Response to Richard Arsinow

[National Dialogue Moderator <moderator>]

Dear Mr. Arsinow,

Thank you for contacting me on my Social Security reform proposal.  
Below are answers to your questions:


"*Have you drafted this plan into a bill? What is its number?"

Sen. Santorum:  My proposal is still being developed, and so I have 
not yet introduced it in bill form.

"*Am I to understand that there is more privatization of lower 
wage-earners' FICA than that of higher wage-earners?"

Sen. Santorum:  Under my plan, the PRA structure is designed to mirror 
current law Social Security's progressivity so that lower-wage workers 
receive a higher portion of their covered earnings in their personally 
owned and controlled PRA.  There were two primary reasons for my PRA 
design along these lines:  1) to address concerns over administrative 
costs; and 2) to enable low-wage workers and families greater savings 
and wealth creation for retirement -- something that is not possible 
under the current system, nor through most other retirement savings 
vehicles given that payroll taxes and daily living expenses soak up so 
much of working families' disposable income.  At the same time, my 
plan retains the high degree of progressivity of Social Security's 
basic defined benefit structure, so again lower-wage workers have a 
higher degree of protection in comparison to their lifetime payroll 
tax contributions, and are not exposed to new risks, especially if 
they choose to save and invest in government bonds. 

"*It would appear that your plan proposes no changes to formula 
benefits, and that the formula benefits are financed by "clawing back" 
a certain amount from PRAs at retirement?  Is this correct?  In what 
percentage of retirements is it projected that the PRA balance will be 
sufficient to fully cover this "clawback"? What provisions are made 
for funding the benefits when the PRA falls short? Isn't it true
that if the PRA falls short, the participant receives absolutely no 
benefit from the privatization, because his or her PRA is "clawed 
back" in its entirety?"

Sen. Santorum:  I will do my best to address the bevy of questions and 
comments contained in this paragraph.  I have included several 
provisions in my plan outline that specifically addresses Social 
Security's enormous unfunded liabilities, and they are listed on this 
forum's web site under my position paper.  I also discussed these in 
greater detail in an earlier exchange posted on Friday, May 28, 
"Response to Carolyn Cox).  On your question of benefit design, my 
plan would integrate PRA advanced-funding with Social Security's 
current defined benefit.  As my plan calls for aggregate PRAs of 
approximately 3 percentage points of the current payroll tax rate, it 
is not intended to replace all of one's old-age retirement benefit, 
only a portion.  As a consequence, there is still 7.6 percentage 
points of the current OASI tax rate going to fund old-age benefits of 
current and near-to-be retirees, and also for funding everyone's basic 
defined benefit.  And since my plan does not call for complete 
integration of PRAs with the current system's defined benefit 
structure, nearly all workers would be better off under my plan.     

"*The rate of growth of benefits for higher-wage earners is a function 
of past increases in the wage base which every year make up a greater 
percentage of the AIME of new retirees, wage indexing
before retirement, and cost of living indexing after retirement. All 
of these are deliberate features of Social Security. The wage base 
increase, in particular, has been paid for exclusively by higher 
wage-earners through their substantially increased payroll taxes since 
the wage base was increased. That being the case, why do you wish to 
'slow the rate of growth of benefits for higher wage-earners'?
How exactly do you propose doing so?"

Sen. Santorum:  My plan calls for gradual adjustments to the benefit 
formula for higher wage workers by phasing-in a new, third bend point.  I 
do not propose reindexing the calculation of the CPI-W on which the 
various facets of current law Social Security are annually based.  Again, 
I explain this provision in my discussion with Carolyn Cox (posted on 
Friday, May 28, "Response to Carolyn Cox).


"*In your post, you promise 'no increase in the...already-scheduled 
Normal Retirement Age (67)'. In your paper, you propose to reindex the 
NRA adjustment. Please explain."

Sen. Santorum:  As you may know, the 1983 Social Security Act amendments 
provided for gradually increasing the NRA from 65 to 67.  This begins 
for individuals who are first eligible for benefits (turning 62) in 
2000.  But there is a period of 11 years where the NRA stays at 66.  I 
do not support raising either the early eligibility age (62) or the NRA 
beyond 67.  Rather, I propose to continue this phase-in without any 
arbitrary interruptions, so as to treat successive birth cohorts 
equally.

