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The original documents are located in Box 54, folder "1975/12/21 - Social Security
Meeting" of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 54 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
THE WHITE HOUSE
WASHINGTON
SOCIAL SECURITY MEETING
Sunday, December 21, 1975
4:15 p.m. (45 minutes)
Cabinet Room
From: Jim Cannon
I. PURPOSE
To resolve key questions regarding the short-term
financing of Social Security.
II. BACKGROUND, PARTICIPANTS, PRESS PLAN
A. Background: FY 77 Budget deadlines require some
key decisions on the short-term deficit facing
the Social Security system. The alternatives
of limiting benefit increases and/or raising
payroll taxes affect:
a. The FY 77 budget
b. The short-term (1975-83) trust fund deficit
In addition, these decisions have implications
for the long-term problem facing the system.
This affects the issue of "decoupling" which
deals with the double benefit for inflation
built into the current system. Secretaries
Mathews and Simon have very strong and
different opinions in this regard.
Attached at Tab A is a two-page paper from Jim
Lynn which highlights the issues. At Tab B
is a more extensive discussion of the issues
with recommendations from your senior advisers.
At TAB C is a memorandum from Secretary Matthews.
B. Participants: Secretaries Simon, Dunlop and
Mathews, Jim Lynn, Jim Cannon, Paul O'Neill,
Art Quern.
C. Press Plan: To be announced.
2
III. TALKING POINTS
A. Our FY 77 Budget requires us to take a hard
look at what actions we should take this year
in regard to Social Security.
B. The short-term financing issues and the questions
of the current system's overcompensation for
inflation will be affected by our budget decisions.
C. These issues are of concern to all of us, and
I believe we need to look at the steps we are
taking in our FY 77 Budget in relation to both
the short and long-term financing issues.
OF THE
EXECUTIVE OFFICE OF THE PRESIDENT
CHECK
ONLIED
OFFICE OF MANAGEMENT AND BUDGET
STATE
WASHINGTON, D.C. 20503
ACTION
MEMORANDUM FOR:
THE PRESIDENT
FROM:
James T. Lynn
SUBJECT:
Social Security Financing
Annual outgo is exceeding annual income in the Social Security
Trust Funds. If present trends continue, the trust funds will
be exhausted by 1983.
This problem has been discussed by your staff, and a memorandum
will be coming from Jim Cannon which describes several financing
alternatives. These alternatives include a tax rate increase
(possibly tied to a wage base increase), reducing benefit costs,
and decoupling (removing the present double indexing for infla-
tion in the benefit formula).
In preparing the 1977 budget, you have approved a plan to phase
in the next two Social Security cost-of-living increases by
providing 1/3 of the increase in July, 1/3 in November, and
1/3 in March, in order to significantly reduce 1977 budget
outlays.
In reviewing the Domestic Council paper on this issue, you may
wish to consider the following approach which would place the
Social Security Trust Funds back on a sound actuarial and finan-
cial basis through the year 2000.
1. Decouple the system at current replacement rates.
2. Phase in the next two Social Security cost-of-living
increases, as we now plan in the budget.
3. Increase the tax rate by .6% (.3% more for employer
and employee) in January 1977, gradually moving to
1.2% above current levels by 1984 (.6% more for
employer and employee).
-2-
Decoupling would remove a costly and unintended feature
of the 1972 Social Security amendments, and remove half
of the trust fund deficit over the next 75 years. Phasing
in the next two cost-of-living increases is an important
part of meeting your budget outlay goals between now and
FY 1979. The tax rate increase will bring in about $100
more annually for each worker earning the maximum subject
to the tax ($50 by employer; $50 by employee). The
increased revenues will reduce the overall FY 1977 budget
deficit by $2.5 billion, and eliminate all of the trust
fund deficit for the next 25 years to the year 2000.
THE WHITE HOUSE
WASHINGTON
December 17, 1975
MEMORANDUM FOR:
THE PRESIDENT
FROM:
JIM CANNON
SUBJECT:
Social Security Jun Financing
PURPOSE
The purpose of this memorandum is to present for your decision options
for dealing with the serious short and long term financing problems
facing the Social Security System. The timing of any legislative pro-
posal is clearly a key element in your decision. Therefore, options
must be examined in terms of the impact on the trust fund, the budget,
and broad policy considerations.
It is our suggestion that before making a final decision, you meet with
the three trustees: Secretaries Mathews, Simon and Dunlop, together
with Jim Lynn and myself.
