1994-1996 Advisory Council on Social Security
Report of the Social Security Advisory Council Meeting July 27-28, 1995
Members Present: Edward Gramlich (Chair), Edith Fierst, Gerald Shea, Sylvester Schieber, Robert Ball, Marc Twinney, Gloria Johnson (July 27), Ann Combs, Carolyn Weaver (July 28), and Brett Hammond representing Thomas Jones.
The meeting began with a discussion of the Advisory Council's schedule. The next meeting will be on August 31 and September 1. With regard to the Council's report, staff plan to circulate a draft to the Council by the third week in September, with two weeks for comments, two weeks for staff rewrite, and another two weeks for Council review. This schedule would facilitate completion of the Council's work by the end of the year.
The meeting continued with a staff presentation of the change in the Social Security financing situation between 1995 and 2035 under current law and the effect of certain program changes on the 2035 outlook, different proposals for personal investment plans, and moneysworth measures. Chairman Gramlich suggested that the Council agree that it was important to increase the national savings rate and that Social Security should not be taken "off budget" before 2005, because doing so earlier would make it more difficult to balance the budget.
FICA Taxation of Fringe Benefits:
The Council then turned to a discussion of various issues. The first was Ms. Fierst's proposal for FICA taxation of employer contributions to pension plans. Employer contributions to defined contribution plans would be subject to both employer and employee FICA taxes, while contributions to defined benefit plans would be subject to employer taxes only (because of the difficulty of determining what amount was contributed for individual employees). Ms. Fierst recommended the proposal because it would (1) improve fairness between employees with identical total compensation, but different amounts of cash pay, and (2) increase tax revenue to the trust funds.
Technical Panel members Eugene Steurle, Dallas Salisbury, Gary Burless, and Robert Myers commented on this proposal as well as the broader issue of taxation of fringe benefits.
Mr. Salisbury said that attribution to individual employees of the value of non-cash compensation was a problem in extending FICA tax to fringe benefits. For example, with regard to contributions for employee health insurance, an employer pays an age-adjusted premium for each employee, with higher premiums for older employees. If FICA tax were imposed on a composite premium, younger employees would pay tax on more than their actual premiums. If tax were imposed on the actual premium, it could be a burden for older, lower paid workers. With regard to defined benefit pension plans, the issues that needed to be addressed included whether an employer's contribution for an employee should be taxed before the employee is vested (5 years), or whether the contribution should be taxed retroactively when the employee becomes vested. In addition, most defined benefit plans do not have the data to determine attribution.
Ms. Fierst suggested that if attribution were a problem, then FICA tax on pension contributions should be levied on employers only. While this would not increase employee Social Security benefits, it would help with financing the program.
Mr. Steurle said that the issue was different for health insurance benefits than pensions, because taxation of pension benefits is deferred to the future, while health insurance benefits are not taxed.
Ms. Combs commented that if only employers pay FICA tax on premiums for employee health benefits, fewer employers will offer health insurance.
Mr. Burless said that taxing only employers on pension contributions would avoid problems of individual attribution and increased future liability for Social Security. However, it would create an equity issue between employees with the same cash remuneration (and same Social Security benefits) but different pension coverage, because the FICA taxes paid on cash-only remuneration would be less than those paid for employees with cash and a pension plan. He also said that it would be unfair to tax employer contributions to defined contribution plans but not to defined benefit plans (which is more difficult because of the issue of attribution).
Mr. Schieber said that private employer contributions to pension and profit-sharing plans had been declining since the 1970's and is now at the same level as in the early 1970's, before the enactment of ERISA. He also said that taxing employer contributions to health insurance would make older employees more expensive to an employer, and questioned whether the Council wanted this effect at a time when it was considering raising retirement age.
Mr. Myers said he believed that FICA tax should be levied on total employee compensation, non-cash as well as cash, and that employers and employees should pay equally.
After asking the members for their views on taxing fringe benefits, Chairman Gramlich said he didn't think the Council would favor such a proposal. Mr. Ball had said it would be equitable but he doubted if there were enough votes on the Council to agree to it. Mr. Twinney said he thought that employers want to keep the employer/employee taxes the same and would work hard to oppose any proposal to treat them differently. Ms. Johnson was concerned that taxing health insurance premiums would result in reduced health benefits for workers and retirees and that taxing pension contributions would result in lower cash wages. She was strongly opposed to taxing fringe benefits. Ms. Combs said there was some sense to taxing health insurance contributions since the benefits are not taxed, but that the technical problems could not be overcome and that it would be inequitable to tax pension contributions. She opposed taxing fringe benefits.
General Revenue Financing:
In response to an inquiry regarding the issue of general revenue financing, Mr. Shea said that he would not be advancing such a proposal, much as he might like to.
Cost-of-Living Adjustments (COLA's):
The Council then discussed cost-of-living adjustments (COLA's). Mr. Ball opposed reducing the COLA. Chairman Gramlich said that the COLA was a very important part of the Social Security program. He said that taxation of benefits was a way of sharing with beneficiaries the burden of improving the long-range financing situation and that he opposed changing the COLA. Ms. Fierst opposed freezing the COLA because what is supposed to be a temporary measure often becomes long-term or permanent. Ms. Combs said that initial benefits should be set at appropriate levels and kept up to date with prices thereafter. Chairman Gramlich summed up the members views as being that COLA's should be preserved and that contributions of beneficiaries to improving Social Security's long-range financial situation should be accomplished through the taxation of benefits provision.
