Retirees Offered ‘The Real Deal’

By far the most popular 401(k) plans are those in which employers match employee contributions dollar for dollar.

Advocates of a radical new effort to reform Social Security are taking a similar tack.

Pension experts Sylvester J. Schieber and John B. Shoven propose replacing the current pay-as-you-go system, which they compare to a “Ponzi scheme,” with a two-tier system that features a “personal savings account” and tax rebates.

The existing payroll tax would be maintained at 12.4 percent, but at the end of a “full” career of 35 years or more the benefit would be a flat-rate payment. Social Security would pay $6,000 in the first year. In succeeding years, the rate would be pegged to future wage levels.

The “personal savings account” would be funded half by an additional payroll tax deduction of 2.5 percent to be paid by the employee. Social Security would contribute a 100 percent match, making the total amount invested a full 5 percent a year.

And employees would have “discretion” over how the money in their personal savings account is invested by the government.

All this is laid out in their new book, “The Real Deal,” a scholarly text subtitled “The History and Future of Social Security.”

Schieber is vice president of research and information for Watson Wyatt Worldwide in Washington, D.C., a global compensation and benefits consulting firm. Shoven is Charles R. Schwab Professor of Economics at Stanford University. Combined, the two pension experts have worked on Social Security more than half a century.

Their 450-page tome was heavy slogging for me, and I found the mechanisms of reform troubling. In an interview, Schieber sought to explain away my fears.

First off, where is Social Security going to get the extra billions needed to match employee contributions in the new savings accounts?

“It will not come out of thin air,” assured Schieber. “It’s a rebate of the worker’s 12.4 percent payroll tax in the amount of 2.5 percent.”

So what would that leave in the Social Security trust fund? Well, it would leave just that much less money to honor the promises the government made to tens of millions of older Americans who rely on the existing program, along with millions more who collect worker disability and survivor insurance benefits?

But wouldn’t that place current and near-term Social Security recipients at greater risk?

“To a certain extent, they already are at risk,” Schieber said. “The present system is already underfunded. Our proposal would not increase their risk.

“Social Security actuaries have estimated that current benefits should continue payable under a plan such as this during a lengthy transition period of 20 or 30 years,” Schieber said. “Current retirees, along with workers age 55 and older in the year 2000, would continue to be covered under the existing Social Security system. For them, the net change should be quite small.

“We are not proposing to reduce the CPI (Consumer Price Index) for current benefits, as some other reform proposals would do. This is not a time to renege on the old deal, and we do not propose to reduce the benefits that people have already earned by one dollar.”

Even so, isn’t this the sort of strategy former Speaker of the House Newt Gingrich predicted would allow Social Security to “wither on the vine”? Any guarantees against this happening?

None, the reformer conceded. Nor can there be, as long as there are politicians.

“But the old deal will become a raw deal for future generations if we do not address the dual whammy of an aging and shrinking work force.”

Under “The Real Deal,” the collaborators argue, in 20 or 30 years’ time, the full transition to a new flat rate could be accomplished. Then, compounding from the new personal savings accounts would start pouring in, and future generations of workers and retirees would bask in marketrate returns on their investment.

“The Real Deal” is published by Yale University Press. Retail prices are $18.95 (paperback) and $45 (clothbound).