RE: Doesn't Kolbe-Stenholm cut benefits 45%?

[National Dialogue Moderator <moderator>]

No, it does not.

Yes, it is the case that the reforms contained in Kolbe-Stenholm
would have the effect of eliminating the cost explosion projected
for the current system, which Mr. Johnson's message accurately says
will grow to more than 19% by the end of the valuation period.
Bringing these costs down to reasonable levels is one of the most
important reasons to enact reform.  I do not think that we want
our grandchildren to be forced to pay 19% of their income to support
Social Security, and another 15% for Medicare, before any other
national needs are addressed.

The numbers in Mr. Johnson's message refer to last year's version
of the legislation.  This year's would cost slightly more than the
version introduced last Congress, as is the case with the Senate
bipartisan bill.  But last year's would have held long-term OASDI
costs to approximately 10.5%, with an additional mandatory contribution
to personal accounts of 2% for a total of 12.5% -- in other words,
very close to the 12.4% rate that is assessed today.

The suggestion that benefits have been "cut 45%" if we achieve this
is an example of the tactic often used by personal account opponents
-- counting only part of the benefits provided by the Kolbe-Stenholm
plan.  Consider what would be the case if a similar line of argument
were employed against the President's proposal.  In the year 2030,
for example, 24.2% of the financing gap in Social Security, under
the President's plan, would be filled by government sales of stock.
If we were to only count the benefits funded in the old way, instead
of those funded by redemption of assets, it would look as though
we were "cutting" benefits.  As another example, if in 2070 we had
invested enough of the Trust Fund in stocks, it might be possible
to keep total OASDI costs to the taxpayer that year at 10.5%, the
rest coming from stock sales (I of course do not advocate this.)
Similarly, in a reformed personal account plan, part of the benefit
comes from redeeming the assets in the personal accounts, and only
the rest is passed on to the taxpayer.

The essence of advance funding is not to reduce benefits but to
reduce the amount of funding that must be sought at the last minute.
If an individual, or a family, set 2% of his income aside every
year, and save it, consider what would happen.  If his target, at
the age of 65, was to find income equal to 19% of his former salary
(picking the figure that fits your analogy), it might well be
possible to reduce the amount that must be newly generated at the
age of 65, to 10.5%, simply by putting 2% into real saving during
every working year.  (In fact, in this example, it would assuredly
do the job of funding the entirety of that 19%.)  The point is that
the nation, by putting aside some advance funding for the system,
can greatly reduce future costs, whereas they will skyrocket if we
do not do this -- even if the same levels of benefits are sought.
In the same way, if an individual or a family wait until the age
of 65 to begin gathering retirement income, it's a lot more expensive
at that point.  Costs can be reduced significantly by funding in
advance.

The Senate bill has some differences from the House bill, but here
are some relevant figures pertinent to your example:

	Current Law
	Year 2060
	OASDI cost:  19.05%.
	Promised monthly benefit for low-wage earner 
	    in 2060 (1999 dollars):  $895
	Benefit that can be funded:  $611

	Reformed system, 2060:
	OASDI Cost: 11.23%
	Required contribution to personal accounts: 2%  
	Total monthly benefit (1999 dollars) if bond rate earned:  $920
	Total monthly benefit (1999 dollars) if stock rate earned: $1168

The cost of meeting benefits has dropped from over 19% to lower
than 14%, but the benefits provided are higher under the reformed
system.  This is the consequence of prudent advance-funding.  All
figures are from the SSA actuaries or from CRS based on a preliminary
draft of the plan (they are still working on estimating the effects
of additions to the widow's benefit that are still being put
together.)

If we measure the quality of the system only by the costs we assume,
then our policies will simply drive us to pass on the highest
possible cost to future generations.  It would be unfortunate indeed
if we allowed tactics based on fear to cause us to avoid our
responsibility to save future generations from the tax levels that
are cited in this example.

Senator Judd Gregg