (sometimes
called “pay-go”). It was designed so that current workers
pay for the benefits of current retirees out of taxes. Payroll
and self-employment taxes, premiums, and other income
are deposited to trust fund accounts. Retirement and dis-
ability benefits and administrative costs are paid from the
OASI and DI funds. Trust funds not used in the current
year are invested in government bonds. When the bonds
reach maturity or are needed, they are cashed to pay bene-
fits. According to the Social Security Administration, the
nominal interest rate earned on OASI and DI funds in
2004 was 4.3% (OASDI Trustees, 2005).
Proposals for Reform
Many proposals for fixing the Social Security system have
been drafted over the past years. These can be summarized
as follows:
• keep the current system (OASDI) intact and maintain
or raise existing benefits;
• keep the current system intact but reduce benefits;
• change to a regulated two-tiered retirement system,
which includes reducing current OASI benefits and
making up the difference with a Personal Savings
Account (PSA);
• develop a regulated PSA system, eliminate SS benefits
entirely, and provide a PSA invested in securities but
regulated by the government; or
• eliminate the Social Security system and allow the pri-
vate sector to handle retirement.
In 2001, the final report of the President’s Commis-
sion to Strengthen Social Security (2001) listed three vol-
untary proposals for reforming the Social Security system.
The President’s recent proposal for reform comes largely
from this Commission’s study. The idea behind all three
proposals is that Social Security benefits would be lowered
but made up for (“offset”) using a worker’s own Personal
Savings Account (PSA). PSA funds are to be invested and
are to earn an interest rate guaranteed to exceed inflation.
A retirement annuity would be paid from these funds
based on the individual’s life expectancy and contributions
to his or her own PSA. Benefits from individual savings are
projected by the 2001 Commission to be higher or to at
least equal to those received under the current Social Secu-
rity system.
Under the Commission’s first proposal, a Two Percent
Personal Account would result in expected benefits that
would exceed (by approximately 12%) those received
under the current (2001) Social Security system. This pro-
posal establishes a PSA with voluntary contributions of
2% of taxable wages. Invested funds would be com-158 CHOICES 2nd Quarter 2005 • 20(2)
pounded at a guaranteed rate of
3.5% above inflation.
The Commission’s second pro-
posal is called the Voluntary Progres-
sive Personal Account. This proposal
establishes voluntary personal
accounts without raising taxes or
requiring worker contributions above
what is currently required. Features
of this program include:
• voluntary contributions of 4% of
“redirected payroll taxes” from
the OASI trust fund to a PSA,
with PSA contribution limits of
$1,000 annually;
• contributions are to compound
earnings at an interest rate of 2%
above inflation;
• the $1,000 contribution limit
would be adjusted upward for
annual inflation; and
• OASI benefits would be indexed
to price inflation rather than
national wage growth.
Social Security benefits payments will
be offset by payments from the work-
ers’ individual personal accounts.
According to the Presidential Com-
mission, total benefits are expected to
at least equal the OASI benefits
received (as measured by 2001
income). Under this plan, additional
Social Security benefits would be
paid to low-pay, high-risk workers.
The minimum Social Security bene-
fit payable to 30-year minimum wage
earners would be at a rate of 120% of
the poverty level.
The third proposal deals with
Voluntary Add-On Accounts with
Matches from Payroll Taxes. This pro-
posal “carves out” a part of the pay-
roll tax and invests that amount in
PSAs. This proposal is designed to
preserve Social Security benefits (as
calculated in 2001) by allowing
workers to contribute voluntarily an
additional 1% of wages to a PSA.
Features of this proposal are:
• The 1% would be matched by
2.5% of a worker’s payroll taxes
up to a maximum of $1,000
annually;
• contributions would be com-
pounded at 2.5% above inflation,
with the maximum contribution
indexed by inflation; and
• refundable tax credits would be
given for the add-on contribu-
tion.
Under this plan, scheduled Social
Security benefits would be offset by
payments from workers’ personal
accounts. Minimum benefit of 100%
of poverty level would be guaranteed
for 30-year workers and 111% of the
poverty level would be guaranteed for
40-year workers. Any benefits
received from the Social Security sys-
tem would be modified by adjusting
the growth rate for future changes in
life expectancy, decreasing early
retirement benefits, increasing bene-
fits for delayed retirement, and
reducing the benefits for those with
higher incomes.
So What’s the Downside?
If all of this sounds good, what’s the
downside? Concern has been
expressed about the cost of imple-
menting the personal savings account
system. The cost of funding and reg-
ulating such a system, independent
of the contributions required by the
workers, has been estimated by at
least one source to be an additional
$25–50 per person per year, on top
of what the current system costs,
which is about $16 per person per
year (Hill, 2000). A Congressional
Budget Office report (Walliser &
Becker, 1999) estimates PSA admin-
istrative costs (based on Chilean and
Argentinean PSA experience) at
about $50 per contributing worker
per year—similar to the cost experi-
enced by US employer-sponsored
pension plans.
