Don't Worry, Be Happy: Characterization of Social Security Trust Funds

A. Haeworth Robertson
Former Chief Actuary, Social Security Administration, 1975-78

The nature and significance of Social Security trust funds is sometimes misrepresented to the public. This appears to be the case in Social Security Brief #30 issued on May 12, 2009 by the National Academy of Social Insurance. The section of this brief entitled “Where does the Social Security surplus go?” states essentially the following:

“Some people worry when they hear that Social Security annual cash surpluses are loaned to the U.S. Treasury and the government spends the cash on other activities.” Don’t worry, be happy, because when a Social Security surplus is loaned to the government it reduces the debt owed to the public by the amount of the surplus and thereby makes it “easier to afford Social Security and other activities of the government in the future.” (Emphasis added)

I believe that this conclusion is incorrect and that it is an inappropriate way to characterize the nature and value of the trust funds.

Those who believe the brief’s conclusion is correct appear to rely on the assumption that “intragovernmental debt” is different from “public debt.” Perhaps it is, but no matter how the debt is labeled:

• the U.S. government’s responsibility to pay interest and eventually repay the loans is no different.
• the amount of future taxes required to pay interest and eventually repay the loans is no different.

Collecting surplus Social Security taxes and loaning the funds to the government and calling it “intragovernmental debt” does not “make it easier to afford Social Security and other activities of the government in the future” than if the government borrowed that same amount from someone else and called it “public debt.”

There are, however, other consequences to collecting surplus Social Security taxes and loaning them to the government:

• The government uses Social Security taxpayer money to finance other government programs during the years that surplus Social Security taxes are added to the “trust fund,” and thereafter uses general revenue to finance Social Security benefits. This results in a subtle cost-shifting between one generation of the Social Security taxpaying population and a later generation of the general taxpaying population.
• By the time the trust fund is nearly exhausted, say in 2037, Social Security benefits and administrative expenses will be financed 76% by payroll taxes and 24% by general revenue (to redeem Treasury securities). Therefore, this financing procedure is, in effect, an ingenious method of gradual transition from payroll tax financing to significant general revenue financing.
• After 2037 when the trust fund has no more Treasury securities to be redeemed, the government could--with a change in the law--finance the deficit between payroll taxes and benefits by simply continuing to use general revenue or by borrowing, just as it will have been doing since 2016 to pay interest on or redeem Treasury securities. The result would be a seamless shift to still more general revenue financing after 2037.
• Labeling some of the government’s debt as intragovernmental debt (the part borrowed from the trust funds), and thus reducing the acknowledged public debt, may lead some people to believe the government’s fiscal condition is stronger than it really is. Accordingly, the government may be able to offer lower interest rates than otherwise required to induce the general public to buy Treasury securities. However, this will work only so long as the voluntary purchasers of Treasury securities fail to recognize the true government debt. (It may be relevant to note that at the beginning of 2009, 24 percent of the total national debt was owed to the Social Security trust funds; and another 19 percent was owed to other federal trust funds or accounts.)
• By requiring Social Security taxpayers to pay excess taxes that are then used to buy Treasury securities (using the ruse of building up a “trust fund” to finance Social Security benefits), the government may be able to pay a lower interest rate on such securities than if it had to sell them on the open market. (An effective subsidization of government operations—and general taxpayers-- by Social Security taxpayers?)
• By requiring Social Security taxpayers to pay excess taxes that are then used to buy Treasury securities, the government takes funds from the hands of such taxpayers that are thus not available for alternative uses. Such taxpayers might well have made more productive use of these funds if they’d had a choice.
• For the unsophisticated, all the rhetoric frequently used to describe the “trust funds” tends to bestow on the trust funds an undeserved significance; to obscure the fact that funds purportedly collected to pay Social Security benefits are diverted to other government programs; and to suggest that Social Security is more financially viable, during the period the “trust funds” exist, than it really is.

