The
bipartisan Social Security plan spearheaded by Senators Judd Gregg
(R-NH), John Breaux (D-LA), Charles Grassley (R-IA), Robert Kerrey
(D-NE), Fred Thompson (R-TN), Charles Robb (D-VA), and Craig Thomas
(R-WY) is
another important step toward real reform. Like a similar plan by
Representatives Jim Kolbe (R-AZ) and Charles Stenholm (D-TX) in the
House,
the Senate plan contains three crucial elements that are necessary
for true reform:
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It is bipartisan;
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It would take steps to reduce Social
Security's unfunded liability; and
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It would allow workers to divert a portion
of their existing Social Security taxes into a personal retirement
account that they would own.
This
last feature is extremely important because it would enable all
Americans to accumulate a cash nest egg for their retirement and
would improve the rate of return on their Social Security taxes.
Nevertheless, the plan should be strengthened and improved in
several ways during its consideration by Congress.
The
bipartisan Senate proposal would divert an amount equal to 2
percent of wages from a worker's Social Security retirement taxes
into a new individual retirement savings account. All workers,
regardless of their age at the time the plan went into effect,
would be required to participate. The accounts would be similar to
those offered to federal employees under the Thrift Savings Plan,
with workers offered a limited number of investment options. Although
the accounts would be owned by the individual worker and
administered by the federal government, private funds managers
would make the actual investment decisions.
In
addition to the amount diverted from existing Social Security
taxes, workers would be allowed to save up to an additional $2,000
a year in their accounts, and contributions from lower-income
workers would be matched with funds from the government. If the
worker died before retirement, the full amount of the account would
go into his or her estate. After retirement, any amount in the
account that had not been converted into an annuity or used for
other purposes could go to the worker's heirs. This is preferable
to the plan offered by House Ways and Means Committee Chairman Bill
Archer (R-TX) and Representative Clay Shaw (R-FL), under which
the government would seize the whole account upon retirement and
use it to pay Social Security benefits to the worker and, in
certain circumstances, a spouse.
The
Senate plan would gradually diversify the composition of each
American's Social Security benefit to a combination of the
traditional monthly payment and earnings from the individual
account. As the assets in the individual account grew, the
proportion coming from the traditional version would be reduced.
This would be implemented by gradually changing the formula used to
compute the traditional benefit. However, in all cases, workers
would receive both the benefits generated from their individual
account and the monthly payments from Social Security that are
financed by their payroll taxes.
In
addition, the Senate plan contains a number of features that would
either increase the benefits for those who need them most or
improve the system's cash flow. For instance, it would slightly
accelerate the increase in the full retirement age to 67, which is
scheduled under current law, and then index the full retirement age
to changes in life expectancy. It also would calculate retirement
benefits by using the income from up to 40 working years instead of
just the highest 35.
The
proposal would adjust the annual cost-of-living allowance (COLA),
setting it at 0.5 percent below the annual increase in the Consumer
Price Index (CPI). This change in the CPI would apply only to
workers who were under the age of 62 at the time the bill went into
effect.
At
the same time, the existing earnings test, which recaptures some of
the Social Security benefits from retirees who continue to work,
would be repealed, and survivors benefits over time would increase
to a minimum of 75 percent of the combined benefit of both spouses.
The formula that sets initial retirement benefits would be adjusted
to boost benefits slightly for lower-income workers.
The
Senate plan also sets up a new "KidSave" program, financed from
general revenues, that would partially fund future retirement
benefits.
Finally, the proposal would reform the way
in which the maximum income subject to Social Security taxes is
set, and would transfer all of the revenue generated from taxing
the retirement benefits for those earning over $34,000 annually
($44,000 for couples) to the Social Security trust fund. Currently,
part of that money goes to Medicare.
IMPORTANT REFORMS IN THE BIPARTISAN SENATE
PROPOSAL
The
bipartisan Senate plan meets many of the necessary conditions for
Social Security reform. The important reforms that it contains
include the following:
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Individual retirement savings accounts
would be funded with a portion of existing Social Security
taxes.
The Senate plan would reform the existing Social Security program
by redirecting an amount equal to 2 percent of income into these
accounts. This is far preferable to plans that would fund these
accounts from temporary budget surpluses.
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Workers would own and benefit from
their accounts.
