The US retirement system might change dramatically by year’s end; or pension reform could be postponed again until after the 2012 presidential election. Either way, the debate about how to prevent the bankruptcy of social security is hotter than ever.
A deadline of 23 November is set for the Joint Select Committee on Deficit Reduction - the Supercommittee - to come up with a plan to cut the US deficit by at least $1.2trn (€881.6bn). If there is an agreement, then Congress has to vote on it by 23 December. The question is whether the proposals will contain some kind of reform of entitlements, including social security.
The Supercommittee was created as part of the August deal to increaase the federal debt ceiling. “For investors, the committee’s success or failure could have a big impact on markets, taxes and the nation’s credit rating - and may shape the country’s fiscal outlook for years to come,” Michael T Townsend, vice-president for legislative and regulatory affairs at Charles Schwab explained in a note.
The Supercommittee is bi-partisan - four of its 12 members belonged to the National Commission on Fiscal Responsibility and Reform created by President Barack Obama last year but that never reached the necessary majority to require a vote in Congress on its own plan. However, that plan had a few ideas that could be recycled by the Supercommittee.
Among those, says Steve Vernon, consultant to Mercer’s US retirement, risk and finance business, are: making the retirement benefit formula more progressive by gradually slowing the growth in benefits for high earners; gradually increasing early and full retirement ages based on increases in life expectancy, after the full retirement age reaches 67 in 2027 under the current law; gradually increasing the maximum taxable wage for social security to cover 90% of wages by 2050; and adopting an improved measure for the cost of living adjustment in order to reduce the future value of benefits for current retirees.
Changes to retirement savings could also be on the table. Economic adviser to President George W Bush, William Gale, has just proposed replacing the current deduction for contributions to retirement savings accounts with a flat-rate refundable credit that would be deposited directly into a saver’s account. “Consideration of reforms to strengthen the private retirement system would be appropriate and constructive, especially since any plausible long-term fiscal plan will involve some reductions in social security and medicare benefits,” says Gale.
About three quarters of Americans would have more of a financial incentive to save for retirement if the tax credit were set at a 30% rate for everyone, according to Gale’s proposal. At that same rate, however, upper-income households, now in the 35% marginal tax bracket, would lose tax benefits. Gale’s idea has already been harshly criticised by Brain Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries, who said that, if it were enacted, it would put an end to all small business retirement plans.
However, Gale and Graff went to provide their testimony at the hearing entitled ‘Tax Reform Options: Promoting Retirement Security’, which was organised by Senate Finance Committee Chairman Max Baucus. The latter is also a member of the Supercommittee, and “has long been someone who has forged partnerships across the aisle… a possible candidate for avoiding a six-six tie by forging a compromise with his Republican counterparts”, according to Townsend.
Another key member of the Supercommittee is Senator Rob Portman, who was director of the Office of Management and Budget under Bush. He has long been a proponent of expanding opportunities for retirement savings and is considered a pragmatic and straightforward politician. The Portman-Cardin Pension Reform Act could be a model for the Supercommittee.
But to make its task even more difficult, in his jobs speech Obama asked the Supercommittee to find an additional $447bn (€328bn) to fund his new ‘stimulus’. Many commentators interpreted this as the launch of his 2012 presidential campaign. His most likely opponent, Texas Governor Rick Perry, defines the Social Security system as a Ponzi scheme. If the Supercommittee’s members stick to their ideological lines thinking of the battle ahead, they will defeat any effort to reach a sensible deal.