MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Last week, GOP presidential candidate Rick Perry called Social Security a Ponzi scheme. Changes to the program will be on the congressional debt super committee's agenda. And President Obama hopes to ignite to job market in part by extending cuts to payroll taxes that otherwise would go into the trust fund.

MS. DIANE REHMJoining me here in the studio to look at the future of Social Security: Nancy Altman of the Strengthen Social Security coalition and Charles Blahous, a Hoover research fellow and a public trustee for the Social Security and Medicare programs. Joining us from WBEZ in Chicago is Mark Miller. He's a syndicated columnist specializing in retirement issues. Of course, your comments, questions are always an important part of the program. Call us on 800-433-8850. Send us your email to drshow@wamu.org. Join us on Facebook or Twitter. Good morning and welcome to all of you.

MR. CHARLES BLAHOUSThank you.

MS. NANCY ALTMANThank you.

MR. MARK MILLERThanks.

REHMMark Miller, let me start with you. Gov. Perry's views on Social Security seem rather extreme. What is the reality? Can Social Security legitimately be called a Ponzi scheme?

MILLERNo. I think that was a very -- well, it was a reckless and irresponsible comment, frankly. You know, the essence of Social Security is that people pay taxes and they accumulate credits, and in return, they get a pension. And that's a program that's been working for 75 years. And the essence of a Ponzi scheme, if you checked that in a dictionary, is criminal fraud.

MILLERSo Social Security on the one hand is backed by a demonstrated legal and political commitment and big financial reserves, and we can get into a discussion, I'm sure we will, about what that -- that's all about. And the other, a Ponzi scheme, is backed by nothing. So it's really a comment, you know, that is very baseless in my view.

REHMAnd turning to you, Charles Blahous, you're one of two public trustees of the Social Security fund. Exactly what are your responsibilities?

BLAHOUSWell, the short of it is we're responsible for reporting each spring on the financial condition of Social Security and Medicare both now and projected into the future. There are two public trustees: one Democrat, one Republican. Your listeners can guess which I am by the end of the program if they're inclined. The other public trustee is Dr. Robert Reischauer, who I'm very privileged to serve with.

BLAHOUSThe public trustee positions were created as part of the 1983 reforms, and they were created because there is a concern on the part of elected officials that the projections be reviewed so that public could be confident that it weren't being slanted in any particular way. And so these two public trustee positions were created to join the government trustees: the secretary of Treasury, the Social Security commissioner, secretary of Labor and the secretary of HHS. And our primary responsibility is just to make sure that the projections are done in the best possible way.

REHMAnd what are the current projections for the fund?

BLAHOUSWell, there's a number of different elements of the projections. The combined Social Security trust funds are projected to be solvent through 2036, and the Social Security trust funds have two pieces. There's a disability piece and there is an old-age and survivors piece, which people think of as the retirement program. The disability piece is in much more dire condition. It is projected to be insolvent by 2018. The retirement piece is projected to be insolvent by 2038.

REHMWhy is the disability piece so much more dire?

BLAHOUSThat's a very good question, and there are a lot of opinions about it, but I think there's really, I'd say, three different pieces. One is that when the tax rates were set, the 12.4 percent payroll tax, the division of that tax into the retirement tax and the disability tax, that was set in the 1983 reforms. And then the disability eligibility rules were liberalized considerably in the 1980s. So right off the bat, disability got into more trouble.

BLAHOUSNow, disability got another shove into trouble with the recent recession. Historically, it's always been the case that when we have a recession, disability claims spike. But even before that happened, the disability program was in worst shape than the retirement program.

REHMCharles Blahous, he's a -- pardon me -- Hoover research fellow, one of two public trustees for the Social Security, Medicare programs, author of "Social Security: The Unfinished Work." Turning to you, Nancy Altman. How do you think Social Security actually compares with insurance plans or other pension plans?

ALTMANSocial Security is an extremely good deal. It is, as you say, it's insurance. The -- some people talked about the need to modernize Social Security, but the concept is really thoroughly modern. The idea is that as long as workers are dependent and their families are dependent on wage income, they need insurance against the loss of those wages. They need unemployment insurance if they lose their jobs, disability insurance if they become disabled, life insurance, old-age insurance. Social Security provides the last three.

ALTMANActually, unemployment insurance was part of the 1935 Social Security Act. If you try to compare it to buying life insurance or disability insurance or private pension on the -- in the private sector, you really can't find the product. Social Security provides -- is completely portable, which private pensions generally are not from job to job. They are completely protected against inflation.