Including Total Earnings in Benefit Computation:
The Council then discussed the issue of including a worker's total earnings in the benefit computation without a concomitant increase in the computation period, i.e., regardless of the length of the computation, whether it be 35 years or 38 years, all earnings would be included in the numerator. Mr. Lindeman said that this would cost .24 percent of taxable payroll with a 35-year computation period, and more with a 38-year computation period.
The Council supported the proposal in principle. Chairman Gramlich said it would give a worker credit for all the wages on which he had paid taxes. Mr. Ball said that he liked the idea but was not in favor of having to find financing for benefit liberalizations. Ms. Fierst said that the proposal would be an incentive to work longer (i.e., a worker would get an increased benefit for working longer than 35 years) and would be appropriate with increasing retirement age. Ms. Combs liked the idea. Mr. Shea thought it was a good idea but could not recommend it because of the need to deal with the long-range financing situation.
Retirement Earnings Test:
The Council briefly discussed the issue of eliminating the retirement earnings test (RET) but did not reach a consensus. Mr. Ball said that he preferred present law but noted that the RET was probably the most unpopular feature of Social Security. He was concerned that eliminating the RET would result in negative public reaction because full benefits could be paid to high-paid executives. Thus, he said he could support the proposal passed by the House in H.R. 1215 to increase the annual exempt amount to $30,000. Ms. Combs also preferred present law, but noted that the RET was unpopular. Ms. Fierst said that she preferred advancing the date at which delayed retirement credits become actuarially fair--2008--to changing the RET.
The focus of the meeting was to continue the discussion of plans for solving the long-range financing problem in Social Security and also to see if there were some consensus on benefit issues as opposed to an agreement on one particular plan.
Steve Goss (Office of the Actuary, SSA) made a flip-chart presentation to clarify the usage of the terms low, average, and high in reference to workers' earnings histories. Steve pointed out that the real average worker in the system is actually different than the average earnings level that are used in SSA actuarial projections.
Mr. Goss' chart showed that the steady low, average, and maximum real wage earners in the system who were age 62 as of 1994 had AIMEs of $860, $1911, and $3400 respectively. He also said that 90 percent of all female workers, 38 percent of all male workers, and 60 percent of combined male and female workers would get AIMEs less than the steady average AIME of $1911. However, the percent of female workers getting less than the average AIME is continuing to shift downward from 90 percent mark toward the combined male and female percentage of 60 percent.
Public Opinion Poll:
Mr. Ball suggested that there be a public opinion poll on how people feel about benefit cuts versus increases in the normal retirement age (NRA). Mr. Lindeman stated that AARP could do the poll. Mr. Ball responded that the Council should be doing its own poll, in order to ask the correct questions. Ms. Weaver was strongly opposed to initiating any polls at this time, since the deadline for the draft of the Council's report (September 25) is rapidly approaching.
Chairman Gramlich stated that since information from a poll would not be available in time to do anything with it, a poll should not be considered. This sentiment prevailed, although it was agreed that any pertinent data from existing polls could be used as needed.
Presentation by World Bank:
Ms. Weaver suggested that speakers from the World Bank should be invited to brief the Council on personal investment plans and multi-tier systems. Chairman Gramlich said that a speaker could be scheduled for the next meeting. Mr. Lindeman stated that the meeting would need to be extended one or two days to accommodate the briefing.
Ms. Weaver stated that a 10- to 12-page paper on the subject might be enough for the Council. Chairman Gramlich stated that the Council should continue the discussion on a possible World Bank briefing at the next meeting. Mr. Lindeman will contact the World Bank in the meantime for possible speakers.
Chairman Gramlich queried the Council for any consensus on benefit issues, as opposed to a preference for one long-range financing plan over another. All Council members agreed to eliminating the hiatus in the present-law schedule for raising the normal retirement age (NRA).
Ms. Fierst wanted to raise NRA to 68 and index it after that based on increases in average life expectancy. She wanted to keep the early entitlement age (EEA) within a 3-year span of NRA. Ms. Fierst also wanted to stop paying full benefits to widow(er)s who had previously received reduced retirement benefits on their own Social Security records. It was explained that there is currently no carry-over benefit reduction from a reduced retirement benefit to a widow(er)'s benefit.
Mr. Shea stated that he opposed the present-law schedule for raising NRA and would like NRA to continue to be age 65. However, if the NRA must be raised, he would support the elimination of the hiatus.
Chairman Gramlich stated that he would like to see the NRA moved beyond age 67, but done in a manner to avoid any benefit notches. He also agreed with indexing NRA after it reaches age 67 based on increases in life expectancy. He stated that he is not so concerned about increasing the EEA, since it would be an actuarial adjustment and would not save money.
Mr. Twinney agreed that a solution to fit the financing problems is to raise both the NRA and EEA. He did not agree with raising taxes since that would cause the system to be inefficient. Mr. Ball said he did not agree with raising NRA past age 67 by indexing. Ms. Weaver agreed with raising both NRA and EEA.
Mr. Schieber reluctantly suggested raising the NRA to age 68 and raising the EEA in tandem with the NRA, but allowing people to retire at age 62 based on voluntarily purchased annuities.
Disability Benefit Amount:
Mr. Lindeman raised the question of tying the disability benefit amount to the age 65 reduced retirement benefit amount once the NRA begins to rise. Ms. Weaver suggested a cap on the disability benefit amount similar to the 80-percent cap offered in a plan introduced by Senator Pickle.