Acknowledgment of the true nature and significance of the Social Security trust funds will be important as the nation considers alternative ways to make the program viable. It will be of particular significance when considering proposals to increase payroll taxes at a time they are not needed to pay current benefits. Such tax increases might put the system’s income and outgo into “arithmetic balance,” but they would result in a trust fund buildup of questionable value.

Strengthening Social Security Wage Reporting For Farm Workers

Barbara Robles
Associate Professor, School of Social Work, Arizona State University

Farm workers are at risk of not having their work count toward Social Security benefits because their employers may erroneously classify them as independent contractors or simply fail to pay Social Security taxes and report wages. Strengthening Social Security for Farm Workers: The Fragile Retirement Prospects for Hispanic Farm Worker Families supports legislation introduced in the 110th Congress, along with stronger enforcement of existing laws, to strengthen wage reporting. The proposal also notes that the changes would increase tax receipts and benefit the Latino farm worker population by increasing their Social Security benefits, providing better access to the Earned Income Tax Credit, and easing the burden on adult children of farm workers who have the triple burden of school debt, raising children and supporting aging parents.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Increasing Social Security Benefits for Low-Wage Single Retirees

Patricia E. Dilley
Professor of Law, University of Florida Levin College of Law

Single retirees (that is, never married, divorced or widowed) are at high risk of being poor in old age. The decline in private pensions, rising out-of-pocket health costs, and declining housing values can be expected to make the already precarious financial situation of unmarried retirees even worse. Restoring Old Age Income Security to Low-Wage Single Workers proposes a change to the basic Social Security retired-worker benefit formula that would increase benefits for single retirees with at least 30 years of covered employment and low lifetime earnings. A second change would target single beneficiaries over age 85. Those who had at least 30 years of covered work, and received relatively low benefits (less than 75 percent of the average benefit), would receive a 10 percent benefit increase at age 85.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

A New Social Security Minimum Benefit For Low Lifetime Earners

Melissa Favreault
Senior Research Associate, The Urban Institute

Despite a lifetime of hard work, many workers end up poor or near poor in retirement. A New Minimum Benefit for Low Lifetime Earners examines a new minimum benefit that targets workers with long careers and low lifetime earnings, along with a modest credit that compensates for up to three years of low (or no) earnings due to care giving, unemployment, or poor health. The benefit at the full retirement age would pay 60 percent of the poverty threshold for a worker with 20 years of Social Security covered work and increase to 110 percent of the poverty threshold for a worker with 40 years of work. Caregiver credits would be available only in years when a child is under age 4 and only to one parent. The credit would be 60 percent of the average wage in the first such year, 50 percent in the second year and 40 percent in the third year.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Improving Benefits for Widowed Spouses of Low-Earning Couples

Joan Entmacher
Vice President for Family Economic Security, National Women’s Law Center

Social Security is especially important to older women, particularly widows. Most poor elderly women are widows. Social Security survivor benefits help to bridge the transition to widowhood, but the benefits are less adequate when both the husband and wife had worked at low pay. Strengthening Social Security Benefits for Widow(er) s: The 75 Percent Combined Worker Benefit Alternative proposes to increase benefits for widowed spouses of low-earning dual-earner couples. The new widowed-spouse benefit would be 75 percent of the combined retired-worker benefits of the husband and the wife, but would be capped to not exceed the benefit for one person who had earned the average wage over a career.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Increasing Social Security Benefits at Advanced Ages

John Turner
Director, Pension Policy Center

People who live into their 80s and 90s face a growing risk of becoming poor. They rely more and more on Social Security because their other sources of income decline as they age: private pensions, if received, are eroded by inflation; income from work is very rarely an option; and financial assets may have been spent. Longevity Insurance, Strengthening Social Security at Advanced Ages proposes increasing benefits at age 82 (about the average life expectancy at age 65) for beneficiaries with low Social Security benefits and long work histories. This longevity insurance would improve financial security for individuals who live longer than the average life span.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Easing the Impact of Increasing the Retirement Age: Occupational Disability

