A better fix than privatizing Social Security
The president's determination to partially privatize Social Security stems from ideological reasons. But in fact the projected Social Security deficit is small enough - 1.89 percent of payroll, under the Social Security trustees' intermediate assumptions (neither optimistic nor pessimistic) - that a major revision to the system is not necessary. The deficit can be remedied with a few discrete changes in the program, all of which are surprisingly easy to understand and accept.
The first is to raise the earned income on which the Social Security payroll tax is assessed and benefits are paid. At present, the maximum is $87,900 a year, subject to annual indexing to wage growth. But it could be raised gradually over several years to 90 percent of covered earnings of individuals, from its current level of about 85 percent, and indexed thereafter. If that were done, the additional payroll tax paid by the 6 percent of those who earn more than $87,900 would reduce the long-range deficit by 0.61 percent of payroll.
A second proposal is to keep the tax on estates worth $3.5 million and more and dedicate the proceeds to Social Security. At present, the tax applies to estates valued at a minimum of $1.5 million. In 2009 the exemption rises to $3.5 million and the following year the estate tax is scheduled to end. Dedicating the tax on estates worth $3.5 million and over, and retaining it, would reduce the long-range deficit by another 0.6 percent of payroll.
A third change would be to bring all newly hired public employees under mandatory coverage of Social Security, thereby reducing the long-range deficit by about 0.22 percent of payroll. About 6.7 million state and local government employees are currently exempt - virtually the only workers not covered by America's retirement system. Instead these employees are covered by plans operated by their employers. For long-term employees, the benefits of state and local government plans are often greater than those paid by Social Security. But these plans, unlike Social Security, are not portable, so employees who change jobs or employers may lose their coverage. If they become disabled before acquiring substitute coverage, they may be without disability benefits. Furthermore, the dependents of public employees exempt from Social Security, even employees fully covered by state and local government plans, are unlikely to be protected by disability, spouse, or survivor benefits.
If coverage were to be broadened to include newly hired public employees, the governments involved would need time and possibly financial help to phase in the new coverage. Delicate negotiations between these governments and public-employee unions might be required, but the example of how smoothly newly hired federal employees were brought under mandatory coverage and a revamped federal retirement system in 1984 would be a good model.
The final change would be to adopt the more accurate formula for cost-of-living increases designed by the Bureau of Labor Statistics and in use by many programs. Using that formula would reduce the long-range deficit by 0.3 percent of payroll.
Delaying retirement age seems like a common-sense solution, but it would be a mistake. Many people retire early for good reason, such as physically demanding work, family responsibilities, or poor health. Social Security permits anyone to retire at age 62 with a reduction in benefits. The reduction for those who retire at 62 in 2004 is 24.17 percent of benefits. That reduction will go up to 30 percent for those who retire at 62 when the normal retirement age rises to 67 in 2027. Typically, early retirees have slim resources other than Social Security, so if the normal retirement age were raised further, the resulting reduction in benefits could be impoverishing.
Under the intermediate assumptions of the Social Security trustees, these recommended changes would save more than three-quarters of the projected deficit - which in any event won't threaten payments before 2042. If the lower deficits estimated by the Congressional Budget Office are right, they would wipe it out.
Guaranteed benefits after these changes would be far better than privatized accounts, full or partial, because:
• Individual accounts are inevitably insecure when the market goes down or the worker makes poor investments.
• With private accounts, but not Social Security, the retiree runs the risk of outliving benefits unless he or she purchases an annuity, usually at considerable expense.
• Administrative costs, now about 1 percent of benefits, would go up because individual accounts would have to be administered separately and commissions paid.
• Spouses, survivors, and other dependents of workers would lose their benefits if the worker decides to stop sharing with them.
Moving to privatization - even partial - would also be enormously expensive; the government would have to pay for benefits for older retirees if contributions of younger workers were to go into their own private accounts.
In short, privatization unnecessarily risks the security of Americans during retirement or disability. Guaranteed benefits under Social Security can and must be saved.
• Edith U. Fierst was a member of the Clinton administration's Social Security Advisory Council. © The Washington Post.