CURRENT SYSTEM
The Social Security System is composed of three separate trust funds:
Old Age and Survivors' Insurance (OASI), Disability Insurance (DI),
Health Insurance (HI) -- Medicare. The combined OASDI trust funds
are the major concern in this memo, as they are expected to decline
rapidly in the next few years.
In 1974, Social Security collected $58.9 billion for OASDI from 99 million
workers in covered employment and paid $58. 5 billion in OASDI benefits
to some 31 million beneficiaries. The OASDI tax rate is 9.9% (4. 95%
each paid by employees and employers) on a maximum wage base of
$14, 100. The wage base will increase to $15,300 in 1976. The current
tax rate for the HI (Medicare) trust fund is 1. 8% (.9% each paid by
employees and employers). Current law provides a tax increase of 2%
in 1978 for HI only.
- 2 -
Social Security Tax Rates (Employer/Employee, each):
Present Law
Calendar
Year
OASDI
HI
TOTAL
1975 - 77
4.95%
0.90%
5.85%
1978 - 80
4.95%
1.10%
6.05%
1981 - 85
4.95%
1.35%
6.30%
1986 - 98
4.95%
1.50%
.45%
PROBLEMS
The OASDI trust funds are underfinanced in the short and long-term.
Benefit outlays are expected to exceed payroll tax receipts in 1975 and
every year thereafter. If no changes are made in current law, the
projected deficit over the next 25 years (1975-1999) will average 1. 3%
(.65% each for employees and employers) of taxable earnings. In the
following 25-year period (2000-2024) the deficit will rise to 4. 1% (2.05%
each for employees and employers) of taxable earnings.
Unless some action is taken, OASDI trust funds will fall from the
current 66% of yearly outgo to 43% in 1977, 33% in 1978, 11% in 1981,
3% in 1982, and the trust funds will be exhausted by 1983.
The projected rapid decline in trust fund assets over the next few years
can be attributed to:
:
Increased benefits resulting from wage growth and
inflation.
-- Legislation since the late 1960's which raised benefits.
-- Absence of equivalent increases in payroll tax revenues.
(In fact, payroll tax receipts have lagged due to high rates
of unemployment and slowed wage growth).
The projected long-term deficit beyond 2000 can be attributed to:
--
Population trends which include a substantially increasing
ratio of retired persons to the working population after
the beginning of the 21st Century.
- 3 -
-- A flaw in the current system which over adjusts the
benefits of future retirees to inflation. The current
formula which determines future benefits for workers
increases the weighting of earnings by the rate of in-
flation. Since wages normally grow with inflation, the
result is an overcompensation -- commonly referred
to as a "coupled" system. There is a general consensus
in the Congress and among outside experts that the
inflation adjustment in the formula should be eliminated,
thus "decoupling" the system. Such a change would not
affect the automatic CPI increases in benefits after re-
tirement. It should be emphasized here that "decoupling"
will have virtually no effect on the short-term deficit.
POLITICAL CONTEXT
A review of the political environment surrounding the Social Security
System is useful as we sort out these very important issues. Social
Security decisions have traditionally followed a pattern which has
insulated the system from sudden and far reaching changes. Structural
modifications take place usually after extensive public debate including
exhaustive studies and visible commissions. Protection of the system
is fostered by one of the strongest and largest consituencies in the
public policy arena, including the elderly, organized labor and all of
the wage earners who are contributing to the system and expect to
benefit from it in the future.
Members of Congress and especially of the Finance and Ways and Means
Committees have institutionalized this process of incremental reform.
The Committees have jointly established an advisory group (the Hsiao
Panel) to examine the long-term financing -- "decoupling" problem and
to recommend policy changes to the Committees in the spring of 1976.
Although some hearings have been held on the short-term financing
problem, no proposals have come out of the Committees. Secretary
Weinberger testified before Ways and Means last May and took the
position that the Administration would be pleased to cooperate in develop-
ing a proposal to alleviate the short-term deficit. You decided then not
to propose any tax or wage base increase noting that the Congress had
failed to act on the 5% cap on benefit increases proposed in the FY 1976
budget. The stand-off has continued since that time as the trust fund
continues to decline.
- 4 -
Because of the financing problems, the public has begun to question the
stability of Social Security. Although the subleties and complexities
are not widely understood, there exists general pressure to move to-
ward stabilizing the trust fund with a minimum of change for those in
the system.
