1994-1996 Advisory Council on Social Security

Report of the Hearings Held by the 1994-1995 Advisory Council on Social Security

March 8 and 9, 1995

Council Members Present

Robert M. Ball, Sylvester J. Schieber, Ann L. Combs, Gerald M. Shen, Edith U. Fierst, Marc M. Twinney, Jr., Gloria T. Johnson, Fidel A. Vargas, George J. Kourpias, Carolyn L. Weaver

Purpose of Hearing

To obtain public opinion regarding possible options to be taken to offset the long-range deficit facing the Social Security program.

Panel I

Panel I consisted of William Beeman, Vice President and Director of Economic Studies, Committee for Economic Development (CED); Stephen Entin, Resident Scholar, Institute for Research on the Economics of Taxation; Teresa Ghilarducci, AFL-CIO; Brad Klinck, Senior Actuary, AT&T; and Robert Shapiro, Vice President, Progressive Policy Institute.

Mr. Beeman talked about an upcoming statement from CED on Social Security that will include recommendations for the taxation of Social Security benefits that exceed past contributions, a larger increase in the retirement age with an earlier implementation date than that already legislated, and measures to ensure that the current operating Social Security surpluses add to national saving. He also said that initial retirement benefits for new retirees should grow more slowly than wages and that the most promising way to protect future retirees without overburdening workers is to increase reliance on private retirement saving.

Mr. Entin said that the concept of constant replacement rates is arbitrary and that once initial benefits for new retirees reach a reasonable level to prevent poverty in old age, there is no reason for them to rise faster than the growth in prices. He would combine and expand some of the proposals introduced by Representatives Rostenkowski and Pickle in the 103rd Congress. He would also eliminate or reform the taxation of Social Security benefits, eliminate or raise the earnings limitation, make delayed retirement credits (DRCs) actuarially fair in order to lower labor costs and increase the pool of experienced workers, and give all saving IRA or pension-type plans tax deferrals to boost private retirement saving and reduce capital costs. He opposes raising payroll and income taxes, changing cost-of-living adjustments (COLAs), raising the minimum age for drawing benefits, repealing the currently scheduled increases in the DRC, and covering all new State and local government employees not now covered under Social Security.

Ms. Ghilarducci said that AFL-CIO polls show that 73 percent of workers would not favor reducing Social Security benefits in order to get a tax break. Once Social Security came into existence, it acted as a stimulus to workers who began to save and bargain for pensions. The real retirement crisis is not with Social Security but with the flagging second tier of employer- provided pensions. Reducing Social Security, when factors that promote private pensions--wage growth, stable health care costs, long-term employment contracts--are weak, would be disastrous for retirement income security.

Mr. Klinck noted that while the rest of the economy was being deregulated during the 1980's, the budget reconciliation process resulted in a curtailing of the tax incentives and funding policies available to pension plans. And, at the very time pension plans were being burdened by negative legislative and regulatory policies, there was a general collapse in personal savings. This has further increased the burden on employer- sponsored plans and the Social Security system.

Mr. Shapiro commented that certain elements of the Social Security system should be preserved: (1) progressivity--the redistribution of income; (2) equity--maintenance of the link between taxes paid and benefits received; (3) equality--people in similar economic circumstances should bear roughly the same payroll tax burden and receive roughly the same benefits; and (4) efficiency--redistribution should affect economic markets as little as possible. He advised the Council to consider reforms that would incorporate an element of mandatory private savings as a supplement to Social Security.

Panel II

Panel II consisted of Michael Monroney, Concord Coalition; Joseph Perkins, Vice President, American Association of Retired Persons (AARP); Aldonna Robbins, Fiscal Associates, Inc.; Mike Tanner, Director of Health and Welfare Studies, CATO Institute; and Richard Trumpka, President, United Mine Workers.

Mr. Monroney advised the Council to consider "means-testing" or "affluence-testing," and he referred to two plans, one by Peter G. Peterson in his book Facing Up and one by the Concord Coalition. Both plans would withhold aggregate benefits only from those persons or households with incomes over a certain level ($30,000-$35,000 for Peterson and $40,000 for the Concord Coalition). The Concord Coalition also favors increasing the retirement age immediately by raising it 3 months each year until a new retirement age of 68 is reached in the year 2006.

Mr. Perkins said that the AARP supports mandatory coverage for all newly hired State and local government workers. Also, it would support increasing the normal retirement age (NRA) if there were expanded job opportunities for older workers, protections for those who cannot remain in the labor force, a long lead time, and education of the public about the change and its rationale and implications. AARP does not favor "means-testing" of the COLA or a "flat COLA"--which provides the same reduced COLA to beneficiaries above a given benefit level. In this regard, the Council was urged to examine the extent to which older consumers have a different pattern of purchases than wage earners, i.e., older consumers spend a much larger percentage of their income on health care, the cost of which has grown much faster than overall inflation. AARP is against income taxation of benefits, but would support a modest payroll tax increase as long as it is not accompanied by a dramatic alteration in the rate of return for future beneficiaries. AARP favors individual "income security" accounts only if they can be provided in addition to the current program.