ALTMANThey have extremely low -- it has extremely low administrative cost, returning more than 99 cents of every dollar in benefits. It is -- and it has benefits for divorced spouses. In the private sector, you'd have to argue about that in divorce court. There -- it has all kinds of advantages that you can't get because it's universal and because it covers -- insurance works best when it has the largest risk pool, and ours is a risk pool covering the whole nation. And that's why Social Security works so well and is so popular.

REHMNancy Altman, co-director of Social Security Works. She is author of "The Battle for Social Security." And do join us, 800-433-8850. Send us your email to drshow@wamu.org. Mark Miller, I should've mentioned that you are also the author of "The Hard Times Guide to Retirement Security." The -- turning back to you, the congressional debt super committee is going to consider changes to Social Security. But that's not really part of its mission, is it?

MILLERWell, it depends on whether you consider Social Security to be part of the deficit problem or not. I'm one who does not. And, you know, I think that your guests in the studio there are closer to the numbers and the way that the monies are transferred back and forth, but, you know, I would argue that it's not part of the problem. If I could, could I just offer a quick comment on this notion of insurance?

REHMCertainly.

MILLER'Cause I think the broader context of where we are in terms of hard times economy and where people are in terms of retirement security needs to be part of the backdrop of this conversation, which I'm sure is gonna get very nuts and bolts and numbers-oriented in just a second. I just like to point out a couple of quick things. One is that we've seen a near complete disappearance of defined benefit pensions in the private sector, which, you know, when we talk about insurance, what we're insuring against is longevity risk with a pension or with Social Security.

MILLERLongevity risk simply means running out of money before he run out of time. And the fact is none of us can know how long we live. So, you know, private accounts while valuable -- 401 (k), IRA and the like -- nobody can really know how much they're gonna need. So what's so valuable about insurance of the type that we're talking about is that it does provide income for life. And the statistics show that the very old tend to rely on Social Security for a much higher percent of their total income.

MILLERAnd so even people who will say -- I’ll get comments from readers occasionally who say, well, I've got plenty of money. I won't need Social Security. But even people with a fair amount of assets can exhaust those assets as they get into advanced age. So this is one of the things that's so important. The other thing about this discussion when we talk about boosting retirement age is making people work longer, saying, oh, we're all living longer. We should all work longer.

MILLERMore and more people are trying to do that, but it's easier said than done in a, you know, climate with 9-plus percent unemployment. And the statistics show that most people retire earlier than they thought they would, either due to job loss, disability. In fact, the Employee Benefit Retirement Institute found that this year, 45 percent of Americans are retiring earlier than they thought they would. So we're really up against a crisis in retirement security, and I feel strongly that's one of the reasons why Social Security is so critical.

REHMChuck, a crisis in retirement security?

BLAHOUSIt's funny. I certainly agree we have very severe challenges in retirement security, but I have some perspectives that are different from the ones we just heard with respect to the role of Social Security and the broader budget issue. I have something of schizophrenic attitude towards the joint committee on the Social Security question. On the one hand, they've been given a charge of producing a certain amount of deficit reduction within 10 years. That's probably not the best way to think about the Social Security problem.

BLAHOUSThe Social Security system is really a long-term program. And if you're trying to get as much deficit reduction as you can within a 10-year window, that's probably not the best format for thinking carefully about Social Security policy over the long run. On the other hand, there is language tucked into the committee's charge that says they need to make recommendations to deal with the long-term fiscal predicament, and there, Social Security clearly does play a very significant role.

REHMAll right. Short break here. We'll talk further when we come back and take your calls. I look forward to hearing from you.

REHMAnd welcome back. We're talking about Social Security, a subject, I believe, affects a good many of us. In fact, 90 percent of all workers are in jobs covered by the program. Here in the studio, Nancy Altman, co-director of Social Security Works, and the author of "The Battle for Social Security." Charles Blahous is a Hoover research fellow, one of two public trustees for the Social Security and Medicare programs. He's author of "Social Security: The Unfinished Work."

REHMAnd Mark Miller, he's on the line with us from WBEZ in Chicago. He's a syndicated columnist and author of "The Hard Times Guide to Retirement Security." Nancy, you were Alan Greenspan's assistant when he chaired that commission that developed the 1983 amendments to Social Security. What were the most important changes at the time?

