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Employee Benefit Research InstituteEDUCATION AND RESEARCH FUND
2121 K Street, NW, Suite 600
www.CHOOSETOSAVE.org
Social Security ReformDecember 3, 1998Submission of Dallas L. Salisbury, President, EBRI The Employee Benefit Research Institute (EBRI) joined others in early 1995 to launch a national savings education campaign. That work led to the SAVER Act, a 1998 National Summit on Retirement Savings (see more at www.saversummit.org), and the launch of a major print and broadcast education campaign called Choose to SaveTM. That campaign, in print and radio form, is now being used across the nation (see more at www.choosetosave.org). EBRI and its partner organization, the American Savings Education Council, were the private sector co-organizers of the summit. The summit led me to three clear conclusions, which were highlighted in my opening presentation and in the final summit report. First, Social Security and pensions do not provide enough income for most Americans to have a comfortable retirement. Second, any change to Social Security must be undertaken with great care if it is to do more good than harm in terms of retirement income, survivors' benefits, and disability benefits delivery. Third, the nation is not yet doing enough savings and investing education to allow a smooth transition to individual choice in Social Security for at least 60 percent of the labor force, those who are not yet saving. As a result, EBRI has both accelerated its own educational efforts and expanded its work on the analysis of alternative methods of Social Security reform, towards our constant objective: "informed design and decision making." We first published a major Social Security reform study in 1983, which included a chapter on individual accounts. Like every other study on the subject published since that time, the focus was on philosophy and average numbers. The numbers have been projections of how individuals would fare-"on average"-given assumptions about contribution rates and investment returns. The analysis of individual accounts published to date has been lacking in a number of ways. First, most of the analyses ignore survivors' benefits as a value of the present system. Second, most assume that all account holders get the same rate of return, and that this rate of return is above the bond rate but below a pure equity rate. Third, they use static analysis without consideration of investment risk, and present findings as if there is not any dispersion around the mean. Fourth, they simply assume that all forms of individual accounts are possible. EBRI began work in 1996 to overcome these weaknesses in the way Social Security reform alternatives are assessed. First, we worked to develop a stochastic model of the Social Security program that shows a distribution of possible reform outcomes, allowing you to see the winners and the losers within a cohort, not just the average for a cohort. Further, survivors' benefits are built into the model to allow a fuller comparison of the present system relative to an individual account system (see http://www.ebri.org/SSProject/sslisting.html. Second, we began working with the Investment Company Institute and major 401(k) record keepers in 1996 to develop a comprehensive data base that would allow us to input into the Social Security model information on how different individuals invest by age, income, and suite 600 tenure. This allows real investment allocation variation to be used to assess likely investment allocation, and rates of return, in an individual choice system. Third, we began detailed administrative implementation analysis to assess what type of individual account might actually be possible given the current structure of the labor force and the current state of employer action in making SSA filings with the government. We considered the call of many advocates of individual accounts for a design that would not increase the work of small employers. We concluded that any plan to reform Social Security by adding individual "defined contribution" accounts must address important logistical challenges and trade-offs that have been largely unrecognized in the reform debate. Such considerations will actually determine whether we can have individual accounts in Social Security, in what form, and in what time frame. As an organization with 20 years of experience in administrative issues pertaining to employment-based savings plans, we found ourselves in a unique position to shed light on some important issues surrounding the administration of Social Security individual accounts. We've also seen Congress repeal laws such as the Medicare Catastrophic Coverage Act of 1988 and the Internal Revenue Code Section 89 "nondiscrimination" rules for health insurance plans (Tax Reform Act of 1986) because administrative issues were not worked out before reform was passed. Our new survey of small employers' attitudes toward individual accounts (www.ebri.org) underlines the importance to small employers of not adding substantial administrative burdens or costs and not increasing payroll taxes to pay for individual accounts. Our new Special Report/Issue Brief lays out the facts and trade-offs, in the hope that others will use them to examine whether and how an individual account system might be designed to achieve policy goals.(http://www.ebri.org/ll98ib.pdf) The major findings of the EBRI analysis include:
The tools are in place to allow this Social Security reform debate to be the most substantive/fact-based in history. Those who set forth proposals will have them tested for validity and results, by EBRI and others. The ultimate result should be a better policy outcome.
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