By:Pamela J. Larson, Executive Vice President and Virginia P. Reno, Director of Research
Published: December, 1998
The National Academy of Social Insurance (NASI) is a non-profit, non-partisan organization of 500 of the nation’s leading experts on social insurance. The Academy conducts objective, non-partisan analyses of Social Security, Medicare and other social insurance programs. It does not take positions on legislation or policy issues. Its members hold diverse views on policy proposals.
The Academy is founded on the premise that, through research and education, it can contribute to sound policy development of social insurance that fits with the needs and values of the American people. Our staff and expert members are available to help policy makers reach informed decisions.
The Academy’s major study by a blue-ribbon panel on Evaluating Issues in Privatizing Social Security was released on November 23, 1998 and is available from the Academy and our website. Our new book, Framing the Social Security Debate: Values, Politics and Economics, includes essays from 30 experts with varied views on Social Security reform. It is available from Brookings Institution Press. Social Security Briefs are also on the website.
Our recent research reveals widespread agreement among experts, as well as sources of their disagreements, on Social Security reform.
First, experts agree that Social Security faces a long-range financing short-fall, not a near-term crisis.
Second, experts agree that it is prudent to restore long-term balance sooner rather than later.
Third, past approaches to balance Social Security used a combination of gradual benefit reductions and future tax increases. Experts agree that these must be part of any reform that achieve balance. There is no free lunch.
Fourth, new economic issues in the current Social Security debate, while sometimes confusing, are not a major source of disagreement among experts. Three new concepts are:
diversifying investments; and
Privatization refers to proposals to set up individual savings accounts as part of Social Security. Such individually owned accounts would be a significant change from the traditional system, which shares across all contributors protection against the risks of disability, death of a family worker, a low-earning work life, and the prospect of living a long time in old age. By prefunding, experts refer to building up more funds inside Social Security to help pay future benefits. It requires sacrifices in the near term — either higher taxes or lower benefits — in order to set aside more funds for the future. By diversifying investments, experts refer to changing the current policy of investing Social Security funds only in Treasury bonds to include investing part of the funds in stocks and corporate bonds. Many economists agree on the desirability of prefunding and diversifying investments, which could be done with similar economic effects in either the traditional system or in privatized accounts.
Experts differ on the desirability of setting up privatized individual Social Security accounts.
The heart of the privatization debate is about values — for example, how much one values individual choice and control, on the one hand, versus collective provision for shared security, on the other. On values, experts differ.
Experts also differ in their personal predictions about how future political events might unfold with and without privatization. These differences are outlined in Evaluating Issues in Privatizing Social Security and are examined by political scientists in Framing the Debate.
To date, there has been much analysis of how individual accounts would be invested, but relatively little attention to the kinds of benefits they would pay to workers and their families at retirement, or when a worker dies or becomes disabled before retirement. It is not yet clear how individually-owned accounts would achieve the purpose of Social Security. If it is hoped that they will, more attention to their benefit design is warranted.