Executive Summary
T
he President’s Commission to StrengthenSocial Security was appointed in May 2001to formulate proposals that would protect bene-fits for today’s retirees; enhance Social Security’sfiscal sustainability for the long term; and giveyounger workers the opportunity to invest part of their payroll taxes in personal retirementaccounts that they would own, control, and beable to pass on to their children. The commis-sion’s three reform proposals, delivered to thepresident in December, fulfill those obligations.The commission’s interim report, issued inAugust 2001, cast doubt on the current system’strust fund financing and questioned the pro-gram’s progressivity. Those findings generatedconsiderable public controversy. The commis-sion’s final report, which put forward three dis-tinct plans to strengthen Social Security throughpersonal accounts, generated even more debate.Although the commission’s three plans covera spectrum of approaches, the proposals haveimportant characteristics in common. All threeplans would provide higher benefits than the cur-rent system can pay, and lower-income work-ers—who opponents of private accounts claim tobe most concerned about—would receive higherbenefits than are promised under the current sys-tem. Moreover, all three plans would producethose benefits at a cost lower than that of main-taining the current program.The commission attracted significant criti-cism from opponents of personal accounts.What the commission’s work did not attractwas substantive counterproposals on how tokeep Social Security solvent and sustainableover the long term in the absence of personalaccounts. The next stage of the Social Securitydebate is for account opponents to put their ownproposals on the table. Inaction, the “policy”most often put forward by opponents, is not aviable option.A review of the arguments and evidence findsthat the personal account-based proposals fromthe President’s Commission provide a better wayto pre-fund future Social Security benefits thanthe current program’s trust fund mechanism; thatprotections against poverty in old age would beincreased and progressivity enhanced; that work-ers would have the right to own, control, andpass on their Social Security savings; and thatpersonal account-based proposals have thecapacity to pay higher benefits at lower long-runcosts than the traditional pay-as-you-go methodof financing Social Security.
August 22, 2002SSP No. 27
Perspectives on the President’s Commissionto Strengthen Social Security
by Andrew G. Biggs
Andrew G. Biggs is a Social Security analyst and assistant director of the Cato Institute’s Project on SocialSecurity Choice. Biggs served as a staff member on the President’s Commission to Strengthen Social Security from May 2001 to January 2002.
Introduction
In May 2001 President Bush appointed thePresident’s Commission to Strengthen SocialSecurity to formulate proposals that wouldmaintain Social Security’s promise for today’sretirees while improving that promise foryounger workers through personal accounts.That was their task, and in the end they accom-plished it well.The commission began its work with an inter-im report, issued in August 2001, outlining thestate of the current program. The interim reportgenerated significant controversy—particularlyits criticism of the Social Security trust fund andthe overall progressivity of the program.The commission’s final report and recom-mendations, delivered to the president inDecember 2001, contains three separate reformproposals based on personal retirementaccounts. Although the plans encompass abroad range of ideas on how to maintain SocialSecurity, each would pay benefits at least ashigh as the current program at a lower long-term cost, while giving workers the opportuni-ty to build assets and wealth in personalaccounts that they would own and control.The commission’s Plan 1 would do nothingmore than give workers the option to voluntarilyinvest a portion of their Social Security payrolltaxes in a personal retirement account. Because itmakes no other changes to the system, it is politi-cally attractive in the short term, but it does notaddress long-term concerns. Nevertheless, eventhis “accounts only” approach would pay higherbenefits to all retirees while reducing long-termgeneral revenue costs by 8 percent compared withthe current program.Plan 2 would go further, by allowing work-ers to voluntarily invest 4 percent of theirwages up to $1,000 while indexing traditionalbenefits for new retirees to increases in pricesrather than wages. This step would make SocialSecurity sustainable indefinitely, reducing thelong-term general revenue costs of supportingthe program by 68 percent while paying retireeshigher benefits than under current law.Plan 3 incorporates a combination add-onand carve-out account, wherein a worker whovoluntarily invests an additional 1 percent of his wages may redirect 2.5 percentage points of his payroll taxes, up to $1,000 annually. Plan 3would pay benefits higher even than thosepromised by Social Security while putting 52percent less pressure on general revenues thanthe current program. More problematic is thefact that Plan 3 incorporates new, ongoing gen-eral revenue transfers to the traditional pay-as-you-go program. Although these fundingincreases are consistent with the desire of theplan’s sponsors for workers to continue toreceive a combination of defined benefit anddefined contribution benefits that exceed levelspromised by the current program, it is believedthat revenues are better applied to establishingthe funded portion of Social Security reformrather than bolstering the existing pay-as-you-go element.The latter two plans incorporated significantnew protections for the most vulnerableAmericans. Both plans would guarantee 30-year minimum-wage workers a retirementabove the poverty line, a promise the currentprogram cannot make. This guarantee wouldlift up to one million retirees out of poverty by2018. Survivors’ benefits for lower-wage indi-viduals would be increased to 75 percent of thecouple’s prior benefit, increasing benefits fortwo to three million retired women.The commission’s plans would also assistdivorced persons, who for the first time wouldgain a right to benefits on the basis of theirspouses’ earnings even if they divorced before10 years of marriage. Coupled with the pro-gressive funding of the personal accounts inPlans 2 and 3, these steps make reform basedon personal accounts unequivocally beneficialto lower-income Americans.The commission attracted considerable criti-cism from opponents of personal accounts.What the commission’s work did not attractwas substantive counterproposals on how tokeep Social Security solvent and sustainableover the long term in the absence of personalaccounts. The next stage of the Social Securitydebate is for account opponents to make theircase and for the public and policymakers todecide what they want. Inaction, the “policy”most often put forward by account opponents,is not a viable option.
