Saving social security - and bettering retirement

By , William C. Greenough is former chairman and currently a trustee of TIAA-CREF, which provides pensions for colleges and universities.

One reason that social security reform poses such difficult problems is that most policymakers take too narrow a focus. The plain fact is that the United States has a retirement problem, not just a social security problem. Social security must be reformed, but focusing only on social security ignores the critical need to increase employer pension coverage and to broaden the role that private saving plays in providing retirement income.

The impact that the nation's various retirement systems have on the economy is enormous. In 1979, private pension plan assets alone were valued at approximately $375 billion, and the United States Department of Labor predicts $ 3 trillion in private assets by 1995. The multitrillion-dollar long-term liabilities of the Social Security Trust fund are not even included in the recent record $1 trillion national debt. The sheer magnitude of these numbers is a strong argument for developing ways for making retirement policy a positive force for economic growth.

The country can devise ways not only to provide adequate retirement income for older Americans, but also to develop retirement policies that will benefit the economy over the long term. This can be done through a strategy of simultaneous actions that slow down the increases in social security and strengthen the present role of employer pensions and individual saving for retirement.

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Encouraging more privately generated saving will, of course, eventually add to the income of retired workers. But it can also serve a function that social security never can - a function that many people do not associate with retirement policies. More individual saving and more well-funded employer plans can help provide the capital for new factories, machines, housing, and new products and processes that are so desperately needed to help revitalize the economy.

It is important to remember that the success of all retirement programs - social security included - depends directly on the economy's ability to produce goods and services efficiently and competitively.

Action should begin now on a two-step, long-term program of scaling back social security to affordable levels and of increasing the scope of private pensions and saving.

Social security is being strained to its limits by an aging population and a shrinking body of younger workers who must bear the cost. Inflation is causing benefits which are fully indexed to the Consumer Price Index (CPI), to outpace the increases in wages for current workers who support the system. By social security's own estimates, combined employer-employee social security taxes could be 45 percent of covered payroll by the year 2050.

A few basic changes can make social security affordable - without further tax increases - in the years to come. And this can be accomplished without reducing current benefits or causing undue hardship for those about to retire. The President and Congress should:

* Gradually raise the normal retirement age for social security from 65 to 68 and the early retirement age from 62 to 65. This should be accomplished by raising the retirement ages two months a year until the goals are reached by the end of the century. This change would make a substantial contribution to eliminating the long-term deficit in the old age portion of social security.

* Revise indexing. Full indexation to the CPI will add $17 billion to social security costs in 1981 alone. Social security increases should be linked to a new index which more accurately reflects the spending patterns of older Americans. (The CPI, for example, includes housing and housing finance costs - costs which do not usually affect retired individuals.) Any increase in benefits should be based on this new index or on the rise in average pretax wages of workers, whichever is less.

* Make automatic benefit adjustments at less than 100 percent of the CPI. Between 1972 and 1980, social security benefits in real terms increased 20 percent while real wages actually declined. Less than 100 percent indexing would not only correct this inequity, but would do much to solve the short-term financing problems of social security.

The second step in this strategy should be development of incentives for increased personal saving and wider coverage by employer pensions. In the past, public policy has created an environment which actually discouraged people from relying on personal saving for retirement. The US now has one of the lowest personal saving rates in the industrialized world.

The new 1981 tax legislation should go far toward increasing personal provision for retirement. But even liberalized eligibility for IRAs and Keoghs may not be enough. Based on the experience gained under the new law, contribution limits should probably be raised further in years to come.

While over 75 percent of the full-time nonagricultural working population is now in jobs covered by some form of employer pension plan, additional incentives are needed to encourage more employers to establish plans. The most effective way to broaden coverage is to allow companies maximum flexibility in setting their own pension arrangements. This is especially important for the small employers who constitute an increasing source of new employment opportunities.

While government should not mandate any specific pension arrangements for employers, there are a number of incentives that could help increase the retirement income provided by employer pensions. For example, all employee contributions to private plans should be tax deductible and the benefits should be included in taxable income when received.

Now is the time to face squarely the need for a workable, affordable, and humane system of providing retirement income. A strong commitment to reforming social security and to increasing private sources of retirement income will not only assure the future solvency of social security, but will help the economy break away from its current vicious cycle of low saving, low productivity, and high inflation.

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