Five years ago I did the Economic Indicators presentation, and at that time said that changes to the Social Security system would obviously be necessary an order to make the system self‑supporting as defined by SSA, that is in long‑range p5+) year actuarial balance. 1 mentioned both benefit reduction and revenue enhancement as major players in this process, as well as "partnership" concepts including better education and training of the workforce, Approved worker health, and full employment. Well, 1 come to you today to basically reiterate my 1992 conclusions and to share with you the results of the most recent Social Security Advisory Council 

In 1994 Department of Health and Human Services Secretary Donna Shalala commissioned a 13 member nonpartisan council to consider financing issues, including the long‑range financial status of the Social Security program, and to come up with recommendations for the future of the program. In addition, tine Council was to look at general Social Security program issues, such as the relative equity and adequacy prided for persons at various income levels, in various family situations, and of various age cohorts, taking into account such factors as the increased labor force participation of women, lower marriage rates, increased likelihood of divorce, and higher poverty rates of aged woman.  Finally, the committee was directed to analyze the relative roles of the public and private sectors in providing retirement income and particularly at how underlying policies of various public and private programs affect retirement decisions and the overall economic status of the elderly. The findings of the Advisory Council were reported in January 1997. Before 1 discuss the three different financial reform plans the Council proposed, I want to explain what basic tenets of Social Insurance that Committee members agreed on: 

1.         It is of great importance to the nation that the four‑tier retirement system (Social Security, employer‑sponsored pensions, individual savings, and a safety net program (SSI)) continue. Social Security is err important part of the tier plan, but the other three are important and need to be improved. 

2.         The Council favors partial advance funding for Social Security. 

3.         Early action should be taken to reform Social Security. 

4.         Social Security should provide benefits to each generation of workers that bear a reasonable relationship to total taxes paid, plus interest. 

5.         Any sacrifices in bringing the system into balance should be widely shared and not borne entirely by current and future workers and their employers. 

6.         Maintaining full cost‑of‑living adjustments (COLAs) throughout tire period of benefit receipt is one of Social Security's most important contributions to individual security. 

7.         Conventional means‑testing of Social Security is unwise. 

8.         Social Security should be financed by taxes on workers' earnings. along with taxes paid by employers, earmarked taxes on benefits, and interest earnings on accumulated reserves, without other payments from the general revenue of the Treasury. 

9.         Benefits for low‑wage retirees should be protected. 

10.       Any reductions in the growth in benefits should be made in a way that avoids real reductions between one cohort and the next, commonly known as notches.

11.       The stricture of family benefits in Social Security should be revised. 

12.       Extend universal coverage of the program to all State and local employees hired after 1997. 

13.       There should be improved incentives for people to extend their working                   career. 

14.       The period over which the indexed average wage is computed should be extended to 38 years 

15.       The income taxation of Social Security benefits should be revised. 

16.       The change in the age of eligibility for full retirement benefits from age 66 to age 67 should be accelerated, and this age should later rise in line with overall longevity. 

As you can see, there were many areas of agreement among the members of the Advisory Council. The synopsis of the Items listed above. as well as additional recommendations regarding research/data and other retirement Income have been reproduced for you and wil4 be available at the end of this presentation. 

After determining their points of agreement, the Council went on to develop three separate options for long‑term financing: the Maintenance of Benefits (MB) plan, the Individual Accounts (IA) plea, and the Personal Security Accounts (PSA) plan.

Option I: Maintenance of Benefits

The NB plan would maintain the present Social Security benefit and tax structure essentially as it is, with an extension of the benefit computation period or a small increase in the contribution rate, and coverage of newly hired state and local employees. it would gain revenue by more complete Federal Income taxation of current Social Security benefits, and a reallocation of part of the Medicare portion of the FICA tax to the Social Security cash benefits programs. Option I would also use a 1.6% combined employer/employee payroll tax increase effective in 2045. Probably the most cautious of the three plans, Option I wants a period of study and evaluation followed by large scale investment of the Trust Fund monies in the equity market. It proposes to change investment policy from exclusive use (prescribed by law) of special government issues with a yield equal to the average on all outstanding long4erm debt of the United States (projected to average 2.3 percent in real terms over the next 75 years) to Investment of a sizeable portion (up to 40%) of the growing Trust Fund in private equities. Otherwise, Option 1 makes few recommendations for change

to the current Social Security structure. Social Security would still be a defined benefit plan with the amount of benefits and the conditions under which they are paid out ‑ and the definition of who pays how much ‑ continuing to be a matter of federal law, with the program administered by the Federal government. 

