1994-1996 Advisory Council on Social Security

Report on Social Security Advisory Council Meeting on May 19

Members Present: Edward Gramlich (Chair), Robert Ball, Gerald Shea, Marc Twinney, Ann Combs, Thomas Jones, Joan Bok, Sylvester Schieber, Edith Fierst, Carolyn Weaver, Gloria Johnson, George Kourpias, Fidel Vargas (by teleconference)

The Council began by discussing a proposal by Edith Fierst to count all earnings , not just the highest 35 years of earnings, when determining Social Security benefits. Steve Goss, OACT, said that using all earnings, but keeping the present 35-year computation period would cost about 0.30 percent of taxable payroll. Increasing the computation period to 38 years would result in a no-cost proposal.

After some discussion the Council decided that, in principle, workers should get more credit toward Social Security benefits if they have additional years of earnings. The particulars of the proposal would depend on any other benefit computation changes the Council decides are necessary or desirable.

The Council then discussed a second proposal by Ms. Fierst to tax employers, but not employees on any fringe benefits that workers receive. She thinks that this would be preferable to an increase in payroll taxes as a way to increase revenues. It is estimated that this proposal would increase revenues by 1.1 percent of taxable payroll. There was little support for this idea. Reasons stated for nonsupport were because it would be technically difficult to do, it would be politically unpopular, it would break the tradition of equal payments by employers and employees, and it would complicate the program.

Chairman Gramlich then described the plan that he had developed. It is a double decker plan with the nonearnings-related first deck based on the number of years of work and an earnings-related second deck, In addition, the plan would increase normal retirement age to 68 by 2017 and provide for indexing it for subsequent years based on improvements in life expectancy. The plan is specifically designed to maintain the current 12.4 percent tax rate and maintain current benefit levels for low earners. As a result, benefits for average and high earners would be cut about 30 percent. The plan is also structured to result in a stable trust fund ratio at the end of the 75-year period. The Chairman also noted that the plan could provide a voluntary individualized account in addition to the basic benefit.

Many of the Council members were concerned that the benefit cuts required by this plan were excessive and may result in an unstable system. Carolyn Weaver pointed out that comparing benefit levels to current law was unfair because the current benefit levels are unsustainable. The system will eventually be bankrupt and no benefits will be payable. Robert Ball said that was true only if you hold the tax rate at 12.4 percent. He pointed out that under his plan benefit levels very close to present law are sustainable with only a modest tax increase.

During an extended discussion of this plan it became clear that there were two points of view among the Council members. Some members wanted to maintain something like the current system and favored minor tax increases and benefits cuts. Others wanted a much "smaller" Social Security system that could be supported by the current amount of taxes and favored large benefit cuts in the future.

The Council members who favored raising taxes were mainly concerned with maintaining current levels of income security in retirement. They were concerned that decreases in the level of Social Security benefits would not be made up by other kinds of retirement income or savings. The members who favored cutting benefits were concerned about the lack of confidence and support for the system among younger people and the poor rates of return for young workers and for high earners. They thought that tax increases were either politically unfeasible or that the current 12.4 percent tax rate was high enough to support a basic plan.

Sylvester Schieber pointed out that there are only two alternatives--raise taxes or reduce benefits. Under both alternatives, workers would have a lower rate of return than they currently have. If taxes are raised they are paying more for the same benefit and if benefits are cut, they are paying the same amount but getting less. Although neither choice is attractive, there are no other options.

Chairman Gramlich said that one strong point of his plan is that it provides stable trust fund ratios so that the system does not face a crisis of declining trust fund ratios in another few years. The members generally agreed that this was a worthy goal to strive for and both the Gramlich plan and the Ball plan achieved this goal. Most of the members also agreed that, at least in principle, any revised plan should include covering all newly hired State and local employees.

Some members objected to the piecemeal approach that the Council was taking. They wanted to look at the overall plans, rather than the specific items. Both Mr. Ball and Ms. Weaver pointed out that, for example, in 1983 the Bipartisan Commission reached agreement on an overall plan even though many members voted against most of the specific items included in that plan. Chairman Gramlich agreed to poll the members to see if they favored a plan like his, that cut benefits and did not raise taxes, or a plan like Mr. Ball's that preserves the current level of benefits, but increases taxes.

Mr. Ball said that he favors his plan. Tom Jones said he favors a plan like Ball's because it shows the public the cost of keeping the current system. He also said that he considers this a "balanced" plan because it has both small benefit cuts and tax increases. In his estimation only 1/3 of the shortfall comes from increased FICA taxes. George Kourpias said he was leaning toward Ball's plan with some variations.

Marc Twinney said he was leaning toward Gramlich's plan, however, he was uncomfortable with increasing the retirement age, especially the early retirement age. He also stated that increasing the retirement age to 70, as in the recently-introduced Kerrey-Simpson plan, was too much. He said the Ball plan should be included in the Council's report as an example of how "painful" it would be to keep present law.

