Hearing on the Final Report Produced by The President’s Commission to Strengthen Social Security


Mr. Chairman and members of the Committee, thank you forinviting me to offer testimony regarding the reform proposals ofthe President's Commission to Strengthen Social Security.

My name is Andrew Biggs, and I am a Social Security analyst atthe Cato Institute. During 2001 I was a staff member to thePresident's Commission and worked with the Commission members andother staff on reports and proposals in question. While I ambroadly supportive of the Commission's goals and proposals, Ishould add that the opinions expressed today are my own.

Details of the Commission's reform models can be found in itsfinal report, as well as in a shorter analysis I conducted for theCato Institute and a recent working paper for the National Bureauof Economic Research by two Commission members.1

The Commission was appointed with a mandate to "providebipartisan recommendations to the President for modernizing andrestoring fiscal soundness to the Social SecuritySystem,"2 with provisos that modernization should:protect retirees and near-retirees from changes to their benefits;dedicate the entire Social Security surplus to Social Security; notincrease payroll taxes or allow the government to invest SocialSecurity funds in the stock market; preserve Social Security'sdisability and survivors' components; and include voluntarypersonal retirement accounts to augment the Social Security safetynet.

My testimony today will focus on Commission Model 2, which hasbeen the subject of the greatest debate in the public sphere. TheCommissioners' first step with Model 2 was to determine the rate ofbenefit growth the current program could afford to pay each cohortof future retirees without raising taxes, regardless of whetherpersonal accounts were introduced. This affordable rate of benefitgrowth turned out to be slightly above the rate of inflation. TheCommission instituted this affordable benefit growth rate byreplacing the current program's formula of "wage indexing" with aformula of "price indexing." (See below for further comment.) Theexcess affordable benefit growth was targeted toward improving thesafety net and poverty protections for low-wage workers and widows.Under Commission Model 2, however, all workers and retireesaged 55 and older would be exempt from any changes to their SocialSecurity benefits.

Having established a benefit formula that would bring SocialSecurity back to long-term solvency without tax increases, theCommission introduced personal retirement accounts. Accounts couldhelp make up for the reduction in traditional benefit growththrough their higher-returning investments; give workers a trueproperty right to their benefits, which they lack under currentlaw; more effectively prefund future benefits than the currenttrust fund financing mechanism; and aid groups disadvantaged byaspects of the current program, such as African Americans, divorcedwomen, and single workers and dual-earner couples.

Commission Model 2 would improve the long-term unified budgetcash flow by over $16 trillion (in $2001), equivalent to a lump sumtoday of $2.2 trillion. Thus Model 2 provides increased budgetaryflexibility to address national security, health care, and the manyother issues sure to face the government over the next 75years.

The remainder of my testimony will concentrate on severalimportant objections to the Commission's proposals made in a recentstudy co-authored by Peter Orszag of the Brookings Institution andPeter Diamond of the Massachusetts Institute ofTechnology.3 This focus is testament to the authors'reputations as economists and the influence the study has had onthe public debate over Social Security since it was released inJune. Nevertheless, I am concerned that their study does not tellthe full story, and by itself could give a false impressionregarding the challenges we face over Social Security and the rolethe Commission's proposals could play in addressing thosechallenges.

In my testimony, I will make several references torecommendations from the Consultant Panel on Social Security, whichwas appointed in April 1975 at the request of the Senate FinanceCommittee to recommend revisions to Social Security's financingstructure. Professor Diamond served on the Consultant Panel, and inseveral significant ways the Panel's recommendations mirror thoseof the President's Commission.4

Benefit Cuts

I first wish to address charges of "benefit cuts" in theCommission proposals. Consider the following passage from a pressrelease summarizing the findings of the Diamond-Orszag study:

The proposals that President Bush's Social SecurityCommission issued in December would substantially reduce benefitsfor future retirees and the disabled while requiring multi-trilliondollar transfers from the rest of the budget to finance privateretirement accounts.

The press release goes on to state that, "Benefits would bereduced 41 percent for those born in 2001 who retire at age 65 in2066."5

These charges are initially compelling. After all, if a SocialSecurity proposal both pays less and costs more than the currentprogram, what is the point of making the change? This is thequestion that many opponents of personal accounts would like thepublic to ask itself, particularly in this year in which SocialSecurity reform is a highlycharged election issue.

Winston Churchill was reputedly once asked the question, "How isyour wife?" The former British Prime Minister reportedly answeredwith a second question: "Compared to what?"

It is not recorded precisely how the Prime Minister's wifereacted to this comment, yet these charges of benefit cuts andlarge general revenue transfers must be subjected to the samecounter-question put forward by Mr. Churchill: "Compared to what?"The answer, I submit, is not compared to the present SocialSecurity program.

The following arguments may seem excessively technical andarcane. Yet they have a direct impact on the Social Security debatetaking place not only here in Congress, but outside the beltway aswell.

For example, last week the head of the North Carolina DemocraticParty wrote that under the Commission's proposals, "the guaranteedmonthly benefits for the average retiree would fall by 46 percent,or $374, from $814 to $440 per month."6 This statement,which is wholly and unequivocally false, is based on amisunderstanding of the arguments presented in the Diamond-Orszagpaper.

It is unlikely that the Democratic Party chair intended to makesuch a blatant misstatement, and I am sure that Peter Orszag andProfessor Diamond do not intend for such errors to be made. Butunless participants in the debate clearly understand thedistinctions I am going to make, an informed and accurate debateregarding the choices facing us on Social Security will bedifficult to achieve.

The essential problem with Diamond and Orszag's charges of"benefit cuts" is that, simply put, they mis-define "benefits" andmis-define "cuts." Benefits paid by personal accounts are notcounted as true benefits, while cuts are measured versus what thecurrent system promises, not what it can and would payunder current law.

The following charts illustrate.

Chart 1 compares the annual retirement benefits promised to alow-wage worker7 by the current program (solid line) tothe traditional benefit paid by the government under theCommission's Model 2 (dashed line). While the Commission proposalwould pay higher traditional benefits in the short term, beginningin 2031 the current program promises a significantly highergovernment-paid benefit. This is the basis of charges of large"benefit cuts" that you have heard repeated so often. By 2075, the"cut" for a lowwage worker reaches 35 percent, for an average-wageworker 46 percent.

The comparison in Chart 1 is less than fully informative,though, because it compares the Commission proposal to the benefitsSocial Security promises, not what Social Security would actuallypay.8 By law, when the trust fund runs out in 2041,benefits would be reduced to the level that payroll tax revenuesalone could pay. This will amount to an across-the-board benefitcut of 25 percent or more.