Eric Klieber
Director, Retirement Actuary, Buck Consultants

Legislation in 1983 increased from 65 to 67 the age at which Social Security pays full retirement benefits. The change lowers retirement benefits at each age they are claimed. Disabled-worker benefits remain unreduced, but are not available to individuals who fail to meet a strict test – “inability to engage in any gainful activity” – yet are unable to continue in their jobs. Strengthening Social Security for Workers in Physically Demanding Occupations proposes a benefit for such individuals based on an occupational disability test – “inability to perform the essential duties of one’s current occupation.” Making such an occupational disability benefit available at age 62 could protect recipients from retired-worker benefit reductions (or part of such reductions) due to increasing the full benefit age.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Increasing Social Security Benefits for Family Elder Caregivers

Shelley White-Means
Professor of Health Economics, University of Tennessee Health Science Center

Rose Rubin
Professor, Department of Economics, University of Memphis

Informal care provided by family members improves quality of life for frail elders, allows them to remain in the community instead of in nursing homes, and saves Medicaid dollars. Providing the care also imposes opportunity costs on caregivers that weaken their own retirement security. Retirement Security for Family Elder Care Givers with Labor Force Employment proposes to provide up to four years of Social Security credit to individuals who provide care to elders. The elders must be certified to need levels of care that would qualify for Medicaid coverage. The value of the credit would be the caregiver’s average wage in the three years before care giving interrupted earnings. The authors suggest the credit could be financed based on the reduction in public spending for nursing home care.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Helping Homeless Individuals with Serious Mental Illness Get Disability Benefits

Yvonne Perret
Executive Director, Advocacy and Training Center

Deborah Dennis
Vice President, Policy Research Associates, Inc

Margaret Lassiter
Senior Project Associate, Policy Research Associates, Inc

Social Security and SSI disability benefits are often the main sources of stable income for people who have serious mental illness. Individuals who are homeless face particular barriers in navigating the application process. They typically lack a mailing address, transportation, and a treatment history from accepted medical sources (physicians or licensed psychologists). Improving Social Security Disability Programs for Adults Experiencing Long-term Homelessness proposes three strategies to address these barriers: (a) expand the acceptable medical sources to include professions likely to be available in publicly funded health and mental health care systems; (b) use SSA’s presumptive eligibility for SSI disability benefits for people with schizophrenia who are homeless for at least six months; and (c) modify the administrative process to accommodate homeless individuals consistent with SSA’s Homeless Plan of 2002.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Increasing the Social Security Special Minimum Benefit and Updating SSI

Laura Sullivan
Research Assistant, Institute on Assets and Social Policy, Brandeis University

Tatjana Meschede
Research Director, Institute on Assets and Social Policy, Brandeis University

Thomas M. Shapiro
Director, Institute on Assets and Social Policy, Brandeis University

A special minimum benefit was added to the Social Security program in 1974, but few receive it today because it does not keep up with wage growth. Enhancing Social Security for Low-Income Workers: Coordinating an Enhanced Minimum Benefit with Social Safety Net Provisions for Seniors examines ways to update the special minimum benefit so that individuals with 30 years of work covered by Social Security would receive benefits that meet the updated poverty measure of the National Academy of Sciences, which is about 125 percent of the current official poverty threshold. It also proposes to update SSI to reflect inflation since the program began – that is, increase the asset limit for individuals from $2,000 to $6,700 and increase the general income exclusion from $20 to $89.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

A Social Security Supplement for Low-Income Working Parents

Pamela Herd
Assistant Professor of Public Affairs and Sociology, La Follette School of Public Affairs, University of Wisconsin

Social Security provides benefits for spouses and widowed spouses, but does not provide credit for raising children. A growing portion of retiring women will not qualify for spousal benefits because they are divorced (with less than 10 years of marriage) or never married, yet will have earnings records that are limited because of time spent caring for their children. Crediting Care in Social Security: A Proposal for an Income-Tested Care Supplement proposes to supplement Social Security benefits for retirees who have raised one or more children. The supplement would be an additional 75 percent of the worker’s benefit (80 percent if two or more children were raised) but would be capped to not push the retiree’s household income above 125 percent of the poverty threshold. The benefit and income testing would be administered through individual tax returns, similar to the Earned Income Tax Credit.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Reducing Eligibility Requirements for Retirement Benefits