Gerald Shea said he was leaning toward the Ball plan. He doesn't like increases in the retirement age because of differential impacts on minorities and blue collar workers. He thinks the tax increase in the Ball plan is modest, and he pointed out that the overall tax rate in the United States is low compared to other industrialized countries.

Ms. Fierst indicated that she was not in favor of a drastic benefit cut and was also reluctant to raise taxes. She stated that she was in favor of increasing both early and normal retirement age, but wants some kind of "safety net" for people who already have worked a full career by age 62.

Sylvester Schieber said he was leaning toward something like the Gramlich plan. He said any plan with significant tax increases would not receive serious consideration in Congress. He said he was not in favor of indexing the normal retirement age.

Joan Bok indicated that she was leaning toward the Ball plan, but favored further increases in the retirement age in order to reduce the amount of tax increase required. Ann Combs indicated that she was leaning toward the Gramlich plan. She thinks that individuals can compensate for reduced Social Security benefits through savings, but would not rule out the possibility of increases in tax rate or in the contribution and benefit base. She favors raising normal retirement age to 70 and to preserving current benefit levels for very low earners. Gramlich said he favored his plan.

Ms. Weaver said she leaned toward Gramlich's plan, but said it did not go far enough. She said Social Security should focus public resources on people in need and reduce disincentives to work and saving. She favors something more like a defined contribution plan along the lines of the Kerrey-Simpson proposal. Gloria Johnson said she favored something more like the Ball plan and was opposed to increasing the retirement age.

The Council then decided to discuss the question of increasing retirement age and the possibility of personalized retirement accounts either on a voluntary or mandatory basis as a replacement for part of the FICA tax.

The Council agreed that the current hiatus in the increase in the retirement age should be eliminated. In addition, more than half of the members thought that the ultimate normal retirement age should be raised to at least 68 with early retirement age 3 years earlier than that. In response to a question, Dave Lindeman, Executive Director of the Council, said that increasing early retirement age by itself would have little effect on the issue of cost because of the actuarial nature of the benefit reductions. Ms. Weaver pointed out that the major reason for an increase is the question of the message sent to people about how long they should be expected to work. If you continue to make benefits available at 62, people who can afford to do so will continue to retire then.

Mr. Twinney and Mr. Ball pointed out that there is no current experience with the increase in retirement age currently in the law. They thought that it would be premature to further increase the age without first seeing the response to the current increase. Other members were concerned about people who were unable to continue to work but who were not disabled enough to get disability benefits, or people who had no jobs or who lost their jobs due to "downsizing" or other corporate strategies to get rid of older, more expensive, workers.

Members who favored raising retirement age said that workers would save to cover the possibility of early retirement. However, those members who did not favor an increase said that workers, especially those with average or below average earnings, found it difficult or impossible to save. Schieber said that one way was to force savings through the addition of individualized retirement accounts that people could, if they wanted, use to fund early retirement.

Chairman Gramlich pointed out that raising normal retirement age to 68 amounted to a benefit cut of about 6 1/2 percent for people who continued to retire at the same age and asked for a sense of the members on increasing the age. Many of the members said that they could not vote for or against a raise unless it was part of an overall plan. Those voting were evenly split between those favoring and those opposing an increase in the normal retirement age. (There were 4 abstensions from this vote from members who only wanted to vote on this issue as part of a comprehensive package.)

During the discussion of individualized accounts that followed, Ms. Weaver said that the proposals diverting 1 or 2 percent of taxes to individualized accounts did not go far enough and would not solve the "savings problem". Many members were concerned that diverting taxes to individualized accounts would undermine the current system . They suggested allowing voluntary payments to these accounts in addition to the current tax payments. Some members were also concerned about the possibility of diverting money in these individualized accounts to things such as home purchases, educational expenses, or medical emergencies.

Mr. Ball said the idea of individualized accounts was interesting, but he wanted to see a detailed plan of how to go to a plan like the Kerrey-Simpson plan without drastically cutting benefits and without cutting benefits for people currently receiving them.

Mr. Lindeman said that it is not possible to divert 2 percent of current FICA taxes to individualized accounts without cutting benefits for current retirees and that one way this is handled in the Kerrey-Simpson plan is through cuts in the COLA. However, he said that the Gramlich plan the members were considering had a variation that diverts 1 percent of taxes to individualized accounts without affecting benefits for current retirees.

Although there was much sentiment that individualized accounts might have some promise, the members decided that they needed to see a detailed plan with a transition procedure before they could make any firm conclusions about such plans. Further, they did not want a plan that would require cutting benefits for current retirees. The Council adjourned until the meeting scheduled for June 2.