In testimony to the House Budget Committee the day following therelease of the Diamond-Orszag study, GAO director David Walker madepointed reference to this issue:

There's a lot of people that want to compare SocialSecurity reform proposals just to promised benefits. That isfundamentally flawed and unfair because all of promised benefitsare not funded. There is a huge shortfall between what's beenpromised and what's been funded, and you've got to figure out howyou're going to close that shortfall. So, any analyses, includingthe [Diamond-Orszag] one released yesterday, that compare thebenefit cuts based upon promised benefits solely rather than fundedand promised, is unfair, unbalanced, in my opinioninappropriate.9

Former Senators Bob Kerrey (D-NE) and Warren Rudman (R-NH) wentas far as to characterize such comparisons as a "shell game,"writing recently that while

It is certainly fair to criticize reform plans onpolicy grounds. But it is fundamentally unfair to judge themagainst a standard that assumes the current system can delivereverything it promises. It can't. Today's Social Security systempromises far more in future benefits than it can possibly deliver.The relevant comparison for any reform plan is with what currentlaw can deliver, not what it promises.10

Likewise, the Congressional Research Service writes that

Comparing a proposal's projected benefits to thoseresulting from the rules of current law can be misleading, sincethe full amount of benefits promised under current law would not bepayable under the trustees' projections. For example, a proposalthat is shown to result in benefits that are 10 percent or 20percent lower than under current law may at first glance appearpolitically unattractive, but may appear less so if compared to the27 percent reduction in benefits that would have to occur …if policymakers were to take no action.11

These points are important to remember throughout thedebate.

Correcting for this problem, Chart 2 compares the traditionalbenefits paid by the government under Model 2 to the benefits thecurrent program can actually pay.12 In most years the Commission'sModel 2 would pay a low-wage retiree a higher traditional benefitthan the current program can afford to pay.

But even this comparison does not tell the whole story. Chart 2assumes that the worker holds a personal account. Such a workerwould accept a traditional benefit up to 24 percent lower than aworker without an account. Yet Chart 2 does not include thebenefits paid by the account.13

Chart 3 compares the total retirement benefits a low-wage workercould expect under Commission Model 2 to those the current programcould afford to pay.14 In almost all cases CommissionModel 2 would pay a low-wage account holder substantially higherexpected benefits than the current program can afford to pay. Alow-wage worker retiring in 2052, for instance, can expect totalretirement benefits 47 percent higher than Social Security canafford to pay.

However, some would call this an unfair comparison, arguing thatCommission Model 2 receives general revenue transfers with apresent value of $0.9 trillion while the current program receivesno extra funding.

Chart 4 compares the total retirement benefits a low-wage workercould expect under Commission Model 2 to those the current programcould pay with similar general revenue transfers. Simply put, Chart4 shows what the current system could afford to pay if we boostedthe current $1 trillion balance of the trust fund by another $900billion. The current program would remain solvent for 9 additionalyears, from 2041 until 2050, but after that would again be forcedto cut benefits by more than 25 percent. A low-wage worker retiringin 2052 could expect total retirement benefits from CommissionModel 2 46 percent higher than from the current program, even withsimilar general revenue transfers.

Chart 5 shows that Model 2 generally would increase benefits fora low-wage worker, even compared to a current program that faced nofinancing shortfall and could pay full benefits without anyincrease in taxes. A worker retiring in 2052, for instance, couldexpect total benefits some 7 percent higher under Model 2 thanthose promised by the current program.

An average-wage worker retiring in mid-century would receivearound 94 percent of promised benefits (and around 28 percent morethan the current program can afford). A high-wage worker wouldreceive less, collecting around 89 percent of promised benefits,though 23 percent more than the current program can afford to pay.All workers, however, would be spared the 50 percent increase inpayroll tax rates necessary in 2041 to finance the benefits thecurrent system promises, but cannot pay.

To repeat, the entire basis of charges of large benefit cutsunder the Commission proposals is, in the opinion of GAO head DavidWalker, "fundamentally flawed and unfair." People from both sidesof the debate should remember this when considering theseclaims.

A Note on "Risk Adjustment"

Most charges of "benefit cuts" do not even count income frompersonal accounts as true benefits, though this is rarely madeclear in non-technical writings. But even when Diamond and Orszagdo count the benefits from personal accounts, they use a method of"risk adjusting" which reduces them by one-third or more comparedto the standard methodology used by Social Security'sactuaries.15

In practice, "risk adjusting" means that Diamond and Orszagassume that personal accounts would invest solely in governmentbonds (earning 3 percent returns after inflation), rather than themixed portfolio of stocks, corporate and government bonds assumedby Social Security's actuaries (returning 4.6 percent). This riskadjustment reduces monthly benefits substantially; for a low-wageworker retiring in 2042, "risk adjustment" reduces the accountbalance by 36 percent.

Three points are worth making regarding risk adjustment.

First, whatever its merits, risk adjustment is not standardpolicy of Social Security's independent actuaries, nor is itstandard practice among actuaries in general. Any equity investmentnecessarily involves risk, and economists and actuaries should anddo explore the best ways to express the risks of equity investment.Even some members of the Commission favored risk adjusting.Nevertheless, general actuarial practice16 as well asthe specific policies of Social Security's actuaries is to focus onthe expected value of the investment portfolio chosen, not to riskadjust all equity and corporate bond investments to the governmentbond rate of return. Diamond and Orszag have in other contextscriticized the Commission for veering from the actuaries' standardmethodology,17 yet risk adjusting investment returns issimply not how the Office of the Chief Actuary conducts itsanalysis.

In the actuaries' analysis, "Workers are assumed to maintainpersonal-account portfolios that would have an average distributionof 50 percent in equity, 30 percent in corporate bonds, and 20percent in U.S. Treasury long-term bonds." Equities are assumed toreturn 6.5 percent after inflation, corporate bonds 3.5 percent,and government bonds 3 percent, for an annual portfolio return of4.6 percent net of inflation and administrative costs. The benefitlevels discussed in this testimony and in the Commission's ownreport are based on these return assumptions, which the actuariesmake in consultation with outside experts.

Social Security's actuaries presented two variations on theassumed account yield. A "high yield" portfolio assumes thatequities return 7.1 percent annually, their long-term historicalaverage or, alternately, that workers invest a higher proportion oftheir portfolio in equities. The "low yield" portfolio assumes 100percent investment in government bonds or, alternately, the riskadjustment utilized by Diamond and Orszag.