Instead of having the government seize all or a major portion
of a worker's individual retirement savings account--as would be
the case under the Archer-Shaw plan--the bipartisan Senate proposal
would allow workers to receive all the benefits from their
accounts. They could either receive a higher retirement income or
take part of the money in cash for such things as investing in a
small business or helping to pay for their children's or
grandchildren's college education. If the worker died before
retirement, the accounts could be left to his or her heirs.
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Retirement benefits from Social
Security would be adjusted as those from the individual accounts
grew.
All workers would continue to receive a retirement benefit from
Social Security. In addition, they would receive the benefits from
their individual retirement savings accounts. However, as the
amount available to a worker from his or her individual account
grew over time, the amount from the traditional plan would
shrink.
This newest adjustment would be
accomplished by using a formula that calculates the amount of
monthly income that would be generated from the worker's individual
account if it were invested in government bonds, subtracting that
figure from the monthly benefit that would have been received from
Social Security. If the worker were to invest in super-safe
government bonds, the combined benefit from the individual account
and Social Security would be the same as he or she would have
received from Social Security. However, if the worker invested in a
fund that pays a higher return, he or she could receive either a
higher monthly benefit or a cash lump sum upon retirement. The
combination of retirement benefits from both the individual account
and Social Security would allow workers to look forward to a higher
standard of living in retirement, while at the same time reducing
Social Security's huge unfunded liability.
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The rate of return on Social Security
taxes would improve.
Because workers would be able to invest their individual
retirement savings accounts in stocks and bonds that pay much
higher returns than the current system pays, their rate of return
most probably would improve. Instead of the average annual return
of about 1.2 percent a year received on Social Security taxes, the amount
invested in the individual accounts could earn an average of 7
percent a year after inflation. Even the lowest-risk investments,
such as government savings bonds, would provide a return that
greatly exceeds Social Security's low returns.
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The plan is bipartisan.
Any reform supported by members of just one political party cannot
pass Congress and be signed by the President.
CHANGES THAT WOULD IMPROVE THE
PROPOSAL
The
bipartisan Senate proposal is a major step toward successful reform
of the Social Security program and can serve as an excellent
legislative foundation upon which to build this reform. However, it
is by no means perfect. It could be improved by:
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Increasing the number of investment
options.
The bipartisan Senate plan would require workers to invest their
individual retirement savings accounts through a federal agency.
Although this should be one option, workers also should be able to
invest their accounts through a traditional financial services
provider, such as a mutual funds company, bank, credit union, or
broker. Millions of Americans already have such savings plans, and
it would make sense for them to be able to use them for Social
Security.
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Protecting workers from arbitrary
adjustments in cost-of-living allowances (COLAs).
Allowing Congress to adjust COLAs might make them more accurate
today, but it opens the door to politically motivated changes in
the future. Because the Bureau of Labor Statistics (BLS) is
developing a more accurate form of the Consumer Price Index that
will be completed by 2002, it would be better to enact
a temporary 0.3 percent reduction, which is the approach taken by
the Kolbe-Stenholm proposal. Moreover, if the BLS re-estimate turns
out to be smaller than this 0.3 percent reduction, the difference
should be refunded to workers.
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Reviewing regularly the government
match of workers' savings.
Congress should pause before reforming one entitlement program in
part by creating a new one. Even though there are good arguments
for some level of government matching of additional savings for
low- to moderate-income workers, this feature needs to be crafted
carefully to avoid its growing into an entitlement program that
later has to be reformed.
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Dropping the proposed KidSave
program.
One of the reasons Social Security has financial problems is that
Congress has attached unrelated programs to it. There may be
excellent reasons to create a KidSave program. However, adding a
new entitlement program that gives each newborn child a $1,000
savings account paid from general tax revenue and deposits $500
into the account in each of the following four years just makes
Social Security reform more difficult.
CONCLUSION
The
bipartisan Senate proposal is another step toward serious Social
Security reform. It is fiscally responsible and makes many of the
hard decisions that will be necessary to prevent Social Security's
impending insolvency. Most important, it would allow workers of all
income levels to build a nest egg for retirement and benefit more
fully from the continuing growth in the American economy.
David C.
John is Senior Policy Analyst for Social Security at The
Heritage Foundation.