Committee for Economic Development
2000 L Street, N.W., Suite 700
Washington, DC 20036
Phone: (202) 296-5860
Fax: (202) 223-0776
Bruce K. MacLaury
President Emeritus, The Brookings Institution
Chairman, CED Subcommittee on Social Security Reform
Van Doorn Ooms
Senior Vice President and Director of Research, CED
The Committee for Economic Development (CED) is an independent,
nonpartisan organization of over 200 business and education leaders,
principally CEOs of business firms or universities. For over half
a century, CED's trustees have produced policy statements from the
perspective of the national interest on major economic and social
issues. In 1997, after a year of study by a committee of its
trustees, CED released Fixing Social Security.
The Problem. CED found that Social Security faces two fundamental
problems -- fiscal insolvency and political insolvency. Fiscally,
promised benefits cannot be delivered in the long-term under the
present funding structure. Politically, current contributors,
especially younger workers, are increasingly dissatisfied with the
low and declining returns from their payroll tax contributions. As
a result, they view social security as a "bad deal," and their
political support for the system is waning. We believe that any
viable reform effort must address both these problems.
CED's Principles for Reform. CED trustees first defined a set of
principles and objectives for reform. We recognized that there are
no easy fixes, that trade-offs between objectives are inevitable,
and that some sacrifice is required. However, we concluded that,
to the greatest extent possible, reform should:
- Provide a guaranteed minimum retirement income, or safety net,
for all workers and their families, retaining an element of income
redistribution to support this safety-net;
- Reduce inequities between generations, principally by raising
returns for younger workers, and also improve equity among
beneficiaries, particularly between workers with non-earning spouses
and other retirees;
- Increase national saving and investment, which will be required
to provide adequately for both the rising number of elderly and
the relatively small number of workers who will help support them;
- Require universal participation, so that the burden of the
redistribution and insurance elements of social security be shared
as broadly as possible;
- Be enacted promptly but phased in gradually to provide ample
time for planning for and adjusting to changes in retirement
arrangements;
- Hold down administrative costs, including any arising from
investments in private assets.
CED's Recommendations. To address the dual
problems of fiscal and political insolvency,
CED recommends a two-tier solution:
- Restore solvency to our current basic benefit system. The current
payroll tax would be preserved. While retaining a basic retirement
safety net for low-income workers, future payments to middle and
upper income beneficiaries would be modestly reduced by slowing
the growth of initial benefits, raising the normal retirement age
to 70, increasing years of covered employment required for full
benefits from 35 to 40, and taxing benefits in excess of contributions,
as is done now for private pensions.
These changes would have little or no effect on current beneficiaries
or older Americans near retirement. However, they would be
substantially more than required to restore 75 year actuarial
balance to the trust fund. We believe that such a "safety margin"
is appropriate in light of the history of optimistic projections
of the trust fund balances and in order to maintain such actuarial
balance over an extended period. If the safety margin proves
unnecessary, the benefit changes can be modified or payroll taxes
reduced.
- Raise the rate of return on contributions by establishing a
"second tier" of privately owned personal retirement accounts (PRAs).)
These accounts would be funded by mandatory contributions of 3
percent of payroll, half from employees and half from employers.
The contributions would be made from pre-tax income (as in 401(k)
plans) and annuitized upon retirement. PRAs would be privately
owned and managed, but investment options would be limited to hold
down administrative costs.
We consider the private ownership and
management of these accounts -- putting them beyond the reach of
government -- to be a critical feature of the program. Public
ownership and/or control of these funds entails the risk that the
government will contrive to spend them, as continues to be the case
at present, our new unified budget surplus notwithstanding. In
addition, public investments in private securities would place the
independence of the private sector in serious jeopardy. These
investments would be extremely large, giving the federal government
an effective controlling interest in many private companies. We
doubt that government could permanently resist the temptation to
pursue political and social objectives through its investment
policies.
Comparison With Other Proposals. In designing this program,
CED's trustees rejected other proposals that fell short with respect
to some of the basic principles and objectives listed above:
- CED rejected tax increases which would reduce rates of return,
increase intergenerational inequity, and weaken political support
for social security. Payroll tax increases would also tend to reduce
employment and economic growth.
- CED also rejected privatization of the basic system, which
would abandon the principle of social insurance and impair our
retirement safety net. Privatization would also create enormous
transition costs that would entail unacceptable increases in deficit
financing or commensurate tax increases. Partial privatization
plans that would "carve out" a significant portion of the current
payroll tax to fund private accounts suffer in some degree from
these same shortcomings.
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