Briefing Book

White House Conference

The Concord Coalition A nationwide, nonpartisan, grass roots movement to eliminate federal budget deficits and build a sound economy for future generations. 1019 19th Street N.W., Suite 810 Washington D.C. 20036 202 467 6222 (Fax) 202 467 6333 http://concordcoalition.org After a year of dialogue, the time has come for bipartisan action to ensure that Social Security is fiscally sustainable and generationally responsible. The current system is neither. Overall, the challenge is to reform the program in a way that retains its beneficial effects for retired and disabled persons without overburdening workers or the economy. Defining the problem The first step in this effort is to define the problems that need fixing. The Concord Coalition has identified these key problems to be addressed in any comprehensive reform proposal: Changing demographics make the current pay-as-you-go benefit structure unsustainable. Absent change, the system will either overburden future workers with steep tax hikes or betray future retirees with deep benefit cuts. Workers are on track to receive increasingly low returns on their contributions. Despite a growing consensus that America needs to raise its private savings rate, Social Security's pay-as-you-go benefit structure discourages savings. Low and declining public confidence threatens support for the program. No single reform is capable of addressing each problem. Reform legislation will require a mix of options. And, because the political process is one of debate and compromise, no one is likely to get his or her ideal result. Failure to achieve perfection, however, is not an excuse for inaction. Establishing criteria The second step in the process of reform is to establish a set of criteria for evaluating the final result. These criteria should be correlated to the problems that need fixing. Having a vision of the desired result will help avoid the danger of adverse unintended consequences. The Concord Coalition suggests the following criteria: Social Security reform should, at a minimum, maintain the program's vital safety net protecting older Americans and the disabled against poverty and loss of income. Social Security reform should improve the projected "money's worth" of payroll contributions for young workers and those who have not yet entered the work force. Social Security reform should not add significantly to the publicly held debt, but instead, should increase net national savings. The costs of reform should be borne fairly by age and income groups. Reform of the system should provide adequate protection against both political and investment risk. Because the Social Security trust funds only provide spending authority with no real resources beyond the government's power to tax future workers, reform proposals should be measured by their impact on the program's projected operating balance in addition to the trust funds' 75-year actuarial balance. Reform proposals should be grounded in prudent demographic, economic, and administrative assumptions. Any plan, including one that simply maintains the status quo, can be made to work on paper if the assumptions are drawn to fit the desired result. Assessing the options Social Security does not face an immediate crisis. But reform is on the political agenda in 1999 because the program is unsustainable over the long term, and early action will produce less abrupt and disruptive solutions. That leads to some crucial but often overlooked conclusions: The choice among options is not between "guaranteed" future benefits under the current system and "risky" or "burdensome" reform. The only guarantee about the benefit promises of the current system is that they are substantially unfaded. Reforms involving individual accounts should not be compared with a hypothetically solvent status quo. The proper comparison is between a reformed system with individual accounts and a reformed system without individual accounts. The current debate is not about the retirement security of those who have left the work force, or those who will leave in the near future. The debate is about the retirement security of those who have many working years ahead, and those who are still in grade school. For them, doing nothing is the worst option. There is no free lunch. Each reform option involves trade-offs and each comes with a fiscal and political price, regardless of whether it aims to shore up the pay-as-you-go system or involves a transition to a prefunded or partially prefunded system. Saving the surplus The currently projected Social Security surplus could be productively used to reduce federal government debt held by the public. However, there is a great probability that the surplus will be used, as it has been in the past, to finance other government spending or for tax cuts, unless steps are taken to invest it for Social Security beyond the reach of government control. If individually owned accounts are part of a comprehensive reform bill, the Social Security surplus could be used as an initial source of funding for these accounts. This would truly save the surplus for Social Security.