ALTMANWell, the -- at that time, the -- let me speak -- first of all, put it in context, and then tell you the most important changes. It was quite different from now because there was widespread agreement on the fundamentals of Social Security so that the members decided right off the bat that they were focused just on Social Security, not on Medicare. They decided they were not focused on the deficit, even though there were concerns about the deficit back then.

ALTMANAnd they focused -- and they ruled out major changes like privatizing it or means-testing it or something like that. So within that framework, they looked at the income coming in and the outgo.

REHMRight.

ALTMANAt that time, because of the stagflation, there was concern -- there was an immediate crisis. Benefits wouldn't have been paid within a matter of about 18 months. So that -- they focused on that. They did a number of things. They delayed the cost of living by six months. They began taxation of benefits, which was a major change at that point. They moved up the FICA rate that was in the law.

ALTMANBut they also were concerned about the long-term. And for the long-term, they didn't reach agreement. They said to Congress, we should make sure the funds are there for the baby boom. You can either raise the retirement age or put a rate increase in around 2010, and Congress chose to raise the retirement age. So it is currently at 66, going up to 67, as a result of that 1983 law.

REHMAnd, Chuck, when you say those reforms created confusion over program finances and further gridlock, what do you mean?

BLAHOUSWell, I would just second what Nancy said. I think, on the first point, which is I think one of the reasons the '83 reforms were possible was that there was a common understanding of the nature of program financing. You could talk to Republicans or Democrats in 1983, and they would both say, we've got a problem. Here's the size of it, and here's the size of the shortfall we have to fix.

BLAHOUSYou talk to people on different sides of the aisle today, they don't feel that way at all. And the biggest reason, I think, is because we now have this massive Social Security trust fund sitting there, at least on paper, and that greatly affects people's view of the urgency of the problem or the lack of urgency of the problem. A couple of points I would make about the '83 reforms.

BLAHOUSA lot of people don't realize that the shortfall we now face today is much, much larger than the one we faced in '83, even in a relative sense. And the reason people don't realize that is that the trustees' methods of measuring the shortfall changed in the interim. They changed in 1988. So if you look at the shortfall today relative to 1983, it's already over 50 percent larger and getting larger rapidly. And there's no political precedent already for closing a shortfall of the size we now face.

BLAHOUSThe other difference -- and I think it's very sobering -- is that while in one sense the problem was more urgent in 1983 because the trust fund was almost out of money, there's another sense in which the problem is much, much more urgent today. Back in 1983, the demographics weren't hitting them in the face. There was a pretty stable ratio of workers and collectors. And so if you had a delay of a year or two, you could patch the program over.

BLAHOUSThings wouldn't get too much worse. The problem wouldn't get too much more difficult to solve. But that's not the case today because every year we wait. We've got more and more bloomers on the roles, and the gap between the program's outflow and its income is widening very dramatically.

REHMNow, Mark Miller, from your point of view, aren't there pretty simple options to fix the program?

MILLERWell, the options that are front and center in the discussions that have come forward from the various commissions, the bipartisan commissions that looked at solutions, the two that seem to be front and center are another increase in the retirement age. That's a big one, with the underscore on the word another, as Nancy just explained. And the other would be the change in the cost of living formula to something called the chained CPI. We can get into that if you like.

MILLERBut the net effect of that is a reduction, I believe of about three-tenths of 1 percent annually in cost of living increases for seniors. That one is gonna be quite controversial because the cost of living adjustment is one that, in that situation, already enrages seniors, I can -- trust me, I can tell you from my mail. So those are the two that are out there that get discussed most often.

MILLERBut the other one that, I think, should be part of the mix of discussion -- I certainly hope will be -- is to eliminate the cap on the amount of earnings that are taxed for the -- for FICA. If you completely lifted that tax, that eliminates most of the shortfall, according to most of the analyses I've read.

REHMNancy.

ALTMANAnd let me put this, again, in context because we talk about solutions, but it's more maintenance of the program. As Chuck has said, there's a -- projections are made every year, 75 years down the road.

REHMSurely.

ALTMANAnd this is a program that is very fiscally responsible, conservative. As Chuck said, it can pay all benefits in full and on time for the next quarter of a century. And then the shortfall is just .6 percent of gross domestic product. It's about the same as extending the Bush tax cuts for the top 2 percent. So it's not -- it's a very manageable size. It's still decades away. The problem is there's not even agreement on the goal.