The actuaries judged the intermediate yield assumptions utilizedin this presentation to be the most likely. Following that, "thehigh yield is assumed to be more likely to occur than the lowyield."18 In other words, the risk-adjusted returnutilized by Diamond and Orszag is, in the view of Social Security'sactuaries, the least likely outcome of the three.

Second, while Diamond and Orszag have discussed issues of riskin prior analyses of Social Security, their analysis of theCommission proposals appears to be the first instance in whichexplicit risk-adjustment of investment returns was insistedupon.

In a prior paper on then-Governor Bush's proposal for personalaccounts, Peter Orszag did not explicitly risk-adjust accountreturns.19 Likewise, the final report of a recent panelchaired by Professor Diamond argued that

Diversifying the planned portfolio for Social Securitywould increase the expected rate of return on the Trust Fund. Thusit would improve the intermediate-cost actuarial evaluation ofSocial Security that is based on expectedreturns.20

Yet if proposals for the government to invest the trust fund inthe stock market were scored on Diamond and Orszag's risk-adjustedbasis, this would be wholly untrue: even if the trust funddiversified from bonds to stocks, it would be treated as if stillheld only bonds and thus actuarial balance would be unaffected.

Diamond and Orszag's risk adjustment renders any privateinvestment, whether undertaken centrally by government orde-centrally by individual workers, superfluous to enhancing thesolvency of the Social Security program. This would be a radicaldeparture from mainstream Social Security analysis over the pastdecade or so.

Third, if benefits from personal accounts are to be adjusted forrisk, benefits from the current program should be similarlyrisk-adjusted. This concept applies in two ways. First, the currentprogram is insolvent over the long-term, promising future retireesbenefits 50 percent higher than can be paid under current lawfinancing. Hence, there is not simply a risk but a certainty thatcurrent tax or benefit schedules will be altered. Assuming thatlegislated tax rates are not changed, the common sense "riskadjusted" benefit baseline would be what the current program canafford to pay - that is, the payable level of benefits utilized foranalysis by the Commission. By this standard, the comprehensiveCommission Models pay substantially higher benefits to all retireesthan the current program, with low-wage individuals receiving thelargest increases.

Moreover, benefit promises under the current program are clearlynot as secure as explicit government obligations such as Treasurybonds. A worker with a personal account holding bonds backed by thefull faith and credit of the government would unquestionably have astronger claim on future government resources than a workerpromised the same sum under the current Social Security program,which grants individuals no legal right to their benefits andwhich, as the 1977 and 1983 reforms attest, can change the rules ofthe game at relatively short notice. Risk adjusting current programbenefits could involve estimating the risk of the current systemand adjusting promised benefit levels downward until risk wascomparable to that of government bonds.21

Subsidies to personal accounts

Under Commission Model 2, workers opting for personal accountsgive up their traditional benefits equal to their accountcontributions compounded at a 2 percent real interest rate, calledthe "offset interest rate."22 Diamond and Orszag arguethat "Model 2 subsidizes the accounts by charging an interest rateprojected to be one percent below the [3 percent real interest]rate on Treasury bonds." The traditional program, they argue, losesmoney on the deal and reform therefore subsidizes personal accountholders at the expense of non-account holding taxpayers andretirees.

This argument relies on a confusion between the interest rateearned by the Social Security trust fund - which is set inlegislation, and can be changed at any time - and the (generallylower) rate of return Social Security pays to individuals. In thiscontext, several points are worth making:

1. Account holders as a group do not receive a subsidy underCommission Model 2. If a worker choosing an account gives up lesstraditional benefits than his account contributions would have"bought" him from the current program, he has effectively beensubsidized. On average, future retirees will receive anapproximately 2 percent real return from Social Security, the sameas the offset interest rate under Model 2. At a 2 percent offsetinterest rate, most workers would give up traditional benefitsworth roughly what their account contributions would have boughtthem. At an offset interest rate of 3 percent, which Diamond andOrszag imply would eliminate the "subsidy," most workers would giveup substantially more in traditional benefits than their accountcontributions would have bought from the currentprogram.23 Hence, there is no overall subsidy to theindividuals holding accounts.

Illustration: A worker earns a 2 percent return under thecurrent program, entitling him to $1,000 per month in retirement.If he put all his payroll taxes into an account (not just part, asunder the Commission plans) subject to an offset interest rate of 2percent, he would give up all his traditional benefits -- $1,000per month. At a 3 percent offset interest rate, he would not onlyhave to give up the entire $1,000 per month but pay an additional$200 per month back to the government. In short, Diamond and Orszagargue that to eliminate Model 2's account "subsidies" accountholders should owe the traditional system more than they would havereceived from it, a highly counterintuitive argument.

2. Subsidies within the group of account holders tend to flowtoward lower-wage individuals. An account-holder entitled to acurrent-program return exceeding the 2 percent offset interest rategives up less in traditional benefits than his accountcontributions would have bought him in the current system. Ineffect, he receives a subsidy. An account holder entitled to acurrent-program return below the 2 percent offset interest rateeffectively pays an "exit tax": he must give up more traditionalbenefits than his account contributions would have bought him.

While future retirees will receive approximately 2 percentreturns on average, low-wage workers tend to be entitled to returnsabove 2 percent and high-wage workers to returns below 2 percent.Hence, while account holders as a group do not receive a subsidy,within the group low-wage account holders effectively receive asubsidy from high-wage account holders.24

3. Diamond and Orszag's contention that 100 percent of eligibleworkers would opt for accounts means we would be "subsidizingourselves." Even if we accept that a general subsidy to accountholders exists, Diamond and Orszag argue that participation underCommission Model 2 would be 100 percent (not 67 percent as assumedby the Commission and Social Security's actuaries).25 Ifevery eligible worker would become an account holder, what existsis a general tax subsidy to personal account holders with, as point2 shows, the largest subsidies relative to wages flowing tolow-wage workers.

4. Charges of "subsidies" assume the trust fund can effectivelysave cash today to pay benefits tomorrow. Many believe this not tobe the case. Many argue that Social Security surpluses havehistorically been used to hide deficits elsewhere in the budget,enabling the non-Social Security portion of the government to taxless or spend more than in otherwise would have. If this is thecase - and many on both sides of the personal accounts debatebelieve it is26 - then Social Security funds areeffectively subsidizing the rest of the budget, not being saved topay future retirement benefits. Saving Social Security funds inaccounts that cannot be "raided" to pay for other programs simplyreduces these subsidies to the rest of the budget and ensures thatfunds dedicated to Social Security can, in a meaningful economicsense, help pay benefits in the future.

