Briefing Book

White House Conference

The Center on Budget and Policy Priorities 820 First Street, NE, Suite 510 Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 center@center.cbpp.org http://www.cbpp.org The Strengths of Social Security and the Best Course of Action for Preserving this System Wendell Primus Director of Income Security The Center on Budget and Policy Priorities Social Security has unquestionably been our nation's most successful social program. As such, great care must be taken to ensure that the achievements of this program are continued and any reforms taken to address the long-term actuarial imbalance do not undermine the strengths of this system. The Success of Social Security. Social Security is largely responsible for the dramatic reduction in poverty among elderly people. Half of the population aged 65 and older would be poor if not for Social Security and other government programs. Social Security alone lifted 11.4 million seniors out of poverty in 1997, reducing the elderly poverty rate from about 48 percent to about 12 percent. Social Security payments provide the majority of the income of poor and near poor elders. In 1995, Social Security payments constituted two-thirds of the total income of the elderly poor. Some 96 percent of seniors with incomes just above the poverty line received Social Security payments in 1994. This program is the major source of income for 66 percent of beneficiaries age 65 or older, and it contributes 90 percent or more of income for about 33 percent of these individuals. Social Security is designed with protections that are especially important to low-income seniors. The benefit formula is progressive and provides low-wage workers with proportionally larger benefits in relation to their pre-retirement earnings. Additionally, benefits are automatically adjusted each year for inflation, which prevents erosion in the buying power of benefits. Finally, Social Security is a comprehensive insurance system that provides important benefits in the event of death or disability. Approximately one third of all beneficiaries receive disability or survivors benefits. One in six people age 20 today will die before retirement and about three in ten will become disabled. Clearly, Social Security is an essential program for workers of all ages. Moreover, Social Security is essential to dependents of workers. The program is also responsible for removing 4.6 million non-elderly individuals, including one million children, from poverty in 1997. Preserving Social Security for the Future. In light of the importance of Social Security to workers and their families, actions taken to address the long-term imbalance in Social Security must not undermine the achievements of the system. One option is to invest a portion of the trust funds in the private market through an independent governing board. This would increase the rate of return on this portion of the assets and make the treatment of Social Security assets comparable to the treatment of private pension funds. Furthermore, investing the trust funds would achieve the same rate of return as individual accounts without exposing workers to market risk or incurring the transition costs, annuity costs, or administrative costs of establishing 150 million individual accounts (see "The Shortcomings of Individual Accounts" by Kilolo Kijakazi of the Center on Budget and Policy Priorities ). The investment decisions would be isolated from political influence by: appointing an independent governing board, set up like the Federal Reserve Board, to manage the funds; appointing an independent executive director of the board; selecting a portfolio manager through a competitive bidding process to invest the funds; requiring the portfolio manager to passively invest in broadly indexed funds with the level of investment set by statute; and prohibiting board members from voting stock. The Social Security Administration actuaries estimate the long-term imbalance of 2.19 percent of payroll can be reduced to 0.97 percent of payroll if 50 percent of the trust funds is invested in equities. The savings achieved by investing the trust funds in equities would lower the benefit reductions or tax increases needed to restore the long-term balance. Another option would be to measure price changes more accurately. Providing the Bureau of Labor Statistics (BLS) funds to update the market basket used in the Consumer Price Index (CPI) at least every five years and incorporating corrections to the CPI already announced by BLS will reduce the long-term deficit by about 0.45 percent of taxable payroll. The remaining amount could be eliminated by modest increases in revenues or benefit reductions. Modest reductions in benefits on a prospective basis should be considered to close the gap. The most attractive revenue options are to increase the earnings base subject to taxation and to add all newly hired uncovered state and local employees to the Social Security system. Conclusion. The strengths of the Social Security system can be preserved for future workers by investing the trust funds in the private market to increase the rate of return to assets without individual risk, transaction costs or administrative costs. Then modest program changes could be implemented to eliminate the remaining shortfall.