The U.S. Advisory Council on Social Security:
A Group Divided
In 1965, the U.S. Congress amended the Social Security Act to require that an Advisory Council be established every four years to analyze the long-term health of the Social Security program. The 13 members of the Advisory Council are chosen to represent the general public, business, workers and the self-employed. The 1994-96 council was asked to focus on three things: the long-range financial status of the old-age survivors and disability insurance program (OASDI); the adequacy and equity of the benefit structure of the OASDI program across generations, income status and family situation; and the roles of the public and private sectors in providing retirement income.
Council members agreed that the system needs to move away from the pay-as-you-go approach toward a more fully funded system of financing retirement. Members were unable, however, to develop a single proposal to which all could agree. Thus, their final report highlights three different proposals, each of which was advocated by a council subgroup. All of the proposals include measures designed to raise revenue and reduce benefits along the lines of those highlighted in the text. The proposals' key differences are the extent to which they would change the nature of the current system from an intergenerational transfer system to a fully funded one. These differences are detailed below:
One of the elements of this plan is to raise the Social Security tax rate in 2045 from 12.4 to 14 percent. But the plan's key element is the proposal to invest a portion (approximately 40 percent) of the Social Security trust fund in equities. Historically, the rate of return on equities has been higher than the rate of return on U.S. government securities, where the fund is currently invested. By phasing in this plan beginning in 2010, supporters hope that the fund's depletion date will be delayed from 2029 to 2050. Thus, the changes under this plan would do little to alter the structure of the current system.
Individual Accounts Plan
This plan gets its name from the proposal to add a 1.6 percent earnings tax to the employees' contribution rate, with these funds to be invested by individual workers in retirement accounts. The contributions would be collected by the Social Security Administration, and individuals would be offered a small range of bond or equity index funds among which to invest their contributions. Thus, the money goes toward the individual's own retirement rather than the retirement of a previous generation. Upon retirement, these funds would be converted into annuities indexed to provide protection against inflation.
Personal Security Accounts Plan
The third plan would move the Social Security system closest to a fully funded system. The key to this system is the movement to a two-tiered pension system. The first tier would consist of a flat monthly benefit designed to equal 76 percent of the monthly benefit currently payable to low-wage workers, which would increase along with inflation.
Tier two would consist of mandatory contributions to private retirement accounts. These accounts would be held and managed by private investment firms, and individuals would have a wider range of investment opportunities than under the individual accounts plan. Furthermore, individuals would not have to convert their funds to annuities upon retirement.
Workers over 55 would continue to be covered by the existing system. Workers between the ages of 25-54 would receive retirement benefits based on benefits accrued under the old system and contributions to the new system. Those under the age of 25 would be covered solely by the new system.
The current payroll tax would finance contributions to both tiers. To continue to finance benefits paid to current and future retirees covered under the old system, a transition payroll tax would be added to the current tax.
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