May 26, 1999 | Backgrounder on Social Security
Congress could begin the process of Social Security reform this year by passing legislation to guarantee the Social Security benefits of retirees and to provide more information to workers and analysts about the current program and the options for reform. Taking such steps would help to prepare Americans for a more informed debate on the future of Social Security, and it would make it easier to develop a national consensus on real reform. Moreover, these steps would cost very little, both politically and financially. Congress need not wait for a complete Social Security reform plan to be agreed on by all sides before taking these important steps.
Although Social Security is the government's most popular program, many Americans know very little about how it operates and how its benefits compare with alternative retirement investments. For example, millions of Americans remain convinced that Social Security maintains a savings account in each of their names, despite the fact that there is no direct connection between the amount of taxes one pays and the retirement benefits that one eventually receives.1 Even academic researchers are denied access to information that would allow them to evaluate plans that could increase the retirement security of future generations. Moreover, few Americans realize that the rate of return on their Social Security taxes is averaging a mere 1.2 percent,2 or that the program will reach insolvency by the year 2014 without reform.3
Doing nothing with the current Social Security program makes little sense and will serve only to make matters worse. Recent testimony by U.S. Comptroller General David Walker indicates once again that the overall cost of not enacting reform increases every year.4 If serious reform is not feasible this year, then Congress should pass four simple but extremely important changes that would make real reform more likely in the near future.
All current retirees should receive a legal guarantee that they will receive both their monthly retirement benefits and an appropriate cost of living (COLA) increase for the rest of their lives.
Future retirees should receive this document on application for their retirement benefits.
This guarantee would override partially a 1960 Supreme Court decision5 that Americans have no property right to their Social Security benefits. Congress still could change the benefit levels of current or future workers, however.
This guarantee would serve to calm retirees' fears that any reform would force them into poverty while not increasing the cost of Social Security reform.
One of the worst aspects of the debate over Social Security's future has been the attempts to frighten older Americans. As a result, many current retirees and those who are close to retirement worry needlessly that any reform plan would reduce their monthly benefits. The truth is quite different; no serious reform proposal includes any reduction in the monthly benefits of those who already are retired.
To give seniors an ironclad commitment that their benefits are safe, Congress should provide all current retirees with a legal guarantee that they will receive both their monthly retirement benefits and an appropriate COLA for the rest of their lives. Future retirees should receive this document after they applied for retirement benefits. Because Congress still would be able to change the benefits of younger workers, the document would be the equivalent of a contract between the federal government and the retiree, which would give that retiree legal protection against future legislation that could reduce retirement benefits. Federal courts repeatedly have ruled that Congress does not have the right to abrogate a contract.
Although it is extremely unlikely for both political and policy reasons that Congress would attempt to reduce the benefits of current retirees--at least openly--the Supreme Court ruled in 1960 that Americans have no property right to their Social Security benefits. In other words, Congress could change or even end Social Security at any time. Partially overturning this decision would be the first step toward allowing all workers to own a personal retirement account that they could invest and control.
Social Security reform would not force older Americans into poverty. Instead, it would enable their children and grandchildren to achieve a higher standard of living in their retirement years. Granting current retirees property rights over their benefits would ease seniors' fears and focus the debate on improving the retirement income of future generations.
Data should be included on each PEBES statement explaining the recipient's estimated rate of return from his or her Social Security retirement taxes, as well as a comparison with the rate of return of that amount had that money been invested in government bonds and stock market indexes.
A more accurate account of Social Security's future financial difficulties also should be added to the PEBES statement.
By 2000, the Social Security Administration will be mailing annual PEBES statements to an estimated 123 million workers.6 These statements include an accounting of Social Security taxes the individual worker has paid to date, the worker's eligibility status for benefits, and an estimate of the various types of benefits the worker and/or the family could receive under different circumstances.
For most Americans, the PEBES statements will be their sole source of official information on how they personally will fare in retirement under the current system. Unfortunately, in its current form, that information is both flawed and misleading. As a result, millions of Americans may be misinformed about how the current system works and confused about how much retirement income they will receive. Moreover, if a reform is enacted that includes the option for opening personal retirement accounts, these workers will not have the necessary information to make an informed decision.
