Economics Update (April-June 1997)

Social Security Council:
Make Gradual Changes, but Start Now

D espite a few public arguments about some future actions concerning the Social Security fund, members of the 1994-96 Quadrennial Advisory Council on Social Security did agree on two recommendations, according to Edward Gramlich, chairman of the council. First, regardless of what changes might occur in the system, they should be very gradual changes. Second, regardless of what improvements might be made in the system, the nation should start making those improvements now.

The Social Security law mandates that a council meet every four years. This is the first such council since 1983 to deal with issues involving the retirement system.

Edward Gramlich
Edward Gramlich, chairman of the Quadrennial Advisory Council on Social Security
Speaking to a group of business and civic leaders at the Atlanta Fed recently, Gramlich outlined three goals in dealing with Social Security:
  • retain social protections,
  • make the system affordable, and
  • add new savings for at least one-third of the work force.
"We can do some very important, far-sighted things for the country without really hurting those people who are presently retired," he said.

Adequate for Next 30 Years

Gramlich said that the trust fund that finances Social Security is adequate for approximately 30 years, "even using fairly conservative assumptions. It's not in imminent danger."

But, Gramlich noted, given the aging of the U.S. population and trends in real (inflation-adjusted) wage growth, the situation deteriorates rapidly after those 30 years are up.

The Social Security System traditionally changes very gradually, Gramlich stated. "If people are either in retirement or close to it, you can't come along with a huge cut in their benefits. They've been basing their plans on a certain amount being there, and you can't pull the rug out on them at the last minute. Consequently, you have to look ahead and do things early."

Options for the Future

Members of the advisory council offered three approaches, Gramlich noted, to ensure the future financial stability of the Social Security System. One is to "patch up the present system." The second is privatization. Gramlich stated that his preference is an "intermediate approach. It's got something old and something new. And I think it covers all the bases."

Gramlich said that, given the three goals for the Social Security System—social protection, affordability and new savings—he believes that two basic components are necessary to achieve those goals: cutting benefits gradually and cutting only the benefits of high-wage earners.

Gramlich said that the first requirement for the Old Age, Survivors and Disability Insurance (OASDI) Trust Fund—which is the central trust fund for the Social Security System—is that there must be cuts in benefits. He believes that reductions can best be achieved by adopting some technical changes, such as adding complete coverage of the whole work force, including state and local workers.

More importantly, "changing the retirement age in a slow, moderate way seems like an important element of any compromise," Gramlich added.

He cited as useful a procedure already in effect in Sweden: indexing retirement age demographically so that it goes up with overall mortality. Such an approach "will make a big change in the 21st century," Gramlich stated, "without affecting anybody now."

Still more is required, though, to bring the system into balance. Gramlich has proposed developing a formula that would convert an individual's wages into his or her Social Security benefits. The system would be designed to reduce benefits only for high-wage workers.

Sources for New Savings

To address the third crucial question for Social Security reform—Where do we get new savings?—Gramlich proposed add-ons to defined contribution accounts as a supplement to Social Security.

Though he believes that the defined contribution accounts should be owned privately, Gramlich favors public management of those accounts—"not because I like the government so much, but there are great deficiencies otherwise."

"Just imagine the problem of regulating 160 million individual accounts," he continued. "Public management would cut way down on administrative costs and would also cut down on risk." Gramlich admits, though, that his idea of mandating individual accounts has not been particularly popular.

What else could be done to stimulate savings for Social Security and retirement? "The Social Security System has begun sending out personal earnings and benefits statements so people can see what they get in retirement," said Gramlich. If the general population sees its actual Social Security figures, "this in itself may stimulate saving."

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