Andrew Biggs
Resident Scholar, American Enterprise Institute for Public Policy Research

To qualify for Social Security retired-worker benefits, individuals must have worked at least 40 calendar quarters (ten years) in jobs covered by Social Security. The Effects of Reducing Eligibility Requirements for Social Security Retirement Benefits examines the impact of eliminating the 40-quarters eligibility requirement. A small group of individuals (about 6 percent of those born in 1950) would gain eligibility for Social Security retired-worker benefits. The increases in benefits would often substitute for means-tested SSI benefits. Much of the new benefits would flow to immigrants who are not otherwise eligible for Social Security.

Click here to download the full policy proposal developed as part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Protecting Social Security Benefits from Garnishment

John Infranca
Judicial Clerk, The Honorable Berle M. Schiller, Federal Judiciary, Eastern District of Pennsylvania

Because Social Security and Supplemental Security Income (SSI) benefits are essential to meet basic needs, the Social Security Act protects the benefits from garnishment or attachment by creditors. Nevertheless, when benefits are deposited in a bank account, beneficiaries may find that their accounts have been temporarily frozen, or worse, permanently garnished at the behest of a creditor under provisions of state law. Because the government encourages direct deposit, over 80 percent of Social Security and SSI recipients receive their benefits electronically. Safer than the Mattress: A Policy to Ensure that Social Security and Other Exempt Federal Benefits Remain Safe From Garnishment, Attachment, and Freezes when Deposited in a Bank Account proposes a five-part legislative and administrative policy solution to ensure that Social Security and other exempt federal benefits remain safe from garnishment, attachment, and freezes when they are deposited in a bank.

Click here to download the full policy proposal developed as a part of the project, Strengthening Social Security for Vulnerable Groups.

The project was funded by the Rockefeller Foundation’s Campaign for American Workers.

Correcting David Broder on Social Security

Tom Bethell

Dear Mr. Broder,

If Bob Ball were still with us, I'm confident that he would be phoning or writing to you this morning re your Washington Post column of 2/5/09 in which you speak of "the looming bankruptcy" of Social Security, Medicare and Medicaid. He would be pointing out that all of these programs face challenges but none faces actual bankruptcy unless the full faith and credit of the United States is a meaningless phrase. In the case of Social Security in particular he would be dismayed to see you contributing to totally unjustified fears about the program's future. He would be pointing out that an estimated 2-percent-of-payroll shortfall over 75 years is hardly synonymous with bankruptcy and is in fact eminently manageable, and he would also be warning against casual assumptions that bipartisan commissions are panaceas (as he well knew from his experiences on many of them, particularly the Greenspan Commission). Bob is, of course, no longer with us, alas, but having worked with him off and on for 20 years I know he would want me to send you his plan for Social Security (as I know he did himself many times). He was in the process of updating his plan just weeks before his death, a year ago, and I've updated it to 2009 after checking with SSA's chief actuary to be sure that the plan's assumptions and data are valid. The Ball plan is available from the NASI website by clicking here.

A Bright Light in a Dismal Landscape

Alicia H. Munnell
Peter F. Drucker Professor of Management Sciences and Director of the Center for Retirement Research, Boston College
Original Published 3/25/09, The Boston Globe

President Barack Obama has said that overhauling Social Security and Medicare would be "a central part" of his administration's efforts to contain federal spending. But amid all the economic calamity, the Social Security program is functioning perfectly, meeting the crucial economic needs for millions of Americans. When older workers are losing their jobs and their 401(k) accounts are down about 30 percent, the ability to claim Social Security benefits serves as a backstop against severe economic hardship. Therefore, policymakers should tread carefully.