Ms. Robbins supported slowing the growth in real benefits and mentioned two possible options: changing the benefit formula to lower replacement rates gradually over time and raising the NRA. She opposes reducing COLAs and taxing benefits. Mr. Tanner would privatize Social Security along the lines of the Chilean system, and he supported the recommendation made by Senator Robert Kerrey and former Senator John Danforth as co-chairmen of the Bipartisan Commission on Entitlement and Tax Reform to allow individuals to shift a portion of their Social Security taxes to individual investment accounts. Mr. Trumpka opposes privatization because it only works for people who do not become disabled, get fired, get laid off, or die--leaving behind dependents. He also opposes raising the retirement age because of the severe impact on low- income workers, who generally have shorter life expectancies, are generally in worse health, and have fewer employment opportunities.

Panel III

Panel III consisted of Deborah Briceland-Betts, Executive Director, Older Women's League; Jon Cowan, Executive director, LEAD or LEAVE; Arthur Flemming, Executive Director, Save Our Security; Robert Lukefar, Co-Founder and Board Member, Third Millenium; and Larry Crecy, Vice-President, National Caucus and Center on Black Aged (NCBA).

Ms. Briceland-Betts listed recommendations for changes in Social Security that would address adequacy concerns: provide dependent care credits to be posted to a caregiver's earnings record; permit a person's own DRCs to be added to the widow's benefits when these benefits exceed those based on own record; eliminate the earnings limit for persons with limited earnings who have minimal or no private pensions; treat caregivers of disabled spouses as if they were caring for an adult disabled child; eliminate the 2-year waiting period for divorced spouses over age 62; and resolve inequities between most one and two-earner families.

Mr. Cowan and Mr. Lukefar said that there is a crisis of confidence among the young about Social Security. Both said that the young people that they represent want to have a privatized retirement plan. Both also said that they would help pay off the existing Social Security liability at the same time they were paying toward their own retirement. Neither believed that the current system was a good investment.

Mr. Flemming outlined possible options of an increased income taxation of benefits, extending coverage to new State and local government employees, and a slight increase in the payroll tax. He said that we should build on the existing system as has been done successfully in the past.

Mr. Crecy expressed his opposition to accelerating the planned increase in the retirement age or to increasing the retirement age beyond the planned increases because of the effects on Blacks, other low-income groups and those who must retire at an earlier age because they are physically drained. Life expectancy at birth is only 64.6 years for Black males and 73.8 years for Black females. A large proportion of the Black population will not live to collect benefits and another group will not live much beyond even the current planned retirement age increase. The NCBA is also against "means-testing" which would make Social Security a welfare program. The NCBA does support legislation to raise the special minimum monthly benefit for workers with 30 or more years of covered employment to a level that would exceed the poverty threshold.

Panel IV

Panel IV consisted of Senator J. Robert Kerrey, Barry Bosworth, Brookings Institution, and J. J. Pickle, retired Member of Congress.

Senator Kerrey discussed the importance of the Advisory Council's work, stressing his hope that the Council would persuade the Congress to take immediate action to resolve the Social Security financing issue. He said that the tendency of Congress will be to defer action until there is a crisis situation.

Senator Kerrey also stressed his view that reforms should be enacted to make it possible for Americans to supplement their Social Security. In response to questions, Senator Kerrey indicated that the cost of the Social Security program is already too high, and that outlays should be reduced; once the program is in balance, workers should be allowed to invest a portion of their payroll taxes themselves in personal IRAs.

Mr. Bosworth agreed with Senator Kerrey that changes to address the long-range deficit should not be put off. Referring to the intergenerational conflict that is part of any discussion of possible remedies to the financing problem, he noted that there is a tendency to view Social Security as a "fixed pie of resources" that must be divided between young and old people. He stated that the "retirement income pie" could become larger through savings.

He noted that private pension contributions grow because they are saved and invested, but that the conservative investment strategy used by the trustees to manage the Social Security trust funds works against growth. He said that an aggressive investment plan for trust fund assets should be undertaken after the trust funds are balanced.

Mr. Bosworth said that Brookings Institute studies indicate that Americans are not preparing for their own retirements; cutting Social Security benefits would make this problem worse. He would recommend raising the retirement age and also increasing payroll taxes 2 percentage points to address the long-range financing problem.

In discussion, Senator Kerrey raised questions about the management or oversight of an investment program of the magnitude that Mr. Bosworth suggested. He said that he would rather see mandated IRAs that individuals manage themselves. Mr. Bosworth responded that if the investments were managed by Social Security, the money would be used for retirement. He said that IRAs can be used by individuals for purposes such as first time home buying and education.

Mr. Pickle discussed the provisions of his bill, H.R. 4275, introduced in April, 1994. The bill would have gradually increased the normal retirement to age 70, reduced benefits for early retirees, reduced spouse's benefits, covered certain State and local employees, and made Social Security cost-of-living adjustments (COLAs) biennial.

Mr. Pickle noted that the long-term deficit cited in the 1994 Trustee's Report of a 2.13 percent of payroll could be equated in today's dollars to a deficit equal to about $60 billion a year for the next 75 years. He said that the situation would continue to get worse, if not corrected soon.