It is true, of course, that a worker holding a personal accountcould increase his total benefits simply by investing inguaranteed, risk-free government bonds. What that shows is thattoday's workers effectively subsidize the system, since theyreceive lower returns than their contributions would earn in SocialSecurity's trust fund and could earn higher returns with ownershipand absolute security by holding even the safest, lowest-returningprivate investments. That says very little for the value-for-moneythe current Social Security program renders to the public.

Price Indexing

The Commission's recommendation in Model to move from the "wageindexation" to the "price indexation" of initial Social Securitybenefits has generated controversy, at lies at the root of chargesof "benefit cuts." At present, the initial benefits received byeach annual cohort of new retirees rises by the rate of wagegrowth. If wage growth were 2 percent, for instance, anaverage-wage worker retiring in any given year should receivebenefits 2 percent higher in real terms than an average-wage workerretiring the previous year. Under price indexing, the two retireeswould receive the same benefit from the government, adjusted forinflation.27 (Total benefits under Model 2 wouldcontinue to rise, however, due to rising personal accountbalances.)28

Wage indexing's principal merit is that it maintains replacementrates over time, such that Social Security benefits would comprisea relatively constant share of a worker's retirement income. Butwage indexing has several downsides as well.

The first, of course, is dramatically rising costs. The math issimple: today, the average benefit paid by Social Security equalsroughly 36 percent of the average wage; since there are 3.4 workersper retiree, the required tax rate is approximately 10.6 percent(36/3.4=10.6). As the payroll tax rate is 12.4 percent, SocialSecurity is currently running surpluses. When the worker-to-retireeratio falls to 2-to-1, the cost to each worker to maintain that 36percent replacement rate rises from 10.6 percent to around 18percent of each worker's wages (36/2 = 18). Under a wage-indexedbenefit formula, rising costs are simply inescapable.

Wage indexing means that in 2075 a maximum-wage earner will beentitled to a monthly retirement benefit of $3,250 (in today'sdollars), yet the program will require a 19.8 percent payroll taxrate to pay such benefits. Is such a growth in both taxes andbenefits truly necessary? As chairman of the 1978-79 AdvisoryCouncil on Social Security, Henry Aaron of the BrookingsInstitution argued for price indexing on just such a basis:

As per capita income rises, the case for increasing theamount of mandatory "saving" for retirement and disability throughSocial Security is far weaker than was the rationale forestablishing a basic floor of retirement and disability protectionat about the levels that exist today.29

The policy was not adopted, however.

Second, wage indexing means that increased economic growth cando very little to ease the burden of Social Security's financing.If economic growth increases then wages and payroll tax receiptsrise as well. But since Social Security's benefits are also linkedto wages, after a short delay the amount it must pay out rises too.Hence, even if economic growth doubled, Social Security would stillbegin running payroll tax deficits and eventually becomeinsolvent.30

Price indexing would avoid these rising costs, principallybecause price indexing closely approximates the level of benefitsthat the current Social Security program is able to pay over thenext 75 years. (In fact, Social Security could pay somewhat higherbenefits; under Model 2, as noted above, the residual is dedicatedto improving the Social Security safety net.)

Indeed, Peter Diamond argued as a member of the Consultant Panelthat it was both "fair and necessary"31 to price indexfuture benefit levels, since "Future generations of workers shouldnot be committed in advance to materially rising taxrates."32 The wage indexing formula, as noted above,commits future workers to an over 50 percent increase in systemcosts relative to their wages. Under price indexing, Diamond andthe Panel argued, "Workers would receive more equitable benefits inrelation to their contributions."33

Diamond also noted, correctly, that price indexing "is not abenefit reduction for those already retired. Nor is it a reductionin the purchasing power of benefits for any generation of retiredpeople compared with corresponding people of previousgenerations."34 A glance at the Commission's reportshows rising real benefit levels for all future retirees.

When President Carter was seen to be favoring wage indexing overa priceindexed approach, Diamond and the other panel members chidedhim for fiscal and generational irresponsibility:

President Carter would be displeased with hispredecessors if he were currently faced with the choice of cuttingSocial Security benefits for present recipients or raising the sameamount of revenue as would be raised by an increase in the payrolltax rate of five percentage points. Yet that is precisely what thebest current estimates say he is proposing to do to some futurePresident…. It appears to us that correction of overindexingby choice of a price indexing method would be greatly superior [towage indexing]…. Use of the price indexing method wouldeliminate the need for a tax rise when the percentage of retireesincreases sharply early next century… While the priceindexing method implies protection from inflation and a growth inbenefits with the real growth of the economy, the wage indexingmethod calls for a much larger growth in benefits for futureretirees at a time when the country may not be able to afford it.Use of the price indexing method would permit moderate tax andbenefit increases to aid those recipients with greatest need asperceptions of those needs arise.35

The same charges could be made today against those who wish tosaddle future taxpayers with economic burdens they themselves areunwilling to bear today.36

The price indexing method as advocated by Professor Diamond wassomewhat different from that proposed by the Commission. Diamond'siteration would, if instituted at the same time as the Commission'smethod, pay somewhat higher total benefits over time (at a somewhathigher cost, of course). On the other hand, according the SocialSecurity's actuaries, the alterations this method of price indexingmakes to Social Security's benefit formula would "gradually reduce,and eventually eliminate, the progressivity of the current benefitformula.37 As a whole, Model 2 clearly increases SocialSecurity's progressivity.38

The most important difference, however, is based on time: theConsultant Panel of which Diamond was a member would have fullyimplemented their version of price indexing by 1988, reducingbenefits for workers retired today. The Commission, by contrast,would not begin price indexing benefits until 2009, protecting allworkers aged 55 and over from any changes. Moreover, unlike theCommission's Models, the Consultant Panel's proposal contained noprovisions for higher-returning personal accounts with which tomake up for reductions in promised traditional benefits.

Diamond and others argue that they favored price indexing in the1970s because the short and long-term financing problems facingSocial Security at the time were much greater than those atpresent. But price indexing, which is extremely slow to takeeffect, would have done little to avert short-term insolvency,which was addressed largely through increases in the payroll taxrate and wage ceiling.

Over the long term, the double indexing for inflation introducedin the 1972 amendments would have produced runaway growth ofbenefits. Clearly promised benefit levels would not beproduced.

