8. Some proposals for ensuring Social
Security’s future financial health
In 2001 the President appointed a Commission to come up with a
solution that would include private investment accounts. Although
it was a "bi-partisan" group, and composed of members
of outstanding achievement and experience, all of its members were
on record in advance as being in favor of this approach. The Commission's
mandate was disturbing to those who believe the original concept
of social insurance to be viable and sustainable with relatively
minor adjustments, if initiated soon. The stated goal was
"To Strengthen Social Security and Create Personal Wealth
for All Americans".
Like every group of Trustees for a number of years, the Commission
concluded that adjustments were necessary and that they should be
made soon. Without a change in basic structure, they conluded that
the alternatives fell into four categories: 1.) Increase payroll
taxes. 2.) Decrease benefits. 3.) Reduce other government spending.
4.) Borrow heavily.
Within those categories, several suggestions have been made from
time to time:
Reducing COLAs. There is a difference
of opinion about whether the annual cost-of-living adjustments understate
or overstate inflation. COLAs are not intended to be benefit increases
but to maintain the current purchasing power of benefits. This step
alone would not be enough but it might help.
Investing reserves in the stock market. Proponents of substantial
investment of Social Security reserves in the market have been quieter
since the downturn in the stock market in recent years, making the
risk of a major change obvious. Those still proposing a major overhaul
of the program argue that the stock market has historically provided
a greater return than Treasury bonds and point to the apparent recovery
in recent months.
Opponents argued that we should continue a level and less risky
approach. They point out that Social Security is not an investment
or retirement program, and that the greater returns of the stock
market carry corresponding risks that are not appropriate for a
national insurance program. Both critics and proponents are concerned
about the government having control over a large portion of the
stock market and its resulting power over the private sector. With
the reality check supplied by a down market, future wholesale equity
investment of reserves seems unlikely.
Means testing. Proponents point out that many people with
high incomes collect generous benefits they do not really need;
they advocate some means-testing in order to receive benefits. Critics
of this approach argue that benefits are an earned entitlement and
that denying them to those who have contributed the most would undermine
support for the program. Taxation of some benefits has something
of the same effect, and increasing that effect might transform Social
Security into something of a welfare program.
Privatization of part of each worker's accumulated account.
This is the solution the Commission was appointed to research. They
were unable to agree on any single approach and eventually came
up with three proposals, none of which has been greeted with enthusiasm
by the public or lawmakers. Proponents claim that partial privatization
would increase individual responsibility for retirement planning
and improve the national savings rate, and individuals would achieve
greater returns. Proponents do not make clear that redirecting contributions
would necessitate reducing guaranteed benefits, regardless of whether
privately-invested funds did well or not. If we are not taking in
enough now to cover all guaranteed future benefits, reducing contributions
further can only make the situation worse. The hope apparently is
that private investments will make up the shortfall.
Opponents argue that privatization would undermine the basic concept
of Social Security, which is to provide a safety net as with other
insurance models. This approach also overlooks the disability and
survivor aspects of Social Security, and ignores the possibility
that not everyone will invest wisely or achieve substantial returns.
There would also be large transition costs and administrative expenses
which critics claim have not been recognized or addressed by proponents.
Critics also point out that many of those vigorously advocating
private investment of some part of worker's contributions are associated
with financial organzations that would profit from an influx of
funds to be invested.
Retaining the basic system with minor changes.
Proponents (including former Social Security Trustees) contend that
the present system appropriately balances equity and social adequacy
and that solvency could be maintained by minor changes if they are
made soon enough. They favored some combination of tax increases,
increases in the taxable earnings base, benefit reductions, increasing
the age at which benefits are paid, and other adjustments.
It is difficult to find information that is not slanted in one direction
or another, but it is critical for all of us to be fully informed
about all aspects of the Social Security issue. This is a complex
problem for which there is no quick or simple fix.
There are a number of web sites with information about the program;
many of them are heavily biased in one way or another, and they
do not always make that bias clear. There is considerable pressure
for limited privatization from financial institutions and organzations
supported disproportionately by their representatives. That does
not mean their views are wrong, but it helpful to know the backgrounds
of those disseminating information. The Social Security web site
provides an interesting history of the program that can help to
maintain perspective about the basic concept: Social Security was
not intended as a pension program or an investment program. It is
a social insurance - designed to provide a basic level of support;
it is not a wealth-building tool.
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