Social Security checks are not large, but they are reliable. For workers who claim benefits at age 66, the full retirement age, monthly benefits range from $850 for low-paid workers to about $2,200 for those who have consistently earned the maximum taxable amount. In fact, many workers claim early and receive reduced benefits. But Social Security benefits are increased each year to reflect changes in the cost of living, and they continue for as long as the recipient lives. So, despite the modest amounts, the benefits are predictable and people can count on them.

Are these valuable Social Security benefits endangered by the current economic crisis?

Certainly, a higher-than-predicted unemployment rate means that fewer people will be working and contributing to the system than originally projected. This shortfall could be a problem if Social Security operated on a pure pay-as-you-go basis, where today's contributions were the only source of funds for benefit payments. But the system has always had a contingency reserve to serve as a buffer in the event of economic downturns, and today's trust fund is more than adequate to ensure full benefit payments for decades.

How about Social Security's long-run outlook?

A worse-than-expected short-term economy will have only a tiny impact on Social Security's 75-year projections; the long-run costs of the program are driven mainly by the aging of the population, which has not changed. Over the next 75 years, the Social Security actuaries project a program shortfall equal to 1.70 percent of taxable earnings.

This number equals the size of the tax increase required to maintain solvency for 75 years. That is, if the payroll tax rate were raised immediately by roughly 1.70 percentage points - 0.85 percentage point each for the employee and the employer - the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2082.

A lasting fix for Social Security would require a little more attention to the fact that the aging of the population will present an increasing financial challenge over the 75-year period. Thus, a lasting fix for Social Security could have smaller tax increases initially and larger ones later. This pattern would avoid the prospect of suddenly running short of money right after the end of the 75 years, and would achieve "sustainable solvency."

When crafting a solution to Social Security's long-term deficit, the lesson from the current financial crisis is that Social Security benefits are crucially important to older Americans.

This importance has increased with the shift in the private sector from traditional defined benefit pensions, which promised benefits for life, to 401(k) plans, which are exposed to the vagaries of the stock market. Americans, with little else to rely on in retirement, may be willing to pay up to maintain the country's successful Social Security program.

Building on Social Security’s Success

Virginia P. Reno
Vice President for Income Security, National Academy of Social Insurance

The United States needs a new conversation about how Social Security is part of the solution to the growing economic risks American workers face. The key question is: How can we build on the strengths of Social Security – its fiscally responsible design, its universality, progressivity, efficiency, and it effectiveness – to meet the needs of working families in the 21st century?

As employers’ shift away from traditional pensions to 401(k) plans, workers shoulder more financial risks. Social Security offers employers what they want – freedom from financial risk and fiduciary burdens, and it provides workers what they need – economic security.

Social Security has features of an ideal pension plan. It covers virtually everyone and is fully portable between jobs. Its retirement benefits last for life, keep up with the cost of living, and continue for widowed spouses in old age. Social Security provides family life insurance and disability protection. It has a permanent sponsor (the federal government) that will not go out of business or move its operations overseas. And Social Security is remarkably efficient – spending less than 1 percent of income on administration.

Social Security will continue to be affordable in the future. It is not part of an “entitlement crisis.” Its cost is projected to rise from 4.3 percent of gross domestic product (GDP) today to 6.0 percent by 2030, and then decline slightly and level off for the rest of the next 75 years. The increase in the share of GDP going to Social Security (1.8 percentage points) is smaller than the increase in national security spending in just the last 7 years (2.0 percentage points). It is also smaller than the increase in spending for public education (2.8 percentage points) when boomers were children and showed up in record numbers to enroll in kindergarten.

Social Security provides bedrock security for seniors. But benefits are modest. The case for improving Social Security benefits rests on the facts that:

• U.S. seniors have lower replacement rates from Social Security and are more likely to be poor than are seniors in other advanced economies;


• Benefit cuts already enacted and rising automatic deductions for Medicare premiums mean that seniors will need higher benefits in the future just to maintain replacement rates that retirees have had for the past 25 years; and


• The rest of the retirement system is becoming less adequate and subjecting workers to more risks.

