interviewed by Harry Goldstein Published November 10, 1997		Eric Kingson teaches public policy at Boston College and is co-editor of the book Social Security in the 21st Century. Kingson is a longtime member of the National Academy of Social Insurance; has served on its board of directors; and served as a special advisor to both the 1983 Greenspan Commission, which generated the consensus package that led to the 1983 Social Security amendments (the last significant packages of changes to Social Security), and the 1994 Kerrey-Danforth Entitlements Commission. The commission, though it did not come to a consensus, raised some fundamental issues about the future of social security, including the pros and cons of individual retirement accounts, something Kingson passionately opposes for a host of reasons he laid out in the following interview with Harry Goldstein. Tripod: Is the Social Security Trust fund really in crisis? Eric Kingson: There is a significant financing problem that needs to be addressed at some point. The Social Security Administration makes estimates of costs 75 years in the future, estimates made with the best judgement based on certain assumptions, out of which arise certain scenarios, with extreme cases at either end of the spectrum. We then go by the central estimate, the one that is most commonly accepted, which says that there will be sufficient money in the trust funds to meet all obligations through 2028, after that only 3/4 of what's been promised. Tripod: So contrary to the sky is falling scenario... EK: ...there is a revenue stream that covers 3/4 of all promised benefits in perpetuity. This central scenario assumes that Congress would do nothing, no tax increases or benefit cuts. The bottom line is that there's a 14% shortfall over the entire 75 year estimate. In the years beyond 2028, there would be a 25% shortfall. So, yes, there's a financing problem. I don't see it as a crisis, but as a problem that we need to address in the next few years. You don't want to let this kind of problem continue for a long time; it's not good for public confidence and the reality is that all of our futures depend on social security. The polls show us that people are fairly skeptical that social security is going to be around for them and those same polls show young people supporting the program. These polls also ask where do you think you're going to get retirement income, and the overwhelming majority say they're going to get income from social security. And they're right; social security represents a high proportion of all the income going to old households. We need to encourage people to save, private pensions are a great idea. But the reality is that social security provides a floor of protection for most people and there's nothing out there that's going to replace it. The public needs a system that provides that protection. For households whose income falls between $19K and $31K — 42% of their income comes from social security. For the 15 million elderly households with less than $19,000 income, 70% comes from SS. For the richest 20%, above $31K, social security provides 23% of their income. Young people think they're not going to rely on social security, but the fact is that very few people get a substantial income from private pensions. Even at the highest levels of incomes, private pensions income represents 10% of total income; most of the top quintile's income comes from earnings or income off assets. But for 80% of Americans, social security is base protection. When we start out working, we think we might be rich and won't need SS. But a lot of us aren't going to be rich. Most of us just don't achieve independent wealth.
Put it this way, there are certain things government does better		Tripod: And social security covers other things besides cash benefits, right? EK: Social security is the regular person's main source of life insurance and disability protection. Example: for a family with two young children under five, two parents in their mid to late '20s, SS provides the equivalent of a 300K life insurance policy. Most young working families do not have other life insurance or have disability protection. The system provides a basis of supporting our community. Put it this way, there are certain things government does better, things that are operated in terms of the whole society. This is important in light of the changes we're going to go through as we move into a stage of free trade capitalism. We're asking people to assume more risk in the work place, and if we ask them to assume more risk with their retirement funds by putting them into individual investment accounts, then we start pulling out those built in props — the safety net. This is not the time to take away something that provides protection. Tripod: But there are some financing problems to be concerned about over the long haul. What solution do you favor? EK: I'll start by telling you about two things we shouldn't do because it would pull apart the social contract we have and take away social protection. We should not privatize in any way, no private individual accounts nor should we means test the system... First, private accounts shift risk onto individual and create a system where the highest income people will have less and less support for the system. In the short run it may be in their interest, but not society's. The people who stand to lose the most are low and moderate income people and the people likely to gain the most are the richest. Privatization undermines the idea of the social system and the retirement system and ultimately you lose the idea of protection. If you establish private accounts, you have winners and losers, you subject people to market risk and there's a limit to how much risk you want to subject people to. We probably need less market risk for most American families, given the dramatically changing times we're living in. Tripod: And means testing? EK: That's a bad idea because we have a system that has a social component that provides some protection against ending up in a low income situation, and that progressivity is maintained by having everyone in the system. If after 40 years you say to a high income worker that, hey, you don't get anything back, it will erode broad public support for the system. The other problem is that you also discourage savings, because if you save over the course of your work life and build up a substantial savings, when you retire, you won't get a dime from social security. So people might very well say, why bother saving anything at all if I, in effect, get penalized by means testing?
