A Clinton administration task force on Social Security is expected to recommend drastic benefit cuts, tax increases, a higher eligibility age for retirement benefits and a move into equity investing to restore the ailing 60-year-old system to financial health.
The task force also is expected to recommend stretching out to 38 working years, instead of the current 35, the base for computing Social Security benefits, and extending coverage to the one-fourth of state and local government employees who do not now participate in the system.
The 13-member Advisory Council on Social Security, appointed by Health and Human Services Secretary Donna Shalala last June, is expected to present its recommendations by the end of summer.
Because members of the council are deeply divided on separate proposals by Edward Gramlich, an economics professor at the University of Michigan and head of the task force, and Robert Ball, a former commissioner of the Social Security Administration, the council is planning to present both in its report, Mr. Gramlich said.
Instead of just slashing benefits for higher-paid workers or raising payroll taxes, the Gramlich plan would revise the entire formula under which older Americans earn Social Security benefits. Mr. Gramlich's plan uses a two-tiered approach - a basic benefit for all retired Americans, irrespective of how much money they put into the system, and a variable benefit amounting to 15% of their average lifetime earnings.
Mr. Ball's plan, in contrast, rests on raising Social Security payroll taxes to 6.4% for both employers and employees from the current 6.2%, and lifting the salary cap at which higher-paid employees stop contributing to Social Security by $10,000, to $71,200. Mr. Ball also would alter the way older Americans pay taxes on Social Security benefits, so they would be taxed on all benefits that exceed what they put into the system.
While it is unlikely lawmakers will attempt any serious discussions on the future of Social Security until after the 1996 presidential election, the council's report could become the starting point for those discussions.
"Our report is going to be there for people to look at or discard when they discuss" Social Security, said Sylvester J. Schieber, director of research in the Washington office of Watson Wyatt Worldwide, and a council member.
"I don't think the timing is important, but if we come out with a strongly worded report, it's going to become part of the political lexicon" in the 1996 presidential campaign, he said.
Sens. Bob Kerrey, D-Neb., and Alan K. Simpson, R-Wyo., have already started the debate on the future of Social Security by introducing a package of eight bills that complements the proposals of the Social Security Advisory Council. Mr. Kerrey was co-chair of the Bipartisan Commission on Entitlement and Tax Reform, which submitted its proposals to President Clinton at the end of last year. Mr. Simpson was a member of the commission.
The Kerrey-Simpson proposals would raise the age at which older Americans can claim Social Security retirement benefits, let workers divert one-third of their Social Security taxes into an individual investment account, and allow part of the Social Security trust funds to be invested in stocks instead of the special Treasury bonds in which the assets are now invested.
Like the Republican federal budget blueprints, the Kerry-Simpson proposals anticipate revising the manner in which the Bureau of Labor Statistics calculates the Consumer Price Index - to which inflationary increases in Social Security are linked.
The Kerrey-Simpson proposals are expected to cut the CPI by 0.5%, and cap increases in Social Security benefits for middle-class and upper-income Americans until a panel of experts can devise a better way of calculating the CPI.
Sen. Charles S. Robb, D-Va., has signed on to the Kerrey-Simpson legislation. Two Republicans - Reps. Porter J. Goss, of Florida, a member of the Entitlement Commission, and Bill H. Orton of Utah - are planning to jointly introduce the package in the House within the next month.
Rep. John Edward Porter, R-Ill., last month said he planned to reintroduce similar legislation in the House.
Mr. Porter had offered such legislation in 1991.
But already, the American Association of Retired Persons, the powerful Washington-based lobbying group, has labeled the Kerrey-Simpson approach to fixing Social Security as unbalanced and unacceptable.
David Certner, a lobbyist with the AARP, said his group would prefer to see a plan that would take "a little from employees, a little from employers and a little from current retirees. If it's going to be a balanced plan, then all groups will have to contribute to its solvency."
Mr. Certner declined to comment on the Gramlich or the Ball plans, saying he preferred to reserve his comments until the advisory council publishes its report.
But Mr. Certner expressed concerns that any plan hinging on diverting Social Security contributions into IRA-like accounts would exacerbate the investment risk many working Americans already face through the shift from traditional pension plans to 401(k)-type, do-it-yourself investment plans.
"We don't see that risk as a move in the right direction. Social Security is supposed to be your floor" of retirement income, he said.