Legislated minimum guarantees
may be of particular value in the case
of limited-resource farmers or for
farmers with financial difficulties. A
potential PSA fund accumulation
problem for farmers in particular is
that they may have years of mini-
mum or no contributions because of
farm operating losses. Farm profits
contribute to the size of fund an indi-
vidual can accumulate. The longer
contributions are in a fund, the more
time they can compound and poten-
tially accumulate into a larger nest
egg on which to draw during the
retirement years.
Issues such as the definition of
emergencies (natural disasters, health
emergencies, etc.), which would
allow for early withdrawal, would
need to be worked out. Other ques-
tions include: If participants outlive
their PSAs, should the system con-
tinue paying benefits? If individuals
mismanage their portfolios, what
should be done?
Investment Policy
An excellent article on the marginal
effects of four proposals for restoring
long-run actuarial solvency to the
Social System looked at “including
the establishment of private
accounts, providing for Trust Fund
investment in private securities, using
General Fund revenues, and chang-
ing the benefit structure of Social
Security”  (Lyon & Stell, 2000, p.
473). Their finding is that a one-step
process of contributing 2% of payroll
taxes to a PSA (at the historic 3%
rate of return earned on long-term
bonds) would not fix the system.
Additional measures, such as a trans-
fer of funds from the General Fund
or earning higher rates of return
(6%), are required to balance the sys-2nd Quarter 2005 • 20(2) CHOICES 159
tem. Restoring solvency to the system
as it currently exists requires such
measures as including newly hired
state and local workers in the system,
raising the Normal Retirement Age,
and increasing the contributions and
benefits base to 90% of covered
wages.
With regard to private invest-
ments, a portfolio of 40% bonds and
60% stocks has been suggested for
Personal Savings Accounts (Liu,
Rettenmaier, & Wang, 2001; Lyon &
Stell, 2000). At least one opponent to
stock market investment, John Muel-
ler, expressed concern over its volatil-
ity (Mueller, 1997). Liu et al. (2001)
point out that the higher interest rate
earned in the market is largely a risk
premium. The relative riskiness of
alternative investments would cer-
tainly need careful weighing in any
move to a PSA-type system.
Farmer Savings Needed to 
Replace Social Security?
Table 1 shows the accumulated sav-
ings needed to provide $775, $979,
and $1,327 monthly annuities to
replace average age 62, 65, and 70
Social Security benefits, respectively,
for an individual born in 1936 and
who earned the national average
wage for the past 35 years. Although
it is unlikely that there is a farmer
who earned exactly the national aver-
age wage rate for the past 35 years,
these numbers are provided to show
the approximate retirement fund
necessary to replace Social Security
on average. For example, on average,
a $152,000 nest egg would be
required (at a 2.5% real rate of return
on investment) to replace a $775
Social Security monthly annuity with
a PSA annuity.
Seventy to eighty percent of pre-
retirement earnings has been esti-
mated to provide a retiree with his or
her pre-retirement standard of liv-
ing. Shipman states that to achieve a
70% income replacement at retire-
ment, “one’s portfolio would have to
earn an annual real rate of return of
5.7%” (p. 1). Table 1 shows that a
6% return on investments would
require retirement funds of $110,893
to pay $775 per month, $129,128 to
pay $979 per month, and $143,502
to pay $1,327 per month. Additional
family savings would be required to
replace Social Security annuities for
both a husband and wife. At Normal
Retirement Age, spousal annuities are
currently 50% of the primary earner’s
annuity. Family earnings are subject
to maximum limits. Higher earnings
on investment would reduce the size
of the fund required for retirement.
Care Needed In Redesigning the 
System
There is significant discussion about
the cost of implementing a dual
retirement system and whether any
cost savings would result from such
changes. Farmers who participate in
the Social Security system would be
subject to the same impact as the
general population of self-employed
if the benefits formula were changed.
In 1998, 150,000 limited-resource
farmers had household incomes of
$9,924 and current assets of $6,790.
This group of farmers is relatively
poor (19.1% of national average
income) and would expect a signifi-
cant impact from Social Security
changes. However, farmer retirees are
not generally totally dependent on
Social Security. According to a
USDA Economic Research Service
study of retired farmers, farm rental,
value of farm products consumed,
and CRP are listed as sources of
retirement income (Hoppe, 1996).
Total household income was listed as
88% of the national average income
(Hoppe et al., 2001). Two problems
identified by ERS with farm assets as
a source of retirement funding is the
relatively fixity of real estate assets
and that partnership arrangements
may complicate conversion of wealth
to a liquid form (Hoppe et al., 2001).
Alternatives to reforming the
Social System include raising payroll
taxes, cutting benefits, and eliminat-
ing tax cuts. Although reform is
mostly targeted to younger wage
earners, changes to the tax system
will affect nonretired as well as retired
farmers.
