Building a New Engine for the Old Model
By Judd Gregg, John Breaux, Jim Kolbe and Charles Stenholm
A remarkable transformation has taken place in Washington and across the country. Credit it to maturing baby boomers, an unexpected window of opportunity raised by budget surpluses, politicians seeking to guarantee their legacy or simply an old-fashioned desire to do the right thing. Somehow, the once unspeakable is being spoken: Social Security must be reformed.
The debate over the future of Social Security has evolved because the American people and their elected officials are coming to the realization that the costs of inaction are unacceptable. We can no longer ignore the aging of our population, which would deplete the Social Security trust fund and threaten the fiscal solvency of our nation. The frequently cited (and all too comfortably distant) insolvency date of 2032 actually masks a much closer crisis: Beginning in 2013, the government will not be able to cough up the $3 trillion needed when Social Security begins paying out more money than it is taking in.
Along with Donald B. Marron, chairman and chief executive of PaineWebber Group Inc., and Charles Sanders, retired chairman and CEO of Glaxo Inc., we were proud to serve as co-chairs for the National Commission on Retirement Policy (NCRP), sponsored by the Center for Strategic and International Studies. The 24-member bipartisan commission has developed a plan to strengthen America's retirement policies, including employer-provided pensions, personal savings and, finally, Social Security. Fifteen months after the panel's creation, we disproved the notion that all commissions must end in disagreement or irrelevance. After a unanimous vote, our commission agreed on the 21st Century Retirement Security Plan, which will form the foundation of retirement security legislation that the four of us intend to introduce this month.
In brief, the plan would strengthen the safety net, restore the long-term solvency of the Social Security trust fund, increase individual control over retirement financing and establish features within Social Security that reward work, all without increasing the regressive payroll tax or any other taxes. It would do this by maintaining the core of the current system and adding to it a totally new feature: individual accounts invested in the private markets. It represents a middle ground between those who want a more "privatized" system and those who wish to preserve essentially what we have.
Individuals would invest 2 percentage points of the current 12.4 percent payroll tax in these accounts, modeled on the federal government's proven thrift savings plan, which offers members of Congress and all federal employees a selection of stock, blended or government security fund investments for their retirement savings. Americans would be able to choose between options with higher risk and the potential of higher return and those that are safer, offering more secure, albeit lower rates of return.
Upon retirement, individuals would get their traditional Social Security benefits and the balance of their individual accounts.
The commission does not view individual security accounts as a panacea, but as an important component of a comprehensive reform plan. We demonstrated that it is possible to divert the 2 percentage points into individual accounts while continuing to provide financial security for disabled and low-income seniors. The commission is persuaded that most Americans will receive more retirement income from the Social Security program if individual accounts are incorporated into the system.
The plan also would establish a minimum Social Security benefit provision, which, for the first time, would guarantee that someone who works all his or her life and plays by the rules would be protected from poverty.
While the current Social Security system has served America well since its creation in 1935, it was not built for the demographic transformation we face in the 21st century. We must create a system that will offer a more prosperous retirement while maintaining the important social insurance functions. But to do so, we must look beyond the old solutions of increasing taxes or changing benefits, which jeopardize political support for reform. Furthermore, we should not miss a critical opportunity to make the financial marketplace work for Social Security beneficiaries.
The commission studied various means of improving Social Security solvency, with an eye toward the fairest deal for every generation, demographic group, income level and marital status. Too often, the Social Security reform debate has presented a false choice between two ideological poles "status quo" and "wholesale privatization." We found both extremes to be neither workable nor politically viable. Our centrist plan would preserve the best features of the current system, while modernizing it for the 21st century.
The Center for Strategic and International Studies convened the commission. Its members brought diverse views to the deliberations. Some came as advocates of broad privatization while others carried a dose of skepticism about market-based solutions. Beyond our commission, we listened to many experts, as well as average Americans. Unlike other commissions where differences sharpen and positions harden as discussions progress, the airing of legitimate concerns led each commissioner to move beyond individual opinions and toward a consensus between ideological poles.
Some critics argue that individual accounts are too risky for lower-income individuals. We believe that it is more risky not to give lower-income individuals the opportunity to invest in the stock market. It is precisely this lack of equity investment, an opportunity lost largely to high payroll tax rates, that has left too many Americans on the fringe of the economy. For low-income people, the plan's individual security accounts are a bonus above and beyond the guaranteed traditional benefits and would provide an opportunity for wealth creation largely unavailable today.
We were not seduced by the remarkable return figures from the current bull market. Rather, we looked at the rates of return of the stock market over the past century. From 1926 to 1996, the Standard & Poor's large-stock indices show no 20-year period with a negative return on equities. Over the span of the 20th century, returns on stocks have exceeded those of Treasury securities, averaging about a 7 percent real rate of return. Compare that to the 2.7 percent return that the Social Security system currently receives from investing in Treasury bills. Despite such overwhelming evidence of the stock market's long-term ability to dramatically outperform Treasury securities, we rely on conservative assumptions, not rosy scenarios. If individuals receive the modest 4.5 percent real rate of return we assume on the security accounts in our plan, most retirees would fare better than under reform that does not include individual accounts.
The improved budget picture has substantially reduced the obstacle posed by transition costs the money needed to meet obligations under the existing system as the new system is phased in. The Congress and the president should seize this opportunity presented by our strong economy and use the surplus only to offset the costs of Social Security reform.
Not only would our proposal make the Social Security system stronger, but it would make it affordable. Our plan would bring the traditional system into long-term balance. More importantly, the federal government would no longer be in a position of having to pay hundreds of billions of dollars in interest and principal to meet payments to beneficiaries, a significant problem under current law.
We acknowledge that restoring the solvency of the Social Security system requires some tough choices and trade-offs. Those who extract specific components of our comprehensive plan for criticism have an obligation to suggest other benefit changes or tax increases to replace them without weakening the program's solvency. Our plan includes additional reforms to improve the structure of the traditional Social Security program.
We proposed gradually raising the age of eligibility for retirement benefits to more accurately reflect life expectancy. Current law already increases the age to 67; we would extend the age to 70 by 2029. In fact, because the increase in life expectancy will outpace the retirement age, the length of time each generation of retirees will receive benefits will continue to grow. When the eligibility age for Social Security benefits was set at age 65, life expectancy was 63.5. By 2030, it will have increased to age 79.
The commission also has made several recommendations to reward those who work longer. We would repeal the earnings limit that penalizes working seniors, and expand the delayed retirement credit for those who work beyond the normal retirement age. An individual would be credited for all years of earnings in computing his retirement benefit, and the minimum poverty-protection benefit would also expand for each year worked.
Because Social Security was never intended to be the sole, or even primary, source of retirement income, we also have proposed measures to strengthen the private pension system and encourage personal savings. The commission outlined changes in tax laws that would help more Americans obtain pensions and would expand and simplify individual retirement accounts, making tax-advantaged IRAs available to more Americans. The plan would reduce pension regulation and allow workers to carry pensions when they change jobs.
We know that the Social Security debate will take many turns before reforms are implemented that guarantee the program's soundness into the 21st century. However, we offer our plan as proof that a bipartisan solution can be found, if we join together to craft a plan that serves the best hopes of our society for the future of Social Security.
© Copyright 1998 The Washington Post Company