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Background: Social Security Reform

December 11, 2001 at 12:00 AM EST
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MARGARET WARNER: When President Bush appointed this Commission last May, he instructed the group to come up with a Social Security reform plan that gave workers the option of investing some of their payroll taxes in personal investment accounts. Today, the panel of Republicans and Democrats did just that, but it offered three different ways of doing so.

We begin our look at the panel’s report with the help of Susan Dentzer of our health unit, a partnership with the Henry J. Kaiser Family Foundation. Now, Susan, the president also laid out some pretty firm parameters for the commission’s work. Tell us about those.

SUSAN DENTZER: Very much so. That limited the Commission’s maneuvering room. First of all, the president said you cannot raise payroll taxes. So you cannot put more revenues into the system by the normal mechanism that we currently fund the system, which is payroll taxes. The president also said the system must be voluntary. You can’t force workers into investment accounts if they don’t want to be there. That meant the Commission had to go through a lot of gyrations to figure out, gee, well how many people would elect this proposal or that proposal? That led to a very wide range of estimates about what these proposals would actually be and what they would cost. In addition the president said you can’t do anything to hurt or affect in any way current retirees. You have to leave their benefits intact. And that also posed further limits on the ground that the Commission could cover.

MARGARET WARNER: Now the Commission, as we just said, did come up with three options. They all have this voluntary investment in a personal account, but there’s some big differences. Help us go through them. The first one maybe is the simplest.

SUSAN DENTZER: Yes.

MARGARET WARNER: Explain that.

SUSAN DENTZER: Just by way of introduction, the general principle in all of these is more or less the same, which is that every worker can make the decision to take a certain percentage of the payroll tax that they currently contribute into the system, it’s now 6.2 percentage points up to about $80,000 of earnings. You could take a certain portion of that, put it into a private investment account but in exchange for that you would give up your claim to a certain amount of the benefits that you currently get under the system. It would be adjusted according to specific formulas that vary from plan to plan. In effect it would be this trade-off. The theory is that overall you would get higher rates of return from your personal investment account and therefore in theory you would come out ahead.

Now to the specifics of these various proposals: All of them have different ways of dealing, first of all, with how much money you put into the system, what the offset is, what you give up in various benefits, and importantly what else is done to move the system toward long- term solvency? So in option 1, workers would be able to contribute 2 percentage points of payroll into that account. Very little, if anything, would be done in addition to move the system into solvency. So some have said, taking a cue from Goldilocks and the Three Bears that this is the “too soft” plan. This is the plan that basically where others have called a free lunch plan — this is a plan that doesn’t buy a lot in terms of additional solvency.

MARGARET WARNER: Okay. Plan 2.

MARGARET WARNER: Okay. Plan 2.

SUSAN DENTZER: Plan 2, different approach. In fact some have called this — again picking up on Goldilocks — the “too hard” plan. In effect what this would do is let workers put even more into personal accounts, 4 percentage points of payroll, up to a limit of $1,000 total. That would be adjusted as the years go by. In effect they would have also an offset. They’d give up some benefits under the current system.

MARGARET WARNER: Isn’t this — excuse me for interrupting – but isn’t this the plan that would come up with a new formula for calculating benefits as well?

SUSAN DENTZER: Well, that’s why it’s called the “too hard” plan, because in effect what the plan would do in order to make the system solvent over the long term is it would radically scale back the projected growth in benefits over the time. It would adjust them according to a different formula. We’ve been using one formula since 1977. We’d switch to another one. And in effect as some have pointed out that would mean over time that all workers, even those who did not invest in private accounts, would see cuts in their projected benefits, cuts over and above what they expect to get now of about 25 to 50 percent — again as some say the “too” hard plan.

MARGARET WARNER: All right. And then Option 3 finally –

SUSAN DENTZER: Option 3 finally is an approach that essentially some have described as the “just right” plan because they like that the best. Some have described it as the blue plate special because the government in effect incentivizes people to get into private plans. What in effect happens in this plan is that workers add on an additional 1 percent of payroll over and above what they contribute now to Social Security. The government gives them an incentive to do that, a refundable tax credit. In addition the government kicks in an additional portion of payroll tax and finally there are some other changes made in the way benefits grow over time, not as harsh as under Option 2 but nonetheless real. And that pushes the system into solvency, but the important point over time is that also general tax revenues have to be added to that program. And those are very substantial amounts as the years go by.

MARGARET WARNER: All right, Susan, thank you.