The question facing Diamond then, as facing us today, is what isthe appropriate level of benefits that Social Security should pay -the higher but more expensive level entailed by wage indexing, orthe lower but less expensive level produced by price indexing?Diamond rejected the wage indexed benefit formula that SocialSecurity now contains and argued that a price-indexed formula wasmore appropriate.

Today, Diamond and Orszag argue that maintaining constantreplacement rates through wage indexing is "crucial."39Yet as part of the Consultant Panel, Diamond explicitly rejectedthe idea that replacement rates should be the sole criterion forappropriate benefit levels: "The merit of seeking a benefit formulathat undertakes to maintain the present distribution of replacementratios is a source of doubt to this Panel."40 The Panelelaborated:

[T]he effects of any particular formula should bestudied in terms of what the formula accomplishes in each of tworelated but distinct measure, these being (a) the purchasing powerof the benefit, and (b) the relationship of retirement benefit toincome covered for Social Security just before retirement, i.e.,the 'replacement ratio.' Discussion of Social Security benefitstructure has concentrated heavily upon the second of these as thecriterion of reasonableness. But we believe it is just as importantto discover whether the proposed formula succeeds in grantingnearly equal purchasing power to comparable workers who retire atdifferent times. 41

For lower-wage individuals, total benefits paid under CommissionModel 2 would largely maintain current law replacement rates. Forhigher-wage individuals, greater emphasis is placed on maintainingreal purchasing power at a reasonable cost to the workerssupporting the program. By the standard set by Diamond as a memberof the Consultant Panel, Commission Model 2 would be moresuccessful than maintaining the current program's benefit formula,as most critics of the Commission propose.42

Disability Benefits

Diamond and Orszag, as well as many other commentators, havebeen harshly critical of the Commission's treatment of SocialSecurity's Disability Insurance program, which provides benefits toworkers who through illness or injury are unable to continue towork. They say:

The same benefit formula that is used for retirementbenefits is also used for disability benefits. Thus the switch toprice indexation means that a worker becoming entitled todisability benefits in 2020 would have disability benefits reducedby 10.7 percent; a worker becoming entitled in 2040 would havedisability benefits reduced by 26.4 percent; and a worker becomingentitled in 2075 would have disability benefits reduced by 47.5percent. Yet, many disabled workers would have little opportunityto accumulate substantial balances in their individual accounts tooffset these benefit reductions - and in any case, they would notbe allowed access to their individual account balances prior toretirement age.43

To their credit, Diamond and Orszag recognize that "theCommission apparently does not support the dramatic implications ofits proposals for disability benefits."

Nevertheless, the Commission still counts every penny ofdecreased disability benefits in its actuarial scoring. While theCommission was willing to assume substantial general revenueinfusions to subsidize individual accounts, it was unwilling to usegeneral revenue or other means to protect the disabled and youngsurvivors from the traditional benefit reductions called for underModels 2 and 3.44

These charges have been repeated throughout the Social Securityreform debate.

Diamond and Orszag's charges would have greater resonance,however, if there had been a superior way for the Commission tohandle disability benefits and if Diamond himself had not treateddisability benefits in precisely the same way as a member of theConsultant Panel on Social Security.

To be clear, the Commission made no specific recommendationsregarding the long-term financing of Social Security's disabilityprogram. As the Commissioners' stated:

The Commission's short life span has not allowed time for thecareful deliberation necessary to develop sound reform plans forthe disability program. Because of the complexity and sensitivityof the issues involved, we recommend that the President address theDI program through a separate policy developmentprocess.45

The Commission noted that, "in the absence of fully developedproposals, the calculations carried out for the Commission andincluded in this report assume that defined benefits will bechanged in similar ways for the two programs." However,

This should not be taken as a Commission recommendation forpolicy implementation…. the Commission recognizes thatchanges in Social Security's defined benefit structure and the roleof personal accounts may have different implications for DI andOASI beneficiaries. The Commission urges the Congress to considerthe full range of options available for addressing theseimplications.46

In other words, while the Commissioners anticipated thatadditional steps would be taken to address the DI program, in theabsence of such recommendations the Commission's proposals werescored as if the changes made to Social Security's benefit formulawere to be equally applied to the disability (and survivors)elements of the program.

This is clearly an imperfect step. Were legislation based on theCommission models to provide higher disability benefits than asscored by the actuaries, it would come at a greater cost andtherefore produce smaller savings relative to maintaining thecurrent program.

Nevertheless, it is difficult to imagine a superior solution.Diamond and Orszag faulted the Commission, saying, "it dedicated norevenue to financing a more modest reduction in disabilitybenefits."47 But any such dedication of additionalrevenues to the disability program would clearly (and mistakenly)be interpreted as a specific policy recommendation, just as theCommission's failure to dedicate additional revenues has beenmistakenly interpreted.

The Commission itself had neither the time nor the expertise totackle the considerable financing and policy difficulties facingthe disability program.48 Rather than pretend to havesolved the disability program's problems through hastily consideredchanges or to paper them over through increased general revenuetransfer that imply that DI needs only money and not reform, theCommission chose to leave disability reform to a later group ofspecialists.

Significantly, as a member of the Consultant Panel on SocialSecurity, Professor Diamond adopted precisely the same treatment ofdisability benefits as the Commission:

This Panel has concentrated on benefits forretirements, and therefore recommends a separate exploration ofredesign of survivor and disability benefit programs by a selectedgroup of authorities.49

The Consultant Panel presented its cost estimates for the SocialSecurity program as a whole - including Disability Insurance -rather than restricting its scoring to the retirement element ofthe program. In addition, the Consultant Panel - like thePresident's Commission - did not dedicate additional revenues tothe disability program.

Moreover, reductions in promised disability benefits under theConsultant Panel's recommendations would have been substantiallylarger than under the Commission proposals, as price indexing wouldalready have been in place for twenty years.

By all appearances, this is an instance of the pot calling thekettle black. Yet both the pot and the kettle did the right thing.A working group focusing on retirement issues could not adequatelyaddress the more complex policy questions involved with disabilityreform. Dedicating additional revenue to the disability programwould inevitably be interpreted as a policy recommendation,whatever the group members might have said.

The non-partisan Social Security Advisory Board declared that,"the issues facing the disability programs cannot be resolvedwithout making fundamental changes."50 The Commissiondid not, and did not claim to, make recommendations for thosefundamental changes. Nor, however, did it recommend the nefarious"cuts" that so many commentators have attributed to it.


