1994-95 ADVISORY COUNCIL ON SOCIAL SECURITY

         TECHNICAL PANEL ON TRENDS AND ISSUES IN RETIREMENT SAVING

                               FINAL REPORT




                                    
               1994-95 Advisory Council on Social Security
                                    
        Technical Panel on Trends and Issues in Retirement Saving
                                    
                              Final Report

                           September 29, 1995
                                    
                                    
                            TABLE OF CONTENTS
                                    


Executive Summary .  . .  . .  . .  . .  . .  . .  . . . .Page iv

Preface       .. . .. . .. . .. . .. . .. . .. . .. . .. . . . xx


I.  Introduction . .. . .. . .. . .. . .. . .. . .. . .. . . . 1


II. Labor Market, Pension, and Saving Trends, and        
     Implications for Retiree Well-being. . .. . .. . .. . . . 3

  A. The Labor Market for Older Workers.. . .. . .. . .. . . . 3  
          
  B. The Changing Nature of Employment .. . .. . .. . .. . . . 16 
     
  C. Trends in Employer-Sponsored Pensions 
       and Retiree Health Benefits.. . .. . .. . .. . .. . . . 21

  D. Trends in National Saving. . .. . .. . .. . .. . .. . . . 40

  E.  Implications for Future Retiree Well-Being .. . .. . . . 51


III. Policy Options for Dealing with Projected 
      Social Security Imbalances. .. . .. . .. . .. . .. . . . 70

  A. Criteria for Evaluating Social Security 
      Benefit and Tax Changes.. . .. . .. . .. . .. . .. . . . 70

  B. The Scope of Social Security and 
      the Timing of Adjustments . .. . .. . .. . .. . .. . . . 73

  C. Alternative Means of Lowering Benefits .. . .. . .. . . . 84

  D. Alternative Means of Increasing Revenues. . .. . .. . . . 98

  E. Extending Social Security Coverage to State 
      and Local Workers .. . .. . .. . .. . .. . .. . .. . . . 104

  F. Investing Trust Funds in Private Capital Markets. . . . . 105

  G. Individual Social Security Retirement Accounts . .. . . . 109

           H. Conclusions and Assessment . .. . .. . .. . .. . .. . . . 114
 
         
         IV. Other Policy Options Regarding Future Retirees' 
     Incomes  .. . .. . .. . .. . .. . .. . .. . .. . .. . . . 119

           A. Integrating Social Security Eligibility Ages.. . .. . . . 119

           B. Reducing Older Widows' Risk of Poverty .. . .. . .. . . . 125

           C. Expanding the SSI program. . .. . .. . .. . .. . .. . . . 126

           D. Mandating Private Employer-Sponsored Pensions. . .. . . . 127

           E. Encouraging Employer Pensions and Private Savings.. . . . 130

           F. Issuing Indexed Bonds . .. . .. . .. . .. . .. . .. . . . 131 

           G. Encouraging Reverse Annuity Mortgages. .. . .. . .. . . . 133

           H. Conclusions and Assessment . .. . .. . .. . .. . .. . . . 134

         
         V. Overview and Conclusions. .. . .. . .. . .. . .. . .. . . . 137

              References. . .. . .. . .. . .. . .. . .. . .. . .. . . . 142

              Endnotes .. . .. . .. . .. . .. . .. . .. . .. . .. . . . 162

         1994-95 Advisory Council on Social Security

         Technical Panel on Trends and Issues in Retirement Saving

         Final Report
   
         EXECUTIVE SUMMARY
 
         
         
         
         
       The charge of the Technical Panel on Trends and Issues in
Retirement Savings (TIRS) was to "assist the 1994-95 [Social
Security] Advisory Council with respect to its charge to analyze
the relative roles of the public and private sectors in the
provision of retirement income, particularly how underlying
policies of public and private programs, including relevant tax
laws, affect retirement decisions and the economic status of the
elderly."
    
       The Panel members were
    
         Olivia Mitchell,  International Foundation of Employee
            Benefit Plans, Professor of Insurance and Risk
            Management, The Wharton School,University of
            Pennsylvania (co-chair)

         Joseph Quinn, Professor of Economics, Boston College
            (co-chair)

         G. Lawrence Atkins, Director of Health Legislative
            Affairs,Winthrop, Stimson, Putnam & Roberts

         Richard Burkhauser, Professor of Economics, The Maxwell
            School,     Syracuse University

         Gary Burtless, Senior Fellow, The Brookings Institution

         Robert Clark, Professor of Economics and Business,
            North Carolina State University

         Peter Diamond, Paul A. Samuelson Professor of     Economics,
         Massachusetts Institute of Technology

         John Haley, Watson Wyatt Worldwide, Inc.

         Daniel Halperin, Professor of Law, Georgetown University

         Eric Hanushek, Professor of Economics and Director,
            Wallis Institute of Political Economy, University of
            Rochester

         Diane Macunovich, Associate Professor of Economics, 
              Williams College

         Dallas Salisbury, President, Employee Benefit Research 
                   Institute
 
         John Shoven, Charles R. Schwab Professor of Economics            
         and Dean,                                         School of Humanities and Sciences,                Stanford
         University, and

         Stephen Zeldes, Professor of Finance, The Wharton
            School, University of Pennsylvania.
    
    
       The Panel met in Washington, D.C. for nine sessions,
including two presentations before the Advisory Council, and
produced this Report.  Introduction
    
       The social security system is not in long-term actuarial
balance.  The Social Security Trustees, using their intermediate
assumptions, project that currently legislated Old Age, Survivors,
and Disability Insurance (OASDI) tax revenues will be less than
currently legislated benefits after the year 2013.  Projected
benefits begin to exceed the sum of OASDI taxes and interest
earned in 2020, resulting in a decline in the OASDI Trust Funds,
and projected depletion in 2030.  Over the 75 year long-range
planning horizon, the difference between the projected income and
cost flows is a deficit equal to an annual 2.17 percent of taxable
payrolls.  Some combination of benefit decreases and/or revenue
increases will be required to close this gap.
    
       In addition to these social security retirement and
disability program concerns, much more immediate funding problems
exist with the Hospital Insurance component of Medicare, whose
Trust Fund is projected to run out in 2002.  Moreover,
Congressional Budget Office analysis of the President's proposed
budget for fiscal year 1996 projects continued federal budget
deficits through the year 2000.  It is in this context that the
Technical Panel on Trends and Issues in Retirement Savings
discusses various social security options below.
    
       The Executive Summary begins with a section on current and
projected trends in labor markets, employer pensions, savings and
the well-being of the elderly.  The Summary then discusses policy
options designed to deal with projected social security fiscal
imbalances, as well as selected other proposals to improve the
economic well-being of future retirees.  The Summary includes
other conclusions and suggestions that the Panel thought were
useful to convey to the Advisory Council on Social Security and to
the public at large.
    
       The Panel did not seek consensus; rather, its charge was
to develop evaluation criteria and to use them to discuss a range
of policy options.  The Panel discussed both incremental and wide-
ranging changes in social security and related programs, changes
designed to alleviate both social security's long run fiscal
deficit and the broader problem of potentially inadequate
retirement income for future generations of retirees.  On many of
the issues discussed, Panel members were not unanimous, although
on some issues they did all agree.  Available evidence and
supporting arguments are contained in the body of the Final
Report. 
    
       Some topics were beyond the Panel's charge and therefore
are not discussed in detail in this Report.  One is the central
role of the nation's overall economic health, which has a major
impact on the social security system's fiscal health.  To the
degree that social security encourages, or at least does not
discourage, work and savings, it enhances the  prospects for
economic growth.  The Panel also did not examine how changes in
the medical care and health insurance markets will interact with
the Medicare and Disability Insurance programs.  These two
components of the social security system were the subjects of
reports by previous Social Security Advisory Councils, and were
beyond this Panel's purview.
    
    
Trends in labor markets, pensions, savings and the well-being of
the elderly
    
       In this section, the Panel discusses recent and probable
future trends likely to affect the economic well-being of future
retirees.  Here the Panel assumes no major changes in the
institutional environment, even though it realizes that changes in
the largest program, social security, are absolutely necessary. 
Given its importance to older Americans, significant changes in
social security may well affect the trends discussed here.

       Labor force participation rates of older Americans
(especially men) declined dramatically between 1950 and the mid-
1980s.  This decline coincided with expanded coverage, increased
real benefits and earlier ages of eligibility for retirement
benefits in both social security and many employer pension plans. 
Since the mid-1980s, however, this early retirement trend has
abated or stopped. 
    
         In the absence of major institutional change, but given
the already legislated change in the Normal Retirement Age for
social security from 65 to 66, and then to 67, the Panel
anticipates a slow and modest reduction in early retirement, with
Americans retiring slightly later over the next several decades.
    
       The American labor market is changing in significant ways. 
Traditional manufacturing employment is declining, and service
jobs are on the rise.  Some evidence suggests that the quality of
jobs is becoming more bimodal, with job growth among low-skilled,
low-paid service workers and high-skilled, high-paid technical and
professional employees.  This pattern of job growth is reflected
in the changing American income distribution, which is becoming
more unequal.

       Employer pensions are also in flux.  After increasing
rapidly during the 1950s and 1960s, the proportion of workers
participating in an employer pension has leveled off, with slight
increases appearing in 1993 and 1994 for the first time in years. 
About half of the full-time civilian labor force is participating
at any given time.  Participation rates increase significantly
with age, job tenure and earnings level, suggesting that the
proportion of workers covered at some time during their work lives
will be higher than indicated in any cross-sectional snapshot. 
Vesting in plans has grown, meaning that entitlement to benefits
has increased.  There is a movement away from traditional
employer-managed and directed plans (often with defined benefits)
to more individualistic plans, with faster vesting, more elective
contributions and participant-directed investments. 
    
         Barring major institutional change, it is unlikely that
pension coverage will increase significantly over the next several
decades.  Benefit entitlement will grow because of faster vesting,
and the trend toward more participant-directed, defined-
contribution plans will continue.  Below, the Panel discusses
policy options that might be adopted to encourage additional
pension coverage. 
    
       Private and aggregate national saving in the United States
are low by international and by the nation's own historical
standards.  Many Americans reach retirement age with little
personal savings beyond equity in a home.  Little professional
agreement exists on what public policies short of mandates would
encourage a significant change in American savings habits. 

         The Panel is not optimistic about any dramatic
turnaround in U.S. saving rates, although there is some
expectation of modest increases in private savings if future
social security benefits were decreased.

       The economic status of elderly Americans has improved
significantly over the past several decades.  Median incomes of
the elderly have risen relative to those of the rest of the
population, and elderly poverty rates have fallen precipitously,
even as fewer and fewer older Americans remained at work.  Much of
the credit for this improvement goes to federal programs --
especially social security -- and to the growth of employer based
pensions.  Around these encouraging averages, however, remain
significant pockets of economic distress, with poverty much more
prevalent among elderly who are very old, living alone, female,
Black or Hispanic.  The financial costs associated with long-term
care remain a major economic risk, even for middle- and upper-
middle income Americans.
    
       Evaluation of the retirement prospects of the current
generation of middle-aged workers, the baby boomers, depends on
the point of comparison.  Their income and asset accumulation
experiences thus far suggest that current workers, especially
those at the upper end of the income distribution, will approach
retirement with more resources than their parents did, but without
enough to maintain the standards of living that they themselves
enjoyed prior to retirement.  The baby boomers are unlikely to
enjoy the dramatic increases in the value of their real estate or
the legislated real increases in social security benefits that
their parents did; in fact, social security benefits have been cut
(through legislated delays in the Normal Retirement Age and the
taxation of some benefits), and additional decreases may be
legislated in the future.  The groups of elderly now
disproportionately at risk of poverty are likely to remain so.  An
important unknown is the rate of growth of real wages over the
next several decades.  Some analysts extrapolate from the dismal
record of the past two decades, and foresee only very modest
growth in the future.  Others point to demographic changes on the
horizon (smaller entry level cohorts), and anticipate real wage
growth more in line with long-term trends

       Life expectancy is expected to continue to increase. 
Although life expectancy and health status do not always move in
lock step, recent evidence suggests that the health status of the
elderly is improving on average and will continue to do so in the
future.
    
       Because the social security system is not in long-term
actuarial balance, significant adjustments in future contribution
levels and/or benefit outlays will be necessary.  Social security
benefit cuts (either directly or through further delays in
retirement ages) are one option.  The Panel asked whether there
are changes already under way that would offset the  effects of
potential benefit cuts on the future economic well-being of the
elderly.  The general answer is no  -- the Panel sees no easy
solution on the horizon.  The Panel anticipates small increases in
the average age of retirement, which will help, and some members
foresee either higher real wage growth and/or some increase in
personal savings.  But the Panel believes that far more
substantial adjustments than are currently under way will be
necessary to compensate for any significant decreases in social
security benefits.
    
       What adjustments are most likely?  Employer pension
coverage?  Patterns of personal savings?  Labor force
participation late in life?  The Panel considered policy
initiatives to encourage each of these, and discusses them below. 
    
         The Panel's consensus, especially given further expected
increases in life expectancy, is that the last option - delayed
retirement - would be the most likely and easiest response for the
majority of older Americans who leave career jobs and the labor
market voluntarily and in good health.  For others, however, poor
health or poor labor market prospects late in life would make this
adjustment difficult or impossible.
    
    
Policy Options for Dealing with Projected Social Security
Imbalances
    
       The Panel stresses that some combination of benefit cuts
and/or revenue increases is necessary to restore the social
security system to actuarial balance, and urges that appropriate
legislation be enacted promptly.  Policy options were analyzed in
a three step process.  First, the Panel developed six criteria
against which to judge any specific proposal.  Then, a
straightforward baseline benefit cut (an across-the-board decrease
in the Primary Insurance Amount (PIA) formula for future retirees)
was compared with a straightforward baseline revenue increase (an
increase in the OASI payroll tax rate).  Finally, the Panel
compared other means of lowering benefits with the baseline PIA
decrease, and other means of raising revenues with the baseline
payroll tax increase.
    
       The Panel adopted the following six criteria:
    
       1) Adequacy of retirement income, relative to poverty
thresholds and to the household's pre-retirement income;
    
       2) Insurance against unforeseen income fluctuations (such
as those caused by disability, the death of an earner,
unanticipated early retirement or unexpected longevity);
    
       3) Avoidance of market inefficiencies; in particular, in
the labor-leisure choice (the allocation of time during and at the
end of the worklife) and in the consumption-savings choice (the
allocation of lifetime income between consumption during the
worklife, consumption during retirement and bequests);
    
       4) Equity of lifetime social security taxes and benefits,
both between and within generations;
    
       5) Encouragement of private and aggregate national saving;
and
    
       6) Strengthening the financial integrity of the nation's
retirement income systems.
    
    
Timing and Implementation of Policy Options
    
       Panel members concur on several issues regarding the
timing of legislation and the implementation of whatever social
security adjustments are chosen.
    
         The Panel urges that any significant changes in social
security benefits be announced with sufficient lead time for
workers to adjust their savings, consumption and retirement plans.
    
         The Panel suggests that promptly legislated policy
changes combined with some delay in implementation best helps
people plan for the future.  The desirability of delayed
implementation only increases the urgency of prompt legislation.
    
         The Panel urges that any payroll tax increases and
benefit reductions be phased-in over time, rather than implemented
abruptly.  Gradual implementation reduces the magnitudes of
notches (different treatment of cohorts close in age) and the
perception of unfairness that notches engender.
    
    
Benefit Decreases versus Revenue Increases
    
     The Panel acknowledges that the fiscal imbalance facing OASDI
is a very serious one, demanding immediate attention, but did not
attempt to reach a consensus on the appropriate mix of benefit
cuts and revenue increases to address the imbalance.  The Panel's
focus was to analyze the pros and cons of achieving balance with
different mixes of reduced benefits and increased revenues and to
compare alternative means of both benefit decrease and revenue
increase. 
    
         The Panel's criteria do not unequivocally favor either
raising taxes or decreasing benefits.  Rather, some criteria, such
as adequate retirement income, favored tax increases, while
others, like equity of lifetime social security taxes and benefits
between generations, favored benefit cuts.  
    
         Closing the fiscal imbalance with additional revenues
rather than benefit decreases is suggested if one emphasizes the
first two criteria, adequate retirement income and insurance
against unforeseen income fluctuations.  Social security benefit
cuts would increase the number of Americans with inadequate
retirement income, and lower the insurance protection offered to
workers, survivors and dependents.  Within a generation, the use
of tax increases rather than general benefit cuts favors those
with the longest life expectancies -- those most likely to receive
benefits for a long time -- and those with lower incomes for any
given life expectancy. 
    
         Closing the fiscal imbalance with benefit decreases
rather than tax increases is suggested if one emphasizes the
fourth and fifth criteria, equity between generations and the
encouragement of private savings.  The expected return on social
security contributions is already going to be lower for baby
boomers than for past, current and near-future recipients (and
this return will decline even further when either social security
taxes are raised or future benefits are cut).  Younger
participants would pay the higher taxes for many more years than
would older participants planning to retire soon.  Lower benefits
would also encourage some individuals to offset part of the loss
through their own savings behavior. 
    
         Social security retirement benefits induce some older
workers to leave the labor force earlier than they otherwise
would.  Benefit cuts, especially if combined with an increase in
the early age of entitlement (now age 62), are likely to reduce
this effect.  In addition, payroll taxes may discourage the labor
supply of younger workers, a labor market distortion that is more
likely to decline if benefits are cut than if payroll taxes are
increased.
    
         The Panel found little professional consensus on the
size of the impact of social security on private savings.  To the
extent that social security benefits substitute for private
savings, benefit cuts rather than tax increases would encourage
private savings.  But many workers with little or no savings
beyond their home equity are unlikely to make significant changes
in their savings behavior in response to the changes in social
security benefits being contemplated.  The Panel concludes that
reducing benefits might have a small positive effect on private
savings.
    
    
Alternative Types of Benefit Decreases

       The Panel compared the effects of the baseline benefit cut
(an across-the-board decrease in the PIA formula) with those of
several alternatives, including reducing disproportionately the
benefits of high-wage workers, delaying retirement ages, reducing
the cost-of-living adjustment and means-testing benefits. 

         If benefits are to be reduced, strong arguments suggest
increasing the ages of eligibility for early and normal social
security benefits.  Most Panel members believe that delaying these
retirement ages is a sensible response to increases in life
expectancy, and one that prevents lifetime benefits from
automatically increasing as recipients live longer.
       
         If benefits are to be reduced, most Panel members
believe that the Normal Retirement Age (NRA) for social security
benefits, currently scheduled to increase to age 67, should be
increased further, and that it should eventually be indexed to
life expectancy.  Most agree that the scheduled hiatus between the
increases to age 66 (2000-2005) and 67 (2017-2022) should be
eliminated. 

         Most Panel members believe that the Early Entitlement
Age (EEA) for social security benefits should also be raised, with
most supporting a new EEA of 64 or 65.  

         The Panel opposed means-testing social security benefits
on the basis of other retirement income or accumulated wealth.  To
avoid loss of social security benefits, some workers might reduce
their own retirement saving or persuade employers to shift
compensation from pension contributions to earnings.  Either
response would lower savings and private retirement incomes.

         If benefits are to be reduced by means other than or in
addition to increases in the NRA and EEA (for example, if the PIA
formula becomes less generous), most Panel members prefer
disproportionate cuts at the top to an across-the-board decrease.

       The Panel also discussed how to allocate the burden of
benefit reductions across different cohorts -- those already
retired, those about to retire (for example, within 5 years), and
those further away from retirement.

         If benefits are to be cut, the Panel does not favor
entirely exempting people already retired or about to retire. 
However, the Panel favors smaller benefit reductions for these
groups than for future retirees.

         Social security benefits are the only fully indexed
annuity available to (nearly) all workers.  The threat of
inflation would be a very serious concern to retirees, especially
those with long lives after retirement, if full indexation were
eliminated.  For this reason, the Panel opposes permanently
indexing social security benefits by less than the cost of living. 
At the same time, the Panel urges that the Bureau of Labor
Statistics investigate whether the specific Consumer Price Index
currently used to adjust benefits correctly measures the cost of
living.  If this measure is found to be biased, the Panel would
support corrective changes in the method of calculation.

         The Panel was split on whether a temporary delay or
reduction in the cost-of-living adjustment would be desirable, 
Some Panel members favored this if benefits were decreased for
future retirees, as a way of spreading some of the burden to
current and near-future retirees.

       The Panel is concerned about the well-being of workers in
poor health if the Early Entitlement Age (EEA) were raised from
age 62.  Under current law, individuals can apply for Disability
Insurance (DI) before age 65, and those deemed eligible receive
benefits equal to 100 percent of their PIAs.  If the EEA were
raised, some people who would have opted for early social security
benefits at or after age 62 would instead seek DI benefits.  Some
would be found ineligible, and others would not even apply. In the
case of an increase in the EEA, the Panel discussed whether DI
rules should be relaxed for people aged 62 and older and whether
the age of  entitlement for Supplemental Security Income (SSI)
should be lowered from age 65 to age 62.  Both DI and SSI might
experience large increases in applications if the age-of-
eligibility rules were changed, highlighting the fact that
altering one piece of the social security benefit structure can
have profound effects on other components of social security and
on other programs.
       