DECISIONS
The discussion of alternatives for your decision are presented in three
categories:
I.
Options to deal with the short-term decline in trust
fund assets.
II.
"Decoupling" options which alleviate part or all of
the long-term deficit.
III.
Mechanism for analyzing the structure and role of
Social Security.
I.
SHORT-TERM FINANCING
Preventing the rapid decline of the trust fund requires difficult
choices. Simply expressed, at some point before 1983, revenues
must be increased or benefits must be reduced. The options
take into account the effect on the trust funds, budgetary and
broad policy consequences.
Estimated Trust Fund Assets under Current Law:
Calendar Year
Assets at Beginning of Year as Percent
of Outgo during Year
1975
66%
1976
55%
1977
43%
1978
33%
1979
25%
1980
18%
1981
11%
1982
3%
1983
0%
- 5 -
These projections by the Social Security Administration are
based on economic assumptions (Tab A) which are of course
judgmental. In the light of recent changes in the economy,
CEA advises that the assumptions appear slightly pessimistic
for 1975 and 1976 and somewhat optimistic from 1977-1983.
HEW believes that it would be unwise for the trust fund assets
to fall below 33% in an unpredictable economic situation. This
is in part a matter of public confidence. The 33% reserve
would serve as a buffer if the economy worsens. In order to
prevent the trust funds from falling below 33% during 1978,
legislation to increase revenues or decrease benefits must be
effective by January 1978.
If the economic assumptions are off the mark and/or if you feel
that the trust funds should not fall so low, then the effective
date should be early in 1977, which would require legislation
in 1976. Of course raising taxes or decreasing benefits would
be unpopular but, on the other hand, it may seem irresponsible
not to take a position.
You should be aware that regardless of which short-term
financing option you choose to stabilize the combined OASDI
trust funds, legislation will be required to allow the transfer
of funds from the OASI trust fund to the DI trust fund. Without
such action, the DI trust fund will probably be exhausted before
1980.
Short-term financing options which prevent the OASDI trust
fund assets from falling below one-third in 1978 include the
following:
Option 1: Increase revenues by raising payroll taxes
It would be necessary to increase taxes by 3% (each for employees
and employers) of payroll beginning in 1977 and to gradually
increase that amount to 6% by 1984.
PRO
The advantage of such a tax increase is that it would eliminate
the entire short-term (1975-1999) deficit.
CON
Given your proposal for a permanent income tax reduction and
the recent increase in Unemployment Insurance tax rates, it
- 6 -
would be difficult to justify an additional tax increase in the
next year or so. Also, an increase in the payroll tax has
a particularly harsh effect on low wage earners. The
employer tax increases the cost of labor and may discourage
additional hiring, particularly at the low wage level. There may
be political repercussions from taxpayers generally and
particularly from business and organized labor.
Option 2: Increase revenues by a combination of a more modest
increase in taxes and raising the maximum wage base.
If the wage base were raised from the currently projected $16, 800
for 1977 to $19, 500, the necessary tax increases (for employee
and employer each) would be . 25% in 1978, rising to . 45%
by 1984.
PRO
As in Option 1, the entire short-term deficit would be eliminated
Also, the more modest tax increase would be less hard on low
wage earners than Option 1.
CON
Again, even these more modest tax increases would be difficult,
given economic and political considerations. The base increase
would cause high (above $16,800) wage earners and their
employers to assume more of the tax increase. Because this
group would then be entitled to higher future benefits, the trust
fund expenditures and taxes would be enlarged in the long run.
Option 3: Reduce outlays by placing a cap on the 1976 and 1977
CPI benefit increases and decreasing certain other benefits.
OMB has proposed for the FY77 budget and you have tentatively
agreed to, increasing benefits by only 60% of the CPI in 1976 and
1977 and several other program changes, including:
a.
Eliminate payment of retroactive benefits for the
months before an application is filed if such
payment would require a permanent reduction in
future monthly benefits.
- 7 -
b.
Eliminate the monthly retirement test and
base the retirement test on annual earnings.
C.
Eliminate, over a 4-year period, benefits for
for those aged 18 to 22 in school full time.
The two 60% caps on the CPI benefit increases would save
$3. 1 billion in calendar 1977 and an increasing amount in sub-
sequent years. The other program changes would save
approximately $1. 2 billion in 1977 and up to $3. 2 billion in 1981.