ALTMANIt used to be that, traditionally, we put it in balance for 75 years and we are done, and that seemed awfully good. Now, people talk about an infinite time horizon. They talk about sustainable in the 75th year. They even talk about making sure the money coming in from one source of its revenue -- taxes -- balances as benefits. That's never been an issue over the last 76 years, and that's part of what's making solutions more difficult.

REHMHow would you feel about lifting that cap on income?

ALTMANI think that is where -- a very good solution and one our polling shows that two-thirds of the American people support. There actually is good policy reason for raising it because of the inequality...

REHMIt's currently at 106,000.

ALTMAN$800, that's correct.

REHMOK. And you would be in favor of lifting it altogether.

ALTMANThere are many different solutions. I -- what I say and what our coalition says is that benefits are already extremely low. They average about $13,000 a year. Administrative costs are already very low, less than 1 percent, and really should be a little bit more than what is being spent right now. So there's no room on that side. We should be looking for revenues. We can do it through the cap. We can do it through a new source of revenue. We can do it without raising taxes in part by diversifying the portfolio, which has been proposed too.

REHMAnd, Chuck, how would you respond to the idea of taking that cap off?

BLAHOUSI think it's one of those measures that surveys much better than it works. And the reason for that is that, in Social Security, benefits and contributions are linked. And the more you pay into the system, the more you get out. It's not designed to be a welfare program. Basically, no matter how rich you are, no matter how poor you are, you get something back for your contributions.

REHMSomething, right.

BLAHOUSSo if you lift the cap, then unless you sever that link between contributions and benefits, then you're gonna obligate very large amount of additional benefit outlays to people who need them least. You're basically bringing in more revenue from rich people to pay more benefits to rich people. Now, you could just sever that link, but that would be a very fundamental, I would argue, radical...

REHMHow would you sever that?

BLAHOUSYou could just say that the benefit base will only go up to the pre-legislated change cap, and you won't get any benefit credits above that. Now I think that would be a very radical step, and I would recommend against it because that, to me, destroys what Social Security has always been, which is this idea of an earned benefit.

REHMWould you lift the cap at all?

BLAHOUSLet's put it this way. I myself would not advocate raising the cap because, frankly, we can talk about the numbers, but it doesn't do that much for you, financially. It does a lot more for you by some accounting measures than by others.

REHMBut doesn't it put a lot more into that trust fund?

BLAHOUSIt puts more revenues in the trust fund, and then you have to obligate additional benefits later on. So if you were -- a lot of people have suggested, for example, raising the cap on tax wages so that it covers 90 percent of all national wages, and that was the historic high point back in 1983.

REHMWhat would that mean?

BLAHOUSWell, it'd be the equivalent of about $180,000 today.

REHMOK.

BLAHOUSSo -- but that -- if you did that, the size of your annual shortfalls would only go down. It would go down a little bit. It would go down by about 14, 15 percent. So it doesn't accomplish as much as it first appears from a trust fund accounting perspective. And this gets to another point I'd like to make, which is that what often happens in the Social Security debate is that advocates of particular policies tend to point to the particular scorekeeping measure that makes their proposal look good.

REHMSure. Exactly.

BLAHOUSBut the bottom line is there have been a lot of bipartisan panels and advisory boards that are basically forward and said, here are the different standards any plan has to meet for financial credibility. And the balance of the trust fund is just one. You can change that by accounting gimmicks. That doesn't, by itself, fix program finances. So you have to look at a lot more metrics than just whether there's a non-zero balance in the trust fund.

REHMMark, how do you respond to that idea of lifting the cap on income?

MILLERI mean, I think it should be part of the mix. What I'm struggling to, as I listen to Mr. Blahous, or trying to understand what solutions he is for. I know in the past, you know, during your years in the Bush administration, you were for private accounts. I don't know if that's where you're still heading with this. I don't know exactly what you think the fix is.

BLAHOUSWell, I'm happy to speak to that. In my book, I actually outlined a whole chapter on my preferred ideas. And I think in an ideal world, we would have a funded component to the system, because one of the problems that we have is that a pay-as-you-go financing system is very unstable when the worker-to-collector ratio drops.

BLAHOUSBut even though I did and very happily support a personal account proposal when working for President Bush, we may not be in a position today where something like that is feasible. And I certainly -- there are many solutions that I've written favorably about that do not include a personal account.

REHMSuch as?

BLAHOUSWell, the Simpson-Bowles commission, for example. It contains a few provisions I don't particularly like. It would raise the cap on tax wages over time. It would bring in state and local workers. I don't like either provision. But on balance, it's a reasonably bipartisan approach. They make progressive changes to the benefit formula. They make, in my judgment, a very modest change to retirement age.

