Ghilarducci, Teresa - University of Notre Dame

Teresa Ghilarducci
University of Notre Dame
Department of Economics
Notre Dame, Indiana 46556
219-631-7581 / phone
219-631-8809 / fax

Towards a Diversified, Secure, and Adequate Retirement Income for All Americans
White House Conference on Social Security Reform
December 8, 1998
The American retirement model is good news. Unlike most nations that mandate retirement at certain ages, many at 60, age discrimination laws protect older Americans, workplaces tailor pension plans, and Social Security helps 55% of the nation's elderly out of poverty, most of whom are women. These provisions, as do others, point to the most salient aspect of the U.S. retirement income security -- a vision of portfolio diversity.
U.S. workers depend on 1.) risky and rewarding individual choices; 2.) productive pacts and pensions between workers and employers; and, 3.) a secure base of universal social insurance. Therefore, we have a retirement income portfolio that thrives not only on economic productivity, but individual willingness and ability to save and work, and a strong national unity between generations and classes. U.S. retirement income comes from three sources: individual accounts that are highly costly to administer but can yield high returns from financial markets; insured employer plans that depend on employer and financial market health; and, third, from Social Security-- a universal system backed by the full faith and credit of the U.S. government. Too many of the planet's pensions rely on just one source of retirement income. For example, the Greeks and Italians depend only on their government plans, the Chileans on financial markets.
Aiming to make a good thing better, I have assembled some of the most popular options to amend Social Security into four categories. The criteria for selecting the best and rejecting others are to secure retirement income with portfolio diversity with minimal cost, disruption, and inefficiency.
Below are the 1.) Best, 2.) Acceptable, 3.) Unacceptable, and 4.) Diversionary options to solve the 2.19% of payroll deficit in Social Security's 75-year forecast.

Achieving Social Security Solvency and Diversity, Efficiency and Adequacy

Percent of Deficit Solved

A. BEST

1. Eliminate cap on employer contributions to cover 90% of all income (cap goes to $97,000 from $68,400) 25%

2. Raise payroll tax by .04% per year while indexing the earned income tax credit 64%

3. Use the CBO projections on growth (SSA uses a 1.7% growth assumption the CBO uses 2.0%) 33%

B. ACCEPTABLE, BUT NOT SO GREAT

4. Correct CPI by BLS criteria (hurts long livers) 14%

5. Give Social Security revenue to Social Security - now it goes to the Hospital Insurance (hurts Medicare)
10%

6. Raise normal retirement age to 67 in 2011 only if disability criteria is loosened to include sector unemployment (this costs .004%) 22%

C. UNACCEPTABLE VIOLATORS OF PORTFOLIO DIVERSITY, EFFICIENCY OR MINIMAL COST CRITERIA

7. Privatization is too costly, disruptive, and violates diversity N/A%

8. Shifting 40% of trust funds out of government bonds to stocks by 2014 (this puts too much of retirement income assets in the financial markets.) 12%

D. DIVERSIONARY, NOT WORTH THE FIGHT OR TOO VAGUE

9. Extend Coverage to state and local employees 10%

10. Divert the federal budget surplus to Social Security (too vague - the surpluses might not materialize) 64%

11. Tax all unearned income (capital gains and interest). (This will invite class warfare and moves away from the pension-for- work model.) 145%

Sources: I depended to a great extent on my own papers and Congressional testimonies and on Dean Baker's calculation of the revenue contribution of surpluses and tax increases in his latest Economic Policy Institute paper "Saving Social Security in Three Steps" (Nov. 1998); the Report of the 1994-95 Advisory Council on Social Security; the Bipartisan Commission Final Report on Entitlement and Tax Reform, Dec. 1994, Robert Ball's many communications, and estimates about the revenue impact on taxing unearned income comes from the AFL-CIO in Washington DC.