RE: No support for benefit cuts

[National Dialogue Moderator <moderator>]

It was and remains my hope that this forum can be conducted without
inviting an adversarial or partisan debate, as too often happens
with the Social Security issue.  However, since Congressman Nadler
has made some references to my Social Security plan that I believe
contain several errors and misleading statements, I feel compelled
to respond in the interest of clarity.  I want to repeat that I
congratulate Congressman Nadler for coming forward with a Social
Security proposal, and I do hope in the space provided in this
forum to put forward my plans for reform, without attacking competing
reform ideas.  Since this criticism has come forward, however, I
think it is important to set the record straight.

One accusation in the previous message is that my plan, as well as
the Kolbe-Stenholm plan would involve "benefit cuts."  It is often
the case that defenders of the status quo describe any replacement
of an unfunded benefit with a funded benefit as a "benefit cut"
because the proportion coming from the old unfunded system is less
than before, with some of the system having been moved to a funded
basis.  This permits the use of some misleading arguments.

For example, both President Clinton's proposal and the Nadler plan
would move a portion of the old system out of investment wholly in
federal securities, and permit some investment in other assets,
such as equities.  The difference between our proposals is that
under my plan, the individual beneficiary would choose the direction
of that investment, whereas under the Clinton and Nadler plans,
the federal government would do so.  It is important to recognize,
however, that the economics of shifting the investment are similar.
What is different is the way that the plans can be accounted for
in some discussions.  Under a system in which the government controls
the investment, the old treasury-bill investment and the new equity
investment can all be counted in the same "pot" of the Trust Fund,
and proponents of this approach can point to the total benefits
that this system would provide, summing the benefits coming from
the old methods and the new funding.  When discussing the personal
account proposals, however, opponents of personal accounts choose
not to count the benefits that come from the new funding (Cong.
Nadler's message used the term "phantom profits"), and only the
reduction of the pay-as-you-go portion.  Under both the Clinton
and Nadler approaches, the amount of benefit subject to the old
unfunded pay-as-you-go method would be reduced, as would be the
case in a personal account plan.  The difference is only that one
side permits itself to sum the entire benefit while only counting
part of the benefit of the alternate approach, which enables them
to charge the other side with "benefit cuts."

An example from my legislation makes the point directly.  Under
current law, a low-wage worker retiring in the year 2040 is promised
a monthly benefit of $752 in 1999 dollars.  Of this, only $536 can
currently be funded.  Under my proposal, this same worker would
receive an $852 monthly benefit if their personal account only
accumulated at the bond rate, and $993 if they achieved the historical
return on stocks.  Regardless of what intermediate rate they actually
achieve, they will do better than under the old system.  (These
figures come from the Congressional Research Service.)  But by
counting only the portion of the benefit that comes from the old
unfunded system, even though total benefits are higher, the charge
can be made that we are "cutting benefits." This is unfortunate,
as we would be doing so no more than would "cut benefits" than
would President Clinton or Congressman Nadler's proposals, by
reducing the proportion of the benefit provided on a pay-as-you-go
basis.  If we divided their proposals into benefits provided by
the pay-as-you-go financing and those provided by investment in
equities, it would also appear as though benefits were being "cut."

Congressman Nadler makes a reference in his message to an element
of our plan that he says would cause people to "pay more Social
Security taxes."  The opposite is true.  By moving to advance
funding, we reduce the amount of taxation required to support the
system.

I do not have the precise numbers from the Social Security actuaries
on the costs of the Nadler plan, so I will make an illustration
using the President's plan, which also would redirect a portion of
the Trust Fund into equity investment.

Under current law, the effective tax rates required to support
Social Security will be:

	Year        Effective Rate 
	2020        15.0% 
	2030        17.7% 
	2040        18.2% 
	2050        18.3%

This is the sum of payroll tax and general taxes needed to support
the system.

President Clinton has proposed moving a portion of the Trust Fund
into equities, so that a portion of future benefits would be financed
by selling stock.  The costs of these benefits would not vanish,
but would simply be displaced onto the private retirement savings
system.  However, the remaining portion collected directly through
tax revenues would be as follows:

	Clinton plan:       Effective Rate 
	2020                14.2% 
	2030                16.6% 
	2040                17.1% 
	2050                17.4%

I do not know the exact flow of stock purchases and sales under
the Nadler plan, and thus cannot make the same computation for his
plan.  However, if the level of stock investment is similar to the
President's, the cash flow would also be similar.

