Ten Trillion and Counting

Fixing Social Security

David Walker U.S. Comptroller General, 1998-08; President and CEO, Peter J. Peterson Foundation

We could reform Social Security next year and exceed the expectation of every generation of Americans if you have a process with integrity and an approach that recognizes the reality of today's workforce and the recent changes in the market.

And what is that?

You take people who are retired or close to retirement, and you make little to no changes to their Social Security benefits. Why? Number one, they don't have time to make changes. Number two, it's not politically feasible anyway.

You take people who are younger, ... and you do several things. First, increase the normal retirement age and the early retirement age in phases over time, and index it to life expectancy. Secondly, strengthen the benefit for people at or near the poverty level to make sure that they get an adequate replacement income.

Thirdly, reduce the replacement rate for middle- and upper-income Americans so they get something, but not as much as they get now. You also raise the taxable wage cap such that people pay payroll taxes on not just about $102,000 but $125,000 or so. Don't raise the rate, raise the cap, because the tax rate is the most regressive tax we have.

In addition, ... you add on top -- as a supplement, an add-on, not a carve-out -- an automatic savings account, for example, 2 percent of payroll, that goes into a real trust fund with real investments, with real responsibilities and liabilities, that provides a preretirement death benefit, a supplemental postretirement benefit.

That program would exceed the expectation of every generation of Americans. It would make the program solvent, sustainable, secure and more savings-oriented. I call that a win-win. All we need is leadership.

In 1983, there was much discussion about the Social Security program being [insolvent]. ... The taxpayers were told, "You're going to take a hit in your payroll taxes, but your Social Security benefits are safe." You're saying it's not true.

Here's the deal: What they did in 1983 is they solved the problem for 75 years; they did not solve it indefinitely. We don't want to make that mistake again. What they didn't consider is that at the end of the 75-year period of time, because of demographics and a variety of other factors, we were facing large and growing deficits.

So therefore, in the new Social Security reform plan, we need to not just look at the 75-year period. We need to look at the end of the 75-year period and make sure that the changes that have been made are sustainable over time. That can be done. It wasn't done in 1983. It needs to be done this time.

James Galbraith University of Texas at Austin

The drive to privatize Social Security has beneficiaries. If you take funds from the payroll tax and you convert them into private accounts, you hand them off to brokers and fund managers, people who earn very large fees. When I was first introduced to this 15 years ago ... it was presented to me in precisely those terms -- that this is a program that people are interested in because they see a payroll tax as a river of money which can be tapped for the benefit of private interests of that kind.

Of course that's not in the interests of elderly people. It creates much more instability in their retirement income. … And these are not wealthy people; [these are] people who have worked all their lives. It makes [their retirement benefits] depend not only on their past earnings, but also on the state of the stock market when they retire. So someone who retires in July, when the market is up, and gets an annuity is OK, and someone who retires in December, having exactly the same working history, ends up maybe 20 or 30 percent worse off. Not a good piece of social architecture.

Paul Krugman Princeton University; The New York Times

Many people say there are relatively simple ways to make Social Security solvent forever. Can you speak to that?

The first thing about Social Security is it actually may be solvent forever. We have a pretty good idea of the demography, which is unfavorable, but, in fact, Social Security's balances are affected by the rate of wage growth. And if we have a faster-growing, higher-productivity economy, then the Social Security Administration's projections assume -- and those projections are very, very conservative -- then it's quite possible that Social Security will run without need for alteration for 75 years or beyond. The low-cost case in Social Security always shows the trust fund going on forever, so it's not even clear that we have a crisis.

And you might say, shouldn't we be taking some precautionary steps? Very low-priority thing. Even if the trust fund does get exhausted, even if we do nothing for 40 years and then wake up and discover there's no trust fund, we still have revenues coming in that are enough to pay most of the scheduled benefits, which would, in fact, be higher than the benefits that recipients receive now. So it takes a lot of work to make this look like a crisis.

If you really want to do this, it possibly makes sense to say we ought to try to pre-fund more. We ought to be collecting more revenues or paying lower benefits now, so that we don't have the necessity for major cuts in benefits several decades out. The funny thing is, most of the proposals for doing something about Social Security are let's reduce the formula for distant-future benefits. ... It's actually not doing anything to solve whatever your intertemporal allocation problem is, which leads to the suspicion that most of these proposals about Social Security are really about trying to make sure that future benefits are lower, regardless of whether they actually have to be lower or not.

Paul O'Neill Secretary of the Treasury, 2001-02

Do you have a solution for Social Security?

