The Pension Disaster That Awaits

If Social Security fails, CFOs will have a serious problem on their hands, says former Fidelity fund manager and current Harvard professor Robert Pozen.

Second, we all agreed that we would not raise the payroll tax rate, because 12.4 percent is very high. The commission discussed whether the terms of its executive order precluded an increase in the payroll tax base, and, in the end, the White House ruled that it was precluded. In the third plan, there is a proposal to have dedicated revenues to Social Security, but it leaves it up to Congress to decide what type of tax would be used to get that revenue.

What extra burdens will these plans impose on companies?

We were adamant that there be no extra burden on employers; that they’d continue to send in payroll taxes just like they do now. It would be up to the government — through a new Federal Reserve-like entity for pensions — to take those monies and put a certain percentage in a holding investment, like a money market fund or Treasury bond. Then, at the end of the year, that entity would put the money into the investment choices of the individual.

What will it take for business to get behind Social Security reform?

Business doesn’t understand what is going to happen if there is no Social Security reform. Look at the budget for this coming year. Assuming we have no new stimulus package, it’s roughly about zeroed out. But the accounting is questionable, because implicit in that zero is $189 billion from an annual surplus from Social Security. That surplus, however, is going to dwindle, and ultimately go negative in 2016. Then what are the implications?

Well, first, a lot of CFOs probably want various types of government-funded programs — more money into FDA processing or in developing technologies. Just think of the situation when this $189 billion cushion isn’t there. It will be very difficult to get new spending programs.

Second, think about tax reform. Remember when we had big deficits and whenever you went to Congress for tax reform they said you had to “pay for it”? And they didn’t mean to “pay for it” by increasing the taxes on someone else’s industry. So again, without Social Security reform, there’s going to be tremendous difficulty in getting further tax cuts.

Third, there are still many defined benefit plans around, and roughly 50 percent are integrated with Social Security. That is, they calculate what your total benefit is and subtract your Social Security benefit to determine your defined benefit. Now, suppose people become uncertain about whether they will get Social Security. We know that if nothing is done by 2038, Social Security benefits will be cut by roughly 28 percent. This will pose a significant long-term problem for integrated defined-benefit plans.

Were you surprised at criticism leveled at the commission? The president of the AFL-CIO called your report “a radical plan to dismantle Social Security.”

The PR at the beginning was terrible. There were pickets at our first meeting, before we even said a word. But it’s not a radical plan to dismantle Social Security; it’s taking a small portion of Social Security and giving people the choice of getting a better return. His is what I call the “do-nothing plan.” What’s his suggestion?

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