BLAHOUSAnd they do a number of other things that make a lot of policy since. And it would be a reasonable bipartisan compromise. Not my ideal plan, but it'll be a reasonable compromise.

REHMCharles Blahous, he is a Hoover research fellow, one of two public trustees for the Social Security and Medicare programs, author of "Social Security: The Unfinished Work." And you're listening to "The Diane Rehm Show." Nancy Altman, I know you want to comment.

ALTMANYes. Again, it's important to understand that this is a program that can only pay benefits if it's got the income to cover the cost. It's very conservatively managed. It can pay all benefits for the next 25 years. So we should first look to proposals that have good policy independent of bringing in finances. So, for example, the -- lifting that cap to 90 percent, that was Congress' intent because the idea is this is wage insurance, and that we should -- most workers need all their wages insured.

ALTMANBut the very wealthy need -- don't need them all insured. But even them, they can invest in Bernie Madoff and have a problem. So 90 percent seems the right amount. That takes care of a third of the shortfall, and all it requires is one additional week of withholding. You can phase it in over 30 years. So there are very modest kinds of revenue improvements that are good policy in and of themselves and can eliminate the long-term projected shortfall.

REHMBut, Mark Miller, you talked about the mail you get from seniors. How does the public view even the smallest changes to Social Security?

MILLERRight. Well, the change in the cost of living adjustment, I think, is interesting in the context to what Nancy just said. She was talking about the fact that changes to Social Security in the past have always been phased in quite gradually. One of the things that with this proposal of change in the COLA, which I believe was one of the Simpson-Bowles ideas and also emerged from a couple of the other commissions and certainly will be considered by the super committee, is that it's something that...

REHMAnd we should inject that there has not been any cost of living adjustment for the past two years.

MILLERWhich has to do with just the way that the current formula is written. And we had a big spike in inflation right before the markets crashed in 2008 that basically pushed ahead the COLAs for the ensuing couple of years. But that's why we didn't have it for the last two years. It's not -- it wasn't a, you know, a specific policy decision. But what I wanted to get to was this idea that if we change the formula again, that is something that would impact current beneficiaries.

MILLERIt's a much more near-term change, and it compounds so that some of the calculations suggest roughly an 8.5 percent cut in benefits for somebody that makes it to 92. So it's a more immediate cut, and it'll be a very controversial cut.

REHMAnd I'm sure you hear from an awful lot of seniors who are worried.

MILLEROh, terrified. And the other Simpson-Bowles idea, this idea of another increase in the retirement age, I think people who support that idea like to say, we'll, we're all living longer so we should push out the retirement age. It's important to understand that when you move up the -- what's called the normal retirement age or the full retirement age, that's the time at which you qualify for your full entitled benefits.

MILLERIf -- every time you move that up, that's an across the board benefit cut due to the formulas and the ways that benefits are calculated. So if you're -- it just means you've raised the bar. If the retirement age is 66 and you worked to 66, you get your full benefit. If the retirement age is now 67 and you worked to 66, you get 67 minus -- you get dinged for a year's penalty on that. It's the very short form.

MILLERAnd Nancy or Mr. Blahous, I'm sure, could (laugh) give more detail on that. But -- so it's important to understand it's a benefit cut at a time when people are struggling.

REHMChuck.

BLAHOUSWell, I feel it's important to give a very different perspective on this whole retirement age question. Remember, when this program was first established by FDR, you couldn't collect benefits till 65. Now, there's a lot of things, as Mark said, that go to determine the benefits you can get at a particular age. There is the early eligibility option age, which is now 62. There's the normal retirement age, and there's the benefit formula. And all those things work together to determine the benefits you can get at a particular age.

BLAHOUSNow, since the program was first established -- we established early eligibility at 62 -- quickly became the most popular age of claim. And we also increased benefits several times. Even if we were to raise the early eligibility age and the normal retirement age by three years each, people would still be able to retire at an earlier age and get a much bigger relative benefit than they originally could. So we need to be a little realistic about what's financially possible.

REHMSo it's clearly all very complicated. When we come back from a short break, we'll open the phones for your comments, your questions. I look forward to hearing from you.

REHMAnd it's time to open the phones as we talk about the difficulties, the problems, the solutions that could face Social Security. Let's go first to Cape Cod, Mass. Good morning, John. You're on the air.

JOHNDiane, it's a wonderful show and very timely as usual.

REHMThank you.

