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Social Security Reform

Experts Offer Options for Revising System

November 24, 1996|From Reuters

The public soon will get the views of the experts about how the Social Security System should be reformed. And, being experts, they are not about to agree on the best approach.

Their differing opinions will be presented in a document from the Quadrennial Advisory Council on Social Security, expected to be released early in December. The report will be circulated to the White House, the rest of the executive branch and Congress.

The council was established 2 1/2 years ago under the Social Security Act.

Council Chairman Edward Gramlich said the experts will offer three basic options.

Before examining them, it's important to note that the Social Security System is solvent and faces no immediate crisis. (Because its assets are in U.S. Treasury bonds, however, the government will eventually need to pay the system back--a potential budget problem if the nation is still running large deficits then.)

Gramlich--who is also dean of the School of Public Policy at the University of Michigan--reassures us that if financial and demographic forecasts are accurate, "full benefits could be paid on time until 2030."

This year the system will pay out $350 billion to 44 million beneficiaries. It will also take in $386 billion in taxes and earn $38 billion more on interest from its trust fund investments.

1996 income: $425 billion. 1996 outgo: $354 billion. Bottom line: $71 billion to the good.

Come Dec. 31, the trust fund will hold $566 billion in reserves, said Tom Morgenau, a spokesman for the Social Security Administration in Baltimore.

About 142 million workers pay 6.2% of their earnings to keep this New Deal-era tax-and-transfer plan solvent. Three workers pay in for every beneficiary, so there's no need to worry--yet.

"Some of us, without using the word 'crisis,' " Gramlich said, "would still like to convey the impression that time is very important. Changes can be made now in a gradual way so as not to disrupt anybody's planning and to share their cost over a wide spectrum of the population."

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The system will generate positive cash flow only through 2012, when payouts will grow to equal taxes collected as ever more hands dip into the till. Even then, Morgenau said, trust fund interest income "will keep the system solvent through 2029, when the crunch point would hit."

Economist Thomas Cooley of the William Simon Graduate School of Business at the University of Rochester in New York said workers are retiring earlier and living longer.

By 2030, Margenau said, there will be just two taxpayers chipping in (164 million workers) for each beneficiary (81 million) dipping out.

With these changes in mind, Chairman Gramlich summarized the three options his commission will present to Congress:

First, a "maintain benefits," or MB, approach. This would keep benefits as scheduled under present law but would pay for them with (a) an immediate "slight increase" in income taxation on them; (b) a delayed payroll tax increase on employers and employees totaling 1.6% to take effect in 2045; and (c) the purchase of common stocks by the trust fund.

Second, the "personal security accounts approach, under which the system "gradually converts to a flat benefit that is roughly at the level of the poverty line," Gramlich said.

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Instead of employees paying in 6.2% of their earnings, with matching money put up by employers, employees would set up a private IRA into which they would invest 5% of their pay, leaving their other 1.2% and their employer contribution to flow into the Social Security fund.

"You would have a flat benefit and large-scale defined contribution accounts and transition expenses to get from the current system to the new PSA, but over the long run you convert to a very different Social Security system," Gramlich said.

Third, an "individual accounts" plan approach. "Instead of replacing Social Security with a flat benefit," Gramlich said, IA "just gradually scales back benefits to bring the system into actuarial soundness."

Additionally, IA would set up "small-scale defined contribution accounts" under which an additional 1.6% would be taken from the employee to be invested at his or her discretion.

This approach will challenge workersto make investment decisions on their own, rather than leaving them to government, and to invest more.

As the University of Rochester's Cooley contended, "The best evidence we have to date suggests the existing Social Security system actually lowers private savings."

"The system is a bit out of balance," Gramlich said. "The key issue (about your approach)is where you are in the social insurance or individal responsibility dimension.

"The MB plan is a social insurance approach and the PSA approach relies greatly on individual responsibility both to save and to make good investment choices. The IA plan is in the middle and tries to preserve a lot of the social protections (of the system) but will rely more on individual savings and investment responsibility."

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