Such reduced expenditures would keep the trust fund levels above
one-third of outgo through 1981. This postpones another de-
cision on short-term financing for up to five years.
PRO
This benefit reduction "buys" time. Further economic recovery
(lower unemployment and inflation) in the next five years may
increase revenues and reduce benefits somewhat; and a tax or
tax/wage base increase may be more feasible at that time. Also,
in the present economic situation where social security re-
cipients have been largely insulated from the depressing effects
of the recession, they should perhaps shoulder some of the
burdens, as opposed to wage earners.
CON
It eliminates only a small portion of the short-term deficit.
A similar cap was proposed last year and was not considered
in the Congress. Such a proposal has little chance of enact-
ment and, if proposed, would probably be opposed by con-
stituent groups, particularly the elderly.
Option 4: Do not propose legislation at this time
Since Congress has made no move on short-term financing, you
could simply wait or raise the issue and agree to work with the
committees to arrive at a mutually agreeable solution.
PRO
In economic and political terms, it will be difficult to propose
any of the above options, all of which have clear disadvantages.
The Congress should share the burden of any proposal. Also,
there probably exists some leeway on timing of any legislative
- 8 -
proposal. Depending on your view of the economic assumptions
and trust fund stability, you could postpone action for another
year.
CON
Because of declining public confidence in the stability of social
security, inaction on your part may be viewed as irresponsible.
Aside from the issue of public confidence, if the economic
assumptions are overly optimistic or the economy takes a down-
turn, the trust fund "buffer" may not be adequate.
RECOMMENDATIONS:
---
Secretary Mathews recommends Option 3, reducing
benefit outlays, as being consistent with your overall
budget strategy.
---
Secretary Simon has raised questions about the capa-
bility of the Domestic Council staff in this "very
complex policy area. 11 He urges a delay so that his
staff can assist in producing "a more accurate, readable
and compact decision instrument." Simon suggests that,
instead of any of the above options, we should make
social security benefits subject to the personal income
tax. His staff has not yet analyzed the impact of such
a proposal on the deficit.
---
Robert Hartman recommends deferring action, Option 4.
---
Max Friedersdorf recommends deferring action, Option 4.
--
Phil Buchen believes it would be economically and
politically irresponsible not to adopt one of the action
options. He opposes deferring action.
---
Domestic Council agrees with the OMB recommendation
(Option 3) to reduce outlays. This is the most acceptable
option as it is consistent with current budgetary and
economic policy.
- 9 -
DECISION:
Option 1
(tax rate increase in 1977)
Option 2
(wage base increase in 1977
and tax increase in 1978)
Option 3
(60% cap on benefit increase
and other reductions)
Option 4 (defer action)
COMMENTS:
- 10 -
II.
DECOUPLING
Background
As described on Page 2, "decoupling" means the elimination
of the double indexing for inflation in the benefit formula for
future retirees. The cumulative effect of "double indexing"
began in 1975 in the form of slightly higher benefits for
people who retired that year. Decoupling is a long-term
financing issue, as the "coupled" system will not impact
significantly on the trust fund deficit until after the year 2000.
Replacement Rates
Social Security benefits after retirement replace a certain
percentage of a retiree's previous earnings. This percentage
is known as the replacement rate. Under the current law,
retirement benefits are equal to:
approximately 62% of the recent gross wage / of
a low income worker.
---
approximately 42% of the recent gross wage of an
average earner.
approximately 30% of the recent gross wage of a higher
earner.
Due to the double indexing for inflation in the formula which
determines the level of benefits at the time of retirement, re-
placement rates for each category of worker are rising from
year to year. If this continues, eventually retirement benefits
will replace more than 100% of a worker's recent gross wages.
There existe a general consensus in Congress, among interest
groups representing the aged, and among outside experts that
the overadjustment for inflation in the formula should be eli-
minated, thus "decoupling" the system.
1/
These figures are expressed in terms of before tax gross wages
and do not reflect wives benefits. Analysts at the Treasury
Department estimate that after tax replacement rates for an average
earner ($8, 400 gross wages) would be approximately 56% without
including dependent wives benefits or approximately 84%
assuming a dependent wife.
- 11 -
Key Issues
The issue on which your decision is needed is whether the
Administration should make a specific decoupling proposal in
1976 or whether that proposal should be delayed for at least
another year. The answer to the question depends on the ob-
jectives to be sought through decoupling, your assessment of
the reactions to possible proposals and the implications for
possible future changes in the system.
