E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                Vol. 2,  No. 16: September 6, 2001
_________________________________________________________________

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Editor:        PAMELA J. PERUN
               Urban Institute
               Mailto:pamela@planetnow.com

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                      Topic of This Issue:
           Social Security:  Can the Promises Be Kept?

    Papers presented at the Conference on the Legal, Economic
      and Practical Implications of Social Security Reform,
   funded by the Frances Lewis Law Center of Washington & Lee
            University School of Law, April 2, 2001.
   ___________________________________________________________
 

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T A B L E   of   C O N T E N T S
_________________________________________________________________

WORKING PAPERS

"Privatizing Social Security: Administration and Implementation"
     KAREN C. BURKE
        University of San Diego School of Law
     GRAYSON M.P. MCCOUCH
        University of San Diego School of Law
 

"Social Security Reform Issues"
     CRAIG COPELAND
        Employee Benefit Research Institute (EBRI)
 

"Social Security: Can the Promise be Kept?"
     EDWARD M. GRAMLICH
        Board of Governors of the Federal Reserve System
        Division of International Finance
 

"What Can We Learn from Other Countries About the Why's and How's
 of Individual Accounts in the U.S.?"
     ESTELLE JAMES
        World Bank
 

"Privatization: Not the Answer for Social Security Reform"
     REGINA T. JEFFERSON
        Catholic University of America
 

"ERISA Protections Provide Guidance for Social Security
 Privatization"
     IAN D. LANOFF
        Groom Law Group, Chartered
     ROBERTA J. UFFORD
        Groom Law Group, Chartered
 

"Partial Privatization of Social Security and Private Pensions"
     KATHRYN L. MOORE
        University of Kentucky
        College of Law
 

"Social Security: The Broader Issues"
     C. EUGENE STEUERLE
        Urban Institute
 

"Leverage, Linkage, and Leakage: Problems with the Private
 Pension System and How They Should Inform the Social Security
 Reform Debate"
     NORMAN P. STEIN
        University of Alabama, Tuscaloosa
        School of Law
 

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W O R K I N G   P A P E R   Abstracts
_________________________________________________________________

"Privatizing Social Security: Administration and Implementation"

      BY:  KAREN C. BURKE
              University of San Diego School of Law
           GRAYSON M.P. MCCOUCH
              University of San Diego School of Law

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=281669

 Contact:  KAREN C. BURKE
   Email:  Mailto:burkek@sandiego.edu
  Postal:  University of San Diego School of Law
           5998 Alcala Park
           San Diego, CA 92110-2492  USA
   Phone:  619-260-4527
     Fax:  619-260-2218
 Co-Auth:  GRAYSON M.P. MCCOUCH
   Email:  Mailto:gmccouch@SanDiego.edu
  Postal:  University of San Diego School of Law
           5998 Alcala Park
           San Diego, CA 92110-2492  USA

ABSTRACT:
 This article considers administrative issues that bear on the
 structure and implementation of any universal, mandatory system
 of personal accounts within the Social Security system. The
 central issues involve tradeoffs between relatively
 standardized, low-cost options with constrained individual
 choice and limited risk, on the one hand, and more flexible,
 higher-cost options with enhanced opportunities for individual
 control and greater risk, on the other hand. A centralized
 system modeled on the Thrift Savings Plan for federal employees
 could balance these goals by offering participants a relatively
 narrow range of investment and withdrawal options, with
 correspondingly low administrative costs and limited risks.
 Alternatively, a decentralized system could offer a broader
 range of options, coupled with higher costs and greater risks.
 Ultimately, the choice between these approaches reflects
 controversial judgments about values and politics. It is
 imperative that the inevitable tradeoffs be carefully considered
 at the outset and not left to be resolved at some indefinite
 future time. It is also important to understand that the federal
 government would undoubtedly have a substantial and continuing
 role even in a privatized Social Security system.

______________________________

"Social Security Reform Issues"

      BY:  CRAIG COPELAND
              Employee Benefit Research Institute (EBRI)

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=281679

    Date:  May 1, 2001

 Contact:  CRAIG COPELAND
   Email:  Mailto:copeland@ebri.org
  Postal:  Employee Benefit Research Institute (EBRI)
           Suite 600
           2121 K Street, NW
           Washington, DC 20037-1896  USA
   Phone:  202-775-6356
     Fax:  202-775-6312

ABSTRACT:
 The Social Security Program has traditionally been a strongly
 supported and popular program for providing income protection
 for workers and their dependents from old-age, death, and
 disability. Social Security by most accounts has been a
 successful program, particularly in helping to lower the poverty
 rate for the elderly from 35.2 percent in 1959 to 10.5 percent
 in 1998. However, the program is currently projected to be
 facing a financial shortfall. Consequently, a push to reform the
 program has been under way in some circles. This paper examines
 the issues facing the Social Security program that has brought
 about the discussion to reform the program. In addition, various
 potential reform ideas and the issues surrounding those reform
 proposals will be investigated. Both traditional types of
 reforms, e.g., benefit cuts and tax increases, and privatization
 are considered.

