Society Briefs Press on Social Security

Society Briefs Press on Social Security
Helping to See Through ‘Smoke and Mirrors’ of Reform Debate

By Simon Eskow

Continued from the Home Page

Toward that end, the Society’s presenters, Laurence Keiser and David A. Lifson, are offering financial journalists a look at Social Security’s origins, its anticipated fate, and an analysis of lesser-known reform proposals circulating in Washington. The presentations (one on March 22, with two more planned for upstate locations later in the spring) employ a paper released by the American Institute of CPAs that urges policymakers to understand Social Security before attempting to change it.

“Everything is complex until you understand it,” Lifson said at the inaugural presentation in New York City. “You only need to understand three things about Social Security: benefits, return on investment, and taxes and funding. This is the eternal triangle, and everything we talk about falls into one of these three baskets.”

Lifson later said that if people could understand that there are only these three issues to contend with, they would be able to make rational judgments about Social Security and the seven alternative plans discussed in the AICPA’s paper.

Keiser laid out the problems facing Social Security for the 20 or so reporters gathered at the Society’s headquarters. Drawing from the AICPA’s paper, Keiser said that the Social Security Trust Fund will steadily deplete its funds by 2042, requiring the government to cut benefits by 27 percent to keep afloat.

The Social Security Administration has said that it would take a $3.5 trillion infusion to maintain benefits at current levels, which Keiser said is unlikely to happen. Alternatively, the government could also increase the Social Security tax by 1.9 percent or raise the cap, which currently is not applied to income above $90,000.

Questions over funding and taxation, Keiser said, drill down to more fundamental issues than privatization, such as whether Social Security is a true pay-as-you-go retirement plan, or a welfare program.

“As with most of you, my introduction to Social Security came as a young student when I got my first paycheck and, looking at my stub, wondered what happened to all my money,” he said. “It was something I didn’t want to pay, but it was something I hoped to collect someday.”

Many retirees might agree with that statement; 90 percent of them receive an average $1,000 a month from Social Security. That figure represents 90 percent of personal income for almost one-third of Social Security’s beneficiaries.

But demographic changes are putting pressure on the system. Baby boomers are approaching retirement age, while the ratio of workers (currently paying Social Security tax) to retirees is dropping significantly. People are living longer, drawing more money from the system. Given these facts, Keiser said he could understand why private investment, earning 6 percent annually, would be a tempting option to the 3 percent the fund earns by investment in specific government bonds.

“Why shouldn’t government say: let’s invest in the highest rates securities there are?” Keiser said. “But how do you deal with a system where the biggest investor would be the government? How do you deal with its success or failure? How do you deal with the risk?”

Personal Matter; Private Affairs

Keiser said all these problems go beyond simply privatizing a part of Social Security, an idea that is, incidentally, prevalent among the proposals that Lifson went on to discuss.

These plans include the most expensive of the seven proposals mentioned in the AICPA paper, the Ferrara-Ryan plan, named for its authors, Paul Ferrara, of the Institute for Policy Innovation, and Rep. Paul Ryan (R-Wis.), who proposed an identical plan in a 2003 bill. Lifson said that, for $6 trillion, their plan would keep current benefits intact, but add large personal investment accounts without raising the payroll tax. Funding would come from corporate taxation and an 8 percent reduction in federal spending.

Similar to Ferrara-Ryan is the DeMint plan, authored by Sen. Jim DeMint (R-SC) in his Social Security Act of 2003. The $4.6 trillion plan would maintain the current benefit structure and allow people to divert an average 5.1 percent of income to private accounts (the more you earn, the more you can invest, up to 8 percent). But the minimum benefit distribution would be just above the poverty level. And, like Ferrara-Ryan, DeMint would create public ownership of private companies.

The Reform Commission Plan 2, authored by Bush’s 2001 reform body, would cost $2.2 trillion (although the cost is lowered by calculating according to wage, not price inflation), with the creation of small private accounts but no increase in payroll taxes, nor any other indication of how it will be paid for.

Three of the remaining plans—ranging from $596 billion to $1.7 trillion—would provide small private accounts with minimum distributions at or above the poverty line, paid for by tax increases or by raising the $90,000 cap on Social Security taxation. By contrast, one plan would actually cost nothing because it would increase taxes, cut benefits and avoid the creation of private accounts.

Lifson emphasized that the Society was not taking a position on these proposals, but aimed to cut through the “smoke and mirrors” surrounding the debate.

“This debate is so covered in agenda, and there is no silver bullet,” he said. “Some out there regard Social Security as a safety net and others think of it as a bad investment. They’re both right.”

For a copy of the complete AICPA report, go to www.aicpa.org/members/socsec.htm.