[10004]
June 11, 1998
TO: BOARD OF GOVERNORS No. 39-98
FEDERAL LEGISLATION MEMBERS No. 12-98
PENSION COMMITTEE No. 35-98
PRIMARY CONTACTS - MEMBER COMPLEX No. 50-98
PUBLIC INFORMATION COMMITTEE No. 22-98
RE: BIPARTISAN COMMISSION SUPPORTS INDIVIDUAL ACCOUNT COMPONENT
TO SOCIAL SECURITY
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The bipartisan National Commission on Retirement Policy, chaired by Senators Judd Gregg (R-
NH) and John Breaux (D-LA), and Representatives Jim Kolbe (R-AZ) and Charles Stenholm (D-TX),
recently issued its report on retirement security issues. The Commission placed the Social Security issue
in the context of broader retirement system reform and recommended “broad simplification of the
pension system,” including: (1) establishing a “universal” income limit for participation in all IRAs (i.e.,
deductible and Roth IRAs) and raising these limits; (2) indexing the current $2,000 IRA limit; (3)
establishing a single type of salary reduction retirement plan—a universal 401(k) plan—available to all
employers and enabling (but not requiring) employers to convert their existing 403(b) and 457 plans into
401(k) plans; (4) enhancing portability among different plan types; and (5) establishing a defined benefit
plan equivalent to the SIMPLE plan for small employers.
With respect to Social Security reform, the proposal includes a provision to invest two
percentage points of the current 12.4% OASDI tax into “Individual Savings Accounts” (ISAs). The
Commission also proposed that individuals be permitted voluntarily to save up to an additional $2,000
per year in their ISAs. The accounts would be modeled on the current Federal Thrift Savings Plan.
Investors could choose among stock and bond index funds, an index fund that blends both stocks and
bonds, and a government securities fund. Wage-earners under age 45 who failed to specify an investment
fund would, by default, be invested 50 percent each in the stock index fund and Treasury bonds; older
wage-earners would be placed into the Treasury bond option. The Commission proposal envisions the
number of investment options increasing at a later time. The Commission also recommended that
Congress consider permitting individuals to roll over contributions into “broadly diversified low-
administrative-cost funds” managed in the private sector. Individuals would have access to funds only at
retirement and would be required to annuitize distributions.
The Commission considered the administrative costs of the ISAs. The recordkeeping burden
would be assumed by the Social Security Administration, with the administrative costs distributed
proportionally among individual accounts. The Commission estimated the administrative costs of the
system to be 10 basis points, after certain start-up costs are paid and the system reaches a size at which
economies of scale are obtained. The Commission noted, however, that there were “significant”
administrative challenges and that implementation must be conditioned on administrative feasibility.
The Commission also recommended a series of changes to the traditional Social Security benefit
that would reduce the benefit over time. These recommendations include: (1) raising the retirement age;
(2) reducing amounts paid to aged spousal beneficiaries; (3) increasing the number of computation years;
and (4) modifying the formula on which benefits are calculated.
It is expected that these proposals will be introduced in legislative form in both the House and
Senate shortly. We will keep you informed of further developments.
Matthew P. Fink
President
Attachment