To Fix Social Security

James K. Glassman [op-ed, March 24] compliments Sen. Daniel Patrick Moynihan for courage in proposing to cut payroll taxes and slash Social Security benefits by nearly 30 percent. “A gutsy proposal,” Glassman writes. Really? Let’s take a look.

Even if no legislative changes were made in Social Security, it would be possible for the next 30 years to pay all benefits promised under current law, then to cut them 25-30 percent and continue paying benefits for the indefinite future. The system would not vanish or collapse.

But doing nothing now is a bad idea. Although Social Security is running a large surplus—more than $100 billion a year—it does face a projected long-term deficit. Modest steps taken now would be sufficient to correct that deficit. Delay will make the problem harder to solve. Furthermore, some structural changes are needed.

Moynihan’s plan contains some of those desirable reforms—extending Social Security coverage to all newly hired state and local workers, counting more years of earnings in calculating benefits, applying the same tax rules to Social Security and private pensions, and accelerating the already-scheduled increase in the normal retirement age—at which unreduced benefits are paid—from 65 to 67. These changes—combined with improvements in the consumer price index that the Bureau of Labor Statistics has announced or has on the drawing boards—would close two-thirds of the projected long-term deficit.

The practical question is whether other elements of Moynihan’s plan, which are are distinctive to it, are also good ideas. There are four: cutting payroll taxes by two percentage points now and increasing them later; cutting Social Security benefits by instituting larger increases in the retirement age than are contained in current law; cutting cost-of-living adjustments (COLAs) by one percentage point, not just in Social Security but also in the annual adjustments in personal exemptions, the standard deduction and tax brackets; and permitting but not requiring individuals to deposit the payroll tax cut in personal savings accounts.

The net revenue loss from cutting payroll taxes now would increase Social Security’s projected long-term deficit by one-third, forcing larger benefit cuts to restore long-term financial balance.

Raising the retirement age would cut benefits for retirees about 13 percent by 2017 and eventually by 20 percent relative to current law.

The proposed reduction in COLAs is excessive. The Bureau of Labor Statistics has already made changes in the consumer price index that slow its increase by an estimated 0.3 percentage points, and it is planning further changes that will shave an additional 0.4 percentage points starting this year. The Boskin commission recommended cuts of 1.1 percentage points.

Not everyone agrees that the cut needs to be this large. But a temporary reduction of perhaps 0.5 percent in the index used for adjusting Social Security benefits might make sense as a temporary measure if certain modifications were made.

The most dubious element of Moynihan’s plan is the one that appeals most to Glassman: the option for individuals to place their payroll tax cuts in personal savings accounts. Few would be able to avail themselves of this option. Most low earners prefer to spend their money now. People can already save in tax-sheltered accounts, but few do so. In 1995 nearly all of the 68 million filers with adjusted gross incomes of $30,000 or less could have contributed to IRAs, but fewer than 3 percent did so. Social Security was designed to correct this myopia, forcing people to set aside funds to protect themselves from loss of income on retirement, disability or death of a breadwinner.

Low earners who found the temptations of current income stronger than the desire to save for future contingencies would take the payroll tax cut Moynihan offers and eventually suffer cuts in Social Security benefits averaging roughly 30 percent. As for the workers who do set up personal accounts: Pity their employers, who would have to deal with as many separate plans as employees chose from among the thousands available to them. Employers also would have to keep track of each change of plan that every employee would be free to make.

Deposits for the average covered worker would run about $11 a week. Workers would likely experience high administrative costs and might encounter some financial wrongdoing, if the experiences of Chile and Great Britain, whose systems Mr. Glassman extols, are any indication. The Chilean system is overrun by wasteful selling costs of approved plans. Noncompliance is rampant. A recent study of British private accounts reports annual administrative costs running 2 percent of the amount invested. Furthermore, many administrative costs do not vary with the size of accounts, meaning that the bite would be particularly severe on small accounts.

At present, people who want to convert their savings into annuities so that lifelong payments are ensured must pay U.S. insurance companies fees averaging 20 percent of what they have saved. Is it any surprise that financial companies are in the vanguard of the privatization movement, busy underwriting research by organizations expected to produce congenial results?

Apart from the high administrative costs of individual accounts, one needs to remember why we have social insurance. It is to ensure that people have a reliable income floor when retirement, death or disability cuts their earnings and that this income bears some relation to what they previously earned. Such income should not depend on what happens to stock and bond prices or whether people choose their investments wisely. It should be ensured. Slashing the far-from-generous Social Security benefits as much as Moynihan’s proposal would so that more Americans could play financial roulette with part of their core protection against income loss would undermine the very system he wants to save.

Finally, Moynihan was right to object to my characterization of his plan as the “My Lai of Social Security reform.” My Lai was a dreadful atrocity that I wrongly invoked. I apologize for linking to a war crime what is a well-intended proposal, however flawed I think it to be.