... I think we ought to be a saving society. We ought to organize ourselves so that we actually ... save a substantial amount of money. Maybe someplace between 5 and 10 percent of GDP ought to be saved.

That means you'd like to get rid of Social Security.

No, ... I want to create real financial security for people when their working life is over. And in my scheme, I would begin funding it the day that children are born so that your strength of financial security doesn't depend on your financial success in life; so that when you get to be 65, if you were a person who spent your working life, let's say, cleaning hospital rooms, which is a really important thing, but you only got paid $25,000 or $30,000 a year in today's terms, I'd like for you to be financially independent when you get to be 65. And if we began funding your retirement the day you were born, you'd have financial security. Some people would have a whole lot more, but everybody would have a floor that's gloriously better than what we now provide in Social Security and Medicare benefits. I think we're a rich society, and we ought to do that.

Social Security as it presently exists, in your view, would go away.

Yes, and be replaced by something a hell of a lot better and more in tune with the idea of a Great Society. ...

Maya MacGuineas President, Committee for a Responsible Federal Budget

A couple of years ago, I worked with two colleagues to do a bipartisan Social Security plan, or a Nonpartisan Social Security Plan. I worked with somebody who had come from the Clinton administration and somebody who had come from the Bush administration, and I was an independent. We wanted to see what it would be like to really compromise.

We did a little bit of everything, and I think that's actually the right way to do this. So I think we need to reduce benefits, but not across the board. I think we have to protect people who depend on the program, and cut benefits pretty dramatically for people at the high end. At the same time, I think we can raise the payroll tax cap. We don't have the payroll tax on money above $102,000 right now. I think you could have a surtax on money above that, help get new revenue into the system. ...

A lot of people have argued for private accounts because the magic of stock returns would help the system. And private accounts may not be a topic of discussion right now because the stock market has been so up and down in the past year, but I've always thought that using private accounts carefully, as a way to save the extra money for Social Security, plays a productive role in Social Security. So I support private accounts, but not as a way to replace the tough choices. ...

But my belief is that we need to do three main things to fix Social Security: scale back on benefits for people who are at the higher end of the income scale; raise the payroll tax above the current cap, have a sort of a lower tax above that; and probably most importantly, raise the retirement age. We are living longer and longer, and we cannot afford to be supported in retirement for many, many decades.

Paul Ryan Ranking Member, House Budget Committee (R-Wisc.)

At my age -- I'm 38 years old -- I'm looking at somewhere between a zero and a 1 percent rate return on my Social Security taxes. My three children who are 3, 5 and 6, they're going to get about a negative 1 percent rate return on their payroll taxes. And when 80 percent of Americans pay more in payroll taxes than they pay in other taxes, that's not a very good deal.

We ought to have a Social Security system where you get a good return on your dollar, where you actually get better retirement benefits, where your money grows faster, where you and each and every American has a piece of the American pie, a piece of the free-enterprise system.

If you take a look at my bill, you can't find a way of decentralizing the concentration of wealth any more than what I am proposing for Social Security: a better safety net; better benefits for workers; everybody is a participant and an owner of our free-enterprise system; and a solvent system, where we don't give wealthy people as much of an increase in a benefit as we do for everybody else; where, as longevity increases, we reflect the retirement age to do that.

I believe a system like that, which has been proven by the actuaries to actually bring solvency to the system, is a good compromise between Republicans and Democrats to get us to fix this problem.

[It sounds like] you would like to privatize [Social Security].

No, I don't want to privatize Social Security, because privatizing is saying: "Here is your FICA taxes, go to your stockbroker, good luck. I hope you do well." That's not what I am proposing. I am proposing everybody who is 55 and over, they have the system we have right now with no changes. People who are under 55 get a voluntary option of taking a third of their payroll taxes and putting it in an account that is managed by Social Security -- not by private forces, managed by Social Security just like the Thrift Savings Plan that I and all the other federal workers have to grow their money faster -- to make sure that they get a better rate return on the nest egg that they own and control and can pass on to their heirs. …

What happens if Social Security, in that process, loses the money?

Well, [over] a 30- or 40-year span of a person's working life, it is surely going to do better than the negative 1 percent that my three kids are looking forward to. The problem is Social Security can't afford to pay me my benefit anyway right now, as it stands, let alone my children. So why don't we harness the power of compound interest and grow that money faster? Surely Social Security can beat about 1 percent rate of return. If they just put it in bonds they'll do better.

Greg Ip The Economist

President Bush, after he won re-election in 2004, stepped forward and said, "I have been given political capital, and I intend to spend it." And he spent it on pressing for Social Security reform. Was that a courageous act?

