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Social Security Reform

The current Social Security program has served our nation well for over sixty years. The lives of countless elderly citizens have been greatly improved by this dependable source of income. However, as we approach the new millennium, several changes to the demographic, economic, social, and political landscape of our nation demand that a new assessment be made as to the retirement income policy that should take us well into the next century. Longevity has increased substantially since the current program was designed in 1935. Those reaching retirement age today can expect to live another 15 to 20 years on average compared to the life expectancy of the 65 year old in 1935. Today there are about 3 workers for every pensioner while there were 42 for every pensioner during the days of the first retirees of the 1940's. The aftermath of the Great Depression saw a need for older workers to leave the workforce to create needed jobs for the young and unemployed. Today we see a record of several years of low unemployment with the forecast of a labor shortage in the coming decades. The trust fund concept as a way of protecting future pension promises, though not well understood by the general public, gained acceptance during many years of government budgets that were largely balanced. Growing confidence and trust in the government as a whole, and especially the Social Security Administration, continued into the 60's. These views have now changed and the public, especially younger members, prefer some say in how their retirement future should be safeguarded and the confidence in the government continues to ebb with citizens in all age groups. The personal savings rate in this country continues to lag behind the rates in other competing economies. Considering all of these factors, it is time to consider fundamental changes to the social security retirement program. Changes in the program should follow certain basic principles. Designs should aim to meet the challenges posed by the following factors:
  1. The demographic reality and forecasts bode problems for the current program design.
  2. The savings rate in the United States needs to increase.
  3. The confidence of workers in the system is falling and must be restored.
  4. The vast majority of Americans support or accept a degree of transfer from high earning to low earning workers.

The twelve principles elicited below should guide the efforts to design the retirement income system for the coming century:

  1. Current beneficiaries and workers within at least ten years of retirement should be fully protected under the current system.

  2. The combination of a flat pay-as-you-go defined benefit tier and a fully funded tier of defined contributions can satisfy the desire for some individual choice and utilize the benefits of individual savings and progressive redistribution. This combination also maintains the protection of defined benefits with the opportunity for greater returns on retirement savings.

  3. The program must be designed so that the amount of the defined benefit will ensure against poverty, but also so that individual savings are encouraged and will become the primary source of retirement income.

  4. While the program should move individuals from dependency on government to a system of individual savings accounts, recognize that this will take a long time and that lower level and part time workers' contributions may have to be subsidized. Also, the use of government guaranteed minimum benefit should be used as necessary during transition.

  5. Recognize that there will be a cost for transition and try to spread that cost across generations to the extent feasible. There should also be recognition that the costs to try to h the current program are substantial.

  6. Establishing individual accounts will require substantial time and the investment and regulatory mechanisms to protect workers' savings need to be designed and implemented carefully. The government may have to initially subsidize the establishment of this system

  7. Administrative costs for this new program are likely to be substantially higher than for the current program. At least in the initial years, these administrative costs may limit the choice of investment selections for workers. There should also be recognition that the current administrative mechanism leaves much to be desired.

  8. Some of the details for full implementation require further study, (e.g. requirement for annuitizing the defined contribution income at retirement) but this should not delay the decision for the basic design of the program for the next century.

  9. Whatever the final design of the program there should be broad bi-partisan support before implementation. Such a major decision should have broad acceptance by both parties and the public to forestall immediate attempts to substantially modify the program.

  10. The public still does not have a good understanding of the current program Any new program should be carefully explained to the public along with the reasons for moving away from the current program

  11. While the defined contribution tier of this reformed program should leave the age of retirement somewhat to individual choice, incentives for increasing productive work and reducing early retirement must be identified and implemented. This will require new long term training and education efforts.

  12. While the disability program of Social Security may require its own set of reforms, this reform effort should be restricted to the retirement portion of the program and not affect the disability or survivors aspects of the current program.

Since there is broad agreement that at least a portion of the current budget surplus should be allocated to "save Social Security", Congress and the Administration should agree immediately to allocate the current surplus and any further surplus to individual retirement accounts until the final redesign of Social Security has been agreed to and an implementation plan has been set. In order to stimulate final agreement the entire amount of Social Security surplus revenue collected between now and implementation of a new program should be designated toward this commitment. This should be implemented by allocating a Social Security Bond of$500 to each worker between the ages of 25 and 55 who earns four social security credits for 1998. This entitlement can be established by the Social Security Administration as it processes the earnings records for 1998 and a certificate of entitlement issued. The total amount of these funds should be invested in a special account by the Treasury Department until the appropriate investment ad oversight mechanisms for the reformed social security program are implemented. This allocation will establish the principle of individual accounts and any earnings will be allocated equally to participants. By making these allocations at a flat rate, the principle of redistribution is established and each worker has claim to these funds only upon retirement.

Louis D. Enoff December 1, 1998

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