You were charged with coming up with plans that wouldn't increase taxes or reduce benefits. Both those things ended up in the results. What happened?
I don't think that's quite correct. First of all, we were charged with not reducing benefits for people in retirement or near retirement. That's why we did not address COLAs [cost-of-living adjustments]. We were not prohibited from slowing down the growth in benefits. Remember, every person will do as well, CPI adjusted, in 2050 as they do now. But they won't grow their benefits as fast.
Second, we all agreed that we would not raise the payroll tax rate, because 12.4 percent is very high. The commission discussed whether the terms of its executive order precluded an increase in the payroll tax base, and, in the end, the White House ruled that it was precluded. In the third plan, there is a proposal to have dedicated revenues to Social Security, but it leaves it up to Congress to decide what type of tax would be used to get that revenue.
What extra burdens will these plans impose on companies?
We were adamant that there be no extra burden on employers; that they'd continue to send in payroll taxes just like they do now. It would be up to the government — through a new Federal Reserve-like entity for pensions — to take those monies and put a certain percentage in a holding investment, like a money market fund or Treasury bond. Then, at the end of the year, that entity would put the money into the investment choices of the individual.
What will it take for business to get behind Social Security reform?
Business doesn't understand what is going to happen if there is no Social Security reform. Look at the budget for this coming year. Assuming we have no new stimulus package, it's roughly about zeroed out. But the accounting is questionable, because implicit in that zero is $189 billion from an annual surplus from Social Security. That surplus, however, is going to dwindle, and ultimately go negative in 2016. Then what are the implications?
Well, first, a lot of CFOs probably want various types of government-funded programs — more money into FDA processing or in developing technologies. Just think of the situation when this $189 billion cushion isn't there. It will be very difficult to get new spending programs.
Second, think about tax reform. Remember when we had big deficits and whenever you went to Congress for tax reform they said you had to "pay for it"? And they didn't mean to "pay for it" by increasing the taxes on someone else's industry. So again, without Social Security reform, there's going to be tremendous difficulty in getting further tax cuts.
Third, there are still many defined benefit plans around, and roughly 50 percent are integrated with Social Security. That is, they calculate what your total benefit is and subtract your Social Security benefit to determine your defined benefit. Now, suppose people become uncertain about whether they will get Social Security. We know that if nothing is done by 2038, Social Security benefits will be cut by roughly 28 percent. This will pose a significant long-term problem for integrated defined-benefit plans.
Were you surprised at criticism leveled at the commission? The president of the AFL-CIO called your report "a radical plan to dismantle Social Security."
The PR at the beginning was terrible. There were pickets at our first meeting, before we even said a word. But it's not a radical plan to dismantle Social Security; it's taking a small portion of Social Security and giving people the choice of getting a better return. His is what I call the "do-nothing plan." What's his suggestion?
I'm afraid Social Security is a very polarizing issue. And my personal belief is that if there is not Social Security reform by 2011, when the baby boom goes into retirement, we won't see it until 2038. The cardinal rule is you can't touch people's benefits once they go into retirement.
How do you think the Enron situation is going to affect Social Security reform?
It should reinforce the commission's conclusions. There is a case where all the money was put in one spot — Enron stock. And we kept saying: diversification, diversification, diversification.
Besides diversification, what should be done to prevent future 401(k) debacles?
Employee participants should be able to sell employer stock that's given as a match. There should be some reasonable waiting period, say a year. But Enron didn't let employees sell until they were 50.
Second, there probably would have to be amendments to ESOPs, KSOPs, and [related] tax provisions. They should state that if some employees sell the stock and the plan goes below a certain amount, the firm doesn't lose the whole tax benefit of the ESOP or KSOP. That shouldn't be the price. The combination of those ideas would go a long way toward solving the problem.
Enron obviously has Congress riled up. They are looking at the percentage of company stock in plans, lockdowns, and the idea of giving financial advice to employees. Does it make you nervous that Congress is getting involved?
It always makes me nervous when Congress responds to a crisis. And if Congress understood that some of these proposals might decrease employer matches, they wouldn't think they were such good ideas.
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