your generation will pay for older people and younger people.		Part of the pattern is that people like to say the sky is falling. What those people don't tell you about privatizing is that it has nothing to do with addressing the financing problem. To privatize you still have to pay off past promises, but you also have to prefund future benefits. You have to collect much more income or you have to cut benefits or both. All private proposals call for huge cuts because, as we go from a pay-as-you-go system to an advance funded system, we would incur transition costs. One generation will pay twice: basically if these privatization proposals went through now, your generation will pay for older people and younger people. Tripod: So what should we do? EK: There are several financing solutions that a lot of people agree with: Bring state and local employees into the social security system where they are not included right now. That would address about 10% of the funding problems we're projecting. We could also have a small benefit cut that would be achieved by calculating benefits over 38 years instead of 35 years, effectively including some of your less prosperous years into your overall income average. This would address 13% of problem. Next, tax benefits. Treat as taxable income 100% of social security income after the employee has received the equivalent of the money they've paid in. This would address 14% of the problem by having a higher percentage of benefits treated as taxable income. Those three things together would address about 35% of the problem. Add to that raising the age of retirement to 67 by 2011 and then index a further age increase based on life expectancy, so you'd retire around age 69 or so. This would take care of another 23% of the problem. Those measures take care of roughly 2/3 of the shortfall. There are other plans. One says that we're building large assets with the fund right now and expect to for the next 15 or 20 years. This is the first time the trust funds have had large amounts of money in them. Let's think about diversifying and putting 40% of assets in private investment, something like stock funds. If you average out the difference between return on treasury notes and stock market returns, we could address an additional 30% of the shortfall. Of course, then you have government investing in the private sector. But the difference between the government investing and individual accounts is immense. The advantage with the government investment idea is that we put the risk on the government, on the society as a whole as opposed to the individual.
Another idea would be to raise payroll tax in 2045 by .8%		Another idea would be to raise payroll tax in 2045 by .8% on employer and employee, because it's in the out years where you have your problems. That would take care of 14% of the problem. If the Cost of Living Adjustment (COLA) is overstating inflation by say one-half of a percent or so, just for an example, then go ahead and cut COLA, which assures that no matter how long you live your benefit will purchase the same amount. That would address 32% of problem. You could also eliminate the $65,400 cap on the employer, which would take care of 46% of the financing problem. Employees pay social security on up to $65,400 of their income — anything over that isn't taxed for social security. The rationale for taking away the cap from employers instead of employees is that income distribution is increasingly unequal in this country. We have nothing against some making more than others, but give growing inequality, this is not an unreasonable place to simply tax employers who are paying high salaries. It doesn't make sense to lift the cap on the employee, because you end up paying that money back to them anyway. All of this is to say there are a lot of ways to do this. Tripod: What do you think is going to happen in the near term? EK: I think that there's a genuine interest among some advocates to radically change social security. The moderates believe that they can do some privatization and if everything works perfectly, the outcome might not be bad. But things don't work perfectly and you might end up creating a political dynamic that would pull apart support for the program. I worry about all this talk about privatization. Right now the employer has a pretty simple program: pay in, keep records, they're pretty well out of it. But with private accounts, employers are going to have a mess on their hands, setting up these individual accounts. I worry about the kind of national discussion we're having. People are saying there's no other solution but to privatize and cut benefits, which clearly isn't the case. They like to make this into a huge crisis. There are choices that are out there. All involve distributing the pain, but they're a lot better than privatizing. © 1997 Tripod, Inc. All rights reserved.