The Gramlich plan
Mr. Gramlich's approach, one of many considered but rejected by the 1979 Social Security Advisory Council, would provide about $450 or $500 per month (in 1995 dollars) as a basic benefit to all those who have worked at least 35 years. Those who have worked only 10 years would get half that basic benefit, and those who have worked between 10 and 35 years would get a proportionate amount.
The objective of linking the basic benefit to the number of years worked would be to encourage people to keep working, and to ensure those who have worked more years get bigger benefits, said David C. Lindeman, executive director of the task force.
On top of this flat benefit, Mr. Gramlich's proposal would give all retired workers a variable benefit of 15% of their average lifetime earnings calculated as a monthly amount. The method for calculating average lifetime earnings would be the same as that now used to figure out Social Security benefits. However, under current law, Americans quitting work at the traditional retirement age receive anywhere from 60% to 30% of their average lifetime earnings in Social Security benefits, depending on their income. The average-paid worker receives about 40% of lifetime earnings from Social Security, Mr. Lindeman said.
Under Mr. Gramlich's proposal, lower income workers would get about the same benefits as under current law, but higher and middle-income Americans would see their benefits cut between 20% and 30%
Mr. Gramlich's plan envisages keeping cost-of-living increases in Social Security benefits intact, unlike the Republicans' budget blueprints.
Mr. Gramlich's plan also would:
Raise the age at which Americans could become eligible for their full Social Security benefits to 68 by 2018. Under the current law, the retirement age is scheduled to rise to 67 years (from 65) by 2027.
Raise the "early retirement age," at which Americans can claim a large portion of their Social Security benefits to 65 years by 2018 from 62 years now.
Because of some members' concerns about raising the Social Security eligibility age and the implications for employer-sponsored pension plans that kick in at age 65, Mr. Gramlich is considering stretching out the rise in retirement age, and the move to the new benefit formula to over a 40-year time frame, Mr. Lindeman said.
Allow Americans to voluntarily contribute another 1% to 4% of their earnings to Social Security to finance annuities to bridge the gap between age 62 and the new early retirement age. These contributions, which would be made from pre-tax earnings and would grow tax free, would be taxed only upon distribution. Mr. Gramlich's plan would invest the money either in one very large mutual fund, or several alternative mutual funds.
Possibly eliminate a Social Security benefit for non-working spouses.
Speeding up the rise in the eligibility age to 67 for full benefits without moving up the early retirement age could shrink the payout for Americans ages 62 to 65 by 13%, Mr. Lindeman said. Raising the retirement age to 68 instead of 67 could pare benefits about 20%, he said.
The Ball plan
About half of the council's members, including union representatives, prefer a plan offered by Mr. Ball that rests on hiking payroll taxes but preserving the current benefit structure. Mr. Ball's plan also appeals to those on the council opposed to cutting back benefits for wealthier Americans.
Mr. Ball ran the Social Security administration from 1962 to 1971, and was a member of the 1991 Social Security council, and is considered the loudest advocate of preserving Social Security benefits intact.
The Ball plan would:
Increase payroll taxes and revert increased payroll taxes mandated by President Clinton's 1993 budget law on higher-income older Americans to finance Social Security - as originally intended - instead of Medicare. But because Medicare's financial condition is even more precarious than that of Social Security, some critics have dismissed this idea as "robbing Peter to pay Paul."
Increase the number of younger workers in the system who can finance the retirement years of older Americans by extending coverage to new state and local government employees not already eligible for Social Security benefits.
Tax all Social Security benefits older Americans receive in excess of their contributions into the system.
Gradually shift a portion of the Social Security trust funds into private capital market investments to jack returns from the assumed 2.3% rate to 3.8%. Under this proposal, Mr. Ball anticipates investing one-third of the Social Security trust funds in indexed equity funds, and another one-sixth in corporate bond funds.
Mr. Gramlich's plan also would invest one-fourth of the trust funds in stocks.
But Mr. Schieber and some other council members are troubled by the prospect of investing Social Security assets in non-government securities.
"If we have a buildup of substantial trust funds, Congress will not be able to keep its hands off," he suggested.
And Mr. Ball's plan, like the Gramlich plan, would speed up the rise in the eligibility age. But, it would stop at age 67. "My proposal would last forever so the Social Security system would be properly funded," Mr. Ball said at the council's meeting.