______________________________

"Social Security: Can the Promise be Kept?"

      BY:  EDWARD M. GRAMLICH
              Board of Governors of the Federal Reserve System
              Division of International Finance

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=281682

    Date:  April 2, 2001

 Contact:  EDWARD M. GRAMLICH
   Email:  Mailto:Edward.Gramlich@frb.gov
  Postal:  Board of Governors of the Federal Reserve System
           Division of International Finance
           Washington, DC 20551  USA
   Phone:  202-452-3213
     Fax:  202-872-7555

ABSTRACT:
 In this article, the author, a former Chair of the Quadrennial
 Advisory Council on Social Security, argues that Social Security
 reform ought to focus on two questions: 1) have we protected the
 present benefit system; and, 2) what have we done about new
 saving to equip younger people with the capital to pay for all
 the added retirees in the future. He notes that Social Security
 is an important part of income support for the aged up till at
 least the middle income level and also provides protection
 against work disability and for when the breadwinner in the
 family dies early as well as full protection against inflation.
 He proposes to achieve these two goals by 1) a modest trimming
 of the present benefit system, not interfering with the basic
 social protections, and 2) creating "add-on" individual accounts
 on top of Social Security. For these accounts, he advocates a
 401(k) approach where the money is collected centrally and
 invested centrally. The accounts would have a very constrained
 set of safe investment choices to keep the costs of investor
 education and account administration fairly low. Finally, he
 suggests that indexing the retirement age in line with overall
 life expectancy would substantially slow the rate of growth of
 benefits over time, improve the long-run actuarial balance of
 the system, and also eliminate a major source of forecasting
 uncertainty.

______________________________

"What Can We Learn from Other Countries About the Why's and How's
 of Individual Accounts in the U.S.?"

      BY:  ESTELLE JAMES
              World Bank

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=281683

 Contact:  ESTELLE JAMES
   Email:  Mailto:ejames3@worldbank.org
  Postal:  World Bank
           1818 H Street, N.W.
           Washington, DC 20433  USA
   Phone:  202-473-7489

ABSTRACT:
 This paper describes the structural reforms to their social
 security systems that many countries have adopted in recent
 years. In addition to a publicly managed social safety net, this
 strategy includes a funded component (retirement savings), with
 the funds privately managed. The basic rationale is that relying
 on partial pre-funding enhances system sustainability and has a
 positive impact on the broader economy by increasing long term
 national saving and labor market incentives. The paper contrasts
 how the funded pillar has developed in Latin America (where
 individual accounts prevail), the OECD countries (where group
 plans at the company or occupational level are common), and
 elsewhere.

 The relevance of these experiments in other countries for the
 social security debate in the U.S. is explored. If a portion of
 the current contribution rate to social security were "carved
 out" and placed in individual accounts that earn a market
 return, this would help to keep over-all benefits at their
 present level without a tax increase. It would increase the
 sustainability of the system and, under conditions specified in
 the paper, would also enhance economic growth. Based on
 empirical evidence from other countries, private competitive
 management of the funds would yield the highest return and the
 most productive allocation of capital.

 Once a country has made the political decision to move in the
 direction of pre-funding individual accounts, it faces a number
 of difficult implementation issues. Chief among these are: how
 to avoid undue risk and high administrative costs, how to
 achieve an equitable distribution of costs and benefits, and how
 to finance the transition. The paper describes the variety of
 solutions to these problems adopted by the countries that have
 already undergone structural reforms to their social security
 systems.

______________________________

"Privatization: Not the Answer for Social Security Reform"

      BY:  REGINA T. JEFFERSON
              Catholic University of America

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=281692

 Contact:  REGINA T. JEFFERSON
   Email:  Mailto:jefferson@cua.edu
  Postal:  Catholic University of America
           Columbus School of Law
           Washington, DC 20064  USA
   Phone:  202-319-5140
     Fax:  202-319-4459

ABSTRACT:
 This article analyzes the impact of privatization on the
 existing Social Security program. Part I describes the current
 program and identifies the most critical issues - pre-funding,
 diversification, and privatization - in the reform debate. Part
 II critiques the reliance of the private retirement system on
 individual accounts as primary retirement savings vehicles. It
 demonstrates that this model is inappropriate as a replacement
 for the existing Social Security program. Part III explores the
 impact of privatization on the public welfare function of Social
 Security and examines some of the weaknesses of the
 privatization proposals.