It was not courageous. It sounded courageous at the time, but the way he went about it I think did not show a lot of courage. I think that Bush approached Social Security entirely the wrong way, because there is a central problem in Social Security, which is that today's workers pay the benefits of today's retirees -- which is fine, as long as there aren't too many retirees and there's lots of workers. But we know that, because our population is aging, one day there will not be as many workers per retiree, and at that point, we will be paying a lot more than we are taking in [from] payroll taxes. And that is iron-clad arithmetic. To get that thing into balance we either have to reduce benefits or raise taxes or both.

When Bush came to challenge the Social Security question, the fact that we had to get that system back to solvency was not what animated him. I saw no evidence that that was something that he was impassioned about. What he was impassioned about was private accounts. He saw people investing their payroll taxes basically in government bonds. He said, wouldn't it be wiser for them to invest that in the stock market, own a little piece of America? That's the "ownership society." And there are, frankly, some good economic arguments for that, ... but it would have done nothing to solve the long-term problem of solvency in Social Security.

Allan Hubbard Assistant to the President for Economic Policy, 2005-07

What the Democrats like to attack us on was that we were privatizing it, and we were not privatizing it. There's 12.4 percent of your first $100,000 goes to payroll taxes. We would be giving people the option of taking about 2 percent, or 1/6 of that, to put into a private account. Again, it was an option -- not a requirement, an option.

But secondly, that in itself won't balance Social Security. The only way to balance Social Security is you have to deal with future payout, and we have promised the American people more than we can afford to give them. So we've got to reduce how much we pay them in the future. There are several ways you could do it. You could raise the retirement age, ... or you can reduce the benefits.

But what we had talked about and the president talked about publicly is an idea that was developed by a fellow named [Robert C.] Pozen, who's a Democrat, by the way, who's on the Social Security commission and who made recommendations to the president on Social Security. His idea was that right now Social Security benefits go up at the rate as wages go up, the same percentage. If, by the way, Social Security benefits went up at inflation, as opposed to at the rate of wages, the problem would go away overnight.

What Pozen suggested was higher-income people, people that earn $90,000 to $100,000, let's let their benefits go up at the rate of inflation. For lower-income people, let's let their benefits go up just like they do now, at the rate of wage increases, and then let's smooth it between the two. So if you were, say, making $50,000 or $60,000, your benefit would go up somewhere between wage growth and inflation. If we did that, that would take care of 70 percent of the problem.

And then there were some other tweaks we could do that, again, were taking away benefits -- maybe raise retirement age slightly; maybe reduce the incentive to retire early. Right now you can start collecting your benefits at 62 years old, and you don't get penalized very much for doing that. ... Well, we shouldn't encourage people to start taking benefits at 62. So if you made a few of those little tweaks, plus take to the Pozen plan, we would solve the problem. But the problem is now the longer we wait, you're going to have to have a more draconian approach to reducing benefits to deal with the problem. ...

Judd Gregg Ranking Member, Senate Budget Committee (R-N.H.)

Social Security has very few moving parts. We know what they are. ... You take those four or five parts, you adjust them, and if you could get the political courage to do it, you could correct Social Security in about 15 minutes.

Well, President Bush had the political courage to do it. President Bush came out of the blocks in 2004 --

That's why the [Democratic N.D. Sen. Kent] Conrad/Gregg proposal doesn't come from policy first; it comes from procedure first. Because when you put policy on the table -- if I say to you I want to do X, Y, Z with Social Security -- there are going to be 10 groups in this town that make their living and drive their SUVs and their limousines around this town by sending out letters to every Social Security recipient saying: "Oh, Sen. Gregg has proposed something that's going to take away our Social Security benefits. You better send me $25 or it's going to be lost." There is an attack mechanism in this town [whose] benefits are built around having the ability to attack people who claim that they are trying to address the Social Security issue.

So the only way that you can address this problem -- in my opinion and Sen. Conrad's opinion, and there are a number of other people who agree with us on this -- is to set up a procedure where you basically put the players in a room. You have them come up with a proposal. They hold hands; it's bipartisan; it's fair; nobody gets gamed. And then you take it to the Congress, and it has to be voted up or down without amendment.

Because if you put the policy out first, as President Bush showed and as other people have showed, people just peck it to death, because they don't want to see any change; because they see the political advantage of having Social Security always out there as a political issue; or because they make money out of pecking it to death, by sending out these stupid letters claiming we're going to take way your benefits. And we're obviously not. We're trying to protect the benefits in the long run.

posted march 24, 2009

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