All these findings were true even before 2008 put in jeopardy all other resources that workers hope to have in retirement – home values, pensions, 401(k)s, savings accounts, and jobs.

Policymakers have an excellent tool at hand to strengthen retirement security. Social Security is well designed, secure, and efficient. With its proven track record, it holds the best prospect for using new money effectively to improve retirement security for American workers. Wise policy would first balance Social Security finances without cutting benefits. It would then make benefits more adequate before subsidizing other retirement income tools.

This post is based on a paper presented at an Economic Policy Institute briefing. The views are those of the author. The full paper can be downloaded here.

Social Security and the Vanishing 401(k)

Eric Kingson
Professor of Social Work and Public Administration, Syracuse University
Originally Published 12/28/08, The New York Times Online

The availability, stability and value of traditional defined benefit pensions are diminished. Americans are experiencing dramatic losses in 401(k) and I.R.A. retirement savings accounts. Home equity is shrinking. Employers have been bailing out of retiree health plans. Unemployment is increasing and now, faced with mounting pressures, some employers are reducing contributions to 401(k) plans.

This unfortunate state of affairs serves to remind the nation of the importance of the core mission of Social Security — to provide widespread and basic protection against loss of income due to death, disability or retirement.

Although this comes as a surprise to some, Social Security is fundamentally sound, backed by the full faith and credit of the United States government. Projected financing problems, though real, are relatively modest, manageable and many years in the future.

For those of us fortunate enough to have retirement savings, we can only wish that the value of the other assets in our portfolios are as well positioned to withstand the current economic uncertainty.

Social Security and the Vanishing 401(k) - The New York Times Online

Challenges and Opportunities for Retirement Security

Anna M. Rappaport, F.S.A., M.A.A.A.
President, Anna Rappaport Consulting

We are truly at a crossroads with respect to retirement security in America. We have an opportunity to improve and build on what we have in the longer run, but only if we effectively address some short-term challenges. We need to do several things or we will lose our opportunities:

Find a forum where diverse stakeholders will work together effectively – those who represent the public, labor and business must work together to strengthen the system. Repeated failure to work together has led to regulatory instability and chaos that for decades has been a major contributor to the decline of pensions and loss of retirement security.

Address a critical short-term issue – the existing legislative structure (the Pension Protection Act) is designed to strengthen the funding of pension plans. Its requirements are much more stringent than prior laws, and produce very strange (and I believe unintended) impacts in the face of the financial crisis. The business community and hundreds of plan sponsors have petitioned Congress to protect the workers covered by pension plans by relaxing the requirements for faster contributions. This request would not relieve businesses from paying the required contributions, but it would give them more time. We need to remember that this is a voluntary system. If there is no temporary relief, the PPA requirements will lead to the freezing of many more defined benefit plans and to benefit curtailments. For more information on the critical PPA issues, look at http://www.eric.org/.

Maintain and strengthen Social Security – The system should be maintained as an income based system with the fine tuning needed to make it work effectively.

Understand the realities – We need to recognize the realities facing diverse stakeholders:

• Risk pooling and sharing are a very important part of a financial security system.


• Individuals are far more willing to save in an employer plan, and they are more likely to trust information provided through an employer than in the marketplace.


• Regardless of what changes are made for future benefits, people who are age 50 and over today will get their benefits primarily from existing systems, and they will not have adequate time to earn much benefit from a new system. For a very large number of people, these benefits include defined benefit plans.
  
• Choice and individual freedom are highly valued. However, a system that requires individuals to act and make decisions to ensure their long-term security will fail for many people because of lack of knowledge or discipline.


• For Americans who want to work longer or who do not have adequate assets, work options that enable work to higher ages are critical.


• We need to remember successes and as well as failures as we build on current systems.


• We are living longer. Periods of retirement have increased each decade, and we have failed as a society to adjust out benefits to demographic realities.


