2 1/2 Proposals to Save Social Security [*].

• Author: Fretz, Deborah
• Position: Review

Deborah Fretz [+]

Michael R. Veall [++]

This is a review article of three books that deal with the problems facing the U.S. Social Security system. One deals with the OASDI (Old-Age, Survivors and Disability Insurance) financial shortfall and proposes an alternative plan with both a tier one benefit and a tier two provision based on personal saving accounts. A second considers the social insurance system more comprehensively, arguing for a grand reform that would include new programs, particularly in the areas of child care and housing. A third largely confines itself to arguing against those who wish to change the OASDI plan because of the financial projections, although it also argues for a more comprehensive health care insurance system. The review concludes that key differences expressed in the books, particularly between the first and third, rest on different value judgments regarding intergenerational equity and the role of government.

1. Introduction

   In the grand cycle that seems to govern the social security systems of the nations of the world, it may once again be the United States' turn to move. Chile famously has adopted compulsory individual retirement accounts, Australia has moved to a kind of compulsory 401(k) superannuation plan, Switzerland to a system of compulsory occupational pensions, and Sweden to, a system of compulsory notional accounts, where individual contributions are recorded by the government and accumulate as individual entitlements that do not correspond to private sector investments. Canada, facing roughly the same type of shortfall as the United States, simply raised payroll taxes with a plan for direct investment by the pension authority in the stock market that has not yet been broadly controversial. Interesting attempts (e.g., Robson 1996) to advance Chilean-type solutions did not find much political traction.

   But in the United States, the trustees of the major public pension plan, Old-Age and Survivors Insurance and Disability Insurance (OASDI), have been forecasting for about 15 years (essentially since immediately after the implementation of the last reforms that were to "save" Social Security) that the plan as structured could not meet its obligations through a 75-year forecast window. But there has been no legislative correction. There certainly have been a number of proposals: indeed the 1994-1996 Advisory Council on Social Security came up with three. Here we review a newer proposal presented in book form: The Real Deal: The History and Future of Social Security by Sylvester J. Schieber and John B. Shoven. We also review a second book True Security: Rethinking American Social Insurance by Michael J. Graetz and Jerry L. Mashaw. This book is also about "saving social security," but the problem is thought of as not so much about OASDI financial projections but instead (p. 5) "that the long-term political suppo rt for social insurance could come unglued" unless the effectiveness of current social insurance, broadly defined, is improved. Finally, a third book, Social Security: The Phony Crisis by Dean Baker and Mark Weisbrot, focuses on discussions of OASDI solvency (although it discusses aspects of health insurance as well) but argues that current action to restructure OASDI is not required to "save" it. Hence we have only counted this in our title as one-half a proposal: no pejorative connotation is intended.

   We begin in section 2 with a brief annotated outline of each of the three books. We put most of our emphasis on OASDI issues, as do Schieber--Shoven and Baker--Weisbrot; as noted Graetz--Mashaw covers a very wide range of social insurance programs. In section 3 we make some more general observations. A central point is the reminder that a positive economics approach cannot choose among these or any proposals: to a large extent these proposals are different simply because their authors have different values. Section 4 concludes.

2. Overviews

   The Real Deal: Schieber and Shoven

   This is a substantial and worthwhile book. Schieber and Shoven have devoted several chapters to a history of United States Social Security from its inception. They then discuss current problems in depth, provide a discussion of a number of recent reform proposals, and give a significant proposal of their own.

   According to their history, right from the beginning the central issue facing OASDI was to fund or not to fund, that is, whether there would be a fund to cover the public pension promises being made to current workers (and hence a long delay before any significant benefits would be paid) or whether instead there would be a reliance on subsequent generations to cover the promises in the future (and hence transfers could begin relatively quickly). The initial plan signed into law by Roosevelt in 1935 was a funded one. But by the 1939 amendments, this was changed to a largely unfunded plan by a coalition of liberals who wanted to alleviate current poverty among the elderly and conservatives who argued that the accumulation of a trust fund would lead to untoward government intervention in the economy through "social investment." The authors note (p. 92) that a strong case can be made that the way benefits were introduced led to a program much larger than a simple universal pension paid from general revenues. Hen ce not only did the first beneficiary, Ida May Fuller, receive a grand total of $22,000 in benefits, but the genesis of the plan probably contributed to the illusion that this was somehow a financial return commensurate with the $25 in payroll taxes paid by her and her employer. It is not surprising that Social Security was a popular program.

   Schieber and Shoven describe the further benefit expansions through the 1950s, 1960s, and 1970s, the most famous example being the great overindexing error that was part of the 1972 amendments that first pushed the system into a shortfall not fully eliminated by the 1977 and 1983 retrenchments. They further point out that the current problem was predicted by the proponents of funding when the program was initiated in the 1930s: eventually there would be losers. It has happened. The last cohort for whom the pension plan was a good financial deal (in the sense that the contributions "earned" a return in excess of the government bond rate) has now retired; essentially all current cohorts of workers will do worse.

   The historical discussion (which includes analysis of recent policy proposals) builds toward the single chapter in which they describe their own proposed plan, centered on "personal security accounts" and called PSA 2000. The most immediate target of the plan is the Year 2037 problem [1]: sometime around that year OASDI cannot meet all its obligations and will require the equivalent of a 30% increase in payroll taxes to do so. As do almost all the proposals on the table, Schieber and Shoven wish to forestall that event by current action: indeed their plan would postpone it indefinitely. The most important provisions of their PSA 2000 plan are (i) leaving the OASDI employer/employee payroll tax unchanged at 12.4% of earnings up to the current real annual ceiling of $72,600; (ii) requiring workers to contribute an additional 2.5% of payroll to private investment vehicles called personal security accounts (PSAs) that they could not draw upon until retirement, with at least half of that withdrawal necessarily th rough inflation-indexed life annuities; (iii) matching the workers' contributions dollar for dollar using part of the 12.4% payroll tax, the remaining 9.9% being used to meet current promises and fund a flat rate tier one benefit paid to all full career workers of $500 per month, indexed to average wages; (iv) moving to a retirement age of 67 at a faster rate than currently legislated, with the retirement age thereafter indexed to life expectancy and with a similar advancement of the early retirement age; (v) removing the earnings test for beneficiaries at normal retirement age; (vi) maintaining some tier one spousal and widow benefits; and (vii) having a long smooth phase-in until roughly 2045, during which benefits would be calculated as appropriate averages with those of the current system and all remaining state and local employees would be brought into...