JOHNMy question is for the panel. Do they have any comment on the fact -- of the apparent fact that the federal government owes the Social Security trust funds 15 trillion, that's with a T, trillion dollars?

REHMWhere did that figure come from, Charles Blahous?

BLAHOUSI can't say where 15 trillion came from. The current balance in the trust fund is between 2.6 and $2.7 trillion.

REHMNow, how much does the federal government owe the trust fund? It is said it's been borrowed from extensively.

ALTMANWhere that, I think, 15 trillion comes from is that the total public debt, the total amount owed -- the debt limit that just had to be raised in August was $14.3 trillion. About 10 percent of that is owed to the OPEC nations, some to China, some to private pension plans, and about two -- as Chuck says, $2.6 trillion or about 20 percent of that is owed to the Social Security trust funds.

REHMTwenty percent of that.

ALTMAN2.6 trillion...

REHMOK.

ALTMAN...out of the 14.3.

REHMSo does make you feel a little better, John?

JOHNWell, it does, but I got this from Wikipedia. Of course, I know Wikipedia has its problems, so maybe their figure is wrong. But the -- they oppose this debt in the form of Treasury -- special Treasury bonds that they have held, which are, of course, under the full faith and honor of the United States of America.

REHMMark Miller.

MILLERYeah. You know, this is a really important point that I'm hoping the three of us could all agree on. I mean, the trustees' report, which Chuck signs, says that by law, these are assets that are invested in interest-bearing securities backed by the full faith and credit of the government. The reason I wanted to bring this up is that we do hear talk from time to time that, oh, there's nothing there. It's a bunch of IOUs.

MILLERPresident Bush famely said -- famously visited the facility where the bonds are stored and said, there's nothing there. It's just a bunch of paper IOUs. And this is something that, I think, causes a lot of confusion, this point that somehow the government raided the fund. I mean, when you build up a $2 trillion surplus, you don't keep that in cash in the piggy bank. And so it's been invested in Treasury, we think this most secure form of investment in the world. And so -- but it gets portrayed as some kind of irresponsible maneuver.

MILLERAnd, yes, it's a transfer back and forth between two units of government, but I don't see where the problem lies there. But we hear all the time that there is no such thing as a trust fund. Literally, you hear people say that.

REHMWell, I'm glad we could clear up that point for John and all our listeners. To Allan, who's in Ann Arbor, Mich. Good morning. You're on the air. Allan, are you...

ALLANHello. Oh, yes, here I am.

REHMGo right ahead, sir.

ALLANOK. Thank you. An excellent timely program, of course.

REHMThank you.

ALLANI have a perspective of some history I could offer. My father was one of the drafters of the Social Security Act. And the history of this coming from Gov. Robert La Follette, a progressive in Wisconsin, is that this was progressive legislation. And La Follette called the chairman of the economics department of the University of Wisconsin, 1923 or so, to say to John R. Commons, John, would you get your graduate students on this question? I want Social Security for everyone in Wisconsin.

ALLANGive me some legislation by the end of the semester, or something to that effect. And my father and others were in that graduate class and assistants to it, and they drafted the first Social Security Act. When Roosevelt in -- was persuaded by his woman Secretary of Labor Frances Perkins to do for America what La Follette had done for Wisconsin, he called the same group, now all professional economists, from the University of Wisconsin to do for America what they had done for Wisconsin.

ALLANSo this was progressive legislation from the beginning. And I was also privileged in 1985 to be at my father's house when -- in Ann Arbor where they had a gathering with the survivors who had done this work and had been with the Social Security commission for their professional lives. And I, myself, somewhat as a -- more change the system radical -- was very impressed by the satisfaction this group of people have of actually producing a piece of progressive legislation reformed from within that sustained itself and was sustainable.

REHMAllan, I so appreciate your historical perspective.

ALTMANAnd I've got to say, I was privileged to know Wilbur Cohen, who was a protege of Prof. Commons, who worked for Gov. La Follette, who was involved in the 1983 legislation, as were two other men who started working on that program in the 1930s. We have their legacy, and part of what I'm trying to do is pass their legacy on because it was -- they've really done so much for this country.

REHMCharles.

MILLERAnd, Diane -- sorry.

BLAHOUSGo ahead, Mark.

MILLERI was just gonna add quickly that, A, you know, to me, it's one of the most remarkable policy achievements of our country, but, second, to just quickly add that at the time that the act was passed, half of the population over age 65 was living in poverty. And I forget what the rate is now, but it's maybe 15 percent, so it's been a remarkable achievement.

