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| Briefing Book |
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ROBERT J. MYERS [1]9610 Wire AvenueSilver Spring, Maryland 20901 301-588-1335 FAX 301-588-7809 STATEMENT AT WHITE HOUSE CONFERENCE ON SOCIAL SECURITYIn order to be appropriate and meaningful, any necessary reform of the Social Security program should recognize the importance of two elements--its basic purpose and its current and long-range financial status. Nature of the Social Security Program From the inception of the Social Security program in 1935, it has always been a social insurance system designed as an income-maintenance plan in the event that certain risks occur -- currently, age or disability retirement and death of the worker (either before or after retirement). Conversely, it was not intended to be an investment plan, under which every participant is supposed to receive the same investment rate of return. Rather, the Social Security program is a mixture of individual equity and social adequacy, with emphasis on the latter. For example, larger benefits relative to contributions are paid in some cases than in others -- e.g. (1) workers near retirement age at the start of the program, (2) low-earnings workers, and (3) workers with dependents. Public education is based on social adequacy principles, rather than individual equity ones -- even more so than is the Social Security program. Thus, two families with the same number and ages of children receive the same education benefits, and yet the family with a mansion pays much more real estate school taxes (i.e., a lower rate of return) than does the one with a modest home. Similarly, a family which never has children receives a very poor "rate of return" on its school taxes (unless one takes a broader view as to what is good for the nation). Current Financial Status of Social Security Program From a short-range cash-flow standpoint, the Social Security program is in excellent condition. At the beginning of 1998, the trust-fund balance was $656 billion, an increase in the past 12 months of $89 billion. It is likely that, in the next decade, the annual excesses of income over outgo will increase to a level of about $150 billion. Thereafter, however, according to the intermediate estimate in the 1998 Trustees Report, such excesses will become smaller, and after a decade will cease to exist (and, in fact, will turn negative). As a result, the trust-fund balance will decrease and will become exhausted in 2032. A good measure of the long-run financial status of the Social Security program is the long-range actuarial balance. This element, expressed as a percentage of taxable payroll, if negative, indicates the increase in the combined employer-employee tax rate which would be needed immediately if the program is to be fully financed over the 75-year valuation period. According to the intermediate estimate, the long-range actuarial balance is -2.2% of taxable payroll. On the other hand, the low-cost estimate shows a small positive balance, while the high-cost estimate shows a much larger negative balance. The conclusion to be drawn is that a significant, but not overwhelming, long-range financing problem very likely exists. This can be solved in numerous ways within the existing structure of the program. However, solving the problem by the simple, not too painful, method of increasing the combined employer-employee tax rate by 2.2% is not a complete solution, because insufficient financing would be present after the end of the 75-year valuation period. What would happen if the assumptions of the intermediate estimate were exactly fulfilled, and the combined employer-employee tax rate were increased by 2.2%, is that huge fund balances would be built up in the next few decades and thereafter drawn down. So, at the end of the 75-year valuation period, the fund balance would be only one year's outgo, and a higher tax rate (by about 4%) would be needed thereafter. This would hardly be a reasonable way to solve the problem.
1 Chief Actuary, Social Security Administration, 1947-70. Deputy Commissioner of Social Security, 198l-82. Executive Director, National Commission on Social Security Reform, 1982-83.
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