To make this information more accessible, the Social Security Administration should simplify the current complex format of the PEBES statement so that workers could understand the information it contains more easily.7 The Social Security Administration should be required to include data on the worker's estimated rate of return on Social Security retirement taxes, and comparisons that show the typical long-term rate of return on investments in government bonds and stock market indexes.8 (General information on rates of return also should be made available on the Social Security Administration's Web site.9 ) The PEBES statement also should include a more accurate account of the program's future financial difficulties than is currently provided.10
Because PEBES statements already are included in the federal budget, the cost of making these modest improvements would be minimal. By making such incremental changes to the information Social Security provides on PEBES statements, Congress could ensure that millions of workers and their families have better information on the Social Security program, which would enable them to plan more appropriately for their retirement. It also would enhance the Social Security debate.
Information should be provided in the initial summary of the Trustees' Report on any changes in Social Security's aggregate dollar liability that have taken place since the last report.
Information on the actual nature of the Social Security trust funds and how they differ from private-sector trust funds should be provided, too.
Estimates of the tax increases or benefit reductions that would be necessary to avoid cash flow deficits also should be included, as well as information on how delaying action would change those estimates.
Every spring, the Social Security trustees issue an annual report about the trust fund's financial condition. The 1999 report for the Old-Age and Survivors Insurance trust fund, which includes the Social Security retirement program, includes over 200 pages of charts, tables, and other very detailed information. Unfortunately, some of the most important facts are buried in the report, and others are missing entirely. When the 1999 report was issued earlier this year, for example, news stories concentrated on findings that there would be an additional year before Social Security begins to run cash shortfalls, and two more years before its trust fund is exhausted. Most of the stories did not include the fact that, in the past year, the gap between benefits that have been promised over the next 75 years and the taxes that will be available to pay them actually increased by 8 percent to $19.8 trillion, after adjusting for inflation.11
The unduly optimistic picture would have been closer to reality if Congress had required the Social Security Administration to include in the initial summary information on changes in Social Security's aggregate dollar liability over the past year. Currently, that information is included only among the flood of charts and tables in the back.
Congress should require the Social Security Administration to include information on the actual nature of the Social Security trust funds and how they differ from private-sector trust funds. President Clinton's budget for fiscal year 2000 already includes this distinction. Chapter 15 of the Analytical Perspectives volume states that
The Federal budget meaning of the term "trust" differs significantly from the private sector usage...the Federal Government owns the assets and earnings of most Federal trust funds, and it can unilaterally raise or lower future trust fund collections and payments, or change the purpose for which the collections are used.12
These balances are available to finance future benefit payments...only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits, or other expenditures.13
Both workers and the media should understand that, in discussing Social Security, the term "trust fund" has a different meaning than it does in normal financial dealings. Although private-sector trust funds contain stocks, bonds, or other assets that can be sold for cash, Social Security's trust funds contain only IOUs that will have to be paid with future taxes. Congress should require the Social Security Administration to feature clarifying language prominently in all its literature.
The annual Trustees' Report also should include estimates of the tax increases or benefit reductions that would be necessary to avoid a cash flow deficit, and how delaying actions would change those estimates. In this way, workers would understand that, although cash flow deficits will not appear for another 15 years, the eventual cost of reforming Social Security increases with each passing year. Adding this type of information to the Trustees' Report would allow Americans to see the real state of Social Security's finances. They would know that the crisis has been delayed, but it still is getting worse and will cost more to resolve. Although this realistic picture would not be popular with politicians who would prefer avoiding difficult choices, it would be more honest.
Access to the CWHS would allow private researchers and government agencies to analyze how Social Security reforms would affect the budget and the distribution of benefits among various income groups. The Social Security Administration would retain the ability to edit and format these data to protect the privacy of individuals.
Support for the release of this information comes from both proponents and opponents of Social Security reform.
The CWHS is a random sample of the earnings and benefit histories of about 1 percent of all Social Security participants. To ensure confidentiality, information that can be used to link data to specific individuals, such as names, addresses, and Social Security numbers, is removed from the sample.14
In order to make sure that Americans have the best possible information about Social Security and any proposed reforms, Congress should require the Social Security Administration to release CWHS data to bona fide non-federal researchers. Currently, access to the CWHS is restricted to a small group of government researchers, most of whom are in the Social Security Administration or the Department of the Treasury. The Social Security Administration would retain the ability to edit or format any data being released to provide additional confidentiality protections.
