On June 23, the House Ways and Means Subcommittee on Social Security held the eighth in a series of hearings on proposals aimed at protecting and strengthening Social Security. Other hearings covered by WPI took place earlier this year (see The Source, 6/10/05, 5/20/05 and 5/13/05).
In a press advisory announcing the hearing, Chair Jim McCrery (R-LA) stated, “As we consider how personal retirement accounts would strengthen retirement security, we must acknowledge that the proper design of a personal account system is not a mere technical detail. Rather, we must carefully consider key questions on implementation, administration, and public education to ensure workers receive the quality service they deserve, along with low expenses that preserve account balances.”
Social Security Administration (SSA) Deputy Commissioner James Lockhart outlined the administrative aspects of the Bush administration’s proposal to introduce personal accounts into Social Security. Explaining that the proposal would be modeled after the federal Thrift Savings Plan (TSP), he said that the TSP “is a very good, low-cost role model for personal accounts. It has 3.4 million participants and $157 billion of assets under management. It offers 5 investment alternatives including a Treasury bond option and four very low-cost indexed funds, which are invested to replicate the returns of broad market indexes.” Mr. Lockhart said that the personal accounts “could quickly become the largest defined-benefit contribution plan in the world and achieve very large economies of scale,” adding, “Assuming a two-thirds participation rate, the Social Security actuaries project that under the President’s proposal account framework, which phases in personal accounts from 2009 to 2011, there would be about 120 million personal accounts with assets totaling $602 billion (in constant 2004 dollars) at the end of 2015. He explained that a new independent government agency would be created to administer the private accounts, but noted that the SSA “could play a key role in the front-end education, enrollment and contribution phases and potentially in the payout phase. The education process in particular could involve many government agencies building on the Financial Literacy and Education Council as well as businesses and not-for-profits’ ongoing financial education efforts.”
Patrick Purcell of the Congressional Research Service and Francis Cavanaugh, a public finance consultant, weighed the pros and cons of implementing personal accounts based on the Thrift Savings Plan. They both presented similar testimony before the House Financial Services Subcommittee on Domestic and International Monetary Policy, Trade and Technology on May 5 (see The Source, 5/6/05).
Vice President for Family Economic Security at the National Women’s Law Center Joan Entmacher explained how personal accounts would affect women and their families. Noting that Social Security provides monthly benefits on a “gender-neutral basis,” she argued that “if Congress creates private accounts as part of Social Security, it must prohibit gender discrimination in annuities marketed to those with private accounts. An effective prohibition on discrimination will require more than passing legislation; regulatory oversight will be needed to avoid the design and marketing of annuity products specifically to men or women to avoid the effect of the uniform pricing requirement.” Ms. Entmacher also pointed out that “because Social Security spousal benefits are calculated based on the worker’s Social Security benefit, cuts in Social Security benefits for retired workers mean cuts in spousal benefits as well,” adding, “Private account plans may cut spousal benefits twice: first, as part of a general benefit reduction applicable whether or not a worker has chosen to contribute to a private account (even if these cuts are designed to exempt workers with very low earnings, widows with very low incomes may face benefit cuts, because their benefits are based on the record of a worker who had earnings above the minimum level). Second, if a plan cuts benefits specifically for workers who contribute to a private account, benefits for the retired spouse and widow of a worker who contributes to an account are also likely to be cut further.” In addition, Ms. Entmacher expressed her concern regarding the administration’s proposal to allow surviving family members to inherit a worker’s personal account: “If a worker died young and left the account to his widow, would she have immediate access to whatever small amount the account might contain to help support her family and supplement the reduced survivors’ benefits? Or would she have to save them for her own retirement, as several plans propose? With Social Security, a widow is eligible for benefits based on the deceased husband’s work record both while she is raising their children and at retirement but funds in a private account can only be used once.”