American Academy of Actuaries

In January 2007, the American Academy of Actuaries ("AAA") published a Public Policy Monograph entitled "Social Security Reform Options". The Monograph may be viewed at www.actuary.org/briefings/medicare_June07.asp. It is a generally very thoughtful review of the suggestions for reform of the system. I would, however, like to make a couple of comments to which I would welcome feedback.

Beginning on page 9, the AAA details changes which could be made within the current structure. First, they opine that a combination of tax changes (read increases) and benefit changes (read cuts) could be enacted in order to share the cost of reform between workers and beneficiaries. Not mentioned is the fact that current beneficiaries have already seen both an increase in the tax burden during their working lives and a decrease in the benefit due delay in the full retirement age, taxation of the benefits for some participants and means-testing of the Medicare Part B premiums, again for some workers. Next, in discussing any increase in taxes, they recognize that such an increase would result in loans to the Treasury and therefore would increase the amount of bonds to be redeemed ultimately. That seems to me to be an exacerbation of the problem. Since Social Security funds are currently loaned to Treasury, the repayment burden when the bonds are redeemed to pay benefits is part of the current crisis. Finally, as part of the solution, AAA indicates that some suggest that the cap on wages subject to FICA could be removed. However, those people then question the "appropriateness" of the government providing very high retirement benefits to workers with the highest incomes. Come now, either the program is an earned benefit as many taxpayers perceive or it is a welfare program. In actuality it is both. However, to increase taxation on higher paid workers without a concomitant increase in benefits would further increase the welfare nature of the program. Not a very politically palatable idea.

On page 15, AAA discusses a double-deck benefit formula. They indicate that the proponents of this idea believe it would allow elected official greater flexibility to make decisions about the balance between social adequacy and individual equity. The problem with this idea is that elected officials already use the Social Security system to buy our votes with our money. Why would we want to enhance this ability?

AAA begins its discussion of individual accounts on page 20. On page 21, AAA discusses an earned right to Social Security. They state "[b]y making workers owners of their [individual] accounts, individual account plans would likely strengthen workers' perception that they have an earned right to their Social Security benefits". In reality, they would make the perception a reality. Currently, Social Security is not a right as has been made clear by the Supreme Court in several cases. Individual accounts, however, would be property of the individual in the manner of 401(k) accounts or IRAs. AAA raises concerns that workers with individual accounts with a guaranteed minimum benefit might be tempted to make risky investments. Most proposals for individual accounts, recommend limited investment options, similar to the Federal Employees' Thrift Savings Plan ("TSP"). AAA worries that administrative costs would be very high, particularly if the program were voluntary. Costs in private individual account plans such as 401(k) plans and in the TSP are modest due to economies of scale. It is reasonable to think the same would occur in individual accounts under Social Security. AAA is concerned that workers could run out of money during their or their spouse's lifetime. This could be managed by providing the benefit be paid in the form of an annuity to the extent of existing Social Security program benefits with the balance paid as the individual would choose.. Finally, AAA is concerned that due to inertia not enough workers would participate if the accounts were voluntary. Private individual account plans which are governed by ERISA now permit employers to mandate a contribution, subject to an individual's right to opt out. A similar rule could be adopted here. Social Security is already coercive so this minimum level of coercion in the new program should not cause political problems.

AAA is concerned about financing the transition. While it will be expensive, the transition costs can be paid from general revenue as the underfunding will be. Just as the first generation to receive Social Security benefits did not contribute to the program but was paid from the contributions of those then working so the transition costs can be paid from general revenue. At least this time the source of the funds would be all taxpayers and not just workers. That seems a bit more equitable.

Finally, AAA is concerned that the legislators, in order to please the public, could be persuaded to permit distributions from the accounts during the working life. This should be limited to purchases of life insurance and disability insurance during the build-up period for the accounts. Distributions during the working life are not available now, there is no reason to change this. The program, as long as we must participate in Social Security, should not permit distributions during the working life.