Let me conclude by pointing out that Social Security reformincorporating personal accounts is not painless, it is not a freelunch, it is not something for nothing. And the Commission neverclaimed that it was. Personal accounts would, however, pay higherbenefits at lower cost than alternatives lacking private marketinvestment, making reform less painful than it otherwise will be.And the continued public appeal of personal accounts - a July pollby Zogby International found 68 percent of likely voters continuingto support voluntary accounts, despite a falling stock market andrelentless attacks by political opponents - can make publicacceptance of reform easier to achieve.

As I argued, Commission Models cut benefits only when comparedto a mythical Social Security program that faces no financingshortfall. To their credit, Diamond and Orszag acknowledge thecurrent program's financing shortfalls, noting that

Some combination of a reduction in benefits, anincrease in revenue, and an increase in the rate of return earnedon the reserves of the Social Security Trust Fund is required tobring the system back into balance. Since it is unlikely that areform plan would restore long-term solvency solely through payrolltax increases, transfers from the rest of the budget, and/or theinvestment of Social Security reserves in financial instrumentsthat yield a higher rate of return than Treasury bonds, restoringlong-term balance to Social Security will likely involve somereduction in "replacement rates." A fundamental issue is whetherthe balance among the possible elements of a reform plan isappropriate.51

Yet nowhere in their study do they even hint at what the properbalance among reform elements is, nor how they would address SocialSecurity's long-term funding problems.52

What would be most helpful to the reform debate would be for theconsiderable talents of Drs. Diamond and Orszag, as well as themany other able critics of personal accounts, to be dedicated toformulating model legislation so that a true apples-toapplescomparison between legitimate reform proposals could be made.

The best way to defeat the Commission's proposals is to putforward a better one. It is telling that most personal accountopponents appear reluctant in the extreme to do so. At present, theso-called "secret plan" for Social Security is not, as some allege,the Commission's proposals but the alternatives to them. Onceviable alternatives to account-based plans are put forward, thepolitical and legislative process can produce choices andcompromises between these outlooks and progress towardstrengthening Social Security can be made.

Thank you for the opportunity to testify, and I hope that myviews may be helpful in your consideration of Social Securityreform.

  1. See "Strengthening Social Security and Creating Personal Wealthfor All Americans," Report of the President's Commission, December2001; available at hereafter referred to as "CSSS Final Report."See also "Perspectives on the President's Commission to StrengthenSocial Security," Cato Institute Social Security Paper No. 27,August 2002; and John F. Cogan and Olivia S. Mitchell, "The Role ofEconomic Policy in Social Security Reform: Perspectives from thePresident's Commission," National Bureau of Economic ResearchWorking Paper No. 9166, September 2002.
  2. Executive Order 13210, President's Commission to StrengthenSocial Security, May 2, 2001.
  3. Citations here are from Peter A. Diamond and Peter R. Orszag,"An Assessment of the Proposals of the President's Commission toStrengthen Social Security," Brookings Working Paper, June 18,2002, hereafter referred to as "Diamond-Orszag." Other versionshave been released as well, though the fundamental arguments do notchange.
  4. William Hsiao (Chairman), Peter Diamond, James Hickman, andErnest Moorhead, "Report of the Consultant Panel on Social Securityto the Congressional Research Service," August 1976, p. 23.Hereafter referred to as "Consultant Panel Report."
  5. "Social Security Commission Plans Would Entail SubstantialBenefit Reductions And Large Subsidies For Private Accounts," pressrelease, Center on Budget and Policy Priorities, June 18, 2002
  6. Barbara Allen, "Simple Arithmetic," letter to the Winston-SalemJournal, September 24, 2002.
  7. Benefits are illustrated with a low-wage worker for tworeasons: first, low-wage workers and their families are in most indanger of poverty if the current program becomes insolvent. Second,two of the Commission reform models (2 and 3) contain progressivepersonal accounts giving relatively larger contributions tolower-wage workers. High-wage workers with relatively smalleraccounts would not see the same improvements in benefits relativeto the current program; nevertheless, these illustrations show thepower of prefunding future benefits with market assets earninghigher rates of return than the current program.
  8. Diamond and Orszag argue that their use of the single baselineof promised ("scheduled") benefits "conforms to the approach toevaluating Social Security reforms adopted by the GreenspanCommission in 1983 and the Advisory Council in 1994-1996, both ofwhich used the scheduled benefit formula as the baseline despiteprojected long-term deficits in Social Security." It is worthnoting, however, that the Greenspan Commission report contained(surprisingly) little in the way of individual benefit projections.The report of the 1994-96 Advisory Council, like the Final Reportof the President's Commission, contained in its actuarial tablesdata both for what the program promises ("Present Law") and whatunder current law financing it could actually pay ("Present LawPayable"). Providing information both on what Social Securitypromises and on what it can actually pay allows readers tounderstand how much a reform proposal improved on what it startedwith - a system that must make deep across the board benefit cutsbeginning in 2041.
  9. Testimony of David Walker, General Accounting Office, beforethe House Budget Committee, June 19, 2002. In fairness, Walker'scomments applied only to the scheduled benefits baseline utilizedby Diamond and Orszag. Walker did not condemn the paper as a whole,only the basis of their charge of benefits cuts.
  10. Bob Kerrey and Warren Rudman, "Social Security Shell Game," TheWashington Post, August 12, 2002, Page A15.
  11. David Koitz, Geoffrey Kollmann and Dawn Nuschler, "SocialSecurity: What Happens to Future Benefit Levels Under VariousReform Options," Domestic Social Policy Division, CongressionalResearch Service, August 20, 2001, p. 13.
  12. The current law baselines tells us what will happen in theabsence of action, so that we might best weigh the various coursesof action available to us today and in the future. Some have notedcomments by Federal Reserve Board Chairman Greenspan that such asudden reduction in benefits is politically unrealistic, since someaction would surely be taken to avoid it. (See "Saving forRetirement," Remarks before the 2002 National Summit on RetirementSavings, February 28, 2002.) Greenspan's observation isunquestionably true, but the laws of politics cannot justifydefiance of the laws of mathematics. If we assume that fullpromised benefits are to be paid beyond the trust fund exhaustiondate of 2041, we must similarly assume the tax increases necessaryto fund those benefits; the simplest assumption is an increase inthe payroll tax rate in 2041 from the 12.4 percent contained incurrent law to the 17.8 percent required to pay scheduledbenefits.
  13. Some argue for showing only the government-paid portion of thetotal Social Security benefit, describing it as "guaranteed." Infact, Social Security benefits are not guaranteed in a legal sense,as the Supreme Court ruled in Flemming v. Nestor (1960). Neitherare currently scheduled benefits guaranteed in a financial sense,since the current program promises benefits up to 50 percentgreater than the tax rates mandated in law can sustain. Were aworker to invest his account in government bonds, his accountassets would be both legally and financially more guaranteed thanscheduled (or even payable) benefits from the current program.
  14. Workers are assumed to purchase annuities at retirement payinga fixed monthly benefit indexed annually for increases in theConsumer Price Index. Workers who chose variable annuities wouldreceive benefits 4-9 percent higher than those with fixedannuities, assuming that the annuity is invested in the defaultportfolio of 50 percent stocks, 50 percent bonds. It is alsoassumed that the worker is married. Single workers would receivebenefits approximately 10 percent higher, as they would not berequired to purchase joint-and-survivors annuities providingspousal coverage.
  15. Diamond and Orszag cite recommendations from the CongressionalBudget Office and the Office of Management and Budget that theRailroad Retirement Fund "risk adjust" its investments in equities.Certainly, had the Commission been allowed to borrow policy viewsfrom other organizations rather than submitting their proposals tothe scoring rules of Social Security's actuaries, its conclusionswould have been buttressed. Nevertheless, the Commission abided bySSA's scoring guidelines, as do Diamond and Orszag in other aspectsof their analysis.
  16. The American Academy of Actuaries recommends a similar processfocusing on expected returns, with due cognizance of historicalvariations, rather than Diamond and Orszag's practice of riskadjusting all investments to the government bond rate of return.See Pension Practice Council of the American Academy of Actuaries,"Practice Note: Selecting and Documenting Investment ReturnAssumptions," May 2001. Available at www.actuary.org.
  17. For instance, Diamond and Orszag criticize the Commission forstressing sustainable rather than mere 75-year solvency, which isthe standard most often used by Social Security's actuaries,despite the fact that all sides agree that a sustainable systemwould be preferable and that sustainability is clearly a higherstandard than mere 75-year solvency. See, for instance, Peter A.Diamond and Peter R. Orszag "A Response To The Executive DirectorOf The President's Commission To Strengthen Social Security,"Center on Budget and Policy Priorities, July 15, 2002.
  18. Stephen C. Goss, Chief Actuary, Alice H. Wade, Deputy ChiefActuary, Memorandum: "Estimates of Financial Effects for ThreeModels Developed by the President's Commission to Strengthen SocialSecurity," January 31, 2002, p.18
  19. Henry J. Aaron, Alan S. Blinder, Alicia H. Munnell, and PeterR. Orszag, "Governor Bush's Individual Account Proposal:Implications for Retirement Benefits," The Century Foundation IssueBrief no.11, June 2000.
  20. "Evaluating Issues in Privatizing Social Security: Report ofthe Panel on Privatization of Social Security," National Academy ofSocial Insurance, November 1998, p. 10. Emphasis added.
  21. The difference between the risk-adjusted current programbenefit and the benefit offered by an account holding governmentbonds would be the amount a rational individual would pay in orderto have the greater security that an explicit legal asset provides.On a simpler basis, a worker who would be owed, say, $1,000 permonth at retirement could be asked how much less he would accept inorder to have a benefit based on government bonds, which would givehim a legal asset backed by the full faith and credit of thegovernment.
  22. Under Model 1 the "offset interest rate" equals 3.5 percent;under Model 3, 2.5 percent.
  23. Moreover, even at a 3 percent offset rate the current program'sactuarial balance would decline, due the fact that the fixed75-year actuarial scoring period would count the "loss" to thetrust fund through account diversions taking place within thescoring period but ignore the "gain" from benefit offsets takingplace outside of it.
  24. To illustrate, an average-wage dual-earning couple retiring in2029 is projected to receive a 2 percent real annual return fromSocial Security. This couple would be held relatively harmlesseither way. A low-wage dual earner couple, by contrast, isprojected to receive a 3.1 percent average return from the currentprogram, but in choosing an account they give up traditionalbenefits only as if they were earning a two percent return andhence are subsidized. A high-wage couple is entitled to a 1.4percent return from the current program, but must give uptraditional benefits at a 2 percent rate, effectively penalizingthem.