BLAHOUSI just think it's important to bear in mind that when we talk about repairing Social Security's finances going forward, we're really not talking about undoing FDR's legacy. The program that FDR established and was established in the original Social Security amendments, if we had left it in that form, it would be perfectly, financially sustainable today. The trouble the program got into was a result of many amendments over the years afterwards, in particular in the 1970s. There is a very substantial overreach in terms of benefit promises in 1972.

REHMSuch as?

BLAHOUSThere was a 20 percent across the board increase in benefits.

REHMI see.

BLAHOUSThey established an accidentally doubly indexed benefit formula that had to be phased out in the late '70s to early '80s, creating the so-called notch babies because this formula had been erroneously put down. And the shortfalls that we now face are a direct product of the legislative changes made in the 1970s, not the ones made by FDR.

REHMI think Nancy has something to say about that.

ALTMANYes, I disagree. President Roosevelt said at that time that this was supposed to be a cornerstone. He started out in 1935 with retirement, added survivor benefits in 1939, disability was added in 1956, Medicare was added in 1965, and all of this is perfectly affordable. Medicare has health care issues, but the rest is completely affordable. The increases that have come were understood. As I said, I -- one of the actuaries who worked there in 1934 also worked on the 1983 amendments.

REHMInteresting. Mark.

MILLERWell, wasn't the 20 percent increase in the '70s, if I recall correctly -- and I'm happy to be corrected -- before we had the automatic cost of living increase...

ALTMANYes.

MILLER...and it was an attempt to catch up with inflation?

ALTMANThat's exactly right. That's exactly right.

MILLERThey went out. And the response to that was legislation that put in place the automatic cost of living adjustment.

BLAHOUSWell, no. Actually, they were putting, as part of the same legislation -- they're both part of the (unintelligible).

ALTMANIt was the same legislation.

MILLERSame -- OK.

ALTMANBut it was catch-up, and then indexing from that point forward.

BLAHOUSBecause we didn't have callers at that time, no.

REHMAll right. Let's go to Rockford, Ill. Good morning, Roger.

ROGERGood morning, Diane. Good morning to your guests. I have two questions. The first one is, is one of the major features of the Paul Ryan budget thing was to lean very heavily on private investments rather than Social Security as the way to form retirement. And based on what's happening with the stock market over the last decade even, it seems to me that doing that would put retirees at severe risk for not really even having retirement points.

ROGERThe second one is the disability that your -- disability section that your guest mentioned earlier. I understand that it can be in trouble because of the increased amount. What I don't understand is that when people put in legitimate claims, I mean, medically documented and everything else, it takes five to seven years to get it approved. So I'd like to hear the response to those two questions. Thank you.

REHMAll right. Thank you. And first, to you Chuck on that private investment versus Social Security.

BLAHOUSYeah. And I would stress I'm not here to flog the issue of personal accounts, but I think it's important to bear in mind that there's risk in all these types of systems. I think there's a great misperception that somehow we shield beneficiaries from risk by having the virtue of a defined benefit system. All of our defined benefit systems throughout the country have enormous problems, and they have enormous problems for the same reasons.

BLAHOUSThere's a big moral hazard associated with them, where you have a situation where the person is responsible for funding the benefit has every incentive to try to do it at least possible cost to themselves. And so this is why the employer-provided defined benefit pension system gets in trouble. It's why the state and local system has gotten into trouble. And it's why Social Security is in trouble.

REHMNancy.

ALTMANIt's very important to understand that Social Security is insurance, private accounts are savings. Savings are fine on top of the insurance, but we need this basic insurance -- when you think what's happened to 401 (k) s, the home equity, we need this fundamental foundation of protection, and that's what Social Security provides. It's the most sound part of our retirement income system, so we should keep it strong and, in fact, I think, even expand it.

REHMAnd didn't you say that Social Security funds are invested in U.S. Treasuries, and therefore, unlike private investment programs, which would not all be invested in U.S. Treasuries?

BLAHOUSI -- couple of things. One, it's very important to distinguish between what you're invested in and whether you have a funded system or not. You could have the current Social Security system and invest the trust fund in the stock market. And some people -- I oppose that, but some people would propose doing that. President Clinton proposed doing that.

BLAHOUSYou could also have a personal account system that was invested entirely in treasuries. So we shouldn't confuse the issue of what the money is invested in with whether or not we have a savings-based system.

MILLERDiane -- I'm sorry. Go ahead.