         The discussion persuaded some Panel members that persons
as young as 62 should be allowed to apply for SSI benefits or face
relaxed DI rules if the EEA is raised, to provide a safety net for
those unable to support themselves until eligible for retirement
benefits under the new EEA rules.  Some members think that DI
benefits should continue to equal 100 percent of PIA, regardless
of the age of the disabled recipient, while others feel that DI
benefits should be set equal to the early retirement amount, to
avoid increased incentives to seek DI benefits if early retirement
benefits are reduced.  Others are concerned about the effect of
such a reduction on the well-being of young and old disabled
beneficiaries.

         The Panel focused in detail on the status of surviving
spouses, because family benefits can fall substantially with the
death of a husband or wife.   The significant disparity in the
poverty rates of elderly couples and those living alone suggest
that mechanisms be considered to raise the ratio of survivors to
couples benefits.  If the early age of entitlement for widows 
benefits is increased, then the calculation of benefit reductions
for widows should be changed to preserve benefit levels or limit
benefit cuts for this population.


Alternative Types of Revenue Increases

     The Panel compared the effects of the baseline revenue
increase (a simple increase in the payroll tax rate) with those of
three alternatives: raising the earnings limit on which payroll
taxes apply, expanding the definition of taxable income to include
employee benefits, and infusing additional general revenues into
the Social Security Trust Fund.
    
         If additional revenues are to be raised, most Panel
members favor raising the payroll tax rate rather than increasing
the taxable earnings threshold.  The threshold increase, unless
applied only to the employers' portion or combined with a change
in the benefit formula, would increase future benefits for those
at the upper end of the income distribution, which a payroll tax
increase would not. 
    
         Panel members expressed little enthusiasm for including
employee benefits in the taxable wage base, citing significant
measurement problems.
    
         Panel members expressed almost no enthusiasm for
additional direct infusion of general revenues, preferring to
maintain the link between social security contributions made and
benefits received.
 
    
The OASI Trust Fund

       The OASI program is partially funded.  The OASI Trust Fund
currently exceeds one year's outlays, and is projected to grow for
about two decades, as revenues exceed benefit payments.  The Panel
discussed whether OASI should remain at least partly funded or
revert to a pay-as-you-go system as was in effect before the 1983
amendments.

         The Panel believes that OASI should continue to be at
least partly funded, meaning that the Trust Fund should maintain a
significant and stable margin over annual expenditures over the
foreseeable future.

       On the assumption that Trust Fund reserves will continue
to exist, the Panel discussed how to invest it.  The Fund is
currently invested in special issue Treasury securities, whose
interest and principal are virtually free of default risk.  The
Panel examined whether part of the Trust Fund should be invested
in private capital markets, with the expectation that investments
would earn a higher rate of return than if invested solely in
Treasury securities.

       The Panel believes that a judgment on this proposal should
depend on an assessment of its opportunities and its costs.  If
investing the Trust Fund in stocks carried no risk and provided a
higher expected return, the stock portfolio would obviously be
preferable.  However, there is a risk-return tradeoff which must
be examined and assessed in light of social security objectives. 
A related issue involves who bears the risk if equities perform
poorly - future social security recipients, future social security
contributors, or general taxpayers?

       Panel discussions raised other questions.  To what extent
would investing the Trust Fund in equities increase national
saving?  How might it change perceptions about the size of the
government deficit and increase political pressure to reduce it? 
How much would the inclusion of equities in the Trust Fund alter
private household saving decisions?  To what extent would this
proposal expose future beneficiaries to additional political risk,
because government officials might encourage the selection of
private equity investments using criteria other than pure risk and
return?

         The Panel did not reach a consensus on the proposal to
invest some of the Trust Fund reserves in equities, and concluded
that the issue deserves additional study.


Individual Accounts within Social Security

       The Panel discussed the pros and cons of converting all or
part of the Social Security Trust Fund (or the annual surplus) to
individual social security accounts, over which participants would
exercise some investment discretion.  In considering this
proposal, the Panel noted that distributing the annual surpluses
to individual accounts would require additional adjustments to
benefits and/or taxes beyond what would be required to achieve
system solvency without this distribution. 

       The Panel identified several attractive features of this
proposal.  Participants could allocate their funds as they
preferred.  Personal control might reduce uncertainty about the
future politics of social security and increase public confidence
in the system.  It would probably be easier to increase social
security taxes if the increases were directed to individual
accounts.  Moving these funds off-budget might create pressure to
reduce the deficit, and thereby increase national saving.

       Panel members also raised concerns about introducing
individual accounts within social security.  Would people manage
these retirement assets prudently, and understand the risk and
return tradeoffs inherent in private investment holdings?  Would
additional regulatory structures be necessary?  Should the
government offer a market index fund as a low-cost option?  Would
the administrative expenses of an individualized system
substantially exceed those of the current Social Security
Administration?  Should participants be permitted to access the
funds prior to retirement, or lump sum payouts at retirement? 
Would these accumulations be considered "assets" for means-tested
assistance programs?  Can they be bequeathed?
       
         Despite these questions and concerns, many Panel members
find promising the proposal to convert part of the Social Security
Trust Fund to individual accounts, if the remainder of the social
security system can still be made solvent.  The Panel recognizes
the need to coordinate the pattern of any benefit cuts with the
pattern of benefits that would be received from these individual
accounts.

         Most Panel members would prohibit access to the funds
for any reason other than retirement, and would mandate that the
benefits be wholly or in part distributed in the form of an
annuity, rather than permitting a 100 percent lump sum cashout. 
The Panel was divided on whether the annuity could be best managed
by the government or the private sector.
   

Other Retirement System Changes

       The Panel considered other issues related to the nation's
retirement system, public and private. 

         The Panel identified strong arguments for including all
new state and local employees in the social security system.

       The Panel reviewed the range of ages currently used in
retirement income policy, and concluded that much more coherent
and integrated policy is needed.  These ages include several
discussed above (the NRA, the EEA and the ages at which people can
apply for SSI and DI) as well as the age at which surviving
spouses can apply for survivor benefits and the maximum age of the
social security earnings test.  In addition, the Panel noted that
ages specified in IRS tax code for tax-qualified pension plans
should be coordinated with any new ages recommended for social
security purposes.  For example, tax law specifies that employer-
provided pension benefits under qualified plans may not exceed a
certain dollar level when the worker attains the social security
NRA, and an actuarially reduced amount at earlier ages.  These
linkages should be considered as the NRA increases.  Similarly,
tax law requires that workers receive minimum distributions from
their private retirement accounts once they attain age 70.5. This
age should probably be reevaluated in light of other proposed
reforms and increasing life expectancies.

         The Panel favors a more coherent policy on the ages the
IRS uses in the tax code and the SSA uses in social security
regulations.

       Many Americans save very little and many workers reach
retirement with little or no employer pension benefits.  To remedy
this situation, some have advocated mandatory private pensions
outside the social security system, or proposed additional tax
inducements to save or simplified pension regulations to reduce
the regulatory burden.  The Panel discussed these issues
concerning retirement saving, both inside and outside employer
pension plans. 

         The Panel overwhelmingly opposes mandated employer-
pensions at the present time.  This contrasts with the Panel's
openness to individual accounts within social security.

         The Panel favors simplification of the tax rules under
which employer pension plans operate.  Differences arose regarding
the precise ways in which the tax code and nondiscrimination
legislation should be reformed.  Some members favor raising the
contribution and benefit limits covering employer-provided
pensions, and/or coordinating the very different benefit levels
for different types of defined-contribution vehicles.  Many
members also support the idea of having streamlined regulations
that companies can follow when establishing a tax-qualified
defined-benefit or defined-contribution plan.

         Most Panel members favor increasing the incentives for
private savings, such as raising the limits on Individual
Retirement Accounts.

       A valuable attribute of social security benefits is that
they are the only life annuities that are fully inflation-
protected and available to (almost) all workers in the United
States.  The Panel urges the federal government to consider
issuing inflation-indexed bonds which firms or individuals could
buy to generate private sector retirement annuities protected from
inflation. 

         The Panel favors the government issue of Treasury bonds
indexed to price inflation, recognizing that some phasing in of
this new credit instrument would be necessary.

    
SSA Policy Modeling and Research

       The Panel urges the Social Security Administration to take
advantage of its new independent agency status to re-structure its
policy analysis and forecasting functions, making more use of the
expertise in the policy community.  Some Panel members suggest
that the Social Security Administration would benefit from more
frequent interactions with academic and practicing experts outside
the government to advise SSA on issues of assumptions and methods,
and also on broader issues facing the nation's retirement income
system.

         The Panel urges SSA to make available to the research
and policy community the actuarial and economic models it uses for
forecasting and analysis.  Computer programs, documentation and
research reports should be more widely available.

         The Panel also urges that the data used in modeling
social security system outcomes be made available to the research
and policy community, in ways that preserve confidentiality while
permitting analysts outside SSA to evaluate forecasts and simulate
alternative policy scenarios.  We note that implementation of
these recommendations would have resource implications for the SSA
research offices.
       
         Many questions that the Panel struggled with require up-
to-date, sophisticated modeling and data sets.  The Social
Security Administration's longitudinal Retirement History Survey
(1969-79) played a major role in augmenting our understanding of
retirement processes in the 1970s.  The current longitudinal
Health and Retirement Survey will do the same in the 1990s.  The
Panel urges that the Social Security Administration increase its
support of data gathering and analysis efforts as a means of
answering the policy questions raised in this report and others
that will confront the system as it continues to evolve.


Conclusion

       The social security program in the United States has been
extremely successful and popular since its inception, and has been
instrumental in improving the well-being of millions of American
retirees and their dependents and survivors.  When fiscal problems
have been forecast in the past, adjustments have been made to
address them.  The same is needed now.  The earlier the necessary
adjustments are legislated, the better, because early notification
of impending changes gives people time to adjust their savings and
retirement plans accordingly.  The fiscal problems currently
anticipated with the graying of the baby boom generation are
manageable, and the Panel strongly urges policymakers and
politicians to decide promptly on the appropriate mix of benefit
decreases and revenue increases to return social security's fiscal
house to order.

 
                                     
                                     
                                     
                                     
                                     
               1994-95 Advisory Council on Social Security
                                     
        Technical Panel on Trends and Issues in Retirement Saving
                                     
                               Final Report

Preface

     In October 1994, the 1994-95 Advisory Council on Social
Security convened a panel of technical experts to assist it in its
deliberations.   The charge of this Technical Panel on Trends and
Issues in Retirement Savings was to "assist the 1994-95 [Social
Security] Advisory Council with respect to its charge to analyze
the relative roles of the public and private sectors in the
provision of retirement income, particularly how underlying
policies of public and private programs, including relevant tax
laws, affect retirement decisions and the economic status of the
elderly."
    
     The Panel members were
    
       Olivia Mitchell,  International Foundation of Employee      
            Benefit Plans Professor of Insurance and Risk
            Management, The Wharton School, University of
            Pennsylvania (co-chair)

       Joseph Quinn, Professor of Economics, Boston College 
            (co-chair)

       G. Lawrence Atkins, Director of Health Legislative
            Affairs, Winthrop, Stimson, Putnam & Roberts

       Richard Burkhauser, Professor of Economics, The Maxwell
            School, Syracuse University

       Gary Burtless, Senior Fellow, The Brookings Institution

       Robert Clark, Professor of Economics and Business,
            North Carolina State University

       Peter Diamond, Paul A. Samuelson Professor of Economics,
            Massachusetts Institute of Technology

       John Haley, Watson Wyatt Worldwide, Inc.

       Daniel Halperin, Professor of Law, Georgetown University

       Eric Hanushek, Professor of Economics and Director,    Wallis
       Institute of Political Economy, University of          Rochester

       Diane Macunovich, Associate Professor of Economics,
            Williams College

       Dallas Salisbury, President, Employee Benefit Research
            Institute


       John Shoven, Charles R. Schwab Professor of Economics and
            Dean, School of Humanities and Sciences, Stanford
            University, and

       Stephen Zeldes, Professor of Finance, The Wharton School,
            University of Pennsylvania.
    


     The Panel met in Washington, D.C. for nine working sessions
between October 1994 and March 1995, including two presentations
before the Advisory Council, on January 27 and March 11, 1995.  
    
     The Panel divided its work into three substantive areas.  The
first was a review of several trends relevant to the current and
future economic well-being of older Americans.  These included
labor market, employer-sponsored pension and private savings
trends.  The next was the development of specific criteria with
which to judge policy options for reducing the Social Security
fiscal gap, and detailed evaluations of several means of raising
Old Age and Survivors Insurance (OASI) revenues or reducing OASI
expenditures.  Finally, the Panel discussed other policy options
that might affect future retiree well-being.
    
     Members of the Panel, individually and in groups, researched
these areas, and presented drafts of their findings and
recommendations to the entire Panel.  These were then the topics
of lively discussions at our meetings, which led to subsequent
revisions of the text.  This Final Report and its Executive
Summary were edited by the co-chairs, with considerable and
frequent input from members of the Panel.  Our intention was to
make the report as non-technical as possible, given the
constraints of the subject matter.  Interested persons may consult
the extensive list of references for further reading.
    
     The Panel thanks David Lindeman, the Executive Director of
the 1994-95 Advisory Council on Social Security, and his staff of
Dan Wartonick, Wayne Sulfridge, Arlene Berger, Nick Curabba and
Jeanne Hawkins, who handled our many requests cheerfully, quickly
and professionally.  We also thank Stephen Goss and Steven Sandell
of the Social Security Administration, who assisted us in our
work, and Joseph Foote and Marilyn Thomas, who offered numerous
editorial suggestions that substantially improved the manuscript.
    
    
    
        
                                                                              Olivia S. Mitchell
                                                                         Joseph F. Quinn
                                                                                  (co-chairs)
I.  Introduction
    
     The social security system is not in long-term actuarial
balance.  The Social Security Trustees, using their intermediate
assumptions, project that currently legislated Old Age, Survivors,
and Disability Insurance (OASDI) tax revenues will be less than
currently legislated benefits after the year 2013.  Projected
benefits begin to exceed the sum of OASDI taxes and interest
earned in 2020, resulting in a decline in the OASDI Trust Funds,
and projected depletion by 2030.  Over the 75 year long-range
planning horizon, the difference between the projected income and
cost flows is a deficit equal to an annual 2.17 percent of taxable
payrolls.  Some combination of benefit decreases and/or revenue
increases will be required to close this gap.
    
     In addition to these social security retirement and
disability program concerns much more immediate funding problems
exists with the Hospital Insurance component of Medicare, whose
Trust Fund is projected to run out in 2002.  Moreover, the
Congressional Budget Office analysis of the President's proposed
budget for fiscal year 1996 projects continued federal budget
deficits through 2000.  It is in this context that the Technical
Panel on Trends and Issues in Retirement Savings (TIRS) discusses
various social security options below.
    
     Many topics were beyond the Panel's charge and therefore are
not discussed in detail in the Final Report.  One is the central
role of the nation's overall economic health, which has a major
impact on the social security system's fiscal health.  To the
degree that social security encourages, or at least does not
discourage, work and savings, it enhances the prospects for
economic growth.  The Panel also did not examine how changes in
the medical care and health insurance markets will interact with
the Medicare and Disability Insurance programs.  These two
components of the social security system were the subjects of
reports by previous Social Security Advisory Councils, and were
beyond this Panel's purview.
    
  This Report has three goals:

  -To assess how observed trends in labor markets, employer
pensions and private savings are likely to affect the old-age
security of current and future retirees in the absence of major
institutional change; 
  -To develop evaluation criteria and apply them to specific
policy options for reducing the social security actuarial
imbalance; and
  -To discuss other policy changes that might improve retiree
well-being in the future. 

     The Panel did not seek consensus about which policy options
should be selected.  Rather, it presents a range of options and a
set of evaluation criteria that can be used to choose among them. 
The Panel discusses both incremental  and wide-ranging changes in
social security and related programs, changes designed to
alleviate both social security's fiscal deficit and the broader
problem of potentially inadequate retirement income for future
generations of retirees.  On many of the issues discussed, Panel
members were not unanimous, although on some issues they did all
agree.        

  Part II describes trends in labor markets, employer-sponsored
pensions and national savings, and discusses the implications of
these for the economic well-being of future retirees.  Part III
turns to policy options for social security, first outlining a set
of six evaluation criteria, and then applying these criteria to a
range of general and specific policy options.  Part IV discusses
the integration of various social security eligibility ages,
including the age for early retirement benefits, and then expands
the analysis to other issues that will affect retiree well-being
in the next century.  The Report ends with an Overview and
Conclusions.
II. Labor Market, Pension, and Saving Trends, and Implications for
Retiree Well-Being

         The purpose of this section is to offer informed opinion on
the future of labor markets, pensions, and savings behavior, and
on how these trends might affect the economic well-being of future
retirees.  Here the Panel assumes no major changes in the
institutional environment, even though we realize that changes in
the largest program, social security, are  necessary.  Given its
importance to older Americans, significant changes in social
security may well affect the trends discussed here.

         The Panel begins with a discussion of the labor market for
older workers, emphasizing recent retirement trends, the influence
of social security and employer pensions on labor force decisions,
and some barriers to work that older Americans face.  It then
addresses trends in employer-sponsored retirement and health
benefits, including changes in the types of coverage, and the
characteristics of and risks associated with defined-benefit and
defined-contribution pension plans. It then turns to saving
trends, and asks whether Americans save too little and why it
matters.  Throughout this discussion, the Panel  identifies
policies that might encourage changes in these trends, for
example, longer work lives, growth in pension coverage or
additional saving.  Section II ends with a discussion of the
implications of these issues for the economic well-being of older
Americans, including the past and current status of retirees and
the prospects of those in the future, especially the members of
the baby-boom generation who will begin to reach traditional
retirement age early next century.


A. The Labor Market for Older Workers

         The post-World War II period has seen dramatic changes in the
labor force behavior of older workers.  Americans are retiring
much earlier than they used to and, given increases in longevity,
are spending much longer periods in retirement.  These changes
have coincided with increases in the magnitude and generosity of
public and private retirement income programs -- social security
and employer pensions -- and there is reason to believe that these
phenomena are related.  This section briefly reviews recent
retirement trends and discusses the evidence that  the financial
incentives in retirement income programs have played an
influential role.  An important implication is that retirement
trends are not exogenous, but rather have been and can be
influenced by public policy decisions.

     Retirement trends:  A remarkable demographic development has
occurred in the U.S. during the past 40 years.  Older workers,
especially men, have been leaving the labor force at younger and
younger ages, at least until recently.  In 1950, for example,
nearly half of all American men aged 65 or over were in the labor
force; by the mid-1980s and still today, fewer than 1 in 6 are.

     The early retirement trends can be seen in detail in figure
II-1, which shows labor force participation rates for 5-year
cohorts of older American men over the past three decades.  The
long-term patterns are clear.  The percentage declines since 1964
are about 30, 40 and nearly 50 percent for men aged 60-64, 65-69
and 70 or over, respectively.  For men aged 50-54 and 55-59, below
the earliest age of eligibility for social security retirement
benefits, the declines are much less dramatic.  Figure II-1 also
suggests that the long term early retirement trend may have abated
or come to a halt.  For all the male cohorts shown, participation
rates have changed very little since the mid-1980s. 
    
      For women, as can be seen in figure II-2, the pattern is
very different, because two offsetting phenomena are at work. 
Although people are retiring earlier, women, especially married
women, are more likely to work than before.  For the oldest two
cohorts, aged 65 and above, the resultant trends are flat.  For
the younger two groups, the latter trend dominates, and
participation rates are on the rise.  For the middle group, women
age 60-64, the long term trend is flat, but there has been a
noticeable increase during the past few years.
  
     More detailed data on older men illustrate an interesting
point.  Figure II-3 shows participation rates since 1968 for men
aged 60 through 65, by individual age.  Note the increasing
importance of age 62, the earliest age of eligibility for social
security retirement benefits.  In 1968, the largest labor supply
decline occurred at age 65.  Now, the biggest decline occurs at
age 62.  A significant gap at 65 still remains, but much of the
labor force withdrawal has already occurred by then.  The story is
similar for women -- the behavioral change at age 62 is larger
than that at age 65.
    