    A note on progressivity: Diamond and Orszag argue that the allegedsubsidy in Model 2 favors high-wage over low-wage workers: "A lowerearner choosing to divert revenue into an account would receive asmaller subsidy than would a higher earner, so that the subsidiesrepresent a regressive feature of the Commission plans."(Diamond-Orszag, p. 12) However, the authors' use of the word"regressive" is wholly contrary to its general application. Underthe current Social Security program, for instance, highwage workersreceive larger monthly benefits than do low-wage workers. Does thismake Social Security regressive? Of course not, because low-wageworkers receive higher benefits relative to what they contribute.Based upon Diamond and Orszag's definition of progressivity, thecurrent Social Security system itself would be regressive.

    Under the Commission's Model 2 a low-wage worker holds an account -and therefore receives a "subsidy" - four times higher relative tohis income than a maximum-wage worker. For workers retiring in2052, for instance, a personal account would increase a low-wageworker's total benefit by 48.5 percent, versus a 32 percentincrease for a maximum-wage worker. Moreover, as noted above,subsidies under Model 2 flow not from the system as a whole toaccount holders but from account holders earning low returns underthe current program to account holders earning higher returns underthe current program. To the extent the current benefit formula isprogressive, the individual subsidies inherent to the offsetinterest rate maintain that progressivity.

  25. Diamond-Orszag, p. 29. Higher participation increases the costsof Model 2 during the 75-year valuation period because the assetsaccumulated in accounts as of the 76th year (and traditionalbenefits foregone by account holders at that point) are notcounted.
  26. For instance, in 1988 - under budget conditions similar tothose of today - Henry Aaron of the Brookings Institution arguedthat, "the current policy is to borrow the OASDHI surplus tofinance a deficit in the rest of the budget. As a result thepayroll tax, ostensibly earmarked for retirement, survivors,disability, and hospital insurance, is being used increasingly topay for other government expenditures, such as defense and intereston the public debt." Henry Aaron, Barry Bosworth and Gary Burtless,Can America Afford to Grow Old? (Washington: The BrookingsInstitution, 1988), pp. 11, 7.
  27. Following retirement, benefits for both retirees would continueto increase along with the Consumer Price Index, as under currentlaw.
  28. Lifetime benefits from the government would also rise, sincefuture retirees will live longer.
  29. Aaron and his coauthors argued that:

    At the levels of real income prevailing in the 1930s (or perhapseven in the 1950s), it can well be argued that it was appropriate,indeed, highly desirable--perhaps even necessary for thepreservation of our society--that government should, by law, haveguaranteed to the aged and disabled and their dependentsreplacement incomes sufficient to avoid severe hardship, and tohave required workers (and their employers) to finance this systemwith a kind of "forced saving" through payroll tax contributions.But as real incomes continue to rise, it is not easy to justify therequirement that workers and their employers "save" through payrolltax contributions to finance ever higher replacement incomes, farabove those needed to avoid hardship. Perhaps not all workers willwant to save that much, or to save in the particular time patternand form detailed by present law.