Possible objectives of a decoupling proposal include:
1.
Eliminate the overadjustment for inflation.
2.
Use decoupling as a lever for further changes
such as reducing the role of social security in
overall retirement income, thus reducing the
tax burden on workers, and reducing the re-
distributive (welfare) tilt of the benefit formula.
A consensus exists in agreement with the first objective. There
may be wide disagreement on the second objective, which in-
volves a philosophical question: What should be the future role
of Social Security? What levels of benefits and tax rates would
be appropriate in the context of overall taxes and other retire-
ment income?
HEW advises that a "neutral" decoupling proposal which eliminat es
the overadjustment and maintains current replacement rates
would be acceptable to constituent groups (labor and elderly) and
the Congress. Others believe that such a neutral decoupling
which ignores the second objective would foreclose the opportunity
for major structural changes in the future.
In considering various approaches to "decoupling", this philo-
sophical question translates into a judgment about what are
appropriate replacement rates (percent of wages replaced by
retirement benefits) now and in the future. Should we continue
to replace the same percentage of wages for low, average, and
high earners as we do now? If so, payroll taxes will have to
be raised substantially in the long run (as much as 3% by 2050)
to finance the system.
- 12 -
Or, should we allow replacement rates to decline over time?
This would mean that unless they increase their personal savings,
people who retire in later years would not be able to enjoy
the same standard of living relative to their recent earnings
as people who retire now do. But, a reduction of the role of
Social Security would allow us to contain and perhaps even
lower future tax rates. This is a difficult trade-off.
To illustrate the trade-offs, three models which "decouple" the
system and provide alternative replacement rates over time
will be compared to the current law coupled system. The key
variables are the replacement rates (benefit levels and expendi-
tures (taxes) required to finance the system.
Three charts illustrating the effect on replacement rates and
expenditures of three alternative decoupling models as compared
to the current law "coupled" system are attached (Tab B).
The alternative "decoupling" models are described as follows:
(It should be noted that all models require a phased transition
from the current system.)
Alternative 1: Decouple, maintaining the current role of
Social Security
Stop the increase in replacement rates and hold them constant
over time at current levels. This means that the benefits of
future retirees will reflect increases in the standard of living
resulting from their real wage growth (since wages are expected
to grow at an annual rate of 6% and prices are expected to rise
at an annual rate of 4%, then the 2% real wage growth means that
Ameri cans will enjoy a steadily increasing standard of living
over the years).
Approximately 50% of the long-term deficit would be eliminated
by this alternative. Therefore, additional tax increases (as
much as 3% more employer/employee combined by 2050) would
be required to finance such a system.
PRO
Because this proposal decouples with a minimum of change in
current replacement rates, it would prove the least controversial
13 -
-
among constituent groups and in the Congress. In fact, aging
groups and the AFL-CIO have supported this concept. It en-
sures that the benefits of future retirees will keep pace with
our rising standard of living. You could propose to "decouple"
in this manner now, and come back later after further analysis
and consensus building, with a broader proposal to change the
structure and role of Social Security over the long-term.
CON
It only eliminates 50% of the long-term deficit, therefore,
additional tax increases or further restructuring will be required
in the future (after 2000). Aslo, if you propose decoupling in
this manner with minimum of change in the system, you may
lose a useful lever for forcing the Congress to address the tough
issue of the future role of Social Security as it affects taxpayers
and beneficiaries.
Alternative 2: Decouple and reduce future role of Social Security
Allow benefit levels for future retirees to keep pace with inflation
instead of real wage growth. This means that if such a proposal
were enacted in 1976, the future benefits of workers who retire
some years later will be based on the standard of living in 1976.
Since wages will grow faster than prices, replacement rates will
decline over time. A person who retires in the year 2000 would
receive the same benefits as a similar worker who retires in 1976.
But because the 2000 retiree would have experienced real wage
growth during those 25 years, his Social Security benefits, unless
supplemented by other retirement income or private savings,
would result in a significant change in his lifestyle.
This proposal would eliminate the entire long-term deficit and
would allow future tax reductions (as much as 3% employer-
employee combined) by 2050.
PRO
Future payroll taxes could be reduced. Since the role of Social
Security would be lessened over time, people may save more
or buy supplementary pensions, thus stimulating capital formation.
