1994-1996 Advisory Council on Social Security

Report of the Social Security Advisory Council Meetings on June 2 and 3

Members Present: Edward Gramlich (Chair), Robert Ball, Gerald Shea*, Marc Twinney, Ann Combs, Thomas Jones, Joan Bok, Sylvester Schieber, Edith Fierst*, Carolyn Weaver*, and Gloria Johnson. (* = Present only at June 2 meeting.)

The meeting on June 2 began with a review of current law and the provisions included in plans developed by Mr. Ball, Mr. Gramlich, and Senators Kerrey and Simpson. Council staff had prepared a side-by-side comparison chart for the Council's use.

Changes in the Gramlich Plan:

Chairman Gramlich explained some changes he had made to his original plan:

  1. The new plan would phase in the increase in retirement age and change in the benefit formula over 35-40 years instead of the original 17-20 years because the original phase-in period would have created "notches."
  2. Three elements from Mr. Ball's plan were included in the new Gramlich plan: Coverage of newly hired State and local government employees, a change in the taxation of benefits, and investment of trust fund assets in equities.
  3. Under the new plan, a person who did not have at least 40 quarters of coverage but who was married to someone who did would receive one-half the basic flat benefit (i.e.,one- half of $500--in 1995 dollars).

Mr. Gramlich pointed out several advantages to his plan and circulated a table prepared by Social Security actuaries showing that his plan was more favorable to low earners than the Ball plan when both benefits and taxes paid were considered.

To provide a clearer idea of the affects of various proposals on benefits, Council staff provided the members with a set of tables and graphs for each of four proposals (price indexing initial benefits, raising retirement age to 72, the Ball plan, and the Gramlich plan). These tables showed replacement rates and benefits at retirement under the plans.

Price-Indexed Benefit Structure:

Ms. Weaver initiated a discussion of whether it was more reasonable to index Social Security benefits before eligibility based on wage growth or on the increase in the consumer price index, which she preferred. She noted that, since wages rise more quickly than prices, indexing benefits based on price growth would result in savings to the trust funds. She also drew the Council's attention to a supplementary statement in the report of the 1979 Advisory Council supporting her view.

Mr. Ball and Mr. Jones disagreed. Mr. Ball was concerned that price-indexing would result in a decrease in Social Security benefits that would have to be made up by private pension plans and that these plans could not be counted on to do this. Ms. Combs agreed that the private sector would not make up for the lower benefits for low-paid workers. Mr. Ball added that not all high earners have a pension plan, either. The Council discussed the extent of coverage under private plans. Based on data Mr. Schieber had found in a 1990 IRS research file, he concluded that frequently-relied upon information from the Census Bureau of the Department of Labor underestimated the extent of worker participation in private pension plans.

Investment Policy:

Although Mr. Gramlich had added a proposal to his plan for investing in equities, he expressed some reservations about this idea and questioned whether the projected real rate of return of 3.8 percent was realistic. Mr. Jones replied that 3.8 percent was consistent with historic yields.

Other Council members were uneasy about investing in equities and the possibility that yields would be inadequate or funds would be diverted to investment in projects that policy makers wished to support. At the same time, they recognized this proposal as a key element of the plans being discussed. Mr. Lindeman, Executive Director of the Council, told the Council that he was in the process of putting out a contract on a report on equity investments and related difficulties that must be addressed, and that he expected the results in September.

Taxation of Benefits:

Ms. Weaver raised the issue of whether income from the taxation of benefits should go to the trust funds or be part of general revenues. Mr. Jones objected to taxation of benefits as simply a back door to means testing. Ms. Fierst responded by proposing eliminating the current thresholds for taxation of benefits. She thought this would be fairer than the current provision and would increase income to the trust funds.

Mr. Lindeman cautioned that lowering the thresholds would not be politically popular, but Mr. Ball supported the idea and suggested that it might be more acceptable if it were presented as part of a package.

Since the proposal for taxation of benefits includes channeling all the resulting revenue to the OASDI Trust Funds (i.e., ending the allocation of part of the taxation-of-benefits income that now goes to the HI Trust Fund), some Council members asked about the possibility of proposing compensating changes to the Medicare program. Mr. Gramlich strongly supported making such an adjustment.

Fringe Benefits:

Ms. Fierst advocated taxing fringe benefits other than health care benefits. She could see no reason why some of these benefits are subject to Social Security tax and others are not. Mr. Jones and Ms. Combs were concerned about the added burden this would put on employer-provided fringe benefit plans, which could discourage some employers from providing these benefits. Mr. Gramlich proposed that the staff prepare a one or two page memorandum on what payments are not subject to Social Security tax.

Retirement Earnings Test:

Several Council members asked about ways to finance eliminating the retirement earnings test. Mr. Twinney thought that this might be a way to make the package more attractive.

June 3rd Meeting:

This meeting focussed primarily on the recommendations on public and private pension policy included in a report issued by the Committee for Economic Development (CED), a private, nonprofit, nonpartisan research group. The CED report contained nine recommendations regarding pension policy. The Advisory Council decided to adopt those recommendations with Advisory Council comments. The staff was asked to prepare a draft insert for the Advisory Council report that could be circulated to the members for comment.

During the discussion, several members expressed the opinion that public and private pension policy must be coordinated with Social Security policy so the two do not work at cross-purposes. The view was also expressed that greater private pension coverage must be developed in order to provide future flexibility in the Social Security program.

There was some discussion on the need to better educate the public about planning for retirement. Ann Combs stated that SSA was not adequately fulfilling its role in educating the public due to budget cutbacks. Marc Twinney was concerned, however, that SSA should only tell their story and not try to educate the public about private pensions. Robert Ball stated that SSA could give out simple messages regarding pension and retirement planning.

A number of the members present expressed concern that too many workers are withdrawing their pension money before retirement to use for other reasons. There is great pressure applied by the public to allow for early access to this money, especially to the portion derived from employee contributions. The members expressed a need to educate the public on the difference between savings plans and retirement plans and a need for greater restrictions on early withdrawal of contributions to retirement plans.

Towards the end of the meeting Mr. Ball suggested that the final Advisory Council report include a recommendation concerning SSA's administrative budget. (Other Council members appeared to concur.) Mr. Ball stated that as part of retirement policy, it is important that SSA's administrative budget be sufficient for SSA to be able to both provide adequate research resources as well as perform its service to the public.