January 7, 1997
Excerpts From Report Issued by Social Security Advisory Council
Related ArticlePanel Advises U.S. to Invest Some Social Security Funds in Stock
xcerpts from the overview section of the report by the Advisory Council on Social Security, released Monday.
In the past, efforts to deal with Social Security's financial difficulties have generally featured cutting benefits and raising tax rates on a pay-as-you-go basis. All council members agree that the pay-as-you-go approach should be changed. But despite its best efforts, the council was not able to agree on one single plan for dealing with Social Security's financial difficulties. Rather, council members expressed interest in three different approaches to restoring financial solvency and improving money's worth return. One group of members favors an approach, labeled the Maintenance of Benefits plan, that involves an increase in income taxes on Social Security benefits, a redirection to the O.A.S.D.I. 1/8Old-Age, Survivors and Disability Program) funds beginning in 2010 of the part of the revenue from taxes on O.A.S.D.I. benefits now going to the Hospital Insurance Trust Fund, coverage of newly hired state and local government workers not currently covered by Social Security, a payroll tax increase in 2045, and serious consideration of a plan allowing the Government to begin investing a portion of trust fund assets directly in common stocks indexed to the broad market. Historically, returns on equities have exceeded those on Government bonds (where all Social Security funds are now invested). If this equity premium persists, it would be possible to maintain Social Security benefits for all income groups of workers, greatly improving the money's worth for younger workers, without incurring the risks that could accompany individual investment.
Another group of members supports an approach, labeled the Individual Accounts plan, that creates individual accounts alongside the Social Security system. This plan involves an increase in the income taxation of benefits (though not the redirection of H.I. funds), state and local coverage, an acceleration of the already-scheduled increase in the age of eligibility for full benefits up to year 2011 and then an automatic increase in that age tied to longevity, a reduction in the growth of future Social Security benefits is structured to affect middle- and high-wage workers the most, and an increase in employees' mandatory contribution to Social Security of 1.6 percent of covered payroll, which would be allocated to individual defined contribution accounts. These individual accounts would be held by the Government but with constrained investment choices available to individuals. If individuals were to devote the same share of their I.A. funds to equities as they now do for their 401(k) private pension funds, the combination of the annuity income attributable to their individual accounts and their scaled-back Social Security benefits would on average yield essentially the same benefits as promised under the current system for all income groups.
A third group of members favors an approach, labeled the Personal Security Accounts plan, that creates even larger, fully funded individual accounts which would replace a portion of Social Security. Under this plan, workers would direct 5 percentage points of the current payroll tax into a P.S.A., which would be managed privately and could be invested in a range of financial instruments. The balance of the payroll tax would go to fund a modified retirement program and modified disability and survivor benefits. When fully phased in, the modified retirement program would offer all full-career workers a flat dollar benefit (the equivalent of $410 monthly in 1996, the amount being automatically increased to reflect increases in national average wages prior to retirement) plus the proceeds of their P.S.A.'s. This plan also would involve a change in benefit taxation, state and local coverage, an acceleration of the already-scheduled increase from 65 to 67 in the age of eligibility for early retirement benefits, with the age increased in future years to reflect increases in longevity, a gradual increase from 62 to 65 in the age of eligibility for early retirement benefits (although workers could begin withdrawing the proceeds of their P.S.A.'s at 62), a reduction in future benefits for disabled workers, a reduction in benefits for women who never work outside the home, and an increase in benefits for many elderly widows.
If individuals allocated the assets in their P.S.A.'s in the same proportion as they do for their 401(k) private pension plans, the combination of the flat benefit payment and the income from their P.S.A.'s would, on average, exceed the benefits promised under the current system for all income groups. There would be a cost associated with the transition to this new system equivalent to 1.52 percent of payroll for 72 years. This transition cost would be met through a combination of increased tax revenues and additional borrowing from the public.
All of these approaches have in common that they seek to achieve more advance funding of Social Security's long-term obligations. They would also result in a higher level of national saving for retirement, although the impact on the nation's overall retirement saving would differ under the plans. The two individual account plans would raise overall retirement and national savings much more than the M.B. plan in the early years of the forecast horizon through the mandatory contributions of the I.A. plan or the transition tax of the P.S.A. plan. These two plans are then likely to generate higher national income in the 21st century. While each of the proposals would increase investment in the stock market, one approach invests new Social Security funds directly into equities to realize a higher rate of return; another approach adds additional, mandatory saving on top of a scaled-back version of the existing benefit system, and the third approach moves from the current pay-as-you-go, largely unfunded system to one in which future benefits are more than 50 percent funded through P.S.A.'s. Each of these plans has different potential to create real wealth for retirement and provides for different ownership of that wealth. And each involves a very different vision of the future evolution of the U.S. retirement system.
Copyright 1997 The New York Times Company