 The article concludes that privatization is a questionable
 solution for the Social Security debate. Although changes are
 needed, the primary goal and objectives of the program should
 not be abandoned. As a social insurance program Social Security
 is intended to provide all insured workers with a safety net
 that protects them against loss of wages due to retirement,
 disability, or death. The replacement of the defined benefit
 plan model with individual accounts transforms Social Security
 from a social insurance program to a savings program. This
 exposes all workers to significantly greater risks and fails to
 ensure a minimum standard of living for low-income workers. For
 these reasons, steps towards privatizing Social Security should
 be taken very cautiously, and efforts should be made to ensure
 that all covered workers continue to receive adequate benefits
 under the program.

______________________________

"ERISA Protections Provide Guidance for Social Security
 Privatization"

      BY:  IAN D. LANOFF
              Groom Law Group, Chartered
           ROBERTA J. UFFORD
              Groom Law Group, Chartered

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=281694

 Contact:  IAN D. LANOFF
   Email:  Mailto:idl@groom.com
  Postal:  Groom Law Group, Chartered
           1701 Pennsylvania Avenue, N.W.
           Washington, DC 20006  USA
   Phone:  202-857-0620
     Fax:  202-659-4503
 Co-Auth:  ROBERTA J. UFFORD
   Email:  not available
  Postal:  Groom Law Group, Chartered
           1701 Pennsylvania Avenue, N.W.
           Washington, DC 20006  USA

ABSTRACT:
 This article discusses legal means to minimize investment risk
 if individual accounts are added to Social Security. It
 describes current fiduciary standards in the Employee Retirement
 Income Security Act of 1974 ("ERISA") that apply to private
 pension plans transferring investment responsibility to
 participants. It argues that rulings and regulations issued by
 the Department of Labor under ERISA provide a model of "best
 practice" for individual accounts under Social Security. It also
 suggests that such protective measures could be implemented by a
 Board of Trustees with fiduciary duties and responsibilities,
 such as the Federal Thrift Savings Board that oversees the
 Thrift Savings Plan, the individual account plan for federal
 employees, or the State Board of Administration that will
 implement the recently established individual account plan, the
 Public Employee Optional Retirement Program, for state employees
 in Florida. Or, if the Board approach is deemed unacceptable,
 responsibility for implementing these protective measures could
 be assigned to an existing or newly created federal agency.

______________________________

"Partial Privatization of Social Security and Private Pensions"

      BY:  KATHRYN L. MOORE
              University of Kentucky
              College of Law

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=281704

 Contact:  KATHRYN L. MOORE
   Email:  Mailto:kmoore@pop.uky.edu
  Postal:  University of Kentucky
           College of Law
           Lexington, KY 40506-0048  USA
   Phone:  859-257-7637
     Fax:  859-323-1061

ABSTRACT:
 Policymakers and analysts have widely debated many aspects of
 the various reform proposals but have paid relatively little
 attention to how Social Security reform would affect
 employer-sponsored pensions. Yet, Social Security does not
 provide retirement income in a vacuum. Rather, our national
 retirement income system is often referred to as a three-legged
 stool with Social Security representing one of the legs and
 employer-sponsored pension plans and individual savings
 representing the other two legs. Because changes in one leg of
 the stool, Social Security, are likely to have a direct impact
 on the other two legs of the stool, Social Security reform must
 be not be considered in isolation but must be viewed in light of
 its effect on employer-sponsored pensions and individual
 savings. Accordingly, this Article analyzes how one of the most
 popular reform proposals, partial privatization, would likely
 affect private pensions.

 The Article begins by examining how partial privatization
 would likely affect the integration rules and integrated plans
 because the tax integration rules are the one area of retirement
 law that expressly coordinates private pensions and Social
 Security. Integration, however, is not the only way in which
 private pensions are linked to Social Security. Because Social
 Security has a central role in providing retirement income,
 almost all pension plans are implicitly linked to Social
 Security, insofar as their design takes into account the
 provisions of and benefits provided by Social Security. Thus,
 this Article then considers how partial privatization would
 likely interact with the other links between private pensions
 and Social Security. Specifically, it considers how partial
 privatization would likely affect (1) employees' demand for
 defined benefit plans, (2) employees' willingness to contribute
 to employer-sponsored defined contribution plans, (3) employees'
 investment behavior with respect to the assets in their
 employer-sponsored plans, and (4) investment returns available
 to employer-sponsored plans.