• Americans are retiring gradually. Many have a period between full-time career commitment and total exit from the labor force where they are working at a slower pace, and often partially retiring.


• The size of the program and risk pool matters. A large program can access the market on an efficient basis with much lower expense charges and better results than an individual or small employer.

What should the future system look like? As we focus on retirement security for the next generation and look for new options, we should be prepared for a Tier II system that is different from the existing system. But at the same time it is vital not to throw out the baby with the bath water. Many ideas and options are surfacing. It is critical that we find solutions that offer adequate pooling of risk, respond to the realities of how individuals behave, and build on the strength of our employment and market based system. Rather than focusing on a specific solution immediately, we need to think about trade-offs and options as we balance stakeholder issues.

My wish is that first we deal with the immediate critical issues to not further damage the system that will be the bedrock for the next 10-15 years of retirees and that we work together to create a sound future for Americans. Today, I see our priorities as:

• Creating the right platform to work together.


• Dealing with the short-term crisis so that the long-term situation is not far worse.

A Social Security Fix for 2008

Robert M. Ball
Founding Chair of the National Academy of Social Insurance
This op-ed piece is the last op-ed written by NASI founder Robert M. Ball, who died in January 2008. It was originally published on October 29, 2007 in The Washington Post.

In the Oct. 19 editorial " Mr. Giuliani's No-Tax Pledge ," The Post stated: "It's no more responsible for Republicans to rule out tax increases [to strengthen Social Security] than it is for Democrats to insist on no benefit cuts." The Post praised, as a "bipartisan blend," President Ronald Reagan 's acceptance of a 1983 fix that included both.

I take exception. It's the essence of responsibility, in my view, to insist on no benefit cuts. In 1983, I served on the National Commission on Social Security Reform (better known as the Greenspan Commission) and represented House Speaker Tip O'Neill in negotiations with the White House . What was right in 1983 -- a balanced package of benefit cuts and tax increases as part, roughly half, of the final agreement -- would be wrong today.

Social Security benefits are modest by any measure and are already being cut -- by raising the age of eligibility for full benefits and by deducting ever-rising Medicare premiums from benefit checks. So the benefits provided for under present law will replace, on average, a lower percentage of prior earnings than in the past. To cut them further would undermine all that Social Security has achieved -- exposing millions of vulnerable people, both elderly and disabled, to needless economic hardship.

Social Security has never been more important to more Americans than it is now. Private pension plans continue to dwindle -- currently covering only about 20 percent of private-sector employees -- and the national rate of savings hovers around zero. We just can't afford to cut Social Security benefits further. There's no way to make up for the loss.

Social Security benefits are vital to nearly all recipients. About a third of the elderly rely on Social Security for 90 percent or more of their income; two-thirds count on it to supply at least half of their income. The program lifts 13 million elderly beneficiaries above poverty.

Without Social Security, 55 percent of the disabled -- and a million children -- would live in poverty. The program is particularly important to women and minorities. It provides 90 percent or more of the incomes of almost half of all unmarried women age 65 and older (including those who are widowed, are divorced or never married), and it is the sole source of income for 40 percent of elderly African Americans and Hispanic Americans.

Social Security is the nation's most effective anti-poverty program. But it's much more than that. For every worker it provides a solid base on which to try to build an adequate level of retirement income. To weaken that foundation would be grossly irresponsible.

The good news is that there's no need to weaken it. We can shore up Social Security for the future without cutting benefits -- or raising contribution rates. The program can be brought into close actuarial balance over the long run with just three revenue-enhancing changes that are desirable in any case:

• Gradually increase the maximum amount of earnings covered by Social Security so that the traditional goal -- covering 90 percent of all earnings -- is once again achieved. This change would affect only the 6 percent of earners who make more than the maximum covered amount (now just under $100,000), and implementing the change gradually over the next 20 to 30 years would have only a minimal impact on them.
  
