Benefits Column

Social Security Reform in the Offing?

Add the possibility of Social Security reform to the continuing likelihood of healthcare reform, and HR leaders have workforce-planning issues of substantial complexity to work through -- including the possibility that workers will remain on the job longer.

Monday, July 6, 2009
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"When it rains, it pours" is one of those old sayings that has taken on new meaning in the last year.

The economic crisis has certainly qualified as a major downpour -- one that is finally showing some signs of letting up.

And in the midst of that, President Barack Obama has set out to have many of his policy initiatives take on the quality of major storms with lots of disruption, rather than minor disturbances. In policy "speak," that means comprehensive "reform," rather than just moving things around at the edges.

The major energy bill, financial regulation and healthcare reform have been the primary focus, but Social Security may now be added to the list.

It is the economic crisis that is behind the new possibility for Social Security reform -- an effort aimed at long-term solvency that both President Bill Clinton and President George W. Bush sought, but neither achieved.

Rising federal deficits have put pressure on the bond market. Rising unemployment has drastically reduced payroll-tax revenue and, with the reduction in revenue, the positive cash-flow cushion that Social Security has enjoyed since the 1983 reforms, and was projected to enjoy for at least another decade, is more than a little bumpy.

Declining equity markets have caused key Republicans to decide that the individual accounts initially proposed in the early 1990s by the late Sen. Daniel Patrick Moynihan, D-N.Y., and embraced by Bush, should be off the table.

Senior GOP senators have called for bipartisan action on Social Security now, seeing an opportunity for a bipartisan agreement as the 'line in the sand' represented by individual accounts is now off the beach.

China and the buyers of bonds (the dreadful "bond market") have been sparking concern in both parties about ways to send a message that Congress and the President are capable of meaningful actions that promise long-term solvency and AAA ratings for U.S. bonds. Social Security may be the easy fix that can be used to send that positive message -- at least that is what some leaders in both parties are hoping!

Since Social Security is the only income source for nearly one-third of retirees, the majority source for nearly two-thirds and the ultimate safety net for those who live long enough to have exhausted everything else, it is an essential program if employers and unions want most workers to ever be able to leave the workforce for any reasons other than disability or death.

That may sound morbid, but the actual numbers on today's and tomorrow's retirees underline that this social-insurance program is the primary reason that retirement became part of the life plan of most Americans, not just the lucky or wealthy few.

As employers and unions act to freeze, convert or end more and more traditional defined-benefit pension plans and subsidized retiree-health benefits, more and more of those in the top one-third of the population by income will find Social Security and Medicare essential to making the decision to retire.

Yet, the reforms that can be expected will likely also serve to keep workers working longer.

One reform would introduce longevity indexing of the 62, 65 and 67 retirement ages. If enacted, it will probably keep today's workers working longer. Reducing the level of benefits for the top 20 percent by income through a reduction in the benefit formula that applies to them, may serve to extend working careers as well.

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An increase in payroll taxes for at least some workers, will both increase employer costs and reduce worker take-home pay available for saving, thus pushing off retirement for those that take the time to plan.

Employers and unions are already reporting that the pace of retirements has slowed due to the economic crisis, concern for the future, losses in defined-contribution accounts, reduced work hours or the job loss of one family member, and more.

Workforce planning is getting more difficult, and Social Security reform will add to complexity of the human resource function.

And, as I noted in my last column, health reforms that are likely this year that may end the "job lock" created by current rules in the individual health-insurance market, will add a dimension to workforce planning that has not been present at any prior point in the life of the nation.

For the first time, any citizen will be "guaranteed issue," without concern for pre-existing conditions.

Think about Social Security reform now, as you previously began (you have, haven't you?) active planning for health reform. The implications of both to human resources, workforce mobility and management, and retirement timing, are going to be of monsoon proportions.

Dallas Salisbury, an expert on economic-security issues, is president and CEO of the nonpartisan Employee Benefit Research Institute in Washington. The views expressed, however, are his own and should not be attributed to EBRI or others.

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