David Walker, former U.S. comptroller general, has made it his mission to call attention to how current spending patterns could hurt future generations. He rails against the budget deficit and speaks out in favor of spending controls. Now, as head of the Peter G. Peterson Foundation, Walker continues to urge politicians to make programs such as Social Security and Medicare sustainable. U.S. News spoke with Walker about the future of Social Security. Excerpts:
Is the Social Security program fair to younger workers?
Clearly, Social Security is a system that has matured compared to what it started out as. When Social Security was first put in, the people who were the first beneficiaries didn't end up paying a lot for their benefits, so they got a great return on their investment. As the system has matured, as the ratio of workers to retirees has declined, then obviously the rate of return that you get on your contributions has also declined.
But the way to look at it, rather than young versus old, is really income level. The Social Security system is designed to provide a better deal for workers who make less money because the replacement ratio that you receive compared to your earnings is much higher for lower-income workers than it is for higher-income workers.
So it sounds unfair to both younger workers and higher-income workers.
Social Security is not an investment program. You shouldn't look at it as a rate of return. It's intended to provide a safety net of retirement income. By definition, it's structured so lower-wage workers will get a higher relative benefit. So, by definition, there's an element of transfer payment.
When people look at it as, "Give me the money, I'll invest and do better," it depends on what your income level is. Middle and upper incomes would do better because it would eliminate the subsidy to the lower income. But that's not what the program is. I hear young people saying, "I'm not getting a good deal." That's technically right, but it doesn't reflect the nature of what Social Security is.
So does anything need to change?
My personal view is we have to recognize the reality that only 50 percent of full-time workers have a pension plan, and it's been stuck at that level for four years. Among those who have it, the majority now rely on defined contribution plans, where the risk is borne by the individual and the benefit is uncertain because it can be subject to significant changes, especially if it's near retirement. Combined with a lower savings rate, it means we need to reform Social Security to make it more solvent, sustainable, and secure.
What changes should be made?
We should consider adding on top [of Social Security] a supplement—an automatic individual savings account that people would be able to have to supplement their retirement income. It could come with death benefits that they possibly pass on to their heirs. It would also encourage people to work longer.
Who would manage that savings account? The government?
One option could be the government. Other options could be through employers. It would have to be through preapproved arrangements to meet certain minimum standards, such as a certain number of investment options and certain types of information to help them make more informed decisions. For example, the Thrift Savings Plan [for federal employees] benefits from economies of scale. It keeps fees and other charges very low. It provides a range of information to people that are covered to help them help themselves make informed decisions for retirement.
How would that be different from 401(k)'s?
First, only 50 percent of the full-time workforce has the opportunity to participate in a pension plan. This would be for everybody. Second, in the case of the 401(k) plan, it is optional. Even if you have an opportunity to participate, you don't have to. I'm talking about an automatic deduction from your pay. Third, in the case of a 401(k) plan, you don't have a standard number of options or standard amount of information, so you could be in a plan that could have unlimited options or be extremely limited. Also, in the case of a 401(k) plan, you're not required to take that money in annuity form. You could get a lump sum, and a lot of people do that, so when they end up changing jobs, they end up spending that money rather than preserving it for retirement, so there's a lot of leakage.
There's an old saying my mom taught me: Once you touch the money, you will spend the money. History has shown [that] if we have automatic enrollment or deductions for charitable contributions, you end up generating more money. People are more likely to be able to sustain that because they don't touch the money. Nowadays, it's a matter of how quickly you spend it and if you spend it more than once through credit cards.
You've said we could resolve Social Security within a year. How?
There's broad-based agreement as to the major elements of what's needed for Social Security reform: to strengthen the benefit for people near the poverty level; to provide less replacement income for middle- and upper-income workers; to gradually increase the retirement eligibility ages in installments over time to encourage people to work longer and to index those ages to increases in life expectancy; to increase the taxable wage base cap. The Social Security tax is the most regressive tax that we have. Other changes include to possibly consider a very modest modification to the post-retirement cost-of-living increase and to consider an add-on supplemental savings account.
If you did all of those things, you could provide for a solvent, sustainable, more savings-oriented Social Security system indefinitely.