     Part-time employment:  Not only do older Americans retire
earlier than they used to, but those who do keep working often
work part-time (fewer than 35 hours per week).  The prevalence of
part-time work rises significantly with age.  Although fewer than
7 percent of men aged 25-59 and employed in the nonagricultural
sector work part-time, 16 percent of those aged 60-64, 42 percent
of those 65-69, and well over half of the employed men aged 70 or
over do (U.S. Bureau of Labor Statistics 1994c, table 33).  There
is even a noticeable increase between those aged 60 and 61 (12
percent part-time) and those 62-64 and therefore eligible for
social security retirement benefits (21 percent part-time)
(unpublished B.L.S. statistics).
    
     For women, part-time work is more prevalent at all ages. 
About 20 percent of employed women aged 25-59 work part-time,
along with a third of those aged 60-64, 57 percent of those aged
65-69, and two thirds of the employed women aged 70 or over.  The
increase at age 62 is even more pronounced -- from 28 percent at
ages 60 and 61 to over 40 percent among those 62-64.  The vast
majority of the older Americans who work part-time say they are
doing so voluntarily. 
    
     Since 1970, the increase in the importance of part-time work
among older employed workers has been significant, from 38 to 48
percent for men and from 50 to 60 percent for women.  In this
sense, the long term early retirement trend may be continuing
still, but through reduced hours rather than labor force
withdrawal.
    
     The nature of retirement:  The stereotypical retirement
involves a move directly from full-time career employment to
complete labor force withdrawal.  Although this type of retirement
is common, research has shown that many older Americans do not
leave the labor market when they leave their career jobs.  Gradual
or partial retirement -- the use of bridge jobs -- is an important
phenomenon in America.  Among wage and salary workers in the
1970s, for example, more than a quarter did not retire completely
in one move (Quinn et al. 1990).  A few of them dropped to part-
time status on their career jobs, but most found new jobs.  Among
the self-employed, only half retired abruptly from full-time
career work.  Of those who did not, half dropped to part-time
hours on the same job, and the other half found new employment.
    
     Most of those who change jobs also change occupation and
industry, and most move down the socioeconomic ladder -- from
skilled to unskilled and from white collar to blue collar.  Some
evidence suggests that those at the ends of the economic spectrum
are the most likely to utilize bridge jobs (ibid.).  Poor people
may do so because they have to, lacking pension coverage and
personal savings, and often eligible for only modest social
security benefits, while wealthy people may do so because they
want to, enjoying interesting jobs with important non-pecuniary
benefits.  If there is a labor market trend toward a more bimodal
set of jobs, as argued below, then this phenomenon of gradual
retirement may become more important in the future.
    
     More current data suggest that partial or gradual retirement
remains widespread.  Ruhm (1995) finds that between 30 and 40
percent of those aged 58 through 63 and employed in 1989 were
working on a post-career "bridge" job, and the proportion is
higher than for workers the same age in 1969.  Quinn (1995) finds
considerable bridge employment in the initial (1992) wave of the
new Health and Retirement Survey.
     
     The importance of ages 62 and 65 in retirement decisions
suggests that many older Americans are being influenced by social
security provisions.  Labor supply transitions at these and
earlier ages, like 55 and 60, suggest a similar role for employer
pensions.   Because much of this report will focus on social
security and employer pensions, the Panel turns now to a detailed
description of how these programs might affect the labor supply of
older Americans and the nature of the evidence that they do.   

     Social security incentives:  Most Americans are affected by
social security (OASDI) throughout their lives, contributing taxes
while employed and receiving benefits when retired.  Some receive
benefits earlier, through the survivors or disability programs. 
Both contributions and benefits depend on covered earnings, so
there is a relationship between the two.  When assessing the
impact of the system on an individual or a cohort, economists tend
to view the system in a life-cycle framework, and consider the
contributions and benefits in tandem.  The extent to which
citizens do the same is unclear.

     Labor supply decisions depend on individual preferences and
budget constraints -- the options people face in the labor market. 
Social security can affect budget constraints in several
fundamental ways.  It can increase or decrease one's lifetime
wealth, depending on whether the value of the benefits received
exceeds the value of the contributions made.  (It can also change
how one can use that wealth, by providing a (nearly) universally
available indexed annuity at retirement.)  It can also alter the
pattern of compensation over time, increasing compensation at some
ages and reducing it at others.  Finally, for those who are credit
constrained, the availability of an income flow from retirement
benefits (usually at age 62) is important.  In theory, all of
these factors should influence labor supply, and considerable
empirical research suggests that they do.

     Wealth effects of social security:  The simplest economic
explanation for the post-World War II early retirement trend is
that the nation has grown wealthier over time.  Americans can
afford to start work later, work fewer hours per year and retire
earlier than they once did. 
         
     Recent cohorts of retirees have worked in a generally robust
economy and have enjoyed significant increases in the value of
their real estate.  Their wealth was further augmented by the
social security system, because the retirement benefits being paid
to these cohorts will exceed the present value of their and their
employers' contributions.  For example, government estimates show
that a man who lived to and retired at age 65 back in 1980 after a
lifetime of average earnings would expect to receive retirement
benefits worth nearly $98,000 (all these figures are in 1992
dollars), more than $70,000 greater than the $26,000 in
contributions made by him and his employer, and assumed to be
invested in government securities.  His benefits were worth 3.7
times the taxes paid.  Women retiring in 1980 after a lifetime of
average earnings gained even more because of their longer life
expectancies in retirement: their benefit/tax ratio was 4.4 and
their net gain nearly $90,000.  Lower-earners had an even higher
benefit/tax ratio, while high-wage workers earning at the social
security tax ceiling had lower ratios (3.35 and 3.96, for high-
wage men and women retiring  in 1980) but higher absolute dollar
gains (about $87,000 and $110,000, respectively).  People retiring
more recently have experienced lower benefit/tax ratios;
nevertheless, in 1992, new retirees  ratios all still exceeded
1.00 for men and women, for minimum, average and maximum earners
(ibid.);  the smallest absolute gain (for a male maximum-earner
retiring in 1992) was still nearly $25,000.

     More comprehensive computations have been made by Steuerle
and Bakija (1994), who estimate the net gain or loss from
participation in the social security retirement and survivors'
programs (the disability component is excluded), with and without
adjustment for the chance of death after age 21.  They compare
hypothetical recipients reaching age 65 in five-year intervals
beginning in the 1940s and forecast until the year 2050 (Steuerle
and Bakija, Table A.3).  They assume that taxes and benefits
currently in place are maintained even though the system cannot
remain solvent with this structure.  Twelve combinations are
considered, using three earnings histories (low, average and high)
and four family structures (single men, single women, 1-earner and
2-earner couples).  The results show that 11 out of 12 of these
hypothetical recipients retiring at age 65 in 1995 will enjoy a
positive net transfer from OASI.  All three two-earner couples are
net winners, with net transfers ranging from $57,000 to $85,000
(in 1993 dollars);  the highly paid 1-earner couple nets $140,000. 
The only net loser is the high-wage single man (with no survivors'
benefits), whose expected retirement taxes exceed his lifetime
benefits by about $10,000 (ibid, Table 5.1 or Table A.3)
     
     Net social security transfers peaked prior to the 1983 Social
Security Amendments and are now in decline.  High-wage, two-earner
couples and high-wage single women retiring at 65 in 2005 will be
paying in more than they receive in benefits given current law
(respectively, -$19,000 and -$28,000);  high-wage single men
retiring at age 65 will receive about $73,000 less than they
contributed (ibid., Table A.3).

     What effects did these large positive net transfers have on
older cohorts  behavior, and what effects will some large negative
transfers have on future workers?  These questions are difficult
to answer.  Although economic theory, common sense and casual
empiricism suggest a link between wealth and retirement, the size
of the effect has been difficult to pin down.  One observation
that suggests an important effect is the fact that the largest
declines in the labor force participation rates of older men
occurred just after significant increases in real social security
benefits (about 50 percent) were legislated between 1968 and 1972. 
Skeptics point out, however, that retirement patterns did not
change dramatically during the 1950s despite the fact that
aggregate social security wealth rose rapidly as coverage was
increased (Moffitt, 1984).  Recent research suggests that social
security might account for at most one-third of the labor force
participation decrease over time (Hausman and Wise 1985; Ippolito
1990).

      Compensation effects of social security:  In addition to
influencing lifetime wealth, social security also alters the
pattern of compensation with age, and eventually can decrease the
net compensation of older workers.  Many defined-benefit employer
pension plans do the same, and the effects can be significant. 
Social security and most defined-benefit employer pensions promise
a stream of benefits once certain conditions are met.  The value
of this stream of future income is conveniently summarized by its
present discounted value (PDV), which is the size of the asset
today that would be required to generate this stream of income in
the future.
      
     Prior to the age of eligibility, the value of the future
benefit stream increases with additional work -- social security
"wealth" is on the rise.  By working, one earns twice -- the
paycheck and the increase in the PDV of future social security
benefits.  But once the worker is eligible to receive benefits,
this can change.  Those who delay receipt of social security (for
example, by continuing to work full time) forego current benefits. 
This loss must be compared to the gains from the fact that future
social security benefits will be higher because of the additional
year of work.  Which stream is worth more (a smaller annual
benefit, beginning now, or a larger annual benefit, beginning
(say) a year from now) depends on whether the future benefit
increments are sufficient to compensate for the initial year of
benefits foregone.  If the delayed stream is worth more, then one
still gains twice by working -- the paycheck and the positive
social security wealth accrual.  But if the delayed stream is
worth less, then one loses social security wealth by continuing to
work, and one's true net compensation is the paycheck minus the
amount of the wealth loss (the decline in the PDV).
   
     If forgoing one year s benefits is just offset by the future
increments earned, then the PDV of the benefit stream is the same
regardless of the age of initial receipt.  Social security
benefits claimed at age 62 are only 80 percent of what that same
earnings record would yield at age 65 (the "normal" retirement
age).  This decrement can be viewed as a 20 percent penalty for
receipt at age 62 (about a 7 percent penalty for each year of
receipt prior to age 65), or, equivalently, as a similar reward
(slightly higher on the age-62 base of 80 percent) for each year
of delay past age 62.  For the average person, using single life
actuarial tables and ignoring survivor benefits, this
penalty/reward is approximately actuarially fair.  But individual
life expectancies differ by gender, race, ethnicity, health
status, and other personal characteristics, so a reward that is
actuarially fair on average will be inadequate or excessive for
many others, thereby either encouraging or discouraging retirement
at age 62. 
    
     At social security s normal retirement age, currently 65, the
rules change.  For each year that benefit receipt is delayed after
age 65, future benefits are increased by 4.5 percent.  This is the
delayed retirement credit (DRC).  For many, a 4.5 percent reward
is inadequate to compensate for a year of  forgone benefits.  The
DRC is currently legislated to increase by 0.5 percent every other
year until it reaches 8 percent (close to actuarially fair, on
average) early next century.  Until it does, the social security
incentives will tend to discourage work on average after age 65.

     How important are the effects of social security rules on
worker behavior?  There appear to be important effects because
labor supply behavior changes dramatically at key social security
ages.  These effects can be seen in Figure II-4, which shows
participation rates by gender and age in 1993.  For both men and
women, the largest declines occur at ages 62 and 65 -- the ages of
eligibility for early and normal social security benefits.  For
men, labor force participation rates drop by 12 points at age 62
and by 10 points at age 65;  for women, they drop by 9 and 7
points, respectively.  The declines at these ages are higher than
those at the other ages around them.

     Figure II-5 shows retirement hazard rates, defined as the
fraction of those who are in the labor force in one year who leave
during the following year.   Sharp peaks appear at ages 62 and 65,
and the pattern shifts over time.  In the early years, the age-65
peak dominated, but by 1986, more retirements had shifted to age
62, and both hazard rates were about the same.  These patterns led
Hurd (1990: 596) to conclude that "(t)he peak at age 65 is
probably due to a combination of social security, pensions, and
possible mandatory retirement, but it is difficult to think of any
explanation for the peak at 62 except for the availability of
social security benefits."  
    
     A different view of the same phenomenon appears in Figure II-
6, which plots "annual exit rates," the difference between labor
force participation rates at adjoining ages.  The 1960 data are of
special interest because men could not claim social security
retirement benefits until age 65 then, and the data show no
retirement peak at age 62.  After early retirement benefits were
permitted for men in 1961, an age 62-peak appeared and grew with
each succeeding decade, while the age 65 peak declined
monotonically.  This evidence suggests that "(i)t is difficult to
account for the double-peaked pattern in the 1970-1990 graphs, and
the increased popularity of departure from the labor force at age
62, with any explanation that does not assign a central role to
social security." (Leonesio 1991: 5)
    
     Extensive econometric studies have confirmed that the
financial incentives in social security and employer pensions do
influence the timing of individuals' retirement decisions (Hurd
1990; Quinn, et al. 1990).  Using behavioral models based on the
longitudinal Retirement History Study of the 1970s, several
analysts have simulated the impact of social security reforms,
including an increase in the delayed retirement credit at age 65
(currently under way), a delay in the age of normal retirement
(which will begin in 2003), and an across-the-board reduction in
benefits.  These studies predicted changes in retirement behavior
in the expected direction, but modest in magnitude -- on the order
of months, not years (Burtless and Moffitt 1984; Fields and
Mitchell 1984b; Gustman and Steinmeier 1985; Gohman and Clark
1989).  A shortcoming of these studies is that they all assume
that changes in social security would not affect other essential
economic variables like pensions or wages.  If these important
retirement determinants did respond to changes in the social
security environment, then the effects of social security changes
could differ from those found in this research.

         Another aspect of the system thought to influence work
decisions is the social security "earnings test."  Benefits
decline as recipients earn over an exempt amount.  In 1995, those
aged 62-64 lose $1 for each $2 earned over $8,160, and those aged
66-69 lose $1 for each $3 earned over $11,280.  Because of benefit
recalculations and the rewards for delayed receipt, however, the
benefits forgone are partially, entirely or more than entirely
returned via higher benefits later.  The earnings test disappears
entirely at age 70, and recipients can collect benefits regardless
of earnings.  Although these effects will diminish in importance
in the future, as the delayed retirement credit increases, they
appear to have had some effect on reported behavior in the past. 
Earnings of older workers tend to cluster just below the amount at
which social security benefits would be reduced, as shown in
Figure II-7 (Burtless and Moffitt 1984; Leonesio 1991).
   
         Considerable research has established that social security
rules contain significant retirement incentives (or work
disincentives), for nearly everyone after age 65, and for some,
depending on life expectancy, before that.  Behavioral equations
explaining individual retirement decisions suggest that people
behave as though they understand and respond to these incentives. 
The higher the penalty associated with continued work, the more
likely people are to leave their jobs and the labor force.

         Pension incentives:  Defined-benefit pension plans are
similar to social security in that they promise a stream of future
benefits once certain requirements are met.  Benefits are usually
based on some combination of years of service and earnings, often
averaged over the last few years of employment.  Like social
security, the value of a pension stream is conveniently described
by its PDV, the size of the asset today required to provide the
promised benefits.  (The same caveats regarding life expectancies
apply.)  Also like social security, this PDV can rise or fall with
continued work after the age of eligibility, depending on the
details of the pension plan.  If the PDV rises (that is, if future
increments from delayed receipt exceed the benefits initially
foregone), then accrual is positive; if the PDV is falling, then
pension accrual is negative, and true compensation is less than
the paycheck by the amount of the pension wealth lost.

         It is difficult to summarize the incentives provided by
defined-benefit pensions, since there are hundreds of thousands of
them, each with its own rules and regulations.  Nonetheless,
considerable research has shown that many do penalize work at
older ages, often after the age of earliest pension eligibility.   
 
     In an early attempt to quantify pension incentives, Fields
and Mitchell (1984a) examined the details of 14 specific plans and
estimated the incentives facing an average worker at each age
between 60 and 68.   They found that the PDV of pension rights
tended to rise and then fall, peaking between the ages of 60 and
65.  With a sample of men from one of the plans, they estimated
total lifetime income (from age 60 on) for hypothetical retirement
ages between 60 and 68 - the sum of the PDVs of earnings, social
security and pension benefits.  The increase in this total after
an additional year of work is the true compensation for working
that year.  Fields and Mitchell found that this sum fell each year
after age 60, and at age 68 was less than 40 percent of what it
had been 8 years earlier.  This is a substantial pay cut. 
    
    More recently, Kotlikoff and Wise (1989) studied nearly 1,200
pension plans and found that accruals for the typical plan were
negative for those who worked past the normal retirement age
defined in the plan.  In many cases, accruals were negative after
the earliest age of pension eligibility, encouraging retirement at
that point.  It was not unusual for the annual loss in pension
wealth to equal 30 percent of annual wages.
    
    Research shows that many workers respond to these pension
incentives by leaving career jobs and often the labor force as
well before these pay cuts occur (see Quinn, et al. 1990,  for a
summary of this literature).  For example, Burkhauser (1979)
showed that auto workers were more likely to leave the firm the
larger the pension wealth loss associated with continued work. 
Rhine (1984) found that employees in companies with attractive
early retirement benefits were more likely to retire earlier than
those in companies without such inducements.  Fields and Mitchell
(1984a) compared retirement incentives and individual behavior,
and found that those with the most to gain by postponing
retirement tended to retire later.  Similarly, Kotlikoff and Wise
(1989) studied the employees of one particular firm for which they
knew exact pension details, and showed that departure rates at
specific ages coincided precisely with the discontinuities in
worker compensation caused by social security and pension plan
rules.
    Departure from the firm does not necessarily imply departure
from the labor force.  Herz (1995: table 1) has documented a
significant increase over the past decade in the percentage of
early male pensioners (men aged 50-64 and receiving pension
income) who remain in the labor force, often part time.
    
     Other explanations for early retirement:  Age 62 is now the
most popular age of initial social security receipt; 72 percent of
new beneficiaries claim benefits prior to age 65, and more than
half claim them as soon as they can, at age 62 (U.S. House of
Representatives 1994:18, 22).  Clearly, something is happening at
this age.  Because social security rules are close to actuarially
fair at that age, on average, it is difficult to lay all the blame
there.  (This explanation may make sense after age 65, but most
Americans have already retired by then.)  What then can explain
the prominence of age 62 retirements? 
    
     One explanation may be a liquidity effect -- many older
Americans do not have sufficient savings to finance retirement
prior to social security receipt and are unable to borrow against
future income to do so.  If so, income flows and consumption
decisions are not separate, as simple life-cycle models assume. 
What might be happening at age 62, then, is the aggregation of
people who would prefer to retire earlier but cannot, lacking
enough wealth to tide them over until they become eligible for
retirement benefits.  If this hypothesis is correct, then the
early retirement spike should be more prominent for low wealth
individuals than for those with ample assets, a hypothesis that is
confirmed by the data.  Specifically, people with low wealth in
the Retirement History Survey had two retirement spikes (a large
one at age 62 and a smaller one at 65), while people with high
wealth had only one spike, at age 65 (Kahn 1988). 
    
     Another reason for the concentration of retirements at age 62
may be confusion about social security and pension incentives. 
Many people "may not understand how their current earnings affect
their future benefits.  It is possible, therefore, that social
security is discouraging labor supply (prior to age 65) only
because its provisions are poorly understood" (Blinder, Gordon and
Wise 1980:441).  In a similar vein, Mitchell (1988) found that
workers covered by pension plans had considerable misinformation
about their plans' provisions, especially concerning the
requirements for early retirement. 
    
     Different life expectancies or interest rates may also
explain some retirement behavior.  Whether future benefit
increments adequately compensate for benefits foregone depends on
how long one expects to claim benefits and the relevant interest
rates for discounting.  The lower the life expectancy, or the
higher the discount rate, the less likely delaying retirement will
pay.  Retirement studies use average life expectancies by age,
rather than predictions based on the individual's health status,
and common interest rates, rather than specific rates relevant to
different socioeconomic or tax-bracket group.  Those in poor
health are known to retire earlier than others, holding other
factors constant.  In addition to a direct health effect, they may
be responding to financial incentives to retire that do not appear
to researchers using average life expectancies.
 
     Finally, social security rules may influence societal
perceptions about an appropriate retirement age.  Before social
security retirement benefits were permitted at age 62 (1956 for
women; 1961 for men), 65 was generally accepted as an appropriate
retirement age in the United States.  This acceptance was
reflected in mandatory retirement rules and in the provisions of
many private pension plans, which is no longer the case. 
Mandatory retirement has been all but eliminated, and most
defined-benefit pension plans permit and encourage retirement well
before age 65.  These changes may well be related to the social
security change.  As the major source of retirement income and as
a public policy reflecting national norms about retirement, social
security may have impacts well beyond those generated by its
benefit calculation rules.

         To what extent would additional changes in social security rules
have an impact on future retirement trends?  Once already
legislated changes in the delayed retirement credit are enacted,
the benefit structure will be close to actuarially fair, on
average, from age 62 on.  Delays in the age of "normal retirement"
are then just thinly disguised across-the-board benefit reductions
-- waiting longer for a given benefit is the same as receiving a
lower benefit at any given age.   Empirical evidence suggests that
the impacts of such changes would be small, at least in the short
run, although these studies are all partial equilibrium in nature. 
A delay in the age of earliest eligibility (age 62), on the other
hand, is likely to be much more important, as it was when age 62
eligibility was introduced.  It would affect those who are
liquidity constrained, increase the financial burden on firms who
want to induce early retirement on their own, and might well
affect societal expectations and norms over time.