• Allow Social Security to improve earnings by investing some of its assets -- up to 20 percent, say -- in equities, as just about all other public and private pension plans do.
  
• Provide a new source of income by retaining a residual estate tax and dedicating it to Social Security. By 2010, the estate tax will affect only individuals with estates worth more than $3.5 million ($7 million for couples). Dedicating the income from the tax to Social Security would considerably improve the progressivity of Social Security financing as well as increasing revenue.

Presidential candidates should be expected to discuss Social Security financing. But in 2008 they shouldn't be held to a 1983 formula. We're in a different time, with different needs -- and there are much better options available than benefit cuts.

Robert M. Ball was commissioner of Social Security in the Kennedy, Johnson and Nixon administrations. You can see his entire plan at http://www.robertmball.org.

A Prime Target for Health Care Reform: The $300 Billion, Yes Billion, Spent Wastefully on Processing Bills

Merton C. Bernstein
Coles Professor of Law Emeritus, Washington University; Former Principal Consultant to the 1982-83 National Commission on Social Security Reform; Founding board member of the National Academy of Social Insurance

Over 15% of the medical care dollar gets spent on “processing bills, claims and payments” according to a McKinsey Quarterly analysis.¹ That tots up to some $300 billion a year. In contrast, Medicare spends about 3% of its outlays for administration.

The reason is simple enough: health care providers – doctors, hospitals, laboratories and imaging centers – obtain most of their reimbursement from hundreds of insurers with thousands of insurance programs with different rate schedules. Some large hospitals have a hundred or more rates for the very same procedures depending upon the insurance arrangement for the patient, if any. This balkanized payment system deploys armies of clericals in medical care provider offices to match their billings – roughly a billion a year outside of Medicare – with those nearly countless programs. In addition, insurers often seek to pin the tab on other insurers, as when parents have different coverages from their employers or an injury or illness is allegedly work or accident related.

By contrast, Medicare sets uniform rates within each of its fifteen administrative regions. That makes it much simpler for Medicare to match bills with the appropriate fee. Medicare participants – providers and insurer intermediaries – develop familiarity with Medicare’s procedures and rates. That enables them to process bills more speedily, with fewer mistakes and at lower costs than non-Medicare charges require. Bottom line: Medicare’s system takes less time and much less money.

In addition, analysis of federal data for 2003 (before the Medicare Modernization Act with its subsidies for private insurers and a drug program that prohibits bargaining over charges) shows that the means-tested Medicaid and SCHIP (State Child Health Insurance Program) combined cost four percentage points more to administer than Medicare does. ² Medicaid and SCHIP must repeatedly ascertain whether applicants meet their low-income tests. Doing so runs up the non-benefit costs. Ditto innumerable other federal/state child health programs, such as well-baby services that focus on low-income people.

Further, Medicare intermediaries do not have the conflicts of interest that can spark controversies between insurers and medical care providers and patients. Whether any particular charge is reimbursed does not affect the bottom line of Medicare insurer intermediaries. But a non-Medicare private insurer determination in favor of reimbursement reduces its profits. And where an insurer acts as an employer’s plan administrator, it always wants to show the employer/client that it is holding down costs. That provides a powerful incentive to deny claims; insurers and their employer/customers even come out ahead by delaying payments.

The multi-billion dollar differences in non-benefit costs between Medicare on the one hand and private insurance and public means-tested programs on the other argue for locating insurance where it costs least - in Medicare. Medicare does not own or provide health services any more than private insurers do. Medicare uses private insurers to perform its detailed administrative clerical work. No “socialism” is involved; only practicality and common sense.

¹ Nick A. LeCuyer and Shubham Singhai, “Overhauling the US health care payment system”, The McKinsey Quarterly (June 2007). It used 2005 data from the Center for Medicare and Medicaid Services (CMS). The over 15% includes the more efficient payments for Medicare; hence the non-Medicare component is much higher than 15%.
² Centers for Medicare and Medicaid Services, National Health Expenditures by Type of Service and Source of Funds, CY 1960-2006.