Without wide access to these data, many of the central questions of Social Security reform cannot be explored properly by independent analysts. Because it contains real wage and benefit histories, the CWHS could be used to carry out detailed analysis of the effects of both the current system and any reform proposal on key demographic groups--such as women, minorities, and low-income workers. Without this information, the impact of some of these plans only can be estimated.
Before access to these data was restricted in 1974, they were used widely by private industry, state and local governments, and academic researchers for purposes ranging from forecasting the demand for government services to studying changes in income distribution. Today, there is widespread support within government and among researchers for release of the CWHS data. Both Social Security Commissioner Kenneth Apfel and Secretary of the Treasury-designate Lawrence Summers endorsed the release of the data during Senate Budget Committee hearings on February 24, 1998. In addition, two panels of leading social scientists from the National Research Council (a branch of the National Academy of Sciences) have called for the release of the CWHS data and suggested a number of ways in which the confidentiality of the information could be preserved.15 And a group of top Social Security scholars from across the political spectrum soon will issue a letter calling for release of the data.16
If Congress were to pass all four of the small changes recommended in this paper, the debate over Social Security reform would be greatly enhanced. Guaranteeing the retirement benefits of current retirees would help to focus the debate on ensuring the security of future retirees. Providing more information to average Americans through their annual PEBES statements and in the Social Security trustees' annual report would make it easier for workers to understand how reforms could affect their retirement. And releasing Social Security's Continuous Work History Sample to all researchers would ensure that Americans can determine how different reforms would affect the economy and various socioeconomic groups. Regardless of whether Congress acts this year to deal with Social Security's impending insolvency, these small but important measures are long overdue.
David C. John is Senior Policy Analyst for Social Security at The Heritage Foundation, and Gareth G. Davis is a former Policy Analyst in The Center for Data Analysis at The Heritage Foundation.
1. The formula used to determine Social Security benefits is based on an individual's inflation-adjusted earnings history, not on the taxes he or she paid. Since 1940, retirement taxes have increased from a combined employer-employee rate of 2 percent on the first $3,000 of earnings to 10.6 percent of the first $72,600 of earnings. Meanwhile, the benefit formula has been based on earnings throughout that period.
6. In order to receive a PEBES statement, a worker must be at least 25 years old and have annual earnings, a Social Security number, and a valid current address. The worker also cannot be receiving Social Security benefits.
7. For a critique of the complexity of the current PEBES statement, see U.S. General Accounting Office, SSA Benefit Statements: Well Received by the Public But Difficult to Comprehend, Letter Report, GAO/HEHS-97-19, December 5, 1996.
8. For additional details on possible options for improving the PEBES statement, see Gareth G. Davis, "The Social Security Information Act: Empowering Americans to Plan More Effectively for Retirement," Heritage Foundation Issue Bulletin No. 245, September 11, 1997.
9. See http://www.ssa.gov.
10. For example, the 1999 Annual Report of the Trustees of the Federal Old-Age and Survivors and Disability Insurance Trust Funds projects that, within 25 years, Social Security will be collecting revenues sufficient to pay just 80 cents of every dollar of promised benefits. The current PEBES statement, however, makes no direct mention of this underfunding. Instead, it contains only the vague and misleading phrasing that "Some people are concerned that Social Security won't be there in the future. The program has changed in the past to meet the demands of the times, and it must do so again. Today we are working to resolve long-range financing issues and to ensure that future generations can count on the same financial protections from Social Security as past generations did." See http://www.ssa.gov/mystatement/sipebe1.htm.
14. For additional information on the CWHS, see Gareth G. Davis, "Empowering an Informed Debate on Social Security: Why Congress Must Act to Ensure Access to the Continuous Work History Sample," unpublished memorandum available from the author on request, 1998.
15. National Research Council, "The Aging Population in the Twenty First Century," Washington, D.C., 1988. National Academy Press and National Research Council, Private Lives and Public Policies: Confidentiality and Accessibility of Government Statistics (Washington, D.C.: National Academy Press, 1993).