     Barriers to work in old age: Most of the recent retirement
literature in economics has taken a supply side perspective --
workers are assumed to choose among various options, based on
their preferences and the financial options and incentives they
face.  There is also a much smaller demand-side literature, which
asks whether older workers face particular obstacles or restricted
job opportunities as they age (Straka 1992; Hutchens 1994).
    
     Several interesting differences arise in the labor market
experiences of older workers.  Although their official
unemployment rates tend to be lower than those of the labor force
as a whole, older Americans are more likely than others to be
discouraged workers -- out of work but no longer looking and
therefore not officially counted as unemployed.  Although older
workers (in the mid-1980s) were about as likely as younger workers
to be laid off, those who were laid off were much more likely to
end up out of the labor force -- about one-third of those aged 55
to 64, three-quarters of those 65 or older, compared with fewer
than 10 percent of those 20 through 54 (Herz and Rones 1989). 
Older workers who are laid off or fired are more likely than
others to experience long spells of unemployment, and they suffer
greater earnings reductions if they do find work (Shapiro and
Sandell 1987).
    
     Older workers may face declining job prospects as they age
for several reasons.  Some may suffer age discrimination per se,
but others face sources of labor market adversity, sometimes
privately efficient, that happen to increase with age.  For
example, firms with large fixed costs of hiring or training may
prefer younger workers who offer more potential years of
employment over which to amortize the fixed costs.  
     
     In some cases, long-term, mutually beneficial implicit
contracts between employers and employees may require cessation of
employment or a significant cut in pay late in life.  Lazear
(1979) has argued that firms might lower turnover costs by paying
workers less than their contribution to the firm during the early
years of employment, and then more than their contribution near
the end.  Some compensation is delayed to encourage long tenure
with the firm.  If this pattern of compensation reduces turnover
costs and the gains are distributed between the employer and the
employees, then both parties can benefit.  But at the point when
lifetime compensation and lifetime contribution are equal, the
employment contract must be terminated or the worker's
compensation decreased to the level of his or her contribution. 
Although this agreement looks discriminatory at the end, it may
have benefited the workers over the life cycle.  This theory
offers an explanation both for mandatory retirement, now generally
outlawed, and for pension plans that penalize workers who stay on
the job "too long."
    
     An additional problem may be the full-time/part-time mix of
jobs that are available.  Many older workers would like to retire
gradually, which often means a period of part-time work before
complete labor force withdrawal.  In a recent survey of older
Americans, 21 percent of the working men (aged 55-64) and 43
percent of the working women (aged 50-59) wanted to work part time
(and the proportion increased with age), but only 6 and 19
percent, respectively, were actually doing so (Quinn and
Burkhauser 1994b: table 1).  Given these preferences, why are more
older Americans not working part time?  There are several possible
reasons.  Compensation is often poor on the jobs that are
available, and many employers are reluctant to hire older workers
at all.
    
     Workers who move from full time to part time usually do so at
considerably lower wage rates and with fewer benefits (Gustman and
Steinmeier 1985; Jondrow, Brechling and Marcus 1987; Quinn et al.
1990; Kramer 1995).  Lower pay for these older workers is not
necessarily evidence of discrimination.   Workers who switch jobs
lose specific human capital -- the expertise acquired on the old
job that is not relevant on the new one (Shapiro and Sandell
1985).  Their productivity can therefore decline when they move,
but for reasons having nothing to do with age.  Fixed hiring,
training and employee benefit costs are amortized over fewer
hours, both because of the worker's part-time status and because
older workers have fewer years of service to offer to the firm. 
If so, firms may have to offer lower wages in order to make the
arrangement profitable.  As a result, firms often offer part-time
employment in jobs that require relatively little supervision or
training, and exclude fixed-cost benefits from the compensation
package. 
    
     A final obstacle is employer attitudes toward older workers. 
Although employers speak highly of older workers' strong work
ethic, loyalty and dedication, many fear that older workers are
difficult to train and do not cope well with the technological
aspects of many jobs (American Association of Retired Persons
1989; Belous 1990). 
    
     In summary, older workers do face labor market obstacles as
they age.  Many who remain on their career jobs face declining
compensation, as defined-benefit pensions or social security
wealth decline in value with continued employment.  Switching jobs
is difficult because many employers are not eager to hire older
workers, for reasons that may or may not be accurate.  Part-time
work usually results in lower pay, fewer benefits and reduced
economic status.  In a detailed survey of these issues, Straka
(1992) concludes that without the elimination some of these demand
side obstacles, attempts to increase the working lives of older
Americans through antidiscrimination legislation or supply side
measures may be ineffective.  
      
         Conclusions:  The labor market for older Americans has undergone
significant change in the post-World War II period.  The most
dramatic change has been the trend toward earlier labor force
withdrawal for men, which lasted until the mid-1980s.  For women,
the early retirement trend has largely been offset by the
simultaneous increase in the participation rates of married women. 
Considerable evidence indicates that the growth of and financial
incentives imbedded in social security and many (defined-benefit)
employer pension plans played an important role in this movement
toward earlier retirement.

     Many older Americans do not retire in one move, directly from
full time career employment to complete labor force withdrawal. 
Rather, some retire more gradually, taking bridge jobs in the
interim.  These are often part time jobs, sometimes involving
self-employment, and usually involving a change of industry and/or
occupation.  The bridge jobs generally pay less than the career
jobs did, and are lower down the socioeconomic scale.

B. The Changing Nature of Employment
    
     Broad trends in the labor market will affect those
approaching retirement age today as well as those whose retirement
decisions are far in the future.  Job mobility can influence the
relative attractiveness of different types of pensions, and
changes in the distribution of earnings can have implications for
future elderly poverty rates.   The Panel discusses several
relevant labor market trends and asks what they might suggest for
the future.
    
     The recent and current emphasis on corporate downsizing,
combined with a recession in the early 1990s, has contributed to a
perception that the American workforce is increasingly mobile and
that jobs are less stable than they were in the past.  Recent
layoffs, including middle management positions in blue-chip firms
once noted for their loyalty to workers, have strengthened these
perceptions. 
    
     The evidence backing these perceptions is mixed.  Although
there does appear to be a secular growth in the importance of
part-time and contingent workers (those hired for a fixed term),
aggregate evidence does not indicate that average job tenure for
the American workforce is on the decline.
    
     Contingent and part-time workers: These workers lack a
permanent full-time attachment to a single job.  They may work
part time on one or more jobs, may work as temporary employees
through an employment agency, or may be subcontractors or
independent professionals. 
    
     Temporary employees, probably fewer than 3 percent of the
workforce, fill in for a short time on jobs that have been vacated
or created to meet a short-term increase in demand.  Many are
supplied by agencies that employ the individuals and contract out
their services.  Agencies that originally specialized in providing
clerical help now provide a wide range of skilled and semi-skilled
workers.  Leased employees are placed in jobs lasting a year or
more, and have become a popular way for firms to fill jobs without
providing benefits or making long-term commitments. Independent
contractors are self-employed people who work on a contract basis
for one or more employers.  Growth in these categories reflects
employers' interest in having greater labor supply flexibility
without the employee benefit obligations associated with career
workers. 
    
     Self-employment, which overlaps with the independent
contractor sector, accounts for about 9 percent of the total
workforce, a proportion which has changed little over the past
several decades (Quinn 1995).   The self-employed have to
provide their own benefits beyond social security.  The self-
employed today have the lowest rates of pension coverage (16
percent in 1992) of any broad category of American workers. 
    
     The proportion of the workforce working part time has
stabilized in recent years following significant growth during the
prior decades.  It grew from 15 to 20 percent between 1969 and
1983, and has remained about 19 percent since then (Saltford and
Snider 1994: Table 1).  
    
     Job tenure and mobility: Despite the broad press coverage
that corporate downsizing and interrupted careers have received,
aggregate government statistics do not support the notion that job
tenure is declining.  For example, over the past 15 years, the
fraction of workers remaining on the same job for more than eight
years has remained constant -- 30 percent in 1979 and 31 percent
in 1983, 1987, and 1991 (Council of Economic Advisors 1994: 126;
see also Diebold et al. 1994).  Americans are mobile, but they
have always been so. 
    
     These aggregate numbers, however, might be concealing
offsetting changes underneath.  For example, the increasing
proportion of older workers (who tend to have longer job tenure)
might be masking declining tenure statistics within age cohorts. 
Age- and gender-specific tenure statistics suggest otherwise,
however, because they appear to be fairly stable for men in all
age groups and slightly increasing for women (Yakoboski and
Silverman 1994: table 16).
    
     It is still possible that the aggregate statistics conceal
offsetting changes within certain demographic of socioeconomic
subgroups of the population.  For example, there is evidence that
black workers, low-seniority workers and workers without any
college education have experienced a decline in job stability, but
there are much more conflicting signals on the college-educated
population (Diebold et al. 1994; Farber 1995; Marcotte 1995;
Swinnerton and Wial 1995).  The most recent recession (1990-91)
appears to have affected college educated workers and older
workers more than previous recessions had (Farber 1993; Gardner
1995).  This raises the possibility that the public perception of
increasing mobility is caused by the recent experience of members
of the labor force who traditionally enjoyed the most stable
employment patterns.  If so, the aggregate data may be concealing
an erosion of the kind of job attachment that is associated with
retirement income accumulation. 
    
     The Council of Economic Advisors (1994:126) has summed this
issue up nicely.  "Whether or not job security is decreasing, two
things are clear.  First, there has always been a great deal of
instability in the U.S. labor market.  Second, there is no
question that there is a perception that job security is
decreasing.  This may be due entirely to the normal increases in
job losses during the recent recession, to media accounts of mass
layoffs at companies that used to offer unusually stable jobs, or
to increases in job stability that simply are not reflected in
aggregate statistics."  Additional research is certainly needed on
this issue.
     
     Quality of jobs:  Many analysts have argued that traditional
middle class jobs are on the decline in America, and that recent
job growth has been concentrated at the extremes --  low-wage,
low-skill personal service workers at one end and highly-skilled,
professional and technical workers at the other (e.g., Bluestone
and Harrison 1982; Harrison and Bluestone 1988; Levy and Murnane
1992; Rosenthal 1995).  The middle seems to be shrinking, with
the decline of average-wage, blue-collar, unionized workers in
manufacturing jobs.  As late as 1965, nearly 30 percent of the
full-time workforce was in manufacturing jobs while fewer than 15
percent were in services.  Twenty-five years later, the positions
were reversed: only about 17 percent of employees were in
manufacturing and 25 percent were in services in 1991 (Anzick
1993).  
      
     Jobs in the professional service sector have grown rapidly. 
These include professional and technical positions that require
high levels of skill and creative problem-solving ability, much of
which is provided through college and graduate school education,
rather than through on-the-job training.  These are engineers,
lawyers, investment bankers, consultants, writers, designers, and
a host of other occupations involved with the manipulation,
analysis and communication of abstract concepts.  This group has
experienced real pay increases over the past decade.  Many can
maintain flexible working careers, controlling their hours and
extending their productive worklife into old age if they choose.
    
     Gittleman and Howell (1995) use 17 measures of job quality
and cluster analysis to group more than 600 jobs covering 94
percent of the American work force into 6 categories, or
contours.  They find that "the distribution of employment over
the period 1973-90 shifted sharply away from the two middle-
quality contours toward the two highest-quality contours.... 
[Although] the two lowest-quality contours showed no decline in
employment share... [there was] a sharp drop in the quality of
low-skill jobs." (p. 420)  Rosenthal (1995) analyzed data on 278
occupations and found that the majority of jobs created between
1983 and 1993 were in the highest and the lowest paying quartiles.
    
     Racial diversity:  The population reaching retirement age in
the next century will be much more diverse racially than are
current cohorts of retirees.  The Census Bureau projects that
between 1990 and 2030 the older (65+) white population will grow
by about 90 percent, while the older black population will
increase by almost 250 percent, and the older Hispanic population
(of any race) by nearly 400 percent (U.S. Senate 1991:14). 
    
     As a result, the proportion of elderly who are minority will
double from 14 percent in 1990 to a quarter by 2030, and then
increase to nearly a third by the year 2050 (ibid., chart 1-8). 
As shown below, minority populations have been underrepresented
among those covered by pensions and overrepresented in the poverty
populations. 
    
     Income distribution:  One result of the growing divisions in
the U.S. workforce has been an increase in income inequality,
which is found for a variety of income concepts, household units
and measures of inequality (Karoly 1993).  There is general
agreement that the primary cause of this has been increased labor
market inequality -- a widening gap between the hourly wages and
annual earnings of those at the extremes of the pay distribution
(Levy and Murnane 1992; Danziger and Gottschalk 1993; Gottschalk
and Danziger 1995). 
         
     Over the past two decades, median real family income in the
United States has been stagnant, growing at only 0.2 percent in
the entire 20 years between 1973 and 1993, after having more than
doubled between 1947 and 1973.  (CEA 1994:115; CEA 1995:176). 
This overall stagnation, however, conceals dramatic changes. 
Between 1973 and 1993, the real incomes of the richest quintile of
American families grew by 25 percent, while those of the middle
quintile were virtually constant and those of the lowest quintile
actually fell 15 percent (CEA 1995: 178).
    
     Studies of wage growth reveal similar patterns.  Among both
men and women, the distribution of real wages has become more
unequal.  "Between 1973 and 1993 real hourly wages of full-time
male workers at the 10th percentile...declined 16 percent, while
real hourly wages at the median fell 12 percent.  Over the same
two decades, workers at the 90th percentile eked out a wage gain
of 2 percent.  The net effect is that levels of wage inequality
for men have been greater in recent years that at any time since
1940.  Women received wage increases throughout the wage
distribution, but the gains were concentrated at the top.  Women
at the 10th percentile earned 6 percent higher wages, while those
at the 90th percentile had gains of 24 percent" (CEA 1995:176). 
    
     A major cause of this widening of earnings and therefore
income inequality has been increasing returns to education and
experience during the 1980s.  The college-to-high-school wage
premium for young workers increased more than 100 percent between
1974 and 1992, and the ratio of the wages of experienced to
inexperienced workers has risen as well (CEA 1994: 117; see also
Murphy and Welch 1993).  In addition, inequality has increased in
the earnings of those within education, experience and skill
classes.  The ratio of 90th to 10th percentile wages has increased
within the distributions of high school graduates, college
graduates, young (inexperienced) and old (experienced) workers. 
Those in the upper percentiles have experienced significant growth
in real wages while those in the lower ends have seen only slight
growth or declines (Gottschalk and Danziger 1995).
          
     Many factors have been cited to explain these changes in
earnings inequality, including skill-biased technical change (for
example, the importance of computer literacy), declining
unionization, the erosion of the real minimum wage, changes in
industrial structure (the deindustrialization mentioned above),
immigration of low skilled labor, and increased international
competition in product markets.  Although debate continues about
the relative importance of these factors, a general consensus
exists that the earnings and therefore the income distribution in
the United States has changed dramatically over the past two
decades.  The earnings distribution has became more unequal both
because of a growth at the top and a decline in both absolute and
relative earnings at the bottom.  

         Implications for pension coverage and retirement income
adequacy:  With the exception of the increasing labor force
participation of married women, little in the labor market trends
discussed suggests that pension plan coverage will increase
dramatically in the near future.  Middle class unionized jobs have
declined, and they were frequently associated with pension
coverage.  In service industry jobs, coverage is much less
likely.  If the importance of the contingent economy and part-
time work increase further, long-term job attachment may diminish,
signaling a shift in the obligation to prepare for retirement from
employers to individuals (Allen and Freeman 1994).  This shift
can already be seen in the dramatic growth of defined-contribution
pension plans, discussed in Section II-C below.  Finally, the
increase in earnings and income inequality is a concern, both
because of its current implications and because it bodes ill for
retirement income adequacy in the future.

C. Trends in Employer Sponsored Pensions and Retiree Health
Benefits

     Recent changes in employer provided pensions are examined in
this section.  Although the proportion of people in the labor
force who participate in a pension has changed very little, a
shift toward defined-contribution plans as the primary form of
employer-sponsored retirement plan has occurred, along with a
dramatic increase in the number of workers participating in 401(k)
plans.  Funding and tax regulations are discussed along with
concerns about the allocation of risk between employers and
employees, which differs by pension plan type.  New federal
regulations along with changing economic conditions explain many
of these trends.
    
     The tax and regulatory environment of employer sponsored
pensions:  The Internal Revenue Code provides favorable tax
treatment for savings in the form of employer sponsored qualified
pension plans. Employer contributions to a qualified retirement
plan are deductible as a business expense.  Neither these
contributions nor the earnings of the pension fund are counted as
part of the employee's taxable income until the pension funds are
distributed.   Employees may sometimes also make after tax
contributions to qualified plans.  In that case, the contributions
are taxed when earned, not when distributed; however, fund
earnings on these contributions are not taxed until they are
distributed.  If employers establish plans under sections 401(k)
or 403(b) of the Code, employee contributions avoid current
taxation.
     
     The federal government encourages pensions through this
preferential tax treatment, the objectives of which include
increasing individual savings for retirement and encouraging
national savings.  To qualify for this preferential treatment,
pension plans must conform to a series of government regulations
concerning vesting, participation, funding limits, discrimination
in terms of coverage and benefit levels, and the purchase of
insurance from the Pension Benefit Guaranty Corporation (PBGC). 
These issues are discussed below.
    
     Tax preferences decrease tax revenues.  This loss in
government revenue is called a tax expenditure.  The pension tax
expenditure is the largest calculated by the government, and was
estimated at $57 billion in the Fiscal Year 1993 federal budget,
about half of which was due to public-sector plans (Salisbury
1993, 1994).  Some think that this tax expenditure is too large
for a program that covers only half of the labor force, and that
pension contributions or at least the earnings of pension funds
should be taxed currently.  Others respond that employer pensions
encourage saving and provide a major component of retirement
income for millions of retirees and therefore should continue to
be encouraged. 

    Pension tax expenditures are predominantly a middle to upper
income class benefit.  Those with incomes below $30,000 filed 42
percent of the taxable returns in 1992, but received less than 9
percent of the pension tax expenditures (Salisbury 1993; table 7). 
(They also had less than 8 percent of the total tax liability in
1992.)  Whether the middle or upper class benefits more depends on
the comparison made.  If these tax preferences are viewed as
simple expenditures, they appear to go disproportionately to the
upper class.  For example, the 5 percent of the (taxable)
households with (1992) income above $100,000 received 20 percent
of the pension tax expenditure; the 24 percent with incomes
between $50,000 and $100,000 received 43 percent. 
    
     But the value of the income exclusion is higher for upper
income taxpayers not only because they are more likely to
participate in employer pensions, but also because they face
higher marginal tax rates and pay more taxes.  When the tax
preferences are viewed not as expenditures but as tax reductions,
a different story emerges.  Those at the bottom end receive little
or no tax relief because they already pay little or no federal
income tax.  Those with income above $100,000 reaped 20 percent of
the pension tax expenditure, but paid more than 40 percent of the
taxes paid (ibid.).   Those earning $50,000 to $100,000 enjoyed 43
percent of the tax expenditure, but had only 33 percent of the tax
liability.  And those earning between $30,000 and $50,000 paid 18
percent of the taxes, but enjoyed 28 percent of the tax liability. 
The ratio of pension tax expenditures to total income taxes paid
is the highest for those with incomes between $30,000 and $50,000
per year.  Had these pension incentives been eliminated and
nothing else changed, those earning between $30,000 and $50,000
would have seen their federal income taxes increase by 18 percent;
those in the highest category ($200,000+) would have suffered a 3
percent tax increase.  Tax changes enacted in 1993 reduced the
maximum compensation that any employee can be deemed to receive
for tax deferral purposes from $235,840 to $150,000, which will
lower the relative tax expenditure for high earners (Liston and
LaBombarde, 1994).
     
     Changes in pension plan coverage and type:  Employer 
provided pension plans are an important source of retirement
income to millions of older Americans.  Using income data from the
Current Population Survey, Grad (1992) reports that income from
public and private pensions and annuities provided 18 percent of
the aggregate income of couples and unmarried persons aged 65 or
older in 1990 (exactly half the proportion provided by social
security), an increase of 2 percentage points since 1976.  The
importance of pension income to the elderly generally rises with
income level -- from 3 and 8 percent in the lowest two quintiles
to 16 percent in the middle quintile, and then to 22 and 20
percent in the top two quintiles.  The percentage of the elderly
receiving any pension and annuity income tells a similar story.  
It has risen over time, from 31 to 44 percent between 1976 and
1990, and it increases with income level, rising from 8 to 50
percent between the 1st and 3rd quintiles, and then to 67 percent
in the highest 2 quintiles (ibid.).
     
