AICPA Paper Tackles Social Security
Profession Examines Issues and Alternatives

By Simon Eskow

NEW YORK—President George Bush’s thrust to alter the Social Security system has prompted the American Institute of CPAs to issue a hefty analysis that urges policy makers to fully comprehend the Social Security issue before making any efforts to change it.

The AICPA’s Understanding Social Security Reform: The Issues and Alternatives, an authoritative, 121-page manual, analyzes factors that should be considered in Social Security reform efforts.

“The debate surrounding Social Security reform brings to the forefront philosophical differences, varying opinions, and the age old trade-offs between fairness, simplicity, economic growth and social policy,” AICPA Vice President for Taxation Tom Ochsenschlager is quoted as saying in a statement released by the AICPA. “We…strongly urge policymakers and the public to thoroughly understand the issues surrounding Social Security reform before taking a position.”

The AICPA’s white paper is part of a recent trend of a profession leveraging its expertise to weigh in on vital financial matters facing the nation. Last August, the Texas Society of CPAs called on the profession to take action to implement reforms of Social Security and Medicare. By November, a number of state societies—including the New York State Society of CPAs—met to discuss working cooperatively on Social Security.

But a greater onus was placed on this work when Bush made Social Security reform a priority for his second term. The president has been campaigning for support of a plan that would split Social Security into a combination of guaranteed benefits and private investment accounts, driven by a stated desire to save Social Security from insolvency, which the White House anticipates in 2042.

The resultant debate has been tinged heavily by emotion and politics. Public resistance to Bush’s privatization plan has increased, according to some surveys, while Republicans and Democrats in Washington have begun to take up positions before any specific legislation has been introduced. This lends credit to the AICPA’s intention to provide a neutral analysis.

State societies, including the NYSSCPA, are also taking the opportunity to provide a resource to the public debate over the future of Social Security.

“(The AICPA’s white paper) is a neutral, although provocative in its neutrality,” said David A. Lifson, chair of the NYSSCPA’s Committee on Practical Reform for the Tax System, and a close observer of Social Security policy. Lifson said that questions the paper prods journalists to ask about Social Security, such as what safety nets there would be for low-income beneficiaries, and what choices in investment and distributions an individual would have, are important ways for the public to analyze any reform package.

Lifson and Laurence Keiser, also a member of the NYSSCPA’s tax reform committee, were scheduled to hold a press conference on Social Security reform in late March.

“We are brought up to be neutral advisors,” Lifson said. “We are trying to depolarize the issues, so that the polarized people can make a decision. It’s difficult, because there is no painless silver bullet. And sometimes the politicians or the people promoting a policy will have you think there is one.”

The Paper

The paper sets out to explain Social Security’s current financial condition, its relationship to the elderly living in poverty, its inherent redistribution of income, and how changes might affect that in the future. It also analyzes the trade-off between additional risk and higher rates of return, and potential issues related to funding a transition to some new system.

According to the AICPA paper, the Social Security Administration’s “best guess”—or intermediate assumption—indicates that “the Social Security Trust Fund surplus will peak in 2028,” then steadily decline until 2042, when it will be exhausted. The paper, however, points out that inadequate funds do not mean a nullification of benefits, and that under current conditions, beneficiaries will receive full scheduled benefits through 2042, and only then will there be a required 27 percent reduction in benefits. This can be avoided by a 2 percent increase in payroll taxes now, or a 13 percent reduction in benefits.

The paper is careful to state, though, that while these assumptions are reasonable, there is still some uncertainty about its predictions. A higher cost estimate, for example, shows that the Trust Fund would peak in 2021 and deplete entirely by 203 .

The paper critiques personal account plans, stating that personal accounts by themselves worsen Social Security’s financial outlook over the next 75 years, but proposals attain fiscal balance by reducing benefits and/or transferring cash from the Treasury’s general fund. Such plans tend to reduce the redistribution of wealth, the paper states, and expose account holders to uncertainty over their benefit levels, because of the inherent risk in the market. Additionally, the paper points out, a transition to a personal account system will force the government to borrow to fund Social Security’s liabilities, as younger workers’ contributions are diverted to private accounts.

“We collectively have to evaluate whether creating personal accounts solves anything,” said Keiser. “It may increase the upside (increased investment return), but has the potential to substantially decrease the downside (investment risk).”

The paper goes on to laud the current system’s biggest accomplishment as the reduction of the poverty rate to 10 percent in 2000, down from 35 percent in 1959. The paper estimates that without Social Security (or any other policies put in place to act as a safety net) that rate would be closer to 50 percent.