"*Regarding the values outlined in your post, many participants in 
this forum distinguish between a 'safety net', which is a minimum 
retirement benefit designed to keep any eligible retiree out of 
poverty, and redistribution of funds from higher wage-earners to 
lower wage-earners, called 'progressivity' by some. You seem to 
combine the two in value number 1. While I fully support the 'safety 
net', I question the fairness of such redistribution. I feel that it 
is at odds with your value number 5, improving EQUITY for all 
participants. Please address this."

Sen. Santorum:  As you may know, one of the guiding principles of Social 
Security from its inception has been redistribution.  That is to say, 
individuals with lower earnings over their working lifetimes are supposed 
to get back relatively more in benefits than workers with higher earnings.  
The reasons for this are many, and are rooted in the early debates of 
constructing the program, but essentially Social Security's redistribution 
can be traced to the program's dual foundations of providing benefits that 
are based on both social adequacy but also individual equity.  The 
redistributive nature of Social Security is to what I refer when I mention 
"progressivity," and in my view it is essentially synonymous with the term 
"safety net."  I view these two terms this way because lower wage workers, 
if they live long enough to become eligible for benefits, receive a 
"stronger" benefit as a percentage of their lifetime earnings than do 
higher wage workers.
In terms of individual equity, this refers to reforming Social Security 
so as to reestablish a stronger sense of a proportional link between 
contributions and benefits.  Social Security's "money's worth" on 
contributions, because of the nature of pay-as-you-go financing, are now 
dropping for all workers--and have sunk beneath the risk-free government 
bond rate for most high-earning workers.  This is an issue that was of 
great concern to FDR and the other architects of Social Security back in 
the 1930s.  There was considerable sensitivity to making sure that the 
program provided workers with retirement benefits on a basis that at least 
matched what they could purchase in the private insurance markets.  Indeed, 
Arthur Altmeyer, one of the designers of Social Security and the first 
Social Security Commissioner, said that it would be inequitable to compel 
workers to participate in a system that costs them more than it would cost 
to purchase similar benefits through private means. 
The falling equity of Social Security returns for many Americans is 
leading to widespread public dissatisfaction about Social Security's 
worsening "deal."  In fact, according to the Social Security 
Administration, this is the last year that individuals claiming old-age 
benefits will receive a present value internal rate of return that equals 
or exceeds what they could have derived if their payroll tax contributions 
had been invested solely in government bonds.  All future birth cohorts 
would be better off investing in government bonds than participating in 
Social Security for their old-age benefits. 
It is this very serious problem that personal accounts are designed to 
address.  In addition to providing greater retirement security for the low 
wage worker by keeping and enhancing the current progressive safety net, 
personal accounts help restore the link between benefits and contributions. 
Under current law, individuals' "return" on contributions will get 
progressively worse because of a maturing pay-as-you-go public pension 
system, and even more so with any traditional "fixes" of raising taxes or 
cutting benefits to keep the program afloat for another 15 or 20 years.
On this subject, I would also commend your attention to the insightful 
remarks posted today by Senator Gregg:  "Steve Johnson Post on 1988 vs. 
2015."


"*While not mentioned in your paper, at the end of your post 'no COLA 
adjustments' appears, without elaboration. Does this mean that COLA will 
be eliminated on Social Security benefits? When would
they be discontinued? How would you counter arguments that this 
constitutes a benefit cut? What would you say to people whose Social 
Security benefits represent their major source of income over
many years of inflation?"

Sen. Santorum:  I apologize for any misunderstanding here.  My plan does 
not do anything to the current system's cost-of-living-adjustment.  Under 
my plan, COLAs would continue in their present form, as calculated by the 
Bureau of Labor Statistics, so that Social Security benefits would keep 
pace with annual inflation. 


I hope this addresses all of your questions.  Thank you for your 
participation.


Senator Rick Santorum