     Coverage and participation among current workers:  There are
several sources of data on pension coverage (Beller and Lawrence
1992).  The most commonly used is the Current Population Survey,
which often includes special supplements on pension issues. 
Another is the Form 5500 report sent annually by all private
pension plans to the Internal Revenue Service.  A third is the IRS
Annual Tax File, a sample of those who have filed tax returns in a
given year (Schieber 1995).

     Estimates of pension coverage rates depend on the data source
used, the definition of coverage adopted (usually, currently
participating in a plan) and the population being described. 
Populations of interest include all workers, all wage and salary
workers (excluding the self-employed), all private wage and salary
workers (excluding government employees), all full-time private
wage and salary workers (excluding part-time workers) and the
ERISA work force (which includes all those aged 21 or older who
have worked for an employer for at least a year, and who work at
least 1,000 hours annually). 
    
     The proportion of workers participating in a pension plan
increased rapidly between the end of World War II and the mid-
1970s, but has remained relatively stable since then (Andrews
1985; Bloom and Freeman 1992; Turner and Beller 1992; Silverman
and Yakoboski 1994).  Analysis of Current Population Surveys
between 1972 and 1993 indicates that pension participation among
full-time private wage and salary workers ranged between 48 and 50
percent during this period (U.S. Department of Labor 1994b).  
Participation among full-time male workers has declined slightly
from 54 to 51, percent while coverage of full-time females
increased from 38 to 48 percent.
    
     Yakoboski et al. (1994: Tables 1 and 2), using 1993 CPS data,
report participation rates of 44 percent for all civilian workers and 47 percent for civilian, nonagricultural, wage and
salary workers.  Among the latter, the participation rate is 43
percent for those working between 1500 and 1999 hours per year,
and 58 percent for those working 2000 or more hours.  Of the ERISA
work force (see definition above), 56 percent participated in an
employer-sponsored plan in 1993.  Coverage is higher among men (50
percent of the nonagricultural wage and salary work force) than
among women (44 percent), and higher among those covered by a
union contract (79 percent) than others (40 percent). 
Participation increases dramatically with education (Reno 1993:
Table 2.9) and with annual earnings, from only 8 percent of those
earning less than $10,000 per year, to 61 percent of those earning
between $20,000 and $25,000, and 80 percent of those earning
$50,000 or more annually.
    
     Participation in pension plans also rises with age and with
tenure as workers meet eligibility conditions and advance into
better jobs where employers are more likely to offer pensions. 
Among civilian, nonagricultural wage and salary workers with less
than one year of tenure in 1993, only 11 percent participated in
an employer pension (Yakoboski et al. 1994: Table 2).  This
increases to 35 percent for those with 1 to 4 years of tenure, 60
percent for those with 5 to 9 years, and reaches 80 percent for
those with 15 or more years of service.  In 1993, the
participation rate for wage and salary workers between the ages of
21 and 30 was only 34 percent, compared to 53 percent for those
aged 31 to 40 and over 60 percent for those aged 41 to 60 (ibid.). 
The fact that pension participation increases with age suggests
that lifetime pension participation rates will exceed the point-
in-time coverage rates shown in any cross-sectional data, since
the latter includes many younger workers currently uncovered who
are likely to enjoy pension coverage as they progress in their
careers. 
    
     Pension coverage is also related to firm size.  Only 10
percent of workers in firms with  fewer than 10 employees
participated in a pension in 1993, compared with 50 percent for
persons in firms with 100 to 249 employees, and 67 percent for
those with more than 1,000 employees (ibid.). 

     Pension coverage is much higher in the government sector. In
1988, for example, while 48 percent of the full-time private
sector employees were covered by pensions on their current jobs,
87 percent of the full-time federal government workers were
covered, as were 86 percent of the full-time state and 88 percent
of full-time local government employees (Turner and Beller 1992:
Table B2). Yakoboski et al. (1994) estimate that 79 percent of all
federal workers participated in an employer-sponsored pension plan
in 1993, as did 74 percent of all state and local workers.
    
     In 1993, 63 percent of all private full time wage and salary
workers were employed by firms offering a pension and 50 percent
were actually participating in a pension (U.S. Department of Labor
1994b).  This implies that 80 percent of these workers employed by
firms with pension plans actually participated in these plans. 
Among those offered a pension but not participating, 39 percent
did not participate because they had not yet met the service
conditions while another 31 percent chose not to contribute to the
plan.  Other reasons for lack of  participation included 6 percent
who were in jobs not covered by the employer sponsored plan and 7
percent who did not work enough hours, weeks or months per year to
qualify for participation.
    
     In a recent paper, Schieber (1995) argues that the CPS data
on which so much the pension information is based significantly
understate the receipt of employer-sponsored retirement income. 
There are several possible reasons for this.  One is that persons
receiving lump-sum pension distributions may invest these funds in
financial instruments, and then report the income in subsequent
years as interest or dividends rather than as pension income. 
Alternatively, recipients of lump-sum pension payments could use
the funds to pay off consumer debt or a mortgage, and report no
"income" in later years at all.  Another possibility is that some
people who receive pension annuity checks from a third-party
payers (such as insurance companies) do not report them as pension
income on surveys.
    
     Schieber uses the IRS Annual Tax File to estimate the receipt
of pension, annuity and IRA income for elderly (over 65) federal
income tax filers.  His research is most useful at the middle
and upper parts of the income distribution, where most households
would be expected to file federal income tax forms.  Schieber
finds that slightly over three-quarters of the filing units in the
upper two IRS quintiles reported pension income, compared to an
estimate of two-thirds from the CPS as reported by Grad (1992). 
In addition, Schieber finds that the amounts of pension income
reported in the CPS is smaller than in the IRS files, and claims
that "the CPS fails to measure as much as one-third of the total
income that is being paid out in the form of pensions and
annuities directly and also fails to attribute other income for
the elderly that comes from the employer based retirement system
to the plans responsible for that income 
(p. 29)."  Although the differences in samples and income
definitions make the sources of these discrepancies impossible to
identify, the IRS data suggest, as do the National Income and
Product Accounts data, that the CPS estimates understate the
importance of the pension income received by older Americans.
    
     Types of pension plans:  Employer-provided pension plans are
typically divided into two types, defined benefit and defined
contribution, although recent changes in the structure of some
pension plans have created hybrid plans that blur this traditional
distinction.  Defined-benefit plans promise retirement benefits
based on a predetermined formula, while defined-contribution plans
provide for a specified contribution each pay period.  These plans
differ with regard to the types of financial risks borne by the
employer and the employee, the effect of mobility on the value of
the pension, the effect of changes in pension rules on the value
of benefits, responsibility for the investment of pension funds,
their influence on worker behavior and the effect of government
regulation on the administrative cost of the plans.  One of the
most important trends in employer pensions is the movement towards
greater use of defined-contribution plans as the primary employer-
sponsored retirement plan (Clark and McDermed 1990; Turner and
Beller 1992;  U.S. Department of Labor 1994b).
    
     The proportion of primary pension plans with more than 100
participants that are defined-benefit has declined in all
industries and in all size groups (Clark and McDermed 1990;  Clark
et al. 1994).   The proportion of all plans that were defined-
benefit fell from 28 percent in 1984 to only 14 percent in 1991
(U.S. Department of Labor 1994a).  Non 401(k) defined-contribution
plans have remained at approximately 70 percent of all plans while
401(k) plans have increased from 3 percent of all plans in 1984 to
16 percent in 1991.  The increasing importance of 401(k) plans
is even more dramatic when the number of participants is examined. 
As a percentage of all pension participants, those in 401(k) plans
have increased from 12 percent in 1984 to 31 percent in 1991,
while defined-benefit participants have declined from 50 percent
of the total to 42 percent.  Participants in non 401(k) defined-
contribution plans declined from 38 to 27 percent during the same
period.  The dramatic growth in 401(k) plans is further shown in
the actual number of plans and participants.  In 1984, about
17,000 such plans covered 7.5 million workers.  By 1991,  almost
115,000 401(k) plans covered nearly 20 million participants.
    
     Participation rates in 401(k) plans are relatively high.  In
1993, more than one-third of all private sector workers were
offered the opportunity to participate in a 401(k) plan, and of
those offered a plan, two thirds choose to participate.  The
proportion of those offered who participate increases sharply with
age, rising from 34 percent of those under 25 to 57 percent of
those aged 25 to 29, 69 percent among those aged 30 to 34, and
between 70 and 79 percent of workers between the ages of 35 and
64.  This rate also rises with years of service and annual
earnings.  The median percent of pay contributed to 401(k) plans
is 6 percent for both men and women, and does not vary much by age
or annual earnings.  Despite the relatively high participation
rate for a voluntary plan, there are many workers covered by these
plans who choose not to participate -- the other third.  If 401(k)
plans are the only retirement plans offered by an employer, their
optional nature leads to substantially lower participation than if
all eligible workers are required to participate, as is the case
in many defined-benefit plans.
    
     Cost of employer pensions:  Economists generally agree that,
over the long run, workers bear most of the cost of employer
pension contributions through lower wage earnings.  The tradeoff
between wages and employee benefits has long been recognized in
collective bargaining, compensation decisions made by business
managers, and the selection of jobs by workers (Rosen 1974; Smith
1979; Brown 1980; Woodbury 1983).  Research suggests that workers
accept a portion of their total compensation in the form of future
pension benefits when the effective price of these benefits if
bought through the employer is less than what it would cost the
worker.  Greater value from employer-provided pensions is
attributable to quantity discounts, risk pooling, and the
preferential tax treatment of both pension contributions and the
investment returns.  Factors that increase the cost of employer
pensions (like costly government regulations) will tend to reduce
the demand for this benefit. 
    
     Characteristics of defined-benefit and defined-contribution
plans:  In a defined-benefit pension plan, the plan sponsor
promises to pay a retirement benefit based on a specified formula. 
The size of the benefit depends on eligibility and participation
requirements, vesting standards, the benefit formula, and often
the employee's recent earnings history (see below).  In defined-
contribution plans, employers and employees make periodic
contributions into a pension account for individual workers.
    
     In 1991, about 70 percent of those in defined-benefit plans
offered by medium and large firms had to meet some age and/or
service requirement in order to become eligible to participate in
the plan.  The most frequently used eligibility standard,
covering about a third of participants in defined-benefit plans,
was age 21 with one year of service, the maximum permitted by
federal regulations.  The current participation requirements are
reasonable guidelines that do not significantly affect the
retirement income of those who do not achieve coverage while
limiting the record keeping associated with very short term
employees.
    
     Most defined-benefit plans require 5 years of service before
workers become vested in the plan (that is, before they have legal
rights to benefits even if they leave the firm).  This period has
been reduced by government regulations, which currently require
that firms provide vesting standards at least as generous as 100
percent after 5 years or a graded vesting schedule with partial
vesting after 3 years and 100 percent after 7 years.  Because,
under current requirements, all full-time covered workers will
ultimately receive a pension even if they remain with the firm for
only 5 years, further reductions in vesting standards would have
only a limited effect on the size of retirement incomes.
    
     The normal retirement age of a plan is the age at which a
retiree can begin receiving unreduced retirement benefits or
benefits based on the prescribed benefit formula in the plan.  In
most defined-benefit plans, this occurs at a particular age (most
commonly, age 65), or when some combination of age and service
with the firm (e.g., age 62 and 10 years of service, or age plus
years of service equals 85) is achieved (Mitchell 1992: Table 9.4) 
About 8 percent of participants are in plans that allow retirement
with unreduced benefits after a specified number of years of
service (usually 30), regardless of age (ibid.). 

     In virtually all plans, workers face early retirement options
and can begin receiving benefits prior to the normal retirement
age.  The most prevalent early retirement age is 55 with 10 years
of service.  These early retirement features typically provide
strong incentives for workers to retire from their career employer
prior to the normal retirement age, often at the earliest age of
eligibility (Kotlikoff and Wise 1989).  With the continued aging
of the population, the age for full social security benefits (100
percent of the worker's Primary Insurance Amount) is scheduled to
be raised, first to age 66 and later to 67.  The age at which
maximum benefits can be received from a defined-benefit plan is
often tied to the age for full social security benefits.  If
retaining older workers in the labor force is important,
consideration might be given to establishing a minimum retirement
age for tax-qualified employer pension plans.
    
     In nearly all defined-benefit plans, the benefit depends on
years of service. In addition, for more than two-thirds of all
participants in defined-benefit plans sponsored by medium and
large firms in 1991, benefits also depended on earnings.  Among
these workers, 80 percent were in final-earnings plans (most
commonly, the average of the highest consecutive 3-5 years) and 20
percent were in plans using career average earnings formulas. 
Participants typically receive a specified percentage of average
earnings (however defined) for each year of service.  Another
quarter of all participants in defined-benefit plans (mostly
covered by collectively bargained contracts) were in plans that
pay a specified dollar amount per year of service, independent of
earnings.  Other types of formulas were used in plans that cover
about 7 percent of defined-benefit participants.
    
     In final earnings plans, for workers who stay with the firm
until retirement, the value of initial retirement benefits is
protected against changes in the cost of living as long as
earnings growth matches or exceeds the rate of inflation.  Where
retirement benefits are specified in absolute dollar amounts, more
common in collective bargaining environments, the real value of
initial benefits will decline unless it is periodically increased
to reflect changes in the price level.  These adjustments are
often a topic of negotiation. 

     Participants in defined-benefit plans who leave their career
employers prior to retirement age suffer pension losses relative
to long tenured workers.  This loss in the lifetime value of
pension benefits results from the use of final earnings in the
benefit formula and the lack of indexation of vested benefits to
future inflation or wage growth. This loss in the value of a
pension discourages job turnover among persons covered by defined-
benefit plans (Allen et al. 1993; see Gustman and Steinmeier 1993
for a contrasting view). 
    
     Often, early retirement benefits are not fully actuarially
reduced relative to normal retirement benefits.  In this case, the
present value of expected benefits is highest at the early
retirement age, and then declines.  The magnitude of the
subsequent decline depends, in part, on the response of future
wages and pension benefits to inflation.  The decline in pension
"compensation" along with the early availability of pension
benefits tends to encourage retirement.  The discontinuities in
pension compensation as workers age (for example, the increases in
pension accrual during the years just prior to eligibility for
early retirement benefits and the sharp declines in accruals (and
therefore compensation) thereafter) change the financial reward
for working each additional year and thereby influence labor
supply decisions (Burkhauser 1979; Fields and Mitchell 1984a;
Kotlikoff and Wise 1989; Quinn et al. 1990; Ruhm forthcoming).
    
     In 1991, 54 percent of all participants in private defined-
benefit plans were integrated with social security in the sense
that the employer pension provides a smaller proportional benefit
to the lower paid, whose social security benefits will represent a
greater proportion of their pre-retirement earnings (U.S. Bureau
of Labor Statistics 1993).  The most prevalent form of integration
(covering about two-thirds of those in integrated plans) was the
excess method, in which a less generous benefit formula applies to
earnings below some specified dollar amount.  The remainder were
in plans that use the offset method of integration, which reduces
pension benefits by some proportion of social security benefits
received.  The federal government has specified maximum reductions
permitted under both types of integration.

     Defined-contribution plans include savings and thrift plans,
profit sharing plans, employee stock ownership plans, money
purchase plans, and 401(k) and 403(b) plans.  The benefits at
retirement depend on past contributions and the rate of return on
accumulated pension funds.   Many plans allow for individually-
directed accounts so that participants can decide how pension
funds are invested.  Defined-contribution plans tend to have less
restrictive vesting standards: 31 percent of defined-contribution
participants are in plans that allow for immediate vesting (this
is required for 401(k) plans and common in 403(b) plans). 
Virtually all plans allow for lump sum distributions at retirement
or at termination of employment, which employees can (but often do
not) then roll over into other plans or into individual retirement
accounts. 
   
     Pension compensation in defined-contribution plans is more
explicit than it is in defined-benefit plans, because it is simply
the employer's contribution to the pension fund.  Therefore, these
employer pension costs are more visible to workers than are the
employer costs associated with defined-benefit plans. 
Traditionally, employer contributions are a percent of annual
earnings and are unaffected by age and years of service, although
basing contributions on age or service is becoming more common. 
Funds are generally deposited in individual accounts whose value
is disclosed to the worker, and they are viewed as belonging to
the worker.  A worker who leaves the firm prior to retirement
retains ownership of the entire vested value of the pension fund. 
Pension assets can either remain with the plan sponsor or be
distributed to the departing worker as a lump-sum that can then be
rolled over.  In either case, the worker continues to receive all
future returns on the pension assets.  Because of these factors,
individuals with defined-contribution plans tend not to suffer
losses in pension wealth with job changes that those with final-
pay defined-benefit plans do, and mobility rates are therefore
less likely to be affected. 
    
     Annual benefits are determined by the size of the pension
account and the age of the recipient when benefits commence.  To
hold the asset value of the expected benefit stream constant,
defined-contribution plans have implicit actuarial adjustments for
different retirement ages.  (Of course, the size of the pension
account continues to grow if the worker remains on the job and new
contributions are made.)  Thus, defined-contribution plans are
less likely than defined-benefit plans to influence retirement
decisions. 

     One problem associated with any plan with a lump-sum payout
is that the lump-sum must be turned into an annuity if it is to
provide a guaranteed (nominal) income flow over the recipient's
remaining lifetime.  Annuities indexed to the Consumer Price Index
are unavailable (other than social security), and the ability to
buy even fairly priced nominal annuities in the private market is
a concern given the problems of adverse selection and group size. 
In addition, life expectancies vary by gender, ethnicity and other
personal characteristics.  Therefore, a key factor in the
conversion of a pension accumulation to an annuity is the size and
composition of the pool of persons with whom one is grouped.
    
     Risks associated with pension plans:  Defined-benefit plans
differ from defined-contribution plans in who bears various types
of risk.  Some of the risks are specific to the individual worker,
and some are broader, applying to the firm, the industry or the
economy as a whole.  For example, workers with earnings-dependent
pensions face the risk of uncertain future wages, especially those
whose benefits will depend on their average wages during their
last few years of work.  Those whose benefits will depend on wages
averaged over their careers face the risks of inflation during the
work life, which can seriously erode the real value of early
years' earnings. 

     The risk to pensions from job turnover is borne by the worker
in a defined-benefit plan, because turnover tends to reduce
lifetime retirement benefits.  This loss in pension wealth occurs
even if the worker finds immediate employment at identical
earnings with another firm with an identical pension.  The loss
occurs because benefits are based on earnings up to or at the time
of separation, and are fixed in nominal terms at that time.  Thus,
a worker who switches employers will have lower total pension
benefits than one who remains with a single firm, even if they
have the same earnings profile.  Both the number and the timing of
moves and the rate of inflation thereafter will influence the size
of the pension loss (Clark and McDermed 1988; Gustman et al.
1994).  The problem is the lack of portability of pension credits
across employers, and it is a significant risk factor for the
participant in defined-benefit plans.
         
     Workers in smaller firms may have less opportunity for job
advancement and therefore a higher probability of voluntary job
separation.  If so, such employees are likely to prefer defined-
contribution plans.  Small firms also are much more likely to go
out of business than large firms, which would lead to the same
preference.
    
     The risk of employer bankruptcy or the lack of adequate
pension funding should also be considered by participants in a
defined-benefit plan.  Termination of a fully funded pension plan
(whether because of employer bankruptcy or other economic
conditions) has an effect similar to any other form of employment
separation; lifetime pension benefits are reduced because workers
are unable to complete their working careers at higher levels of
earnings in the same pension plan.   If workers correctly perceive
termination risks, firms with a higher probability of bankruptcy
or likelihood of canceling the pension plan will have to offer
higher cash earnings to attract comparable workers.
    
     Inadequately funded pensions that are terminated at
bankruptcy tend to exacerbate the losses of pension wealth.  To
limit such losses, the Employee Retirement Income Security Act
(ERISA) requires that defined-benefit plans purchase pension
insurance from the Pension Benefit Guaranty Corporation (PBGC). 
If the assets in the pension fund are inadequate to pay the vested
benefits, the PBGC guarantees the payment of such benefits within
specified limits.  Pension insurance reduces the risk that workers
will not receive vested benefits in the event of plan termination. 
Since the PBGC now bears the risk associated with underfunding,
the government has an increased interest in the full funding of
pension funds and in the setting of PBGC premiums so that they
provide adequate revenues to cover defaults.  Determining
appropriate premiums that allow for risk differentials has become
an important component of pension policy.  These premiums are
costs to the plan sponsors and therefore raise the cost of
providing pension coverage to workers. At the same time, they
increase the value of the pension promises to the covered workers.
    
     Another risk faced by defined-benefit participants is the
possibility that the firm might reduce the generosity of the plan
for future years of service.  This outcome would also impose a
loss in expected pension benefits on workers in final earnings
plans.
    
