Concerns of Michael Jones about Younger Workers

[National Dialogue Moderator <moderator>]

I appreciate the chance to respond to Mr. Jones's concerns about
the rate of return for younger workers, which I fully share, and
which are among the many reasons for developing our reform proposal.

You are correct that the current system would provide a worsening
rate of return for young workers relative to current retirees.  It
is not true, however, that our proposal would make that rate of
return still worse.

An evaluation of the rate of return requires a complete accounting
of all of the costs and benefits imposed by the system.  I will
use 1999 dollars to make the point about how a worker would fare
under our proposal vs current law:

Consider a low-wage worker, income $13,380 in 1999 dollars.  Let's
imagine that they were born in 1975 and are working in 2025.  Under
current law, this individual would pay $1659 in OASDI payroll taxes
(again in those 1999 dollars).  Their share of the income tax burden
to pay current benefits would be approximately $241.

In the year 2040, the system would promise them a monthly benefit
of $752 -- but only $536 of that can be funded.  There is no way
of knowing how much future Americans would have chosen to cut
benefits, or to raise taxes.  The individual would be assured of
a benefit likely higher than $536, but we cannot say how much.

Under our proposal, this individual would have a lower tax burden
in the year 2025.  It would essentially come down to $1392 in OASDI
taxes, $268 contributed to the personal account, and an income tax
burden of $153.  Their income burden would have been reduced by
37% -- even including the effects of the CPI reforms upon income
tax indexing.

In the year 2040, if their personal account had appreciated at the
historical bond rate, their benefit would be $821 a month.  If it
had appreciated at the historical stock rate, it would be $993.
Either way, they will be assured of higher benefits, after having
paid lower taxes, than the current system.

The same picture emerges with higher income levels, except that
for them, the distribution between the improvement on the tax side
and the benefit side would be different, more coming from the
improvements in tax levels.

For example, a worker born in 1975 with $29733 in earnings (in 1999
dollars; in other words, an average single earner) would save more
than $650 in income taxes annually by the year 2034.  For a maximum
earner, the savings would be $2350 a year.  This is the result of
reducing the unfunded liabilities of the current system.  This
savings, obviously, could be placed by the workers in a funded
retirement benefit if they so chose.  It is money that they would
not otherwise have under current law.

Yet, their benefits would still be higher.  That average worker,
retiring in 2040, would only be assured a benefit at the $907 level
under current law.  Under our plan they would receive $1100 if
their account grew at the bond rate, $1480 at the stock rate.

This isn't magic.  It is simply the consequence of putting some of
these workers' money aside in funded accounts instead of using it
in increasing portions to sustain a pay-as-you-go system.  The
characterization that they would face "higher taxes, a lower return,
and more uncertainty about getting a benefit" is wrong on all three
counts.  Taxes would be reduced significantly due to restraining
the growth of system costs.  Rate of return improves because the
rate of return in the funded accounts is superior to the current
system.  And certainty would increase because the system would be
solvent instead of facing an uncertain mix of tax increases and
benefit cuts.

You have asked about the burden of change, and whether this plan
singles out younger workers to "break a promise" about benefits
paid.  It was by contrast the necessity of keeping our promises
that guided in large part our proposed reforms of the system.  For
example, current retirees have worked all their lives on one set
of expectations and thus their benefits cannot be cut without
reneging on those promises.  Near-term retirees have paid payroll
taxes for the vast majority of their lives and thus their benefits
can be affected very little without reneging on the promises based
on their past contributions.  Young workers have also paid into
the system for a time and are entitled to benefit promises being
kept on everything they have put into the system to date.  Our
proposal ensures that none of the benefits already accrued by
individuals' contributions to the system will be cut.  Rather, it
deals with the structure of contributions and benefits from this
point onward, changing the mix to a sustainable one.

You ask what guarantee exists that in 15 years future benefit cuts
would not be required.  I would make several observations:

1) There is no such guarantee under the current system.  All benefits
that are promised are subject wholly to the whim of the body politic
at the time.  Moving part of the system into a personal account
reduces the portion that is subject to the threat of benefit cuts,
and gives you direct ownership of a piece of your retirement benefits
that do not face this risk.