- 14 -
CON
Such a far-reaching change in the system would prove very
controversial politically. Replacement rates would fall as
low as 7 - 14 percent by 2050. Although we have developed
the concept of this model, additional staff work will be required
over the next month or so before legislation could be submitted.
Alternative 3: Decouple and reduce future role of Social
Security more moderately.
Allow future benefits to keep pace with approximately half of the
growth in real wages (standard of living). This represents a
middle ground between Alternative 1 and 2. Replacement rates
never fall below 25% of a retiree's recent wages. This proposal
would eliminate 80% of the long-term deficit. Therefore, some
additional tax increases (1.2% by employer-employee combined
by 2050) would be required in the long run.
PRO
This Alternative would reduce the future role of Social Security
(taxes and benefits), but less severely than Alternative 2.
Capital formation may be stimulated somewhat.
CON
Future tax increases, although less than under current law or
Alternative 1, would be required in the long run. Declining
replacement rates (though less severe than those in Alternative
2) would prove politically controversial. Again, at least 1 or
2 months would be required to complete the necessary staff
work for this proposal.
The existing consensus in opposition to the current coupled system
provides a forum for discussion of decoupling proposals. Therefore,
one of these three models could be proposed by itself or in conjunction
with a short-term financing proposal. (It is important to note again
that decoupling will not solve the short-term deficit problems).
Alternatives 2 and 3, which include declining replacement rates, raise
some fundamental questions about the role of Social Security which you
may not wish to address at this point. A fourth alternative would be
to defer any initiative on decoupling.
- 15 -
Alternative 4: Defer Action on Decoupling
Section III of this memorandum recommends a comprehensive
study of the Social Security system. Such a study could address
the question of constant or declining replacement rates.
Unless you are comfortable with proposing Alternative 1 which
decouples (eliminates double indexing for inflation) with a mini-
mum of change from the current structure, you may wish to
postpone action and avoid the controversy represented by
Alternatives 2 and 3. More analysis is needed of these alterna-
tives and the economic assumptions on which they are based.
You could offer to work with the Committees on decoupling and
present several models for consideration.
PRO
Further study of these issues and cooperation with the Congress
would allow time for consideration by the public and in Congress
of some fundamental questions about the future role of Social
Security -- the appropriate tax rates and benefit levels.
CON
Because a consensus exists on eliminating the double indexing
in the formula (Congress may take action this spring) and the
adverse effects are accumulating over time (replacement rates
are rising), it may seem irresponsible to postpone action or
not to take a position.
RECOMMENDATIONS
---
Secretary Mathews advises proposing a decoupling plan
as soon as possible that is as neutral as possible on the
matter of future fundamental changes. He believes that
if we do not, Congress will, and label us indecisive or
unconcerned about this obvious fault in the system. He
therefore recommends Alternative 1, which maintains
the current role of Social Security.
---
Alan Greenspan believes that it is premature to ask the
President to "choose among the few extremes presented
in the memo which have not really been worked out in
all their ramifications."
- 16 -
---
Bill Seidman recommends Alternative 2 which reduces
the role of Social Security, "in view of the large number
of additional pension programs available to Americans. 11
---
Robert Hartmann recommends Alternative 4, postponing
action.
---
Phil Buchen recommends Alternative 2.
---
Domestic Council recommends Alternative 1, to decouple
now with a minimum of change in the current structure.
We believe that you should take the initiative now on this
important long-term issue. After further analysis of
the role and structure of the Social Security System, you
could go forth with proposals for broad program reform.
DECISION
---
Propose decoupling along the lines of:
Alternative 1 ---
Decouple, holding current
replacement rates constant
Alternative 2 ---
Decouple, allowing replace-
ment rates to decline rapidly
Alternative 3 ---
Decouple, allowing replace-
ment rates to decline more
slowly.
---
Defer a proposal on decoupling by choosing:
Alternative 4 ---
Postpone action.
COMMENTS
- 17 -
III.
Study of Social Security System
To allow time for analysis and the development of recommenda-
tions on broader structural issues and for education of the public
and consensus building, it is our judgment that a comprehensive
study is needed.
If you decide to defer legislative action on a short-term financing
proposal and/or decoupling, then the study group could address
these issues over the next year.
Clarification of the role of Social Security in our society is
necessary to ensure its stability and continued public confidence.