Under the bipartisan agreement, total costs would be greatly reduced,
and therefore net tax burdens as well.  Here are the figures for
the bipartisan plan:

	Year            Effective Rate 
	2020            14.7% 
	2030            15.8% 
	2040            14.8% 
	2050            13.5%

This includes the required investment of 2% in personal accounts.
Thus, in the year 2020, OASDI outlays would be approximately 12.7%
of national payroll, plus there would be another 2% placed in
personal accounts.

What can be seen from these figures is that total tax costs would
be greatly reduced by the advance funding created in personal
accounts.  The charge that somehow our changes would require an
increase in "Social Security taxes" is contradicted by the figures
from the Social Security actuaries.

I do wish to make one important point about the idea that 62% of
the projected budget surplus should be "transferred" to Social
Security.  There is broad agreement that a good portion of the
surplus should be saved for Social Security, but there is disagreement
as to whether we should resort to accounting gimmicks in doing so.

Under current law, there is a projected surplus for the next 15
years.  Of this, approximately three-fifths comes from projected
Social Security surpluses, the remainder from surpluses unrelated
to Social Security.  Both parties have agreed that the entirety of
the Social Security surplus should be saved for Social Security,
and that tax cuts and other new spending should be limited to the
remaining surplus.  Currently, we project total surpluses of
approximately $2.35 trillion in Social Security over the next 15
years, and both parties agree that, at least until Social Security
reform is enacted, the government should run a surplus of at least
this size, and this $2.35 trillion should be credited to the Social
Security Trust Fund. Note that this is the current-law Social
Security surplus, and current projections of the system's insolvency
in 2034 assume that this credit has been made and subsequently
redeemed.

Where there is disagreement is over the administration's proposal
to "transfer" another 62% to Social Security.  In other words, we
will effectively pretend that there is a third pot of money in
addition to the Social Security surplus and the on-budget surplus,
called the "unified surplus" -- and we'll give 62% of this to Social
Security, too.  In other words, we're effectively crediting the
surplus twice to Social Security.  The President put forward a plan
to "transfer" 62% of the surplus to Social Security, so that a
total of $5.1 trillion would magically appear in the Social Security
Trust Fund in the next 15 years, even though the total projected
surplus was significantly less.

This maneuver has become notorious in Washington as a form of
"double-counting."  We would save the Social Security surplus,
credit it to Social Security, and then we would credit it a second
time as 62% of the "unified surplus."  Economically, doing this
transfer a second time would achieve exactly nothing.  The
intragovernmental transfer would have no effect on net public debt.
It would simply decree that when it comes time to redeem the Trust
Fund,  the taxpayers would be obliged to redeem trillions more in
bonds from 2014-2049 instead of the current law 2014-2034.  It is
simply a declaration that future generations will be taxed in order
to redeem the transfers that would be made arbitrarily by issuing
a second round of credits.

Although there is much more public opposition to the elements of
the Clinton and Nadler plans to invest the trust fund in the equities
market (recently the subject of a 99-0 opposition vote in the
Senate), the double-credited "transfers" are an equally troublesome
element of each plan.  By making a total of $5.1 trilliion in
transfers over the next 15 years ($2.35 trillion of current-law
transfers plus $2.75 trillion in additional credits), these transfers
plus interest credited based on them would enable policymakers to
pretend that we have postponed the problem for an additional two
decades.  No reform would be enacted, and future taxpayers would
be hit with spiraling taxes while being told that they are simply
"paying off the Trust Fund" and legally and morally have no other
choice.

I have been very critical of the suggestion on the part of the
President that we can simply solve the problem by doing nothing
other than making a series of accounting changes.  I am very eager
to work with him on a bipartisan solution.  The President has set
forth his view that it will be helpful to Social Security if we
"save the surplus" and reduce public debt.  But the credits he
proposed to Social Security, a total of $5.1 trillion over 15 years,
are not in any way related to debt reduction, and are simply a
papering over of spiraling tax liabilities.  This suggestion on
the part of the President damaged the prospects for reform
considerably, because it sent a signal that the problem could be
postponed essentially by doing nothing, emboldening opponents of
reform.  I remain hopeful that the President will come forward with
a more substantive proposal.

I would repeat that I only congratulate those who have offered
reform plans, and I am pleased to present the case for my own.  I
did, however, deem it necessary to respond to the allegations that
had been made about my proposal, and I hope that this information
will enable the discussion to return to a constructive course.

     Senator Judd Gregg