     Financial market risks are borne directly by the participants
in defined-contribution plans and only very indirectly by
participants in defined-benefit plans.  In the former,
differences in rates of return to pension assets directly affect
the size of an individual's pension account at retirement. 
Portfolio allocation decisions that yield lower returns lead to
lower lifetime benefits.  If workers systematically select
portfolios that promise less risk but lower returns than do plan
managers in defined-benefit plans, then participants in defined-
contribution plans will have lower average benefits in retirement
than those in equally costly defined-benefit plans.  Greater
risk aversion by participants would likely be reflected in
individually-directed pension accounts being more heavily weighted
towards bonds rather than equities.  As long-run investments,
bonds and fixed-return instruments have consistently yielded lower
returns than equities (Ibbotson Associates 1993).  The participant
must also be concerned about the effect of short-run fluctuations. 
Declines in asset values may significantly reduce the value of the
pension fund just when the worker had planned to retire.  The risk
of significant declines in asset values near the planned
retirement date can be partially offset by moving funds into less
risky assets as the expected retirement age approaches.
    
     Inflation risk confronts participants in both types of plans. 
Those in defined-contribution plans must be concerned with the
responsiveness of the rate of return of their pension funds to
changes in the rate of inflation while they are still working.  If
contribution rates are constant, real employer contributions will
not decline if earnings keep up with the rate of inflation.  After
retirement, the effect of inflation on the real retirement benefit
will depend on whether the pension funds have been converted into
a fixed nominal annuity, an annuity indexed to market returns or
whether the assets continue to be actively managed with
inflationary increases in nominal returns accruing to the retiree. 
The issuance of government bonds indexed to inflation would
provide considerable additional protection against post-retirement
inflation risk (see Section IV-F below).
    
     Participants in earnings-related defined-benefit plans must
consider the impact of inflation on the rate of growth of their
earnings.  For workers in final-average-pay plans whose earnings
rise with inflation, future real pension benefits are not much
affected by moderate inflation as long as they remain with their
employers.  But if earnings lag behind prices, then the real value
of future retirement benefits will decline.  For workers who have
left their employers and are currently in deferred vested status,
inflation systematically erodes the real value of future pension
benefits that are frozen in nominal terms at the time the worker
left the firm.  Even moderate rates of inflation cause major
reductions in the real value of deferred pension benefits earned
early in the work life.  This inflation effect substantially
increases the detrimental effect of job changes for workers
covered by defined-benefit plans.  For participants in dollar
amount plans, the inflation risk to benefits at retirement is much
more direct.  Benefits are specified in fixed dollar terms.  As a
result, if regular plan amendments do not increase the dollar
amounts, the real value of these promised benefits will steadily
erode.  These plans are nearly all collectively bargained, and the
dollar amount is typically set as part of the negotiations.
    
     After retirement, the effect of inflation on real pension
benefits depends on post-retirement benefit adjustments.  Many
public employee plans provide automatic cost-of-living adjustments
to retirees: for example, federal civil servant pension plans have
annual automatic cost-of-living adjustments tied to increases in
the consumer price index.  Adjustments under the older federal
employee plan are equal to the annual increase in consumer prices. 
Adjustments under the newer plan are less than the full increase
in the price index, however, and increases are granted only to
retirees aged 62 or older.  In 1992, just over half of the
participants in state and local plans were covered by automatic
cost-of-living adjustment provisions, although about 60 percent of
those so covered were in plans that limited the increase to 3
percent or less per year (U.S. Bureau of Labor Statistics 1994b). 
    
     In contrast, only 5 percent of participants in private
defined-benefit pension plans had automatic cost-of-living
adjustments in 1991.  However, many private plans have provided ad
hoc increases after retirement; of those raising benefits in this
manner, the increase has been on the order of 40 percent of
inflation during the 1970s but less since then (Allen et al. 1986,
1992).  Increases in pension benefits for retirees have been more
prevalent in large, collectively bargained plans and have been
larger for individuals who had greater pre-retirement tenure and
who have been retired for a long period.  Although the size of the
ad hoc post-retirement increases has varied over time, they have
generally fallen well short of the rate of inflation.  For most
workers with defined benefits, then, the real value of the
benefits declines during retirement. 
    
     Individuals differ in their risk preferences and in their
understanding of the risks they face.  As a result, some workers
will prefer defined-benefit pensions while other will prefer
defined-contribution plans.  Neither of the plans is "better" for
all workers.  However, it is important to understand what factors
have stimulated the movement away from defined-benefit and towards
defined-contribution plans and to examine how these trends will
affect the economic well-being of future retirees.
    
     Questions regarding the future role of pensions in the United
States. In evaluating the future of employer pensions, several
important questions must be addressed.  They are outlined below,
along with the Panel's current understanding of how they might
play out under alternative scenarios.
    
     1.  Why did the growth in pension coverage cease in the
1970s?  Without further government action, how will pension
coverage change in the future?
    
     Most researchers conclude that the spread of pensions prior
to 1970 was largely driven by the preferential tax treatment given
to pension contributions and earnings (Ippolito 1986; Woodbury and
Huang 1991).  Other factors included rising real income that
increased the demand for deferred consumption and the 1949 Supreme
Court decision in the Inland Steel case that made pensions a
mandatory issue for collective bargaining.  Evaluation of the
current status of pension contributions and the decision to offer
pensions reveals that employers are sensitive to the after-tax
cost of providing pension benefits (Long and Scott 1982; Woodbury
1983; Sloan and Adamache 1986; Woodbury and Huang 1991).
    
     The end of pension expansion coincided with a period of
stagnant real wages, new government regulations that raised the
cost of providing pensions, changes in tax policy and industrial
mix, declines in unionization and a changing composition of the
labor force.  Workers are likely to bear most if not all of the
cost of employer pension contributions in the form of lower wages. 
Given the progressive benefit structure of social security and
current marginal income tax rates, it is plausible to argue that
pensions now cover most workers who are willing to "buy" tax-
deferred retirement income at current prices.
     
     Significant growth in the proportion of the labor force
participating in employer sponsored pensions is unlikely to occur
given current policies.  Mandating that employers offer and
workers participate in a plan would, of course, expand coverage. 
Mandating could be done in conjunction with the existing social
security system or in response to a major modification of social
security.
    
     2.  Why has there been movement away from defined-benefit
plans and toward defined- contribution plans?
    
     This trend is in part the result of government regulations
that have increased the relative administrative cost of defined-
benefit plans.  Continuing increases in the insurance premium
that must be paid to the Pension Benefit Guaranty Corporation may
also have contributed to the declining desirability of defined-
benefit plans.  In addition, new rules have encouraged firms to
offer 401(k) plans.  The decline in the proportion of pension
participants covered by defined-benefit plans (as opposed to firms
offering plans) has also been affected by structural changes in
the economy (Clark and McDermed 1990; Gustman and Steinmeier 1992;
Clark et al. 1994; Silverman and Yakoboski 1994).  If Congress
continues to enact changes that increase the relative cost of
defined-benefit plans, the trend toward defined-contribution
coverage will continue.  These higher operating costs are also
expected to reduce the proportion of the labor force employed in
firms that offer pension plans.
    
     3.  To what extent will the growth in defined-contribution
plans adversely affect retirement incomes in the future?
    
     Some analysts have expressed concerns about the shift towards
defined-contribution plans.  First, some inexperienced
participants in self-directed defined-contribution plans may
follow investment strategies that are more conservative (with
lower yields and therefore lower eventual retirement benefits) or
more risky (with a high probability of loss of capital) than they
would pursue if they knew more.  Second, some plans require
employee matching before the firm contributes to the plan, and
some workers temporarily or permanently opt not to participate.  
Third, separated workers who have participated in defined-
contribution plans may be more likely to accept and spend lump-sum
distributions rather than roll them over into another retirement
plan.  If these concerns are valid, the shift towards greater
use of defined-contribution plans may result in fewer people
receiving pension benefits and lower benefits for some who
ultimately do receive benefits.
    
     Several offsetting issues should be considered.  First, the
administrative costs of defined-contribution plans are usually
lower than those of defined-benefit plans.  These lower costs may
result in more firms offering pension plans.  Thus, without
defined-contribution plans, firms deciding not to offer defined-
benefit plans may opt for no plan at all.  Second, more immediate
vesting and greater portability of pension funds under defined-
contribution plans should result in greater benefits in
retirement, if the funds are preserved until then.  And finally,
education by plan sponsors can help employees make wise savings
and investment decisions (Milne et al. 1995).
    
     4.  How will firms react to increased social security taxes
or reduced social security benefits?
    
     If the social security tax and benefit structure is changed,
there will be an automatic response in those pension plans that
are integrated with social security.  For example, in offset plans
which reduce pensions by some proportion of social security
benefits, pension benefits would rise by some fraction of any
social security cuts.  The exact changes in pension benefits will
depend on the details of integration and whether the current
integration rules are altered in response to the social security
changes.
    
     Other reactions of employers to future social security
changes are difficult to predict.  If social security taxes are
raised while benefits are maintained, other employee compensation
will be reduced to the extent that workers bear the cost of this
payroll tax.  Whether this occurs through lower wages or
reductions in pension compensation depends on worker preferences
for current versus future compensation.  If social security
benefits are reduced in the future, workers may demand more
employer-provided retirement income.  It is uncertain, however,
whether workers would be willing to give up sufficient current
consumption to offset fully declines in social security benefits.
    
     Another interesting and important issue is how employers will
respond to the changes in the social security environment already
legislated.  Both the delay scheduled for the age for full social
security benefits (from 65 to 67) and the increases in the delayed
retirement credit, already underway, will tend to induce later
retirement.  Will employers attempt to offset the reductions in
social security retirement incentives by increasing analogous
incentives in their own pension plans?  Or will they go along with
the social security changes by raising their normal retirement
ages as well?  How would employers who offer pensions respond to a
delay in social security's early age of entitlement (62)?  Should
the government take a position on this issue by mandating minimum
retirement ages for tax qualified pension plans?  Answers to these
questions require further consideration and debate.
     
     5. To what extent would the encouragement of portable
pensions for workers enhance their retirement income?
    
     The preceding analysis has shown how workers who regularly
change employers suffer reductions in their pension benefits
relative to workers who do not.  Many workers have only loose
attachments to any particular firm.  Workers with high turnover
rates would have improved retirement income if they could
participate in an occupational pension associated with their
profession or occupation rather than with a specific employer or
job.  In this case, job changes would not require changes in their
pension plans.
    
     One example of such a pension is TIAA-CREF, which allows many
college and universities staff to move among employers without
suffering breaks in coverage or loss in pension benefits.  The
development of similar pension plans for other occupations would
allow workers to have contributions from different employers
placed in a single pension account. 
    
     Pensions are difficult to provide for low-wage and contingent
workers because of their high mobility and multiple employers. 
Their low compensation and relatively low marginal tax rates makes
it less likely that they would prefer future benefits to current
compensation.  A national pension plan might be established that
permits irregular contributions, contributions from multiple
sources and full portability.  Employers of part-time, seasonal,
temporary, or domestic workers, as well as full-time low-wage
workers, could then contribute regularly or irregularly to
workers' pension accounts.

    Retiree health benefits: The availability of employer-
sponsored health insurance for retired workers is a growing
concern for workers, retirees, employers and policy makers.  Ever
increasing health care costs and recent changes in accounting
rules have caused many employers to re-examine their role in
providing health benefits for current and future retirees.  The
economic security of workers will be affected if fewer employers
offer retiree health insurance or more employers require
contributions from workers or retirees to fund it.  In addition,
the Medicare hospital insurance trust fund is forecast in the 1995
Trustees' Report to be exhausted by 2002 under intermediate
actuarial economic assumptions (Board of Trustees 1995). The
availability of retiree health insurance is likely to become an
increasingly important income security issue as the baby boom
generation moves into retirement.

    In 1992, 52 percent of the (mostly large) employers surveyed
by A. Foster Higgins & Co. (1993) provided health care benefits to
retirees under age 65, down from 62 percent in  1988.  The two
largest declines were in 1991 and 1992.  In addition, the
percentage of these employers offering coverage who fully financed
their retiree health insurance declined from 38 percent (1988) to
32 percent (1992).  The percentage requiring full financing by the
retirees fell slightly from 25 to 23 percent in 1992, while the
percentage of employers sharing the cost with the retirees
increased significantly, from 37 to 45 percent.

    Many employers integrate their retiree health insurance
packages with Medicare and offer supplemental insurance for
retirees aged 65 or older.  This practice is slightly less common
than offering health benefits to retirees under age 65 and has
also been falling in recent years.  A. Foster Higgins survey data
indicate that 46 percent of a sample of medium and large employers
offered and contributed to health benefits to retirees aged 65 or
older in 1992, down from 55 percent in 1988.  While these data
suggest a decline in the proportion of firms offering retiree
health insurance both before and after age 65, U.S. Bureau of
Labor Statistics (BLS) data indicate that the percentage of full-
time workers in medium and large private establishments offered
retiree health insurance has been relatively stable at about 45
percent since 1988 (ibid.).  The BLS surveys also show a decrease
in the percentage of workers with retiree health benefits
available only prior to age 65, and a small increase in the
percentage of workers with benefits available throughout the
retirement years. 

    Less is known about full-time workers employed in small
private establishments, but the BLS data indicate that about 18
percent of these workers had employer-sponsored coverage in 1992,
up slightly from 1990 (U.S. Bureau of Labor Statistics 1994a). 
With respect to full-time state and local government workers, the
proportion with fully or partially employer-funded retiree health
insurance coverage dropped from 58 to 51 percent between 1990 and
1992 (U.S. Bureau of Labor Statistics 1994b). Other workers may
have been able to purchase health insurance at group rates after
retirement because of Consolidated Omnibus Budget Reconciliation
Act (COBRA) regulations.

    The first wave of the Health and Retirement Survey (HRS)
provides a cross-sectional snapshot of retiree health coverage in
1991.  Preliminary tabulations suggest that about 60 percent of
wage and salary workers aged 51-61 had retiree health insurance
available, either through their current jobs or through their
spouses' employers.   Coverage was higher for workers in unions
and for workers participating in a pension, and it increased with
both firm size and the individual's earnings (Fronstin 1995).

    The overall estimates are slightly lower than those suggested
by retirees in the 1988 Current Population Survey.  Gustman and
Steinmeier (1994) estimate that 72 percent of men and 65 percent
of women who retired from jobs lasting 5 years or more had
potential health insurance coverage from that job, and that 60
percent and 43 percent, respectively, actually took the coverage. 

    A restructuring of retiree benefits appears to be under way. 
According to a 1988 survey by Johns Hopkins University and the
Health Insurance Association of America, over one-third of
surveyed firms offering retiree health benefits expected to
increase employee contributions (de Lissovoy, et al. 1990).  These
firms also intend to expand the use of managed care health plans
to provide retiree health benefits, to limit health plan coverage
and/or benefits, and to tighten eligibility requirements. 

    As employers reduce their sponsorship of retiree health
insurance, the economic security of retirees (especially early
retirees, leaving employment prior to 65, the age of Medicare
eligibility) will become less certain.  This may induce changes in
the labor force behavior of older workers.  Recent research
suggests that older workers contemplating retirement are sensitive
to the availability of retiree health insurance.  Karoly and
Rogowski (1994), using the Survey of Income and Program
Participation (SIPP), find that the availability of retiree health
insurance doubles the probability of retiring for men aged 55 to
62.   Gustman and Steinmeier (1994) find that it discourages
retirement prior to the age of eligibility, and encourages it
thereafter, with an overall effect that is very modest.  Madrian
(1994) finds a more substantial effect, and estimates that
individuals with employer-provided post-retirement health
insurance retire substantially earlier -- on average, about a year
earlier -- than those without.  She also estimates that the
increased availability of retiree health insurance between the
early 1960s (when about 25 percent of retirees had it) and the
1980s (when close to half did) might explain between 10 and 20
percent of the decline in the labor force participation rates of
men aged 55-64.

                                                               There is agreement that employer sponsored health insurance
increased dramatically in the 1960s and 1970s (before it was very
expensive to provide), that employers are currently cutting back
on this benefit and/or requiring retirees to pay more of the cost
and that employers are contemplating further reductions in
generosity in the future.  There is also consensus that older
workers considering retirement are sensitive to the availability
of health insurance after retirement, but considerable debate
exists about the magnitude of the behavioral effects.

                                                               Conclusions:  Employer provided retirement benefits represent
a major source of economic well-being for many retirees.  They
provide an important component of retirement income to many
workers who have remained with the same company for most of their
careers and smaller amounts to more mobile workers.  Retirees from
larger firms, unionized firms, and higher paying firms are more
likely to receive pension benefits.  Retiree health insurance is
also more likely for these retirees.
    
                                                               The proportion of workers covered by a pension plan or a
retiree insurance health plan increased until the end of the
1970s.  Pension coverage has remained relatively stable during the
past 15 years, while retiree health coverage declined during the
1980s.  These retirement benefits are critical to those who
receive them, and the elimination or curtailment of these benefits
would considerably reduce these individuals' retirement income.
    
                                                               In the absence of major institutional change, like mandating
employer coverage, current trends do not suggest any expansion of
pension or health coverage on the horizon.  Quite the opposite,
current levels of pension and health coverage and benefits are
threatened by government regulations and policies aimed at
reducing the federal deficit.  Because employer provided benefits
are important components of the economic well-being of older
persons, this forecast is a matter of concern, especially if
combined with reductions in the level of support from government
health and retirement programs.

D. Trends in National Savings

                                                               This section examines U.S. saving rates, and finds them to be
low in aggregate compared to U.S. historical trends and to
international standards.  The microeconomic, disaggregate data are
also discouraging: most Americans reach retirement age with
insufficient savings to maintain pre-retirement consumption.
Several explanations for this phenomenon are discussed, as are
policy options to encourage growth in personal saving.

                                                               Why more saving is desirable:  The current rate of saving in
the United States is low relative to those of the past.  The
decline appears especially large when saving is measured on a net
basis using national income and product account (NIPA)
tabulations.  But it is also seen to be lower with alternative
measures, including gross NIPA saving, net saving adjusted for
revaluations of assets, NIPA saving adjusted for consumer durable
purchases, and NIPA saving adjusted for government capital
investments.  The drop in saving is more ambiguous if research and
development spending and education and training investment are
included.  Part of the ambiguity arises, however, because it is
difficult to allocate educational spending between "investment"
and "consumption."

                                                               Compared with other rich countries, net saving in the United
States is low -- alarmingly low according to some.  This has
implications for the future growth of income and consumption in
the United States relative to other countries, and it may have
implications for the relative influence of the United States in
world affairs.

                                                               One reason that low saving rates are a concern is that the
social return to saving is probably higher than the private return
enjoyed by individual savers.  Private savers receive an after-tax
return, and the taxes on the returns to savings generate benefits
for other members of society.  Hence, when deciding to allocate
lifetime incomes between current and future periods, private
savers systematically undervalue the benefits of deferring
consumption because they ignore an important part of the future
benefits.

                                                               More pertinent for social security analysis is the argument
that the drop in saving has reduced the potential rate of growth
in national income, which in turn reduces the potential
consumption of future workers and retirees.  Because future
workers will be asked to finance social security and Medicare
benefits for the current generation of workers, the redistribution
of potential consumption from the future to the present raises
questions about the equity of the intergenerational transfer.  If
real wages in the future turn out to be the same or only slightly
higher than current wages, then the increased burden of paying for
future social security and Medicare benefits may actually reduce
the future net wage below the current after-tax wage.  Future
workers may thus face the prospect of lower wages (and
consumption) than current workers, in part because the current
generation of workers and retirees has saved so little.  Future
workers do not get a voice in current decisions, so it is
important that current decision makers keep the interests of this
group in mind.

                                                                 If voters and policy makers believe the U.S. retirement
income system faces serious peril, then one way to reduce the
peril is to increase the size of the economic pie available in the
next century.  The retirement consumption of current workers must
ultimately be derived from the output produced by future workers. 
The future output of the country must be divided between the
consumption of future workers, future retirees, and investment. 
If the relative living standards of the retired elderly are to be
protected, then the share of national income devoted to the
consumption needs of the future elderly must rise, because a
larger proportion of the population will be elderly in the next
century.  The most certain way to boost future income is to raise
the future productive capacity of the nation, which can be
accomplished through higher saving rates today.