Option II: Individual Accounts 

The IA plan looks to preserve social adequacy while raising overall national retirement savings and gradually reducing the growth of Social Security benefits. Reductions would be accomplished by accelerating the age of eligibility for full benefits and by adjusting the benefits schedule for middle and high wage earners, and by providing some reductions in spousal benefits to provide better survivorship benefits. There would be a mandatory additional contribution of 1.6 % of covered payroll that would be held by the government in defined contribution individual accounts. Individuals would have limited investment choices on how these funds were to be invested ‑ ranging from a portfolio consisting entirely of bond index funds to equity index funds. These individual accounts would not be included in the Federal budget. To conform their tax treatment with the tax treatment of other defined contribution pension saving, the individual accounts would be taxed in either of two ways: 

(a) They could be made tax‑deductible when saved and taxable when the benefits were paid, or 

(b) they could be made taxable when saved and deductible when received. This tax treatment would have about the same net effect in present value terms as the deferred tax treatment now received by most other defined contribution pension saving. 

The accumulations from the individual account would be converted to single or pint minimum guarantee indexed annuities when individuals elect retirement, but not before age 62. The combination of the reduced growth in benefits, the increased age of eligibility for full benefits, and the proceeds of the individual accounts would, plan proponents believe,, leave total benefits on average at about the levels of present law for all income groups. 

Option III: Personal Security Accounts 

The PSA plan favors moving to a two‑tiered system, away from our current system of Social Security. The first tier would provide a fiat retirement benefit for full‑career workers and the second tier would provide fully‑funded, individually‑owned defined contribution retirement accounts, the Personal Security Accounts. These funds would not be held or managed by the Federal Government, the investment options would be less restricted, and workers would not be required to annuitize their accumulations at retirement. The PSAs would be funded with 5% of the current payroll tax, would be implemented in January 1998, and be fully effective immediately for workers under the age of 25. Survivor and disability benefits would be modified, but would still be financed by the OASDI Trust Fund and administered by Social Security. When fully effective, Option III tier I retirement benefits, spousal, survivor and disability benefits would be find by the 7.46 FICA portion not used to fund the PSAs. To pay for the transition costs from the pay‑as‑you‑go system to advance funding, this plan assumes a 72‑year payroll tax increase of 1.52%, supplemented by added Federal borrowing. 

As you can well imagine, the debate over the three proposals is robust. The full Advisory Council report runs to several volumes, hundreds of pages, with lengthy comparisons of how different groups within our population would be affected both positively and negatively by the three options described above. Charts, graphs, and multiple appendices are available for those interested in the actuarial bases and the more detailed points of all three plans. Whether you care to do more research or not, it behooves all of us to involve ourselves in the reform debate. It is time for thoughtful people to make their thoughts known on the future of our Social Security program. Whether you like one of the options described above, or have your own plan, I urge you to make your ideas on Social Security reform   known to your elected officials. But I also urge you to consider that you are among the fortunate of our society. There are those here in central Wisconsin who are undereducated and underemployed, uneducated and unemployed, aged and disabled, poor. Among that group, all income goes for food, clothing and shelter, and I don't mean tax shelter. The common good has a place in the debate over Social Security reform. We need to consider the needs and abilities of ad, not just the needs and abilities of the few. 

I truly hope that 1997 is the year for Social Security reform and that this is the last year I'm asked 'Will Social Security be there for me?" I hope to see you all again in 5 years, when an equitable reform plan has been implemented, and when the title of my presentation won't have to be "2002: The Year for Reform?" My thanks to Randy Cray and the Central Wisconsin Economic Research Bureau for the opportunity to address you on this most important issue.