2) Our proposal includes a "fail-safe" provision that governs the
life expectancy factors that are used to compute the PIA formula
levels.  As projections change, the Trustees will be required to
notify Congress if the system shifts significantly out of actuarial
balance, for better or worse, and they would be required to recommend
an adjustment to these factors.  Congress would then be required
either to pass them or to enact other reforms that balance the
system.  By requiring change at the moment the necessity is detected,
changes in the PIA levels can be kept slight and occurring 75 years
in advance.

Your question appears to stipulate that you would have to pay more
for the benefits provided under our program, but the reality is
that you would pay far less.  The peak OASDI outlay cost under this
program would be 13.8% annually (or 15.8% if the personal account
contributions are included), in contrast with the 18% you would
face under current law in 2030.  It is incorrect to say that our
proposal would raise the retirement age above current law, under
which it would go to 67. True, our proposal would move it to 67
faster than current law, but would leave it there.  I do not know
your age, but if you were born in 1961 or later, this change would
not affect you, because under current law it will be 67 for people
who turn 62 in 2023.

It is not clear to me from your question whether you would prefer
to allow the status quo to play out rather than enact a reform plan
such as ours.  Clearly, the status quo would greatly exacerbate
all of the concerns that are expressed in your message.

If by contrast you would like to move to a wholly privatized system,
there are political as well as policy considerations:

Political:  Although I, like you, would like to see more of the
system moved to a funded basis, this does not currently enjoy
widespread political support.  Even getting to 2% would require a
confluence of political factors, including the active involvement
of the President, which do not now exist.  You can see on this
forum the widespread divergences of opinion.  Congressmen Nadler
and Pomeroy oppose funding personal accounts with payroll taxes,
even 2%.  Although they are a minority on this board, they represent
a set of concerns that has strength in Congress.  It has taken
considerable active work between me and a number of Democratic
colleagues to produce this level of bipartisan support for even a
2% plan.  Had I insisted on a larger account, there would be no
bipartisan plan with personal accounts in the Senate, and discussion
of them would be irrelevant to prospects for action.  One good way
to make sure that absolutely nothing happens in the direction of
funding would be for personal account advocates to insist on total
privatization of the system, or even half of it.

2) Substantively, it is not a given that moving to complete funding
would be a net gain for your rate of return.  Under our proposal,
it is possible to balance the costs of transition, and also slow
the growth in DB benefits less than we know that the personal
accounts can make up for.  If, by contrast, young workers devoted
the entirety of their personal accounts to a funded system, then
we would have to find another source for the approximately 11% of
payroll that is now needed to meet payments to current beneficiaries.
Even if there were a political consensus to cut benefits for current
beneficiaries, which is very unlikely, this percentage will still
grow rapidly in the next few years.

If you are currently a wage-earner and a taxpayer, there is no
getting around it:  You are the source of the money to pay benefits
to current seniors.  Currently that cost, in a system that puts
aside no advance funding, is about 11% of your pay.  If we moved
to an advance-funded system including 2% personal accounts, it
would cost a little less than 13% in the immediate future -- but
the gain is that a well-balanced reform system will pay for itself
before costs explode by 2030.  Accordingly, the cost to taxpayers,
net, will rise from about 13% to 15.8% in 2030 rather than from
11% to 18%, a fairer distribution across generations.

If today's working population by contrast put all of their 12.4%
into funded accounts, then the net costs they would currently face
would be over 23% of their pay, which would require an enormous
increase in taxation, borrowing, or both.  How much of that cost
you personally bore would depend upon your age and upon the mix of
taxation and borrowing.  But there is no practical way that today's
young generation could simultaneously fund the whole of today's
current retirees' retirement, and the whole of their own, and see
a gain in their rate of return.  The necessity of spreading burdens
fairly among birth cohorts requires some gradualism in the turn to
advance funding.  Moreover, since even the current system would
rise to an approximately 19% tax rate within the foreseeable
projection period, it would seem odd for the nation by choice to
assume costs of 23% at any point.  This would place a greater burden
on today's workers than even workers in 2075 would face under
current law.

I hope that this sheds some light on why we have a plan that does
not go as far in the direction of advance-funding as it appears
you would like.  I do thank you for your question and hope that
this was useful to you nonetheless.


Senator Judd Gregg