                                                               Why do Americans save so little?  Why has saving declined so
much, especially since the early 1980s?  Saving the correct amount
for retirement requires a difficult set of calculations, and these
computations are only performed, and their results seen, once in a
lifetime.  Some people make errors and save too little.  Even if
they make the correct calculation, many people find it hard to
refrain from consuming today in order to ensure adequate income in
the distant and uncertain future.  In addition, many institutions
have been established that diminish the need to save for costly
emergencies or predictable events that will occur before
retirement, reducing the need for nonretirement savings.  Social
security and Medicare, by insuring income and medical consumption
in retirement, reduce the need for retirement saving.  Medical and
other kinds of insurance reduce the need to maintain large savings
balances for unexpected emergencies.  In addition, need-based
programs, like public assistance and college aid, create
disincentives to save.  If two families receive similar incomes,
need-based programs offer more generous treatment to the family
with less accumulated savings.  Finally, the improvement of credit
institutions, like mortgage lending and consumer credit, has made
it easier for many people to borrow.  Americans have taken
advantage of this and increased their borrowing.  In some cases,
the availability of credit has reduced the need to save.

                                                               In addition, an increased fraction of retirement income has
been annuitized; that is, converted into an asset that lasts until
the death of the worker or spouse.  Employer-sponsored pensions
represent one form of annuitized asset.  These pensions provide a
higher percentage of retirement income than they did before 1975. 
Many consumers may therefore leave fewer assets to their surviving
heirs in the form of unintended bequests.  Saving may be lower
than it would be if individual consumers had less access to
annuitized retirement income.

                                                                 Even if these institutional changes have improved consumer
welfare, they have reduced the need for precautionary and
retirement saving.  How much they have reduced the rate of private
saving is a matter of controversy among economists.

                                                               Policy Options for Increasing Savings:  There are really two
questions here: what policies can raise private saving, and can
they also raise aggregate national saving?  A policy that succeeds
in raising private saving may fail to increase national saving if
it simultaneously reduces public saving; that is, increases the
government deficit.  The Panel examines specific policies that
have been suggested to raise private and/or public saving.  Where
necessary, the analysis will distinguish between the effects on
saving in the short, medium and long run.

                                                               To preview the Panel's findings, the literature suggests few
simple answers to these questions.  Assessing the effects of
policy on savings patterns is difficult because policies sometimes
have effects on households' savings environments that are hard to
identify.  For example, measuring how tax changes affect household
or pension savings requires information on savings responses to
different tax regimes, holding other things constant.  The ideal
"experimental" data do not exist, of course, so empirical
researchers rely on actual historical records to try to identify
what a particular tax change accomplished while controlling for
other factors that varied over time and across households or
firms.  Journal debates rage over whether any given set of
"control variables" is sufficient to isolate the true effect of
key policy variables, and whether observed policy effects actually
reflect some other unmeasured but crucially important factor
correlated with a policy tool (for example, unobserved health
problems or saving proclivities).

                                                               A more serious source of professional disagreement is that
researchers do not yet have a fully unified theory of why people
save.  Simple economic models of saving are inadequate
representations of real world behavior, but more complex models
are difficult to work with and often do not produce clear-cut
predictions about responses to policy changes.  The life-cycle
framework is the foundation for most economic savings models.   In
its simplest variant, it posits that people save out of their
(perfectly forecast) earnings to ensure a smooth consumption
stream between retirement and their (perfectly forecast) date of
death.  Not surprisingly, some of the predictions generated by
this perfect-certainty model are contradicted by empirical studies
of U.S. savers.  For example, the simple theory suggests that
people dissave as they near death; in this light, elderly people
would be expected to draw down their assets as they age, and those
who expect to live longest should save the most.  In fact, many
elderly have virtually no retirement assets (other than their
expected social security benefits), and there is considerable
debate about whether those with retirement assets draw them down
as they age (Hurd 1990).  Another ambiguity arises regarding the
effect of the return on savings.  In the simple model, higher
anticipated earnings on retirement savings (or lower taxes on
retirement savings) increase peoples' incentives to save, because
the rewards from doing so are larger.  Nevertheless, higher
expected returns (or lower expected taxes) might encourage more
current consumption or earlier retirement, because people are
wealthier.  Hence, even the simple life-cycle model fails to offer
simple predictions about the determinants of retirement savings
patterns.

                                                               Important extensions of the life-cycle framework have sought
to make behavioral models more realistic by recognizing additional
savings motives, particularly due to uncertainty (Hubbard et al.
1994).  Some studies emphasize the wide range of approaches
households can adopt to cope with these risks, although their
increased complexity sometimes makes it more difficult to predict
how household savings patterns will respond to policy changes. 
For the wealthier population, for example, old-age savings can
take on a strategic role if parents use their prospective bequests
to exact a commitment from their adult children to provide for
them in old age (Pauly 1990).  If this proposition is widely true,
savings patterns should respond not so much to changes in tax
rates, but rather to changes in long-term care policy.  Another
model emphasizes the role of annuities in protecting against
longevity risk;  here, precautionary saving in old age is strongly
affected by insurance market characteristics (Kotlikoff and Spivak
1981).  A third class of studies suggests that poor people may not
save for old age because they rely on "safety net" government
programs such as Aid to Families with Dependent Children (AFDC),
Medicaid, Supplemental Security Income (SSI), and Food Stamps, all
of which penalize private savings (Hubbard et al. 1995). 
Consequently, an explanation for the lack of savings observed
among the old may be less attributable to myopia than to rational
responses to social insurance programs.

                                                               On the whole, second-generation savings models acknowledge
that many environmental and institutional factors shape savings
patterns, in more complicated ways than first anticipated by the
simple life-cycle studies.  As a result, numerous empirical
studies have been conducted examining what factors seem to
influence savings patterns, particularly the specific types of
assets believed to be vehicles for retirement savings.  The
consensus is that many Americans reach retirement age with
relatively little savings, and what they do have is concentrated
in the form of housing equity, anticipated pension benefits,
including 401(k) plans, and anticipated social security benefits. 
A brief review of what is known about the factors that influence
the accumulation of each of these three assets is useful, along
with other factors the influence savings.

                                                               Determinants of saving in the form of housing:  Housing is
the single most important private asset held by older Americans. 
About three-quarters of households with heads aged 45-69 own their
homes, and many have substantial housing equity (Hendershott
1994).  In 1991, for example, the median value of home equity by
elderly households aged 65-69 was $50,000 (including those with 0
equity), over half of the median net worth ($96,600, excluding
social security and pension wealth) of these households (Poterba,
Venti and Wise, 1994: table 1). 

                                                               Given these statistics, it could be argued that increasing
home equity might be a successful strategy to increase savings for
retirement.  From this vantage point, the question then becomes
what policies might be pursued to increase housing wealth.  Before
turning to that matter, it is important to note the controversy
and policy debate about whether housing can and should be
considered an asset to sustain life in retirement.  For instance,
state Medicaid policies do not usually force elderly couples to
sell their homes before becoming eligible for publicly provided
long-term care coverage.  Some analysts have also argued that
housing assets should not be "counted" as retirement wealth
because few people reduce their housing stock as they move into
retirement (Venti and Wise 1990a).  On the other hand, owning a
house and living in it does provide housing services, which is in-
kind income.  In addition, at advanced ages and especially after
widowhood, people apparently do reduce their housing stock,
implying greater housing equity might well improve retirement
well-being (Hoynes and McFadden 1994).

                                                               If housing equity is an appropriate vehicle for retirement
savings, what then are the policy tools available to encourage it? 
One issue is the responsiveness of housing investment to interest
rates.  A recent review of the literature concludes that U.S.
housing purchases are not very sensitive to changes in interest
rates, and that the insensitivity is growing more pronounced with
the advent of adjustable rate mortgages (Hendershott 1994).  This
finding implies that the ability to influence savings in housing
by altering interest rates is limited, at least in the short run.

                                                               Although governments have adopted numerous other policy
instruments to influence housing patterns, remarkably little
information exists on their effectiveness.  Issues that have been
studied include the effect of tax preferences and the special
capital gains exemption offered on one home sale after age 55. 
Because inflation has subsided and because fewer people itemize
deductions now than previously, the tax subsidy effect has
apparently declined.  Skinner (1994) and Poterba (1994b) both
conclude that the tax subsidy has had only modest effects on the
nation's housing stock, increasing it only by 10 percent above
what it would have been otherwise.  Whether changes in bequest
taxes and capital gains exemptions have affected real estate
holdings has received less attention.

                                                               Several other government policies have been designed to
influence housing investments including mortgage subsidies,
subsidies to those facilitating secondary mortgage markets, and
benefits offered to savings and loan institutions.  In most cases,
little evidence exists about how effective these policies are in
influencing net new housing stock (Poterba 1994b).  These
subsidies are also less common now than a decade ago.  Few of
these policies have been evaluated in terms of their net effect on
household saving, so it is still very much in question whether
these subsidies increased private saving or merely reallocated
people's saving toward housing.  And even if they did increase
private savings, the net effect on national saving depends also on
eventual impact of the reduced tax revenues (the tax expenditure)
on other government taxing and spending decisions, and therefore
on eventual government saving.  This is an even more difficult
question.
 
                                                               Even if policy tools can be identified that influence net
housing saving, the question remains as to whether increasing
housing equity is necessarily good public policy.  Housing prices
are quite volatile in the United States, as demonstrated by the
run-up in housing prices during the 1970s followed by their poor
performance in the 1980s.  Because many home owners already have
the majority of their total assets in housing, it may not be
sensible public policy to encourage even more such investment,
particularly were it to come at the expense of other more
diversified assets.

                                                               This problem of volatile housing values may become even worse
in the future, according to several recent forecasts (Mankiw and
Weil 1989; Schieber and Shoven 1994).   These models relate time-
series data on the size of demographic cohorts to housing prices,
and predict that when the baby boomer generation retires and sells
its homes, housing values will fall precipitously.  Not everyone
agrees with these gloomy forecasts, because they depend on the
particular time periods and empirical models used.  Indeed
Hendershott (1994) claims that these predictions of severe asset
value decline are eliminated by adding controls for income and
real post-tax interest rates to the earlier models, and also by
varying the endpoints of the data series.  Nevertheless, because
the prognosis for future housing values is uncertain at best,
dramatic changes in national housing policy are probably not
warranted on the grounds of increasing economic security in
retirement.

                                                               Determinants of saving in the form of pensions:  Employer
sponsored and individually held pensions are the second most
important privately held asset available for retirement purposes. 
Nonetheless, the median level of retirement savings in pensions is
quite low --  $16,000 (including those with 0 pension wealth) for
households with heads aged 65-69 in 1991, about one-third as large
as median housing equity.  Pension asset holding is very skewed,
however.  Average (mean) pension wealth was $62,300 in the same
year, about the same as mean housing equity ($65,000) (Poterba,
Venti and Wise, 1994; table 1). 

                                                               One question of keen interest to policy makers is whether it
is possible to increase pension saving without having adverse
effects on other components of compensation, employment, and the
federal government budget deficit.  The answer appears to be no.
 
                                                               Before turning to that discussion, however, it is important
to mention that specialists disagree about whether pension saving
should be increased via public tax incentive.  One reason is an
equity one, because the tax expenditures go disproportionately to
higher-paid workers, who are also more likely to receive
government guarantees on future benefit promises via the PBGC.  
Another reason is that this strategy increases national savings by
less than it does private savings, because of the increased tax
expenditures.  In addition, some argue that pension plan investors
tend to earn below-market rates of return on assets (Lakonishok et
al. 1992).  Nevertheless, there is a common perception that less
saving would occur were it not for the seemingly automatic nature
of employer (and often employee) pension contributions (Thaler
1994).

                                                               On the assumption that more pension savings is desirable, the
question arises as to what policy actions would increase pension
savings.   Perhaps the most important policy instrument is the tax
code -- pension contributions and investment earnings have
received tax protection in the United States for at least 40
years, which enhances the appeal of pension saving relative to
other forms of saving.  The conditions under which this tax
protection is offered require a pension plan to meet certain
coverage and benefit requirements (known as nondiscrimination
rules), as well as reporting requirements to participants and the
government.

                                                               How effective is the tax incentive "carrot" in inducing more
pension saving?  Has the "stick" of nondiscrimination requirements
been effective in spreading pension participation to more (lower
paid) workers?  These questions have received much attention in
recent years.  One approach is to investigate benefit plan
responses to changes in marginal income tax rates.  A study that
examined the effects of tax cuts under the 1986 Tax Reform Act
concluded that employer pension contributions were quite sensitive
to tax policy.  The results imply that eliminating the tax
preference for benefits would cut employer contributions to
pensions by one-half, with low-wage workers feeling the greatest
reduction in pension savings (Woodbury and Huang 1991:139).  More
recent studies tend to confirm that pension savings are sensitive
to tax policy, although the estimates are imprecise because of the
difficulty of obtaining individuals' marginal income tax rates
along with pension savings information. 

                                                               Data problems also plague assessments of the effect of
pension regulations, such as nondiscrimination rules, on the
willingness of companies to offer pensions as well as the amount
of the contributions.  One report concluded that about half of the
nationwide decline in defined-benefit pension coverage was
attributable to the cost and complexity of these nondiscrimination
regulations (Clark and McDermed 1990), while other analysts find a
smaller regulatory burden (Gustman and Steinmeier 1992; Chang
1993).  Some studies suggest that one important deterrent to
pension growth has been rising levels of premiums which defined-
benefit plans must pay to the Pension Benefit Guaranty Corporation
(Ippolito 1989). 

                                                               Without focusing on particular point estimates, it seems
reasonable to conclude that requiring pension plans to pay
insurance premiums and cover lower-paid workers, and limiting the
tax-favored pension savings of higher-paid workers, had a
depressing effect on the number of pension plans in the past two
decades.  On the other hand, because of the nondiscrimination
rules, lower-paid workers are now more likely to be covered where
plans exist.  Whether these regulatory changes resulted in a net
decrease in overall retirement savings or simply caused
substitution of nonpension for pension savings is not known.  
   
                                                                Because many of the studies of traditional pension plans
have been inconclusive, researchers have turned to two other types
of retirement savings -- Individual Retirement Accounts (IRAs) and
401(k) plans -- to examine the responsiveness of savings to
incentives.  Legislation permitting tax-deferred IRAs for workers
without employer pensions was first passed in 1974.  Eligibility
was extended to all workers in 1981 and then restricted in 1986. 
For a 5-year period, 1982 through 1986, most workers were eligible
to deposit up to $2,000 of pre-tax income per year into a tax-
protected account, with additional amounts available for spouses. 
When contribution and eligibility limits made IRA plans less
popular in 1987, 401(k) plans began to grow.  More than a quarter
of the entire U.S. population aged 35-54 participates in a 401(k)
plan today, with a median account balance of about $6,000 (Engen,
Gale and Scholz 1994).

                                                               Are these new types of plans really retirement savings
vehicles?  If so, are they merely substitutes for saving that
would have occurred in other forms, or do they generate net new
savings?  Research studies are not yet conclusive. 
Demonstrating that people with 401(k) plans save more than similar
people without them requires a good "control group," which is
difficult to obtain.  One approach is to observe that families
with access to a 401(k) plan have more savings accumulated than do
apparently similar families, with comparable incomes, but without
access to a 401(k) (Poterba, Venti and Wise, forthcoming).  Their
findings suggest that encouraging 401(k) plans would increase
private saving.  A contrary view is that people with strong
preferences for saving choose to work for firms where 401(k) plans
are offered, while people who cannot or do not wish to save work
in companies without such options (Engen et al. 1994).  The latter
perspective implies that making 401(k)-type plans more appealing
(for example, by raising savings limits) would have little impact
on current non-savers (Ippolito 1993).

                                                               The current consensus is that 401(k) and IRA plans have had
some positive effect on boosting retirement wealth (but how much
remains a topic of active debate), and that they may increase
savings more in the long run than in the short run, as people
exhaust their opportunities for asset shuffling.  The conservative
assessment is that the advent of 401(k) plans mainly promoted a
reallocation of funds from IRAs and defined-benefit plans, with at
most a 1 percentage point net increase in national saving (Engen
et al. 1994).  This view is based in part on the high rate of
withdrawals prior to retirement, and the fact that many who
withdraw funds devote the money to current consumption (Atkins
1986; Andrews 1992).  The prohibition of these withdrawals would
probably increase eventual retirement savings for those who chose
to participate in the plans, but fewer people would contribute
because of the reduced accessibility of the money.     

                                                               Social security and saving for retirement:  It is widely
agreed that social security policy is the single most potent
federal method of influencing retiree well-being.  In 1991, older
households (aged 65-69) anticipated a stream of social security
benefits totalling almost $100,000 (the median value), which is
higher than the median value of the rest of their (non-social
security and non-pension) net worth (Poterba, Venti and Wise
1994).  This benefit stream is fully indexed, providing retirees
with inflation protection for their most important retirement
income source.    
 
                                                               To what extent do social security benefits offset other
retirement saving?  Would changes in social security, such as
benefit cuts or delays in the ages of eligibility, induce offsets
in private saving?  These questions have been the focus of intense
research for two decades; however, as Poterba (1994a:13)
concludes, "the existing empirical literature in this area is weak
and there is relatively limited prospect for improvement."  Time-
series aggregate data do suggest a negative correlation between
social security promises and private savings, but many alternative
explanations for this finding are available.  A positive
correlation between social security benefits and savings appears
in household cross-sectional studies, but this estimate of the
effect of social security on savings is not credible; rather, both
social security benefits and accumulated savings are positive
functions of lifetime earnings.  This empirical finding does not
predict how individuals would behave, all other things equal, if
social security benefits were cut.
 
                                                               Evidence on social security's effects on private pensions is
more conclusive, and not particularly encouraging.  Early research
by Munnell (1974) concluded that higher social security does
reduce private pension saving, a finding strongly corroborated in
a recent study by Gullason et al. (1993), who concluded that
pension wealth is affected, but not other types of savings. 
However, the results suggest that the effects are small.

                                                               Some have argued that social security might not have an
observable effect on savings if people reacted to more generous
retirement benefits by retiring earlier, instead of by changing
their saving behavior.  Although this explanation is plausible,
data suggest that retirement patterns are not very responsive to
changes in benefits of the sort enacted over the past two decades
(Fields and Mitchell 1984b; Quinn et al. 1990; Kreuger and Pischke
1992; Gustman, Anderson and Steinmeier 1995).   Hence, moderate
social security benefit changes within the existing eligibility
structure would probably have only modest effects on labor supply
decisions at the end of the worklife. 

                                                               In contrast, it is far from clear how aggregate savings and
retirement patterns would be affected by radical changes in social
security; for instance, if the age of eligibility for early social
security benefits were delayed, or all or part of the social
security system were replaced with a national defined-contribution
system (Diamond 1993; Myers 1993).  The effects of the latter
would obviously depend on program characteristics (including
whether the system were mandated, its size and administrative
costs), whether the contributions were invested in government
bonds or private holdings on an internationally diversified
capital market, and how much the government protected those with
low pensions with an old-age poverty program.    

                                                               Other factors influencing savings:  Several other factors
that affect saving policy should be mentioned.  One is how well-
informed consumers are about financial issues and the need to save
for retirement.  Recent surveys give U.S. consumers low scores. 
Many consumers apparently do not understand compound interest,
making it difficult to estimate how much to save for retirement
(Bernheim 1994;  Kotlikoff and Auerbach 1994).  Other studies have
noted that older workers have error-laden estimates of their
likely social security benefits (Bernheim 1993, 1994), and many do
not understand their employer-provided pension plans (Mitchell
1988).  Accurate retirement savings calculations also require an
estimate of life expectancy.  Hamermesh (1985) and Hurd and
McGarry (1993) find that people's expectations about life
expectancy and its determinants are roughly accurate, although
Hamermesh finds that the distributions implied by survey responses
have a wider variance than the true distributions.  One way to
boost savings may be to educate people about the magnitude of
their total consumption needs in retirement. 

                                                               Conclusions: The Panel finds that most Americans hold three
major forms of retirement wealth: houses, private pensions, and
social security.  People's holdings of net home equity are not
strongly influenced by policy tools, and even if they were, there
would not be a strong impact on aggregate national saving.  The
Panel also concludes that it is probably not possible to enhance
net aggregate saving significantly by easing pension regulations
or sweetening tax inducements.  It appears that, because pensions
and social security are substitutes to some extent, reducing
social security benefits would probably encourage pension saving
modestly.  

E.  Implications for Future Retiree Well-being

                                                               This section discusses forecasts about future retiree well-
being.  The Panel asks how income and assets other than social
security might be expected to change over the next several
decades, and what recent trends in the health status of older
Americans imply.  The Panel concludes that future retirees will
probably have higher real income in retirement than current
retirees do, but probably not enough to maintain their pre-
retirement consumption standards unless savings or retirement
behavior changes significantly. 

                                                               Six areas are discussed: (1) the economic status of today's
elderly, and how that has changed over the past 35 years; (2) the
retirement prospects of today's baby boomers;  (3) the socio-
economic diversity of the elderly and the identification of groups
at risk in retirement; (4) alternative views about the economy
over the next several decades; (5) prospects for asset prices when
the baby boomers retire, and (6) the health of older Americans.

