Deputy Social Security Commissioner Says Change Is Necessary

November 6, 2003

The latest PlanSponsor Magazine interviewed James Lockhart, deputy commissioner of the Social Security Administration, for an article "How Close Are We to Greenspan's 'Abrupt and Painful Change'?" Lockhart confirms that the system indeed faces long-term fiscal constraints and said that voluntary individual accounts could make a "substantial difference over time." Highlights of the exchange follow:

PlanSponsor: How close are we to the necessity of what Alan Greenspan once referred to as "abrupt and painful change" in our Social Security system?

Lockhart: I think it is important that we achieve bipartisan change well before the cash flows turn negative in 2018 or the Trust Fund is exhausted in 2042. Done now, it doesn't have to be painful or abrupt … There are creative solutions that could put us well on our way to avoiding the painful and abrupt changes that Greenspan talked about.

PS: The most-cited "solutions" for Social Security seem to be either tax increases or benefit reductions. What other options are feasible?

Lockhart: Yes, increasing taxes has been the traditional solution. They have been raised about 20 times and, for almost 80 percent of American workers, the combined payroll taxes are higher than income taxes. Increasing the rate of return is an option, obviously. Historically, Social Security's rate of return has been good…. However, our numbers show that, compared to investing only in low-risk government bonds, a single male entering the workforce today will receive back only 57 cents for each dollar he pays into the program. An average wage single female will receive back only around 63 cents on the dollar, compared to the low-risk bond portfolio.

Come 2042, Social Security will, simply put, not have enough money to pay scheduled benefits. Now, if we put aside tax increases and benefit cutbacks, we are left with two approaches to boosting returns.

The Social Security trust fund could invest directly in the stock market, but there you have very real issues about scale, potentially trillions of dollars, and politicizing corporate governance as the Congressional Budget Office recently wrote in a report.

On the other hand, both Republicans and Democrats and the majority of the last two Presidential commissions have suggested voluntary personal accounts. These accounts could make a substantial difference over time. Some personal account proposals use a 10th to a third of the 12.4 percent of payroll that now goes to Social Security. Using the Federal Thrift Savings plan as a model, these funds can be indexed, cheaply managed, and recordkeeping could be outsourced at a low cost.

PS: The present Administration has demonstrated that it is not afraid of grasping nettles. Where do voluntary personal Social Security accounts fit in its scheme of things?

Lockhart: [The president] believes in strengthening Social Security, and he believes in personal accounts for younger generations. He wants us to work with Congress and outside groups to develop a bipartisan consensus for reform.

PS: Presumably, we can expect to hear about this in the 2004 elections.

Lockhart: Social Security reform has been a significant issue in many elections. Social Security is a very important American institution. One can only hope that strengthening Social Security will be analyzed appropriately—it can't be stressed enough that benefits for today's retirees and near-retirees will be protected. This is an issue for our children and grandchildren, but we must face up to it now.

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