REHMGo ahead, Mark.

MILLERI didn't mean to interrupt. It's difficult from the remote.

REHMYeah.

MILLERNow, I just wanted -- because I write quite a bit about 401 (k) s and IRAs. That's the public component of private investment and saving for retirement that we have now. And I just wanna comment quickly to say that these don’t come close to replacing defined-benefit pensions in value. A recent survey, the Transamerica Retirement Center found that only 30 percent of American workers have saved over $100,000 in these accounts.

MILLERAlthough I wanna say that the percentages are a bit higher with workers closer to retirement, but that's clearly, you know, indicates that that system is not getting us there and that we need to find benefits in the mix to -- going back to this point of longevity risk, and there's a whole variety of reasons why they don’t work. The average retirement investor is not equipped to make the best decisions about investment. They too often don’t pay close attention to what's going on.

MILLERAnd then, finally, with the loss of jobs that interrupts the contribution levels, the depression, you know, the decline in wages that we've seen over the last 20 years means people have less to invest and so on. So, I mean, we can spend hours on that but just to say that it's not getting us there.

REHMMark Miller and you're listening to "The Diane Rehm Show." Nancy, I know you want to add to that, but please also respond to the question about why it takes five to seven years to get disability.

ALTMANThat is an excellent point. The -- just to add to and amplify what Mark said and then I'll turn to disability. A fundamental difference is, with individual accounts, the risk is all borne by the individual. If the stock market is down or your investments are down, you're in trouble if you have to retire. With Social Security and, generally, with defined-benefit plans, the risk is shared by everyone. With Social Security, it's shared by the entire nation. That’s what makes it work so well. With respect to disability, it is really outrageous that there is such long time -- lag time.

REHMWhy is that?

ALTMANIt's because even though the administrative cost for Social Security are paid from workers' contributions -- we've got $2.6 trillion in trust assets, but the Congress has been cutting the budget of the Social Security Administration even though the money is there. And they're just -- and there's a -- they've trying desperately to cut back that backlog, and they've succeeded. But Congress, as part of this new budget cutting, has cut the budget more.

REHMAll right. And now in the short amount of time we have left, I'd like to ask each of you how, if you have the authority, how you would fix -- or if you would fix, how would you fix Social Security? I'll start with you, Mark.

MILLERI would do it by lifting and eliminating the cap on income subject to tax. That's how I'll do it.

REHMAnd that's it?

MILLERThat's it.

REHMThat's the only change you would make.

MILLERThat solves -- I'm not in favor of higher retirement ages or changes to the COLA.

REHMAnd how far would you lift that cap or would you...

MILLERI'd be in favor of eliminating it.

REHMEliminating it. OK. To you, Nancy.

ALTMANEliminating it is certainly preferable to raising the retirement age or cutting the benefits, which are extremely modest. Other possibilities that I think would be perfectly acceptable, a new progressive source of revenues. Some have talked about dedicating a tax on stocks speculation, a kind of tax that Great Britain has. Dedicate that to Social Security, you actually could raise the benefits. That's how much money is brought in. There are other kinds. Some have talked about dedicating the estate tax.

ALTMANThere are variety of options that are available, all of which, I think, would be very -- test very positively, would be very popular. The American people are united about this. If policymakers listened to the American people across the spectrum, we could solve this without the kind of political friction that we have.

REHMChuck.

BLAHOUSI'll quickly gloss over two things that I would support, that a lot of people support. I would make progressive changes to restrain the growth of benefits, still above inflation, but restrain the growth to people on the higher income end. And I would, unlike my colleagues, raise the retirement age at least to get it back to where we were when the program first began.

REHMTo what?

BLAHOUSTo 65 at least, the earliest eligibility age.

REHM65, earliest eligibility.

BLAHOUSAnd I'd be willing to go faster even if the political system wouldn't. But there's a set of changes that I would make that hasn't been talked about enough, which is that we should change the benefit formula so that we improve the -- or get rid of some terrible work disincentives in the current system. Under the current system, the longer you work, the worst your returns. I would change the benefit formula so that you got your benefit in proportion to each year that you work, and that would actually produce some savings over time.

REHMAnd that's it?

BLAHOUSThose are the main things together you can get to solvency.

REHMAll right. You've heard it here. Let's hope that what happens in the next few months does bring some real change and some real benefit. Thank you all: Nancy Altman, Charles Blahous, Mark Miller. Thanks for listening. I'm Diane Rehm.

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