According to the Trustees and
others, if the system is to be “fixed,”
an early fix is preferred. According to
the 2003 Trustees report, “To the
extent that changes are delayed or
phased in gradually, greater adjust-
ments in scheduled benefits and reve-
nues would be required” (Social
Security and Medicare Boards of
Trustees, 2003, p. 1).
Clearly, changes to the system
should be designed with care and
with adequate safeguards for farm as
well as nonfarm participants. Poten-
tial savings problems of farmers and
Table 1. Savings required to provide a monthly annuity equal to average earned 
social security benefits ($).
Retirement age Monthly annuity ($)
Investment portfolio rate of return
2.5% 3.5% 4.5% 5.5% 6%
62 (early retirement) 775 152,000 138,166 126,197 115,678 110,893
65 (normal retirement) 979 170,500 156,725 144,753 134,052 129,128
70 (delayed retirement) 1,327 176,583 166,125 156,510 147,661 143,502
Note. Assumes a person will live to age 83.160 CHOICES 2nd Quarter 2005 • 20(2)
other self-employed individuals, like
accounting for low or negative
income years, health problems, and
accidents, should be factored into the
reform equation. Anything less
would result in more insecurity than
the current debate provides over the
future of Social Security.
For More Information
Hill, C. (2000). Why privatizing 
social security would hurt women 
(publication #D437RB). Wash-
ington, DC: Institute for 
Women’s Policy Research. Avail-
able on the World Wide Web: 
http://www.iwpr.org/pdf/
CATORIB.PDF.
Hoppe, R.A, Johnson, J., Perry, J.E., 
Korb, P., Sommer, J.E., Ryan, 
J.T., et al. (2001). Structural and 
financial characteristics of U.S. 
farms: 2001 family farm reports 
(Ag Information Bulletin 768). 
Washington, DC: United States 
Department of Agriculture Eco-
nomic Research Service. Available 
on the World Wide Web: http://
www.ers.usda.gov/publications/
aib768/.
Hoppe, R. (1996). Change in farm 
survey allows first in-depth look at 
farming retirees (AER 730). 
Washington, DC: United States 
Department of Agriculture Eco-
nomic Research Service.
Liu, L., Rettenmaier, A.J., & Wang, 
Z. (2001). Social security and 
market risk (policy report no. 
244). Washington, DC: National 
Center for Policy Analysis.
Lyon, A.B., & Stell, J.L. (2000). 
Analysis of current social security 
reform proposals. National Tax 
Journal, 53(3), 473-514.
Mueller, J. (1997). Three new papers 
on “privatizing” social security, one 
conclusion: bad idea. The 
National Press Club, October 14, 
1997. New York: Global Action 
on Aging. Available on the World 
Wide Web: http://www.globalag-
ing.org/pension/us/socialsec/
mueller.htm.
OASDI Trustees. (2005). 2005 
OASDI trustees report: Assump-
tions and methods underlying actu-
arial estimates: Economic 
assumptions and methods. Wash-
ington DC: United States Social 
Security Administration. Avail-
able on the World Wide Web: 
http://www.ssa.gov/OACT/TR/
TR05/tr05.pdf.
President’s Commission to 
Strengthen Social Security. 
(2001). Strengthening social secu-
rity and creating personal wealth 
for all Americans. Washington, 
DC: Author. Available on the 
World Wide Web: http://
www.csss.gov/reports/
Final_report.pdf.
Shipman, W.G. (2001). Is the stock 
market too risky for retirement? 
(brief analysis 382). Dallas: 
National Center for Policy Analy-
sis. Available on the World Wide 
Web: http://www.ncpa.org/pub/
ba/ba382/ba382.pdf.
Social Security and Medicare Boards 
of Trustees. (2003). Status of the 
social security and medicare pro-
grams. A summary of the 2003 
annual reports. Washington, DC: 
United States Social Security 
Administration. Available on the 
World Wide Web: http://
www.ssa.gov/history/pdf/
tr03summary.pdf.
Walliser, J., & Becker, S.M. (1999). 
Social security privatization: Expe-
riences abroad. Washington, DC: 
Congressional Budget Office. 
Available on the World Wide 
Web: http://www.cbo.gov/ftp-
docs/10xx/doc1065/ssa-
broad.pdf.
James Novak is an extension econo-
mist and professor in the Department
of Agricultural Economics and Rural
Sociology at Auburn University. Paul
Gentle is a visiting assistant professor
at the School of Economics of Renmin
University, China. Patricia A. Duffy
is with the Department of Agricul-
tural Economics and Rural Sociology
at Auburn University. Allison Keefe is
an assistant professor of economics in
the Department of Leadership and
Professional Development at Kenne-
saw State University.

Farmers and Social Security Reform

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