1994 - 1996 Advisory Council




January 6, 1997

Seeking to reassure Americans that Social Security will continue to provide retirement income security for many generations to come, the Advisory Council on Social Security today issued its findings and recommendations for the program.

"Some change is needed to return the program to long-term financial stability, and that change can be undertaken in a thoughtful, reasoned way that ensures equitable treatment and adequate retirement income for all workers of all generations," stated Edward M. Gramlich, Chairman of the 13 member Council and Dean of the School of Public Policy at the University of Michigan. "But we must begin to evaluate our options now to assure the American people that the program can continue to be financially solvent for future generations".

The Council was appointed by the Secretary of Health and Human Services, Donna E. Shalala, in early 1994 to evaluate the long-term solvency of the Old-Age, Survivors and Disability Insurance (OASDI) program, commonly referred to as Social Security, and also to review other national retirement policies.

In its report, the Council reaffirmed a number of overarching principles for the Social Security system.

Chief among them are:

  • Social Security is vitally important as a compulsory, universal program of income replacement and should continue as the base of the retirement income system; the Council rejects the proposition that Social Security "will not be there" for future generations.
  • Action to revise the long-range financing of the program should be taken as early as possible to derive the largest return from program changes, and to give policymakers reasonable options to deal effectively with the greater expenditures of the coming Baby Boom retirement.
  • Maintaining full and automatic cost-of-living-adjustments, as determined by the Bureau of Labor Statistics, should be one of the most important goals of Social Security.
  • Any sacrifices involved in bringing the system into balance should be widely shared and not be placed entirely on the shoulders of current and future workers and their employers.
  • Conventional means-testing of Social Security is unwise.
  • Benefits of low-wage workers should be protected in making reductions in the future growth of benefits.

Over the course of its meetings and deliberations, the Council heard presentations on demographic, economic, and financial projections for the system. After 60 years of program development, the system has fully matured; underlying rates of economic and population growth are dropping. Under current assumptions used to project the financial health of the program, costs will exceed income over the next 75 years by 2.2 percentage points of taxable payroll.

Three groups within the Council formulated different approaches that would solve the long-term financial imbalance in the program and improve the return on retirement saving for younger workers and future generations. Briefly summarized the three approaches are:

  •  Maintain Benefits: Maintain the present Social Security benefit structure essentially as is, and, as soon as possible, partially reduce the long range deficit through several small steps largely agreed to by a majority of the Council, such as taxing Social Security benefits to the extent they exceed what the worker paid in. Consider for later implementation eliminating the remaining deficit by passively investing part of the Trust Funds in private equities indexed to the broad market.
  • Individual Accounts: Add to the system individual accounts financed by an additional mandatory contribution of 1.6 percent of payroll while gradually lowering the growth of Social Security benefits, particularly for middle- and high-wage workers.
  • Personal Security Accounts: Convert the present Social Security system to a flat benefit program and substitute compulsory individual accounts for part of Social Security benefits. Older workers would continue to receive benefits from Social Security while younger workers would receive benefits from a combination of Social Security and their Personal Security Accounts. Social Security benefits would be converted to a flat benefit for full career workers, 5 percentage points of the Social Security payroll tax would be re-directed to the individual accounts and the transition to the new system would be financed by a tax equal to 1.5 percent of payroll or its equivalent.

    The findings and recommendations of the Council are being transmitted to Secretary Shalala and to Commissioner of Social Security, Shirley S. Chater. They in turn will send the report to Congress, which is expected to hold hearings on the Council's recommendations.