Background
The President’s Commission to StrengthenSocial Security was appointed with a mandate
The commissionattracted consid-erable criticismfrom opponentsof personalaccounts. Whatthe commis-sion’s work didnot attract wassubstantivecounter-proposals.
2
The next stageof the SocialSecurity debateis for accountopponents tomake their case.
3to “provide bipartisan recommendations to thePresident for modernizing and restoring fiscalsoundness to the Social Security System.”
1
The 16-member commission, split evenlybetween Democrats and Republicans, was co-chaired by former senator Daniel Patrick Moynihan (D-N.Y.) and Richard Parsons, soonto be chief executive officer of AOL TimeWarner. The other members of the commissionincluded
•
Leanne Abdnor (R), former vice presidentof the Cato Institute and executive directorof the Alliance for Worker RetirementSecurity;
•
Sam Beard (D), founder and president of Economic Security 2000;
•
John Cogan (R), former deputy director of the Office of Management and Budget,now a resident scholar at the HooverInstitution at Stanford University;
•
Bill Frenzel (R), former U.S. representa-tive from Minnesota, now a resident schol-ar at the Brookings Institution;
•
Estelle James (D), consultant with theWorld Bank, and lead author of the Bank’sinfluential 1994 book,
Averting the Old Age Crisis
;
2
•
Robert Johnson (D), chief executive officerof Black Entertainment Television;
•
Gwendolyn King (R), former commission-er of Social Security (1989–92);
•
Olivia Mitchell (D), professor of insuranceand risk management at the University of Pennsylvania’s Wharton School and execu-tive director of the Pension ResearchCouncil;
•
Gerry Parsky (R), former assistant secre-tary of the Treasury (1974–77), now chair-man of Aurora Capital Partners;
•
Tim Penny (D), former U.S. representativefrom Minnesota, now senior fellow at theUniversity of Minnesota’s Hubert H.Humphrey Institute of Public Affairs;
•
Robert Pozen (D), former vice chairman of Fidelity Investments, now lecturer in pub-lic policy, Harvard University;
•
Mario Rodriguez (R), president, HispanicBusiness Roundtable;
•
Thomas Saving (R), professor of econom-ics at Texas A&M University and publictrustee of the Social Security program; and
•
Fidel Vargas (D), vice president of ReliantEquity Investors and member of the1994–96 Advisory Council on SocialSecurity.The commission, which was instructed to sub-mit its recommendations to President Bush byDecember 21, 2001, worked according to the fol-lowing principles outlined by the president.1. Modernization must not change SocialSecurity benefits for retirees or near-retirees.2. The entire Social Security surplus must bededicated to Social Security only.3. Social Security payroll taxes must not beincreased.4. Government must not invest SocialSecurity funds in the stock market.5. Modernization must preserve SocialSecurity’s disability and survivors’ com-ponents.6. Modernization must include individuallycontrolled, voluntary personal retirementaccounts, which will augment the SocialSecurity safety net.These principles were the starting point for thecommission’s deliberations. However, they didnot dictate the commission’s conclusions. Thepresident’s principles are flexible enough, infact, not to rule out the approach advocated byformer vice president Gore—retention of the tra-ditional Social Security defined benefit, aug-mented by supplementary personal accounts.Nor do they dictate that accounts must befinanced by redirecting existing payroll taxes.Indeed one of the commission’s plans includesnew contributions by workers. In short, althoughcritics claimed that the commission was“stacked” in a certain direction, the principles itworked under—not to mention the proposals itarrived at—were anything but preordained.
Interim Report
The commission’s first task was to completean interim report
3
outlining the challenges fac-ing the current Social Security system—that is,to define the problem the commission and thecountry have to address. Given the intense reac-tion to the report from reform opponents, itseemed at times that the commission, rather
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