    Future Congresses will be better equipped than today's Congress todetermine the appropriate level of and composition of benefits forfuture generations… Congress might elect to give more tocertain groups of beneficiaries than to others, or to provideprotection against new risks that now are uncovered. But preciselybecause we cannot now forecast what form those desirableadjustments might take, we feel the commitment to large increase inbenefits and taxes implied under current law will deprivesubsequent Congresses, who will be better informed about futureneeds and preferences, of needed flexibility to tailor SocialSecurity to the needs and tastes of the generations to come.

    Statement of Henry Aaron, Gardner Ackely, Mary Falvey, John Porter,and J. W. Van Gorkom, Social Security Financing and Benefits,Report of the 1979 Advisory Council (Washington: GovernmentPrinting Office, 1979), pp. 212-15.

  30. See Andrew G. Biggs, "Social Security: Is It 'A Crisis ThatDoesn't Exist'?", Cato Institute Social Security Paper No. 21,October 5, 2000.
  31. Consultant Panel Report, p. 23. As the panel's report pointedout: "The wage-indexing method provides a sharp tilt in favor ofworkers retiring in the future. The increases in benefits forworkers already retired are limited to increases in the rise in theConsumer Price Index. Yet workers who retire five years later willreceive increments due to both price changes and increases in realwages. This difference in retirement benefits can be substantial"(p.9).
  32. Consultant Panel Report, p. 2
  33. Consultant Panel Report, p. 4
  34. Consultant Panel Report, p. 4
  35. William Hsiao, Peter Diamond, James Hickman, and ErnestMoorhead, letter to the New York Times, May 29, 1977, sec. 4, p.14. Emphasis added.
  36. Other current opponents of the Commission's position then tooka similar view. Henry Aaron of the Brookings Institution concurredwith Diamond, arguing that price indexing "would leave more optionsopen for spending the productivity dividend of economic growth.Congress could still raise pensions in the future, but it couldalso decide that other programs such as housing, health insurance,or defense have greater claims on available funds." See "Proppingup Social Security," Business Week, July 19, 1976, p. 34.
  37. Stephen C. Goss, Deputy Chief Actually, Social SecurityAdministration, "Long-Range OASDI Financial Effects of a Proposalto CPI-Index Benefits Across Generations," Memo to Harry C.Ballantyne, Chief Actuary, May 3, 1999.
  38. Under current law, a low wage retiree in 2022 would receivebenefits equal to 46 percent of those received by a high wageretiree. Under Model 2, that figure would increase substantially to56 percent.
  39. Diamond-Orszag, p. 6
  40. Consultant Panel Report, p. 23.
  41. Consultant Panel Report, p. 21.
  42. The current wage indexing formula would promise far higherbenefits to future workers with identical wages to a worker today.For instance, a $20,000 per year worker would retire today withmonthly benefits of about $877, equal to 53 percent of hispre-retirement earnings. By 2050, the same worker earning the same$20,000 (in today's dollars) would be entitled to $1091 monthly,equal to 64 percent of his pre-retirement earnings. In other words,the 2050 retiree would receive 25 percent higher benefits simplydue to the passage of time, even if he paid precisely the sametaxes. Moreover, under the current benefit formula, futureincreases in benefits will be greatest for the highest earners. Forinstance, a worker earning $10,000 today already receives themaximum 90 percent replacement rate on much of his wages. A similarworker making $10,000 (in 2002 dollars) in 2031 will receive a 25percent real benefit increase, and in 2071 a 58 percent increaseversus today. By contrast, higher income workers today have much oftheir wages covered under the upper bend points offering lowerreplacement rates. Over time, wage indexing pushes more of thesewages into the bend points offering higher replacement rates. Forinstance, a $100,000 worker retiring at 65 in 2001 can expect toreceive about $330,000 in lifetime retirement benefits. By 2031,lifetime benefits increase by 51 percent to $499,000, and by 2071increase by 120 percent to $725,000, under today's (unsustainable)benefit formula. See Andrew G. Biggs, "Perspectives on thePresident's Commission to Strengthen Social Security," CatoInstitute Social Security Paper No. 27, August 2002, pp.26-27.
  43. Diamond-Orszag, p. 8
  44. Diamond-Orszag, p.43
  45. CSSS Final Report, p. 149
  46. CSSS Interim Report, August 2001, p. 138; emphasis in original.Available at www.csss.gov.
  47. Diamond-Orszag, pp. 9-10. Emphasis in original.
  48. As the Commission's Final Report pointed out, "While both OASIand DI face financial shortfalls due to demographic changes, otherfactors affect the DI program that are more complex and may requirea unique set of solutions. It has been decades since acomprehensive review of the DI program has occurred. There areindications that the standards used to determine disability varyacross geographic regions and across different levels of theadjudicative process, which raises questions about the overallconsistency and fairness of the program for claimants. In addition,fundamental questions exist as to whether the program adequatelyreflects Congressional intent and current thinking on disabilitypolicy. Technology, the economy, and social attitudes aboutdisability have changed dramatically in the past 50 years. The lawhas only begun to respond to these changes." CSSS Final Report, p.149.
  49. Consultant Panel Report, p. 38
  50. Social Security Advisory Board, "Charting the Future of SocialSecurity's Disability Programs: The Need for Fundamental Change,"January 2001, p. 11.
  51. Diamond-Orszag, p. 8-9
  52. Peter Diamond has suggested the following steps to addressSocial Security's funding problems: force newly-hired state andlocal workers to enter the system; raise the maximum wage subjectto payroll taxes; increase taxes on benefits and eliminate thecurrent tax exemption for low-income retirees; index benefits forlife expectancy to about half the degree done in Plan 3 (criticscall this an increase in the retirement age, though technically itis not); and phase in payroll tax increases to cover the remainderof the deficit. "Will Voluntary Personal Accounts Save SocialSecurity?" American Enterprise Institute Semina