Some of the fundamental questions include the following:
---
What should be the role of Social Security in terms of
wage replacement VS. income redistribution (welfare)?
---
What should be the role of Social Security in the context
of the overall pension system?
---
What should be the role of Social Security in the overall
tax system?
---
What should be the role of Social Security in the context
of economic growth?
It is our judgment that Domestic Council and Economic Policy
Board members should assist in developing a framework for
the study which clearly identifies the appropriate issues, and
should assist in the selection of a group of outside experts. The
experts would provide needed analysis and facilitate increased
public awareness of the issues. Responsibility for overseeing
the study could be housed in the Domestic Council.
RECOMMENDATIONS
Secretary Simon recommends a study but believes
that the Domestic Council does not have the economic
expertise to study these issues; therefore, the Economic
Policy Board or one of its agencies would be better
qualified.
- 18 -
---
Alan Greenspan recommends a study and feels that the
study group should be appointed jointly by the Domestic
Council and the Economic Policy Board.
---
Bill Seidman agrees with a Domestic Council/EPB study.
---
Robert Hartmann agrees with a study.
---
Domestic Council recommends a year-long "in house"
study designed by the Domestic Council with the
assistance of the Economic Policy Board, with resources
to draw on outside experts. We feel that an appointed
Commission would be less productive and more time
consuming.
DECISION
Propose study of Social Security.
Agree:
Disagree:
COMMENTS:
15 DEC 12 PM 2 05
HAND DELIVERED
HEALTH.
UNIT
DEPARTMENT OF
THE SECRETARY OF HEALTH, EDUCATION, AND WELFARE
WASHINGTON, D.C. 20201
U.S.A.
DEC 12 1975
MEMORANDUM FOR THE PRESIDENT
The purpose of this memorandum is to comment on two important
social security issues that need to be decided as a part of
your 1976/77 budget and legislative program: what to do
about the short-term deficit and about "decoupling."
Both of these issues are the subject of a comprehensive
memorandum that has either been sent to you or is on its
way to you from the Director of the Domestic Council. HEW
and others at interest have had a full and fair opportunity
to participate in the preparation of this memorandum.
However, as the Cabinet Officer responsible for managing
the social security program and as a principal Administration
RW
spokesman about the program, I thought it important to express
my views about these two issues, as follows:
Short-Term Financing
The memorandum lays out several options for dealing with the
short-term financing problem. Without debating the merits
of any of them, it seems to me that, given the overall budget
strategy that you have already adopted, the only consistent
choice would be to assume that the short-term deficit will
be met through the budgetary device constraining social
security benefit payments during the 1976-77 fiscal years.
The 60 percent cap, plus other constraints that are being
included in the budget, would be sufficient to keep trust
fund reserves at an adequate level through at least 1981.
We should emphasize, of course, that these devices will not
avoid the long-term deficit that is clearly facing the system.
"Decoupling"
I would start out by saying that I am a strong believer in
decoupling the system as soon as possible. I would like to
see the Administration take the initiative on decoupling as
a part of its 1976 legislative program. It is my belief that
if we do not do so, the Congress will and, in the process,
label us as being either indecisive about or unconcerned
with this obvious fault in the system.
DERALD FORD LIBRAST
2
I would recommend that you go forward with a social security
legislative strategy that incorporates the budgetary policy
discussed above with decoupling in the name of "fiscal
responsibility."
We would be saying, "We are not going to make the same
mistake with this pension system that New York made with
its system. The present coupled system results in
unpredictable future costs and requires unnecessarily high
taxes. We are taking steps to correct it now rather than
later.
"
I am aware that Secretary Simon (and perhaps others within
the Administration) would prefer to use decoupling as a device
for fundamental change in the overall social security system--
change that goes well beyond decoupling per se. The options
contained in the Domestic Council memorandum that call for
declining future social security "replacement rates" are, in
my opinion, options that represent fundamental change.
They would employ decoupling as a vehicle for reducing the
role of social security relative to the private pension
system in providing retirement income.
Because these options have the practical effect of reducing
the scope and coverage of social security--redu benefit
levels relative to preretirement earnings--they are certain
to be controversial and are certain to attract a great deal
of opposition from the labor movement and others interested
in promoting the cause of social security.
While I cannot argue against examination of the system in
terms of its impact on capital formation, the private pension
system and tax and income maintenance policy, I do argue
that we lack the time to make such an examination in sufficient
depth and be able to present a well-rounded proposal to the
next session of Congress--something that I think we would be
well-advised to do. As I have already indicated, if we are
not on the side of early action, just about everybody else
will be, and we will appear to be less than concerned about
the system's financial stability.
