EVENTS

Date:	Friday, February 3, 2006
Time:	9:00 AM -- 10:00 AM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

February 2006

Why Social Security Reform Is Very Much Alive

On February 3, AEI featured a special conversation with Charles P. Blahous, special assistant to President George W. Bush for economic policy and well-known as the administration’s point person on Social Security reform. Mr. Blahous spoke about the recent history of Social Security reform and what is required for successful reform in the future.

Charles P. Blahous
National Economic Council

There is much agreement among nonpartisan government organizations about the substantive realities of the Social Security system. Last year, the Social Security Board of Trustees released their annual report, which explained just how unsustainable the Social Security and Medicare programs are. They took all the projections involving Social Security and tweaked different variables to see what real effect they would have on the program. They found that in a best-case scenario there is a 97.5 percent probability that the program will show permanent and growing annual cash deficits no later than 2022.
 
The Congressional Budget Office (CBO) model for projecting the future of the system came to a similar conclusion by claiming that even if revenues came in higher than expected and benefit expenditures were significantly lower than expected, there would still be an enormous gap in the program.

This consensus is not unique to government agencies. Numerous scholars at AEI, the Cato Institute, and the Heritage Foundation agree with the general findings of these studies. Even the scholars at think tanks that are opposed to our various policy prescriptions consistently recognize this problem as one that will not go away and will require legislative action to solve.

The dynamics of the debate have evolved little over the last ten to fifteen years. In the early 1990s, we had the Kerry-Danforth Commission. That bipartisan commission was appointed by President Bill Clinton to make recommendations for setting the federal government’s entitlement programs on a sustainable course. Even though the commission was unable to agree on an overall plan, they were able to put forth two key proposals: the first was to make concrete and explicit changes to the Social Security program benefit formula to make the system sustainable going forward, and the second was to establish personal savings accounts to shield beneficiaries from some of the effects of the changes.

After this commission was disbanded, there was an advisory council convened by President Clinton. The council was charged with the task of restoring long-term balance to the Social Security system. Just like the previous commission, this council had difficulty agreeing on one long-term solution, but they did agree on a few recommendations. The first was that the system had to be improved so that its financial condition did not deteriorate simply due to the passage of time. This meant not repeating the mistakes of the 1983 reform, which created short-term surpluses accompanied by major long-term deficits. Another recommendation was a system of partial advanced funding for Social Security. These were basically the same two core findings that the Kerry-Danforth Commission discovered and ultimately became the underlying theme of Social Security reform throughout the 90s.

There has also been general agreement that we need to reform the system in a way that protects people on the low-wage end from the potential consequences of reform. The Social Security system was organized in the 1930s for a very different world than the one we live in today. Radical changes in society have taken place that have affected the composition of the workforce and family structure. Unfortunately, the system has not adapted well and is now failing in its original purpose, which was to efficiently give benefits to low-income people. The current system benefit formula is configured to increase the benefits going to high-income workers relative to low-income ones. It is crucial that we reverse this trend so that low-income workers are not burdened with the increased costs. 

As for personal accounts, we believe in the importance of ownership. We also want to offer people the opportunity to pursue a higher rate of return than what they are currently earning, which is why President George W. Bush has consistently emphasized that the accounts should be voluntary. If a system of personal accounts is established, it is very important to ensure that the system stays in fiscal balance regardless of how many people choose to switch. It is also important to remember that personal accounts are intended to improve the treatment of the individual who is participating and should not be relied on to improve or worsen the fiscal balance of the system.

So, have there been any signs of progress over the last two years? We have definitely been able to increase the public’s understanding of the nature and severity of the situation. Even more, the public seems to understand that delay is costly. What we have not succeeded in doing is developing a bipartisan consensus for a specific reform proposal.

AEI intern Paul Stewart prepared this summary.