                                                               The literature reaches some consensus on the first three
topics and the last.  Current retirees are, on average,
considerably better off financially than prior cohorts of
retirees, but this improvement "on average" conceals significant
pockets of economic distress.   Future retirees, again on average,
are likely to exceed their parents' current standard of living in
retirement, as they have done at all points in the life cycle to
date, but the pockets of economic distress are unlikely to
disappear.  Single Americans (especially single mothers), those
with low levels of education or non-stable employment patterns,
minorities, and non-homeowners are most at risk in retirement. The
major area of disagreement here concerns the appropriate standard
to use in evaluating the baby boomers' retirement prospects.  If
they are likely to exceed their parents' real incomes in
retirement, yet be unable to maintain their own pre-retirement
standard of living, is this to be judged a success to be lauded, a
problem to be addressed, or both?  Finally, the life expectancy of
older Americans continues to rise, and their health, which does
not have to move hand-in-hand with life expectancy, appears to be
improving in the aggregate, although variation occurs across
income classes and racial groups.

                                                               There is considerably less consensus on the other two topics
-- the future course of the economy over the next several decades
(including the impact of demographic shifts on economic growth)
and the impact of the retirement of the baby boomers on future
asset prices.

                                                               The economic status of current retirees:  There is general
agreement by researchers on several key points about current and
recent cohorts of retirees.

                                                               First, poverty rates among those aged 65 or older have fallen
dramatically over the past 35 years, from 35 percent in 1959 to a
low of 11.4 percent in 1989 and back to 13 percent by 1992 (U.S.
Bureau of the Census 1993a: table 3).  As seen in figure II-8,
most of the decline occurred by the mid 1970s.  The elderly
poverty rate had dropped to under 15 percent by 1974, just after
legislated increases in real social security benefits on the order
of 50 percent.  It should be noted, however, that, while the
poverty thresholds are increased annually for the cost of living,
they are not adjusted for increases in the general standard of
living: these official statistics measure absolute, not relative,
poverty.

                                                               Second, the official statistics ignore in-kind benefits,
which are substantial for older Americans.  Were they included and
the poverty thresholds left unchanged, official poverty for the
elderly and for others would be lower.  The Census Bureau
estimates that the 1992 poverty rate for those aged 65 or older
would have been 10.4 percent (rather than the official rate of
12.9 percent) were taxes subtracted and the value of Medicare,
Medicaid and other means-tested government noncash transfers
included.  When an imputed return on home equity is included,
that elderly poverty rate drops to 6.2 percent (U.S. Bureau of the
Census 1993b: table 2).

                                                               Third, social security and other federal programs are
credited with much of the improvement in the economic well-being
of the aged, which took place even as the labor force
participation rates of older men were dropping significantly. 
Both coverage and the generosity of social security benefits
increased dramatically over the past 35 years.  Estimates of the
incidence of poverty in the absence of these transfers (assuming,
quite unrealistically, no changes in labor supply or savings
behavior) suggest the tremendous importance of social security
income among older Americans.  The Census Bureau estimates that
the elderly poverty rate would have been 50 percent in 1992 were
government transfers subtracted from money income (U.S. Bureau of
the Census 1993b: table 2). 

                                                               Fourth, the elderly are a very heterogeneous group.  While
the overall poverty rate for those aged 65 or older was about 13
percent in 1992, it was under 11 percent for those aged 65-74, 15
percent for those 75-84, and 20 percent for those aged 85 or
older, the fastest growing age group in America (U.S. House of
Representatives 1994: table A-7).  Nine percent of elderly men
were poor, compared with almost 16 percent of elderly women.  Only
6 percent of elderly in married couple families were poor,
compared to 25 percent of those living alone (more than 80 percent
of whom are women).  Hispanic elderly are twice as likely to be
poor as white elderly (22 versus 11 percent), and black elderly
are three times as likely (33 vs. 11 percent).  Poverty is the
norm in some subgroups; for example, 51 percent of Hispanic
elderly women living alone were poor in 1992, as were 57 percent
of analogous black women (U.S. Bureau of the Census 1993a: table
3).   

                                                               Fifth, although actual poverty rates for the elderly are
lower than for the entire population, the proportion of the
elderly living near poverty is disproportionately high.  In 1992,
while 13 percent of the elderly were poor, 20 percent had incomes
less than 1.25 times the poverty threshold, and nearly a quarter
were below 1.5 times the threshold (U.S. Bureau of the Census
1993a: table 17).

                                                               In summary, the economic status of the elderly has improved
significantly over time, to a great extent because of large
Federal cash and in-kind transfers targeted at this group. 
Nonetheless, serious pockets of poverty continue to exist,
primarily among elderly widows and minorities, and a
disproportionate number of the elderly who are not poor are not
far from the poverty threshold. 

                                                               Retirement prospects of the baby boomers: The messages
presented by the U.S. House of Representatives (1987), Easterlin
et al. (1993), Sabelhaus and Manchester (1993), Manchester (1994)
and Yakoboski and Silverman (1994) -- and even, to a great extent,
Kotlikoff and Auerbach (1994) and Merrill Lynch (1994) -- are
similar with regard to the baby boomers' expected levels of
retirement income and the relation of these levels to those of
their parents.

                                                               Overall income levels:  Sabelhaus and Manchester (1993)
analyze real income levels on a per household, per capita, per
adult and per adult equivalent basis and show that in all four
cases, in aggregate, by income quintile, age (25-34 and 35-44) and
marital status, baby boomers are considerably better off than
their parents were at the same ages.  For example, the baby
boomers' average household income was over $42,000 in 1989, 46
percent higher than their parents' was in 1960 (see table II-1). 
The difference is higher at the upper end of the income scale (50
percent in the highest quintile) than at the lowest (25 percent),
and even higher when measured on per capita, per adult or per
equivalent adult basis.  The authors conclude that "as long as
real wages continue to grow and assuming that social security and
private pensions remain intact and that health care expenditures
do not swamp other gains, most baby boomers are likely to enjoy
higher real incomes in retirement than their parents.''  It is
worth noting that real wage growth and future health care
expenditures are both causes of concern for many policy analysts.

                                                               Easterlin et al. (1993: 501, 503) reach similar conclusions:
"The evidence clearly belies the notion that on average the baby
boomers are doing less well than their parents. . . . Is the baby
boomers' advantage over their parents likely to be maintained into
retirement?  The life cycle income profiles suggest that the
answer is yes. . . .The improvement of the boomers over their
parents at retirement, however, may prove to be less than it is
currently.  Although the data for younger ages are incomplete, the
baby boomers' profiles appear to rise less steeply between ages
25-29 and 40-44 than their parents', and projecting this slower
rate of increase to retirement would yield somewhat diminished
relative improvement.  But, the present comparison clearly does
not support the view that the boomers will, on average, end up
less well off than their parents."

                                                               Easterlin et al. (1993) offer two caveats to these findings. 
Because of some demographic differences between the baby boomers
and their parents, such as delayed or foregone marriage, increased
divorce rates and fewer children, "as they move into retirement,
[boomers] are less likely than their parents to be living with a
spouse, and are likely to have fewer adult children" (p. 517).
In addition, the economic prospects of the boomers differ markedly
by income quintile.  "For [the top income quintile], the life
cycle profiles give no sign of flattening until the retirement
ages are reached. . . .The lowest income segment of each cohort is
a different story.  It remains true [in this quintile] that those
in the baby boom generation are currently doing better than their
counterparts in the parental generation.  But the percentage
income advantage of the boomer generation over the parental
generation is much less than for the upper income group." (p. 514)
The authors conclude that "while the boomers in retirement will
typically do better than their parents in terms of material well-
being, their advantage from a total welfare viewpoint may be less. 
Moreover, the segment of the boomers whose current economic
prospects are worst, the poorest part of the trailing edge
cohorts, may do less well than their parents in terms of both
economic well-being and total welfare." (p.520)

                                                               Yakoboski and Silverman (1994) agree that baby boomers in
general will enjoy a standard of living higher than that of their
parents in retirement, but they may not be able to maintain their
own pre-retirement living standard.  But housing wealth may close
the gap for the boomers, to the extent that they are willing to
tap this source.  This study emphasizes that "non-homeowners, the
less educated, the single and the youngest boomers" are at the
greatest risk of experiencing financial hardship in retirement.
                                                               
                                                               Kotlikoff and Auerbach (1994) and a study produced by Merrill
Lynch (1994) conclude that baby boomers are likely to exceed their
parents' standard of living in retirement, but they emphasize that
this will not be in keeping with "the American dream" if future
retirees are unable to maintain their own pre-retirement standard
of living.  In addition, the authors emphasize the
unsustainability of current government fiscal policy, and maintain
that once required adjustments are made, such as tax increases and
transfer payment reductions, the retirement prospects of the
boomers will dim considerably.  Both the Manchester (1994) and
Yakoboski and Silverman (1994) project that baby boomers'
retirement incomes will exceed those of current retirees, but
Yakoboski and Silverman suggest that replacement rates (the ratio
of retirement to pre-retirement income) will fall. 

                                                               The picture painted by Levy and Michel (1991) is more
negative, even about the current economic well-being of baby
boomers relative to their parents. The major analytic difference
is that Levy and Michel focus entirely on male earnings among the
baby boomers, ignoring the large improvements in female earnings
and the decline in the average number of children per woman.  The
most pessimistic picture presented by these authors is by Levy and
Michel (1985), in which they emphasize the deteriorating fortunes
of middle class baby boomers ("a dramatic decline in its ability
to pursue the American dream:  a home, financial security and
education for their children" (p. 1)) and offer a gloomy picture
of the boomers' future.  The report implies that the growing
federal deficit will keep interest rates and inflation high, and
productivity and wages low, so that the baby boomers "in the 21st
century [will] bear the costs of resolving not only their personal
debt but the national and international debts as well." (p. 21)

                                                               Savings and wealth:  As noted in Section II-D, American
saving rates are low by international and by U.S. historical
standards.  Although returns on assets (interest and dividends)
provide an important source of income for older Americans (about
17 percent of aggregate income for all elderly units in 1992),
they are only about half as important as either earnings (30
percent) or social security (33 percent) (U.S. House of
Representatives 1994: table A-10).  Among the elderly poor,
interest and dividends are inconsequential, providing a mere 3
percent of total income.  Many Americans reach retirement with
little accumulated savings (excluding home equity), and have
difficulty maintaining their pre-retirement standards of living.  

                                                               Despite these discouraging aggregate statistics, a number of
studies suggest that baby boomers on average have accumulated more
wealth relative to income than their parents had at the same time
in the life cycle.  Exceptions are single people and the youngest
baby boomers (aged 25-34) in the bottom income group.  "But,
especially when attention is focused on the middle 60%, ratios of
wealth to income are the same or significantly higher than in
1960. . . .The only groups which show consistent declines in the
ratio of wealth to consumption are single people in the bottom and
top quintiles. . . . All other groups, including the vast majority
of boomers, have accumulated more wealth [relative to consumption]
than their parents' generation had at the same age 30 years ago."
(Sabelhaus and Manchester 1993:12-13)

                                                               On the other hand, the parents of the baby boom generation
(many of whom are now retired) enjoyed substantial windfalls that
aided them in retirement, such as strong real wage growth in the
1950s and 1960s, substantial increases in real social security
benefits in the early 1970s, increased rates of pension coverage
and the substantial appreciation of housing assets.  These are
windfalls that baby boomers are unlikely to experience.  Kingson
(1992: 37) feels that "the value of equity in baby boomers' homes
is likely to grow less than that experienced by current cohorts of
elders."  And younger boomers may be at a particular disadvantage,
having missed the appreciation of house prices in the 1970s and
1980s.  As house prices appreciated, rents rose.   The high
rents decreased the abilities of some baby boomers to save (for
example, for a down payment), and diminished their prospects for
relying on home equity in their retirement years.

                                                               One unknown in this equation is the role that inheritances
will play in the future.  The current generation of retirees is
doing well, on average, having enjoyed significant windfalls from
social security and real estate.  What ultimately happens to this
wealth remains to be seen.  One possibility is that it will be
bequeathed back to the current generation of workers, and that
this, in the end, will be a significant source of their retirement
income.  Some of their "savings," in other words, may be in
their parents' accounts, not (yet) in their own.  Barring this,
little evidence suggests that the importance of asset income will
grow significantly in the future.

                                                               Earnings:  Despite dramatic declines in the labor force
participation rates of older American men in the post-World War II
period, earnings remain a very important source of income for
those aged 65 or older.  Earnings provide 30 percent of aggregate
income for elderly households.  Earnings are negatively correlated
with poverty status; in 1992, fewer than 4 percent of those aged
65 or older who worked during the year (and fewer than 3 percent
of those who worked year-round, full-time) were poor, compared
with more than 14 percent of those who did not work at all during
the year.  Among blacks, the difference is even more pronounced --
7 percent of those who worked (and less than 3 percent of those
working year-round, full-time) were poor, compared with more than
37 percent of those who did not work (U.S. Bureau of the Census
1993a).

                                                               Labor force participation rates among older Americans have
changed very little since the mid 1980s, suggesting that the long
term early retirement trend in America is over.  Other changes in
the work place are under way: a moderate growth in the number of
contingent workers, a growing disparity in the quality of jobs and
increases in earnings and income inequality.  Barring significant
changes in public policy (for example, a delay in the age of
eligibility for early social security benefits), little reason
exists to believe that the importance of earnings for older
Americans will change dramatically in the future.   

                                                               Pension income:  Private and public sector employee pensions
are expected to continue providing a modest but important source
of retirement income, especially for middle and upper income
households, and their importance should grow for women.  Pensions
currently provide about 16 percent of aggregate income of the
elderly, although less than 3 percent for the elderly poor (U.S.
House of Representatives 1994: table A-10).  Coverage rates
declined slightly in the 1980s but have since recovered.  Some
(e.g., Woods 1989) project declining rates of coverage in the
future, and others (e.g., Andrews and Chollet 1988; Yakoboski and
Silverman 1994) emphasize the small gains during 1987-91, and
expect further increases.  Barring major changes in the regulatory
environment, however, few expect dramatic improvements in the
proportion of the work force covered by pensions. 

                                                               The importance of defined-contribution coverage is
increasing, and many analysts expect this trend to continue.  Some
of this change is attributable to increased administrative costs
of defined-benefit plans, and some may be caused by the
preferences of workers who expect to change jobs frequently or
move in and out of the labor force.  Defined-contribution
accumulations are more portable than are the pension rights in
traditional defined-benefit plans.  At the same time, as noted in
Section II-C, they entail a different set of risks from defined-
benefit plans, such as market risk (because only the contributions
are guaranteed), lower yields (if participants are risk-averse and
follow investment strategies more conservative that traditional
pension managers) and the risk that lump-sum distributions prior
to retirement (e.g., when changing employers) will be consumed
rather than saved.  Also, defined-contribution plans are more
likely to require employee contributions, which means that some
workers will decline to participate.

                                                               An important unknown is how employer pensions will respond to
changes in the social security environment -- for example, the
already legislated increase in the normal retirement age from 65
to 67, or a hypothetical delay in the earliest age of eligibility. 
Will firms attempt to offset this by increasing their incentives
for early retirement, or accommodate the change by raising their
own early and normal retirement ages?  If the latter, the combined
effect of social security and pension changes could have a
significant effect on future patterns of retirement.

                                                               Baby boomers most at risk in retirement:  In a comprehensive
report on the implications of diversity on the retirement
prospects of the baby boom generation,  Kingson (1992: 50)
identified the most vulnerable groups as 

                                                               single parents, low-wage workers, those who are living at or
                                                               below the poverty level, those who are closed out of home
                                                               ownership, or those who lack adequate pension coverage. 
                                                               Although their numbers cannot be precisely estimated, we know
                                                               they are concentrated among the 10.7 million households
                                                               headed by female baby boomers.  We know they can be found
                                                               disproportionately among the roughly 3 million baby boomers
                                                               with less than ninth grade education and among the 'one
                                                               quarter of black men aged 25-34' in 1980 'who had not
                                                               finished high school and could not compete' in the economy in
                                                               the 1970s (Levy, 1987).  We know they can be found among the
                                                               roughly 8 million baby boomers with incomes below the
                                                               official poverty line in 1988 -- including about 2.8 million
                                                               blacks (22.4% of all black boomers), 1.3 million Hispanics
                                                               (20.3% of all Hispanic boomers), and 5.2 million whites (7.8%
                                                               of all white boomers).  And we know they are likely to be
                                                               found among the roughly 50% of full-time private wage and
                                                               salary workers who are not covered by private pensions and
                                                               among the nearly 50% of baby boomers who did not own homes in
                                                               1988.

                                                               Approximately 18 million baby boomers are members of racial
and ethnic minorities.  The Census Bureau projects that, while 86
percent of the elderly population in 1990 was non-minority, this
proportion will drop to 75 percent by 2030 and to 68 percent by
2050 (U.S. Senate 1991: chart 1-8).  In 1992, 26 percent of all
blacks aged 25-44 and 24 percent of Hispanics this age were below
the poverty line, compared with 9 percent of whites (U.S. Bureau
of the Census 1993a: table 5).  Kingson suggests that the high
levels of unemployment experienced by young black men may have a
permanent negative effect on their lifetime earnings patterns.  He
points out that members of minority groups work disproportionately
in arduous and potentially disabling working conditions, and so
are likely to be disproportionately affected by proposals to raise
retirement ages.  Feldman (1991) points to a wide diversity in
mortality rates and in morbidity among the elderly, which he does
not expect to decline, and Kingson (1992: 44) suggests that
"retirement age policy that seeks to encourage later retirement by
reducing benefits (e.g., by raising the age of eligibility for
full benefits) and does not provide substantial offsetting
liberalizations in eligibility for disability insurance benefits
will undoubtedly have very deleterious effects on those baby
boomers with health problems during their later working years
(especially those with fewer years of education and fewer
employment options)."

                                                               Manchester (1994) emphasizes that single, poorly educated
boomers will fare the worst in retirement, and that baby boomers
who do not own homes may be hard pressed to accumulate sufficient
wealth for retirement.   

                                                               The Congressional Budget Office projects that for workers in
the bottom half of the income distribution in 2019, social
security will provide 60-70 percent of retirement income (U.S.
House of Representatives, 1987).  For most baby boomers,
retirement incomes will be well above those of today's retirees. 
Poverty rates will be more concentrated among the single,
especially single women.  And, since official poverty thresholds
rise with prices but not with the standard of living, those living
below the poverty level in the future may feel more deprived than
do poor people today. 

                                                               The economy and the retirement prospects of baby boomers:
Researchers generally agree that much of the baby boomers'
economic progress to date, or lack thereof, can be attributed to
the effects of their relative numbers and to macroeconomic trends. 
But analysts differ widely in terms of the relative weights they
attach to these two sets of causal variables, demographic and
macroeconomic.  They also differ with regard to the underlying
causes of the macroeconomic trends, and hence with regard to
prognoses on those trends. As a result, the literature seems to
fall into three general categories:

    First, the extreme demographic position is that most of the
negative trends observed over the past 20 years have resulted,
directly or indirectly, from the large demographic fluctuations
caused by the size of the baby boom cohort.  Other factors are
viewed as much less important.  The demographic effects have been
felt throughout the economy, but most severely by the baby boomers
themselves.  Although the baby boomers will continue to experience
less favorable market conditions than those in smaller birth
cohorts throughout their lifetimes, the economy is likely to trend
upward over the next two decades as the negative effects of the
baby boom on the economy (low wages, low productivity, the shift
to low-wage, low-skill, service-sector jobs, and low savings
rates) are mitigated by the entry of smaller birth cohorts into
the household formation stage.
    
    Second, the moderate demographic position is that most of the
negative effects of large cohort size have been and will be
experienced only by the baby boomers themselves, and that their
relatively poor experience over the past 20 years is attributable
not only to their own cohort size but also to independent
macroeconomic effects, many of which have also been adverse.
Demography, while important, is not destiny.  These researchers
tend to be more optimistic about future macroeconomic trends. 
They generally feel that the next two decades will be more
favorable than the past two, but for the most part (with the
possible exception of savings rates) they do not attribute this
turnaround to demographic fluctuations.
    
    Third, according to the macroeconomic pessimists, the baby
boomers have experienced adverse conditions, both as a result of
their large cohort size and also as a result of poor macroeconomic
performance.  Researchers in this category see continued negative
effects on the baby boomers of their own cohort size (such as the
potential for "asset meltdown" next century) and find little
reason for hope that macroeconomic conditions will improve over
the next two decades.
    
    Addressing the future of middle- and upper-wage baby boomers,
Kingson (1992), who typifies the moderate demographic position
(group 2), writes: "(t)he greatest threats to the economic well-
being of these baby boomers in retirement are likely to come from
health care costs, the possibility that economic productivity will
be less than anticipated, legislative changes that could reduce
the value of Social Security (by reducing the cost-of-living
protection, for example, or further raising the age of eligibility
for full benefits), and the failure of employer-based pensions to
meet contractual obligations." (p. 37)
    
     Kingson echoes an opinion of Russell (1982) and Levy and