In short, I recommend that the Administration adopt a decoupling
plan that is as neutral as possible on the matter of future
fundamental changes in the system and that the plan be included
in the Administration's 1976 legislative program.
David Walleays
TAB A
Economic Assumptions and Automatic Increases Based on 1975 Social Security Trustees
Report Through Calendar Year 1981
Percent Increase in ---
Percent
Contribution
Percent
Calendar
Average Annual
Average Anual
Real
Unemployment
and
Benefit
Year
Wages
CPI
Wages
Rate
Benefit Base
Increase
1975
6.2%
9.0%
-2.6%
8.8%
$14,100
8.0%
1976
9.0
6.6
2.3
8.0
15,300
6.6
1977
11.0
6.5
4.2
7.0
16,800
6.4
1978
8.8
5.7
2.9
6.2
18,600
6.3
1979
7.7
4.6
3.0
5.4
20,100
4.8
1980
7.0
4.0
2.9
4.8
21,600
4.0
1981
6.0
4.0
1.9
4.8
23,100
4.0
TAB B
Replacement Rates for Regular Workers with Average Wages under Present Law,
under a Constant Replacement Rate Proposal and Two Declining Rate Alternatives
Replacement
FORD LIBRAR
is
GERALD
60
Present
Law
50
40
Constant
Alternative 1:
30
Exceeding Price
(not Wage) Increases
Alternative 2 :
20
10
Constant Purchasing
Power
Alternative 2
1976 1980
1990
2000
2010
2020
2030
2040
2050
Tab B - 1
LIBRARY
% of
Payroll
Expenditures under Present Law, Constant Replacement Rates (Current Levels),
FORD
and Two Declining Replacement Rate Options (One Exceeding Price Increases, One
Maintaining Purchasing Power) and Contribution Rate under Present Law
-
24
(Percent of Taxable Payroll 1975 Trustees' Report Assumptions)
GERALD
Present
21
Law
Expenditures Due to
Rising Replacement
18
Rates
15
Constant
Replacement Rate Exceeding
Replacement Rate
Price (not Wage) Increases
Alternative 1:
Alternative 3:
12
Present Law
Contribution Rate
9
6
Constant Purchasing
Power Replacement Rate
3
Alternative 2:
1975 1980
1990
2000
2010
2020
2030
2040
2050
Tab B - 2
LONG-RANGE ESTIMATES OF COSTS AND REPLACEMENT RATES UNDER PRESENT LAW
AND UNDER DECOUPLING ALTERNATIVES
Long-Range Costs and Deficit or Surplus as Percent of Taxable Payroll
(employer and employee rates combined)
Average
First
Second
Third
75 years
25 years
25 years
25 years
Item
(1975-2050)
(1975-1999)
(2000-2024)
(2025-2049)
Present Law Taxes
10.94%
9.90%
11.02%
11.90%
Long-Range Cost
Present law
16.26
11.16
15.12
22.09
Constant replacement rates
13.80
11.12
13.35
16.66
Slow decline in replacement
rates with increases below
wages but above CPI
12.13
10.92
11.96
13.39
Fast decline in replacement
rates with increases keep-
ing purchasing power
7.64
9.77
7.41
5.85
Long-range deficit (-) or surplus (+)
Present law
-5.32
-1.26
-4.10
-10.19
Constant replacement rates
-2.86
-1.22
-2.33
- 4.76
Slow decline in replacement
rates with increases below
wages but above CPI
-1.19
-1.02
-0.94
- 1.49
Fast decline in replacement
rates with increases keep-
ing purchasing power
+3.30
+ .13
+3.61
+ 6.05
Replacement Rates (based on gross pre-retirement earnings)
1976
2000
2025
2050
Low Earner
Present Law
62%
75%
96%
107%
Constant
61
61
61
61
Slow Decline
61
55
49
45
Fast Decline
61
37
23
14
Average Earner
Present Law
42
58
56
60
Constant
42
42
42
42
Slow Decline
42
39
36
32
Fast Decline
42
25
16
10
Maximum Earner
Present Law
30
36
41
43
Constant
30
34
35
35
Slow Decline
30
30
27
25
Fast Decline
30
18
11
7
Tab B-3