______________________________

"Social Security: The Broader Issues"

      BY:  C. EUGENE STEUERLE
              Urban Institute

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=282318

 Contact:  C. EUGENE STEUERLE
   Email:  Mailto:esteuerl@ui.urban.org
  Postal:  Urban Institute
           Senior Fellow
           2100 M Street, NW
           Washington, DC 20037  USA

ABSTRACT:
 In this paper, the author argues that the primary Social
 Security "issue" is not how to design that particular system for
 retirees 50 or 75 years hence. Instead the broader question is
 whether the federal government budget can be adaptable enough
 over time to best meet the needs of all people over the next 50
 or 75 years. Right now, Social Security and other elderly
 programs have large amounts of growth built into them in fairly
 rigid ways. Legislators simply cannot create systems with that
 much built-in growth without having impacts far beyond the
 systems themselves.

 This paper analyzes three major areas affected by the existing
 structure of growth in elderly programs. The first is the
 budget. Built-in growth does not just affect future budgets; it
 is already a major factor affecting current budget battles. The
 second is the labor force. Social Security induces people to
 retire at what now must be considered late middle age. If that
 trend continues as the baby boom generation retires, there will
 be a significant reduction in the percentage of the adult
 population that will be working. The third is the needs of the
 elderly. Because legislators have set growth patterns in ways
 that are acclimated to deal with problems as perceived in the
 past, the system has become less targeted toward the most
 pressing problems of the elderly themselves. In particular, for
 each additional dollar of expenditures it makes, Social Security
 is targeting smaller and smaller shares of benefits to either
 the older or the more needy among the elderly. By predetermining
 growth rules, however, change is hard to make. The structure of
 the existing system confronts politicians with the dilemma of
 reneging on some set of promises if they want to make the system
 better at meeting its basic purposes.

 What we face as a society is a much broader question of how
 well we are going to allocate scarce resources to meet the most
 important needs of our nation. Demographic changes have merely
 forced this issue to the fore, but they would be there to some
 extent anyway. The issue plays itself out in the three topics
 discussed here: the current and future allocation of the federal
 budget and how those allocations are affected by automatic
 built-in growth of a few major programs; the extent of future
 labor force participation by adults and how current
 institutional structures may be blocking a very natural movement
 toward work by what will soon be a very large stock of older -
 but not necessarily old - people with significant capabilities;
 and the continual allocation of decreasing shares of the elderly
 budget away from those elderly with the greatest needs.

______________________________

"Leverage, Linkage, and Leakage: Problems with the Private
 Pension System and How They Should Inform the Social Security
 Reform Debate"

      BY:  NORMAN P. STEIN
              University of Alabama, Tuscaloosa
              School of Law

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=282328

 Contact:  NORMAN P. STEIN
   Email:  Mailto:nstein@law.ua.edu
  Postal:  University of Alabama, Tuscaloosa
           School of Law
           P.O. Box 870382
           Tuscaloosa, AL 35487  USA
   Phone:  205-348-1136
     Fax:  205-348-3917

ABSTRACT:
 The problems of the private sector retirement system should be
 considered in the debate over whether to introduce individual
 investment accounts into social security. The paper considers
 three problems of the private pension system, leverage, linkage,
 and leakage. By leverage the paper refers to the common
 understanding that the tax treatment of private pension plans is
 intended to leverage the qualified-plan tax benefits for
 business owners and managers through regulation into benefits
 for lower and moderate income workers. By linkage, the paper
 refers to the idea that it is desirable for participant benefit
 expectations to be linked to the actual benefits that they will
 receive. By leverage, the paper refers to the idea that
 retirement plan assets should be reserved for retirement income.
 The paper suggests that these ideas are imperfectly realized in
 the private pension system. The paper also suggests that social
 security has provided a balance to the private pension system,
 since its benefits are weighted to the low and moderate income
 worker, its benefits are more or less certain, and are strongly
 committed to retirement purposes. A private account system would
 likely result in the social security system replicating the
 weaknesses of the private pension system rather than providing a
 counter to them. The paper also explores how private accounts
 might be structured to mitigate but not eliminate some of the
 problems that a private account system would introduce into
 social security.