Scenario for a social security 'reform plan'

Subcommittee by the director of federal legislation for the National Federation of Independent Business.m No government activity directly affects the lives of more Americans than social security. One of seven Americans now collects a social security check. Nine of 10 American workers pay social security taxes to provide those checks.

But now, almost without our realizing it, social security has become an economic time bomb ticking away within our society.

The system is going broke. And the ever-increasing taxes needed to finance its inexorable growth are slowly undermining the job-creating capacity of employers, especially the nation's small businesses.

Clearly, constant tax increases, particularly payroll tax increases, are unacceptable. They retard employment growth and decrease the savings rate which is essential for investment and economic prosperity.

Small business in America is responsible for two-thirds of the jobs created in the United States over the past decade. But ever increasing FICA taxes threaten its ability to perform this vital function.

Clearly, something must be done. But what?What steps need to be taken in order to solve this terrible dilemma?

Before outlining the major alternatives available, there are three points to remember: First, the government can't start the program all over again. It's not 1936. Congress must work with what it has. Second, the only methods to handle the long-term deficit are to raise taxes, lower benefits, or both. Third , a healthy economy is absolutely essential. The higher the nation's growth rate, the more manageable our social security problem. But the opposite is true as well, and the nation's growth rate over the past several years has not been encouraging.

Fortunately, the financial and benefit- equity problems point to one common reform.It is the separation of the annuity and transfer functions of social security. It will simply be referred to here as "separation."

The idea of this plan is to provide social security annuities to retirees based totally on the amounts the individual and his or her employers contributed and on the interest earned. Benefit levels would not be affected by such things as the earnings test and the number of dependents. For example, if the average person at retirement had $60,000 in his or her social security annuity account and life expectancy was 10 years beyond retirement, that person would draw a $6, 000 per year ($500 per month) benefit. Social security annuities would continue to be financed by FICA taxes. Nothing could be simpler or more equitable.

But there is good reason for social transfer benefits being paid to the elderly. Many of these people are poor and desperately need help. Therefore, if the social security system is to be made into a sound retirement program, by eliminating social transfers, something must be done about the substantial number of elderly poor. To ensure that the elderly poor do not suffer from elimination of social security transfer payments, a social transfer supplemental means-tested program would provide benefits to be paid from general revenues. Only the poor elderly would be eligible.

THis is at the heart of what we call the NFIB [National Federation of Independent Business] Social Security Equity Reform Plan. The plan would accomplish two major objectives:

(1) Guarantee every working American a fair return, upon retirement, on all of the money he or she has paid into the system over the years, and (2) establish a fair mechanism for providing retirement benefits to those for whom the entitled annuity (and other income) would be inssuficient to provide them with a decent standard of living.

The NFIB "equity plan" would, in effect, replace the current mixed retirement-income transfer program with properly separated -- and separately financed -- insurance and transfer programs. Taxpayers, upon retirement, would receive an actuarially fair annuity equal in principal amount to the sum of their historical wage taxes, the taxes paid on their wages by employers (and self-employment taxes), plus interest. Under this Entitled Annuity Insurance program, retired people would receive exactly what they paid for. The program would be financed strictly by payroll taxes.

Elderly taxpayers and dependents of deceased taxpayers with inadequate resources also would be eligible for supplemental retirement benefits, a separate but related program that would -- like any other income transfer program -- be funded by general revenues.

What would such a change do? Aren't proponents of this plan just shifting things around to be moving them around? If $1.33 trillion were taken away by eliminating social transfers and then given back, what good would be done?

Under current law, social transfers are paid to virtually every retiree whether needed or not. The retiree in his country home receives a social transfer just like the poverty stricken retiree. Both of these subsidies are effectively being paid by future generations, wealthy and poor who now must expect negative returns on their social security tax dollars.

In the separation proposal, social transfer payments to the non-poor are eliminated. The effect is a net cost reduction. Further, benefit equity is created. Everyone including the young, can expect a fair return on his or her social security tax dollar.

The proposal we offer addresses the principal problems of social security. The plan would separate the insurance function and the social subsidy function of the social security system paying the former through payroll taxes and the latter from general revenues.

Thus, everyone paying into social security would be entitled by right to a benefit based entirely on the amount paid in and the years worked just like any real insurance program. If that amount plus all other income were insufficient, then a subsidy based on need would be drawn. This subsidy would be pai d from general revenues just like any other social program.