Senate Special Committee on Aging
February 3, 2005
SUMMARY OF KEY POINTS
Any Social Security
reform plan should be designed to meet three fundamental objectives--ensuring
Social Security's long-term fiscal sustainability, raising national savings, and
improving the system's generational equity:
Reform should ensure Social Security's long-term fiscal
sustainability. The first goal of reform should be
to close Social Security's financing gap over the lifetimes of our children
and beyond. The only way to do so without burdening tomorrow's workers and
taxpayers is to reduce Social Security's long-term cost.
Reform should raise national savings.
As America ages, the economy will inevitably have to transfer a
rising share of real resources from workers to retirees. This burden can be
made more bearable by increasing the size of tomorrow's economy. The surest
way to do this is to raise national savings, and hence ultimately productivity
growth. Without new savings reform is a zero-sum game.
Reform should improve Social Security's generational equity.
As currently structured, Social Security
contributions offer each new generation of workers a declining value ("moneysworth") Reform must not exacerbate--and ideally it should improve--the
generational inequity underlying the current system.
Meeting these objectives will require hard choices
and trade-offs. There is no free lunch. Policymakers and the public need to ask
the following questions to assess whether reforms honestly face up to the Social
Security challenge--or merely shift and conceal the cost:
Does reform rely on trust-fund accounting?
Trust-fund accounting obscures the magnitude of Social Security's financing
gap by assuming that trust-fund surpluses accumulated in prior years can be
drawn down to defray deficits incurred in future years. However, the
trust funds are bookkeeping devices, not a mechanism for savings. The special
issue U.S. Treasury bonds they contain simply represent a promise from one arm
of government (Treasury) to satisfy claims held by another arm of government
(Social Security.) They do not indicate how these claims will be satisfied or
whether real resources are being set aside to match future obligations. Thus,
their existence does not, alone, ease the burden of paying future
benefits. The real test of fiscal sustainability is whether reform closes
Social Security's long-term annual gap between its outlays and its dedicated
Does reform rely on hiking FICA taxes?
Hiking payroll taxes to meet benefit obligations is neither an economically
sound nor a generationally equitable option. The burden will fall most heavily
on lower and middle-income workers and on future generations. Younger
Americans in particular will be skeptical of any plan that purports to improve
their retirement security by increasing their tax burden and by further
lowering the return on their contributions.
Does reform rely on new debt? Paying
for promised benefits--or financing the transition to a more funded Social
Security system--by issuing new debt defeats a fundamental purpose of reform.
To the extent that reform relies on debt financing, it will not boost net
savings and may result in a decline. Without new savings, any gain for the
Social Security system must come at the expense of the rest of the budget, the
economy, and future generations. Resort to borrowing is ultimately a tax
increase for our kids.
Does reform rely on outside financing?
Ideally, reform should achieve all necessary fiscal savings within the Social
Security system itself. Unrelated tax hikes and spending cuts may never be
enacted, or if enacted, may easily be neutralized by other measures, now or in
the future. Unless the American public sees a direct link between sacrifice
and reward, the sacrifice is unlikely to happen.
Does reform use prudent assumptions?
There must be no fiscal alchemy. The success of reform should not depend upon
rosy projections of future economic growth, presumed budget surpluses or lofty
rates of return on privately owned accounts. All projections regarding private
accounts should be based on realistic assumptions, a prudent mix of equity and
debt, and realistic estimates of new administrative costs.
While fixing Social Security's problems, reform
must be careful to preserve what works. Social Security now fulfills a number
of vital social objectives. Policymakers and the public need to ask the
following questions to assess whether reform plans would continue to fulfill
Does reform keep Social Security mandatory?
The government has a legitimate interest in seeing that people
do not under-save during their working lives and become reliant on the safety
net in retirement. Moving toward personal ownership need not and should not
mean "pivatizing" Social Security. Any new personal accounts should be a
mandatory part of the Social Security system. Choice is not important in a
compulsory social insurance program whose primary function is to protect
people against poor choices.
Does reform preserve Social Security's full range of insurance
protection? Social Security does more than write
checks to retirees. It also pays benefits to disabled workers, widows,
widowers, and surviving children. A reformed system should continue to provide
insurance protection that is at least equal to what the current system offers.
Does reform maintain Social Security's progressivity?
While individual equity ("moneysworth") is important, so
too is social adequacy. Social Security's current benefit formula is designed
so that benefits replace a higher share of wages for low-earning workers than
for high-earning ones. Under any reform plan, total benefits, including
benefits from personal accounts, should remain as progressive as they are
Does reform protect participants against undue risk?
Under the current system, workers face the risk that future
Congresses will default on today's unfunded pay-as-you-go benefit promises.
While reducing this "political risk," personal account reforms should be
careful to minimize other kinds of risk, such as investment risk, inflation
risk, and longevity risk--that is, the risk of outliving ones assets.
If we reform Social Security
today, the changes can be gradual and give everybody plenty of time to adjust
and prepare. If we wait much longer, change will come anyway--but it is more
likely to be sudden and arrive in the midst of economic and political crisis.