Fortunately, there's no shortage of reform proposals circulating among policy groups and on Capitol Hill. "Everybody's got his own plan," says Ferrara, general counsel at Americans for Tax Reform, who has written dozens of books, studies, and articles about Social Security reform. "I can't keep up with all of them."
None of the reform plans under consideration would make Social Security voluntary and let individuals withdraw from the system by renouncing any benefits they might receive. Instead the proposals are all variations on forced savings plans; some rely more on private savings than others. The plans coalesce around two models:
n The two-tiered approach. These proposals deal with obligations to current and soon-to-be retirees by directing most payroll taxes either into traditional Social Security or into tightly regulated private investments. Younger workers, however, could invest some of their payroll taxes into higher-risk, potentially higher-yield, Individual Retirement Accounts. Proponents of this approach assume that payroll taxes from the work force will perpetually support current retirees.
The first legislative proposal along those lines was initially offered by Rep. John Edward Porter (R-Ill.) in 1989, and re-introduced in slightly varied forms since then. Since only about three-fourths of Social Security payroll taxes are spent on benefits for current retirees, Porter's plan would let workers invest most of their "surplus" payroll taxes privately. Specifically, the Porter proposal would cut the 11.2 percent Social Security payroll tax by two percentage points, let workers set up Individual Social Security Retirement Accounts, and invest the 2 percent tax in a limited number of mutual funds or other retirement vehicles. Workers would have a property right in their ISSRAs, and those who set up ISSRAs would reduce their claims to tax-funded benefits by the amount their Social Security taxes were reduced.
Along similar lines, last year Sens. Bob Kerrey (D-Nebr.), head of the entitlement commission, and Alan Simpson (R-Wyo.), a member of the commission, made a more detailed proposal. Among other things, the Kerrey-Simpson plan would increase the retirement age from 67 to 70 over 35 years, reduce the formula for Social Security cost-of-living increases, and force workers to invest two percentage points of their payroll taxes privately. (It would, however, also allow Social Security's trustees to invest as much as 25 percent of the $480-billion Social Security trust fund in commercial stocks and bonds--a sure legislative nonstarter. "Great," quips the NCPA's Goodman. "Let's have the government [buy up] a bunch of private businesses.")
Advocates of the two-tiered approach have a real-world example to look at: Great Britain. In what Peter Ferrara calls "one of the unreported stories" about entitlement reform, "70 percent of British workers have opted out of the state retirement plan." Since 1978, British workers' payroll taxes have gone to finance two retirement programs: a basic benefit that's roughly equal to 18 percent of the mean national income, and a second benefit. Workers can choose where their second-tier payroll taxes go: to fund a government pension that will pay at least twice the basic benefit or to a private pension that is operated by their employers. The NCPA report on private social security options in other countries says about 45 percent of British workers have contracted out of the state pension plan and invested in employer pensions.
Beginning in 1988, the British government gave workers a third option for their second-tier payroll taxes: tax-deferred individual retirement accounts. Individuals who choose this option can supplement their individual accounts with additional tax-deferred contributions. About 25 percent of British workers have chosen the personal retirement option over state or employer pensions.
Several private groups are pushing variations of the British plan. The National Development Council's Sam Beard has outlined his own plan to create "100 million millionaires." In his proposal, to be published in book form by the Institute for Contemporary Studies, the first $500 of payroll taxes each employee and employer pay would go into an individual retirement account instead of to the government, for a total nest egg of $1,000 a year. Beard would also let individuals add as much as $2,000 a year to their accounts--up to $1,000 in personal savings, matched dollar-for-dollar by shifting payroll taxes into the IRA.
From Beard's formula, a person earning $50,000 a year who wanted to max out her IRA would invest $1,500 from payroll taxes. A $10,000-a-year earner who pays $1,240 a year in payroll taxes could max out by adding $120 in voluntary contributions to the $500 that would automatically go into the IRA. Beard says that, over a 45-year working career, a $10,000-a-year worker investing $1,240 at 8 percent would accumulate a portfolio worth $1,026,524, making our minimum-wage worker a millionaire. (Workers who pay more than $3,000 a year in Social Security taxes couldn't invest all of their payroll taxes privately; benefits for current retirees would come from the payroll taxes these higher-wage workers pay.)
Beard has established Equal Capital Opportunity Now, a Concord Coalition-like group to push his plan. ECON's public-relations efforts are geared at those at or near college age--the group most likely to believe they will receive no Social Security benefits at retirement. Two twentysomething organizers, Jonathan Abshire and Beard's daughter, Hillary, are approaching the Concord Coalition, other deficit-fighting organizations, local Perot activists, and groups on college campuses, hoping to focus attention on Social Security among younger people in a "Now Do You Care?" day in April.
And even as political operatives in the White House were trying to whip seniors into a frenzy with their Mediscare campaign, a panel appointed by Health and Human Services Secretary Donna Shalala almost endorsed a British-style, two-tiered Social Security system. The 13-member Advisory Council on Social Security, which has advised every president since Franklin Roosevelt, considered three options for Social Security reforms: Maintain the current benefit structure, increasing payroll taxes as necessary to pay retirees; raise payroll taxes by two percentage points and let everyone invest the extra money in IRAs; or establish a two-tiered system that allows even more private investment. Under this third option, workers younger than 30 could invest five percentage points of their payroll taxes in any private investment vehicle that meets the financial and reporting standards of the typical 401(k) plan. They would also get a tax-funded retirement benefit that would vary with their tax contributions. Those older than 55 would continue to get traditional Social Security but might see the retirement age rise. Those between 30 and 55 would receive a hybrid of the privatized/tax-funded system.
When the council made its final recommendations, five of the 13 presumably Clinton-friendly advisers voted for the two-tiered plan. Two others supported the 2-percent IRA plan. A commission insider was pleasantly surprised that seven of the 13 members sympathized with some form of privatization. "Most [on the panel] believe there needed to be some direct investment of payroll taxes in the private sector," the insider says. But the more market-oriented advisers would embrace neither having the federal government directly invest Social Security trust funds in the private sector nor establishing government-managed "private" retirement-investment vehicles. The advisory council's support for this two-tiered proposal indicates how mainstream previously "radical" views on Social Security have become.
n The stock-and-bond option. The two-tiered proposals offer individuals a partial property right in their payroll taxes and guarantee a stream of money to pay benefits to future retirees. But because they continue Social Security's pay-as-you-go funding, these plans also contain a potentially serious flaw: If some future generation of retirees puts the heat on Congress to increase Social Security benefits, Congress can merely ratchet up the payroll-tax rate.
Another set of reforms could circumvent this possibility. Based on the Chilean social security program, these reforms would let workers either remain with the current system or invest all of their payroll taxes in private accounts. The government would also create a new debt instrument that would let all workers who have paid Social Security taxes get at least some of their money back.
Chile began privatizing its social security system in 1981. Until 1986, workers had the option of remaining in the government retirement system or entering a private pension program. (As of 1986, all new workers must enter the private plan.) In the private system, each worker must invest 10 percent of his wages in a tax-deferred, portable individual savings account and can add as much as 10 percent more of his wages to the account monthly. The government has authorized 21 pension funds to manage and invest money in the individual accounts. Workers must invest in one of the funds, but they can change funds as frequently as every month.
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