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Social Security Takes
Center Stage

January/February 1999 IBEW Journal

Reform of America's Largest Social Program To Test for Labor's Voice in 1999

As issues go in the United States, they don't get much bigger than Social Security. The government-sponsored social insurance program provides at least a base of retirement and/or disability security for virtually every American, except for a relative few employed by some state and local governments. The universal nature of the system ensures that any efforts to change it will arouse strong feelings. As President Bill Clinton said in April 1998 on the matter of preserving Social Security, "It's an issue of our survival as a people, our unity as a people."

The drive to make changes in Social Security draws momentum from several factors. Under the current system, Social Security will face a funding shortfall in 2032, when reserves are exhausted and payroll taxes are expected to fund only 75 percent of the projected benefit obligations. Social Security's surplus has swelled with the upsurge in the national economy and the fact that low unemployment has resulted in more people and employers paying into the system. This has helped create a bipartisan consensus that reform proposals should be discussed now, but for very different reasons.

On one side are those who believe in smaller government and want to see the nation's largest social program turned over to the private sector, with individuals managing their own accounts. The success of the stock market in recent years has added some impetus to this argument. On the other side are those who want to see Social Security preserved in its present form with adjustments to guarantee the long term financial health of the system. Organized labor has been a prominent voice in the latter group.

The AFL-CIO Executive Council, of which IBEW International President J. J. Barry is a member, issued a statement in August 1998 saying, "As the bedrock of family income protection in the United States, Social Security's role must not be compromised, nor its financial condition weakened." The Council set for a series of principles which it believes must be the basis for any reform of Social Security, including:

• Social Security should continue to provide retired and disabled workers, as well as dependents and survivors, with a guaranteed monthly benefit, protected against inflation, for life.

• Benefits should not be subject to the whims of the market, and private accounts should never be substituted for the core defined benefits the system currently provides.

• The age at which workers are eligible for early or full benefits should not be raised.

• Social Security should continue to replace a larger share of past earnings for low-income workers and to provide bigger benefits to workers who earned higher wages during their careers. Replacement rates should not be cut.

• Social Security should continue to provide family insurance protection, with benefits that cover dependent and surviving children and spouses in addition to disabled and retired workers.

Proposals for changing the structure of Social Security are many and varied, ranging from modest adjustments to radical reform.

Payroll Tax Increases

Currently, workers pay 6.2 percent of their incomes in Social Security taxes, which is matched by employers. Raising the tax rate on workers, employers or both would bring in more revenue, but could inhibit job creation and would place a proportionately larger tax burden on lower income workers.

Raise the payroll cap

The cap refers to the maximum amount of income on which workers and employers pay Social Security taxes, currently $68,000. Possibilities include setting the cap at 80 or 90 percent of earnings, rather than a fixed dollar figure. This would temper the regressive nature of Social Security taxes, but would also decrease the replacement rates received by higher income earners and engender strong opposition.

Reduce benefits

Cutting back on the benefit formula for Social Security recipients would help save the money need to address the projected shortfall, but such a move involves basic issues of fairness and obviously would spark strong protests.

Eliminate or reduce cost-of-living adjustments

With inflation low at the present time, some have advocated revising the formula under which cost-of-living adjustments (COLAs) are calculated, saying its effect would be minimal. However, this change would have a significant impact on low income beneficiaries, especially the elderly and disabled who live close to or below the poverty level.

Change the manner in which the Trust Fund is invested

Currently, the Social Security Trust Fund is invested entirely in U.S. Treasury securities. These provide what is generally considered the safest possible investment and keep the program solely as a government function. Such securities, however, also generate lower returns than many stock market index funds, mutual funds or other private investment vehicles. One proposal would allow the Trust Fund to invest part of its revenues in the private sector, much as many state government and private pension funds do now. Some see this alternative as the most painless, common-sense reform possible. However, there are those who want Social Security to remain purely a governmental function. Others dislike the idea of the federal government participating in the market, thus creating the potential for dictating success or failure of private entities.

Individual accounts

This is by far the most controversial of all proposals. While some ardent free marketeers would like to privatize Social Security in its entirety, the most widely discussed proposal is one that would allow individual workers to place a percentage of their Social Security payroll taxes in individual accounts that workers invest for themselves in stocks, bonds or other financial instruments. The appeal of allowing individuals to manage their own money is strong, but workers should be aware that privatization cuts to the very nature of Social Security as a social insurance program. On one hand, private accounts do not automatically cover survivors, and benefit levels are not guaranteed for life, but depend on the skill or luck of the individual. Also, because privatization proposals would divert billions from the Social Security Trust Fund, it would increase the projected shortfall and make benefit cuts and/or tax increases more likely. Private accounts would also greatly increase administrative costs. Currently, Social Security’s administrative costs are only one percent of benefits. In contrast, private insurers charge about 12-14 percent of benefits.

The debate to reform Social Security will be ongoing throughout 1999. Upcoming issues of the IBEW Journal will explore the nature of the system in greater depth, analyze any specific legislative initiatives that are put forth, and provide information on the ongoing debate. All members and their families are urged to keep abreast of the latest developments by visiting the IBEW web site at www.ibew.org.