The re-engineering of Social Security

Nation's Business, May, 1997 by James Worsham, Robert T. Gray

Edward Gramlich, dean of the School of Public Policy at the University of Michigan and chairman of the 1994-96 Advisory Council, says some form of additional private-sector savings will be necessary for Americans in their retirement years because Social Security revenues won't be enough. "At some point, we're going to have to shift our way of financing the retirement system to pre-funding. Pay as you go doesn't look so good when growth slows down and the baby boomers start retiring," he says.

Although Congress isn't expected to consider Social Security reform seriously this year--and may even hand it to yet another commission to resolve--proposals to change the system are being discussed widely by commentators and policy analysts in Washington.

Here are some of the elements of the most prominent proposals:

Raising The Minimum Age For Benefits

If the retirement age is raised, individuals would pay into Social Security longer and begin drawing benefits later. Under current law, the retirement age for full Social Security benefits will rise to 67 from 65 gradually over 24 years beginning in 2003. The age for qualifying for reduced benefits would remain at 62, but the reduced-benefit level would fall from about 80 percent to about 70 percent for early retirees as the normal retirement age rises to 67.

Some reform proposals call for raising the age as high as 70. The CED, for example, proposes boosting the normal retirement age to 70 at the rate of two months a year between 2000 and 2030. Other reform proposals have called for different combinations of a later retirement age and an expedited schedule to reach it.

Proponents cite the obvious fiscal benefits but also note that individuals live longer and are healthier longer. In addition, government projections indicate that the labor force that will succeed the baby boomers will be smaller and that older workers may be needed in the early decades of the 21st century.

Pushing back the retirement age may not meet a lot of resistance from business, either. "We're going to need the labor from our seniors to have a viable economy," says business executive Reg Whitson, who was among the respondents to a recent Nation's Business poll on Social Security issues. Whitson is president and chief executive officer of MIN-Ad, Inc., of Greeley, Colo., a small firm that mines and processes minerals for animal feed.

Tax Increases

Each year, the maximum wage that can be taxed for Social Security goes up. In some years, so does the tax rate. This year, the first $65,400 in wages is subject to a payroll tax of 12.4 percent, paid in equal shares by the employer and the employee. (The Medicare tax is an additional 2.9 percent, also shared equally; there is no wage cap.)

The maximum taxable wage base is raised annually according to a formula that tracks increases in average wages. Some proposals would raise either the tax rate or the maximum taxable wage base--or both.

One of the three proposals put forth by the Advisory Council--Option II--would increase the Social Security tax on workers by 1.6 percentage points to fund individual accounts similar to 401(k) plans that would be invested in private markets. The growth of regular benefits would be slowed gradually for recipients who had been high and middle-income workers to keep Social Security benefits in line with available revenues.