He said that he thought that the public knows that change in the Social Security program is necessary, and that lack of action will be seen as failure in leadership, not as protecting interests. He said that experience with the 1983 amendments indicates that changes can be made and that the public will accept them if they are informed of their necessity through a full and open congressional debate.

Panel V

Panel V included Glenn English, Executive Vice President and General Manager of the National Rural Electric Cooperative Association; Dallas Salisbury, President of the Employee Benefit Research Institute; Kenneth D. Simonson, Vice President and Chief Economist, American Trucking Association; Jack Stair, Chairman, Committee on Employee Benefits, Financial Executives Institute; and John Sweeney, President, Service Employees International Union.

Mr. English discussed the role of the private sector in providing retirement income. His organization supports the expansion of IRA availability. He said that IRAs can help rural communities adjust to economic change because IRA holders consistently invest their funds in their local banks. He said IRAs would help rural communities by providing investment capital. He further stated that expanding IRA availability would increase the rate of personal savings.

Mr. Salisbury urged the Advisory Council to move forward with a proposal to move surplus Social Security tax revenues into private equity markets. He further recommended that SSA begin an education campaign that will help workers understand how little Social Security will provide as an income floor, in order to encourage individuals to begin personal savings plans early. He said that building a false sense of public confidence in the program may only serve to discourage individuals from saving.

Mr. Simonson said that his organization believes that the best way to improve retirement policy is to keep both Social Security payroll tax and income tax rates as low as possible and to keep the tax base broad and consistent for income and payroll purposes.

Mr. Stair raised questions about whether, in the current climate, traditional solutions to the long-range financing problem such as raising taxes and reducing benefits were still appropriate. He said that people should be encouraged to work longer, that real wages should be increased by investing in education and training to improve job skills, that the Social Security trust funds should be managed better, and that a portion of individual Social Security benefits should be privatized.

Mr. Sweeney said that the labor movement feels strongly about Social Security as a basic labor standard that guarantees a minimum level of economic security to working Americans of all ages and their dependents. His organization is concerned about proposals that would privatize Social Security by having Social Security payroll deductions channeled into mandatory IRAs. This would be a particular problem for low-wage workers if their investments did not generate a sufficient rate of return. He also said raising the retirement age would hurt people in manual labor jobs and ethnic groups with high mortality and morbidity rates.

During the "Open Microphone" period, private citizens Margaret Feldman and R. J. Saris addressed the Council. Ms. Feldman supported the flat dollar COLA and Mr. Saris stated that current Social Security surpluses should be used to support public education.

Panel VI

Panel VI consisted of Peter Ferrara, National Center for Policy Analysis; Howard Fluhr, Vice President, American Academy of Actuaries; Marilyn Moon, The Urban Institute; Daniel J. Schulder, Director, Department of Legislation, National Council of Senior Citizens; and Mary Jane Yarrington, National Committee to Preserve Social Security and Medicare (NCPSSM).

Mr. Ferrara noted that Congress has traditionally been reluctant to address the serious structural problems of Social Security and pointed to the work of the Kerrey Commission as an exception. He said that their recommendations represent a realistic starting point for discussing reform of Social Security. However, he said that the Kerrey proposals would also make Social Security an even worse deal for young workers, and that it is already unacceptable. Consequently, he said, such reforms would be desirable only if combined with a private-sector option for today's young workers, similar to the reform adopted in Chile.

Mr. Fluhr stated that there is no national retirement income policy that can be used for guidance as reforms are considered. He said that retirement income's "three-legged stool" model has problems because the Social Security leg has been sawed off a bit, and that the private pensions and the savings legs are wobbling. He concluded that it will be necessary to achieve a balance between social adequacy and fiscal responsibility.

Ms. Moon told the Advisory Council that solutions to improve the long-range solvency of Social Security should be addressed sooner rather than later because a smoother transition could be achieved, future beneficiaries would have time to adjust their plans, and because the Medicare and Disability Trust Fund problems will inevitably affect the OASI Trust Fund.

Among other ideas, Ms. Moon recommended limiting the Social Security COLA as proposed by Senator Simpson, but using the COLA amount for the 60th percentile of primary benefits as the cap, instead of the 20th percentile, as currently proposed. She also said that additional taxation of benefits is another progressive change that could be made to generate savings for the program through current beneficiaries, and that changes in the benefit formula to make Social Security more progressive should be a major feature of reform.

Mr. Schulder characterized Representative Rostenkowski's bill, H.R. 4245, and the proposals of the Bipartisan Entitlement Commission as apparent panic reactions to the 1994 Trustees Report. He said his organization sees no cause for panic. He urged the Council to consider, instead, the Trustees' findings that a payroll tax increase of about one percent for employees and employers, each, would result in actuarial balance for the next 75 years.

Ms. Yarrington said that NCPSSM would support measured changes in the retirement age, benefit computation formula, and payroll tax rates in a package that was balanced. It would have to provide needed improvements where appropriate, not create or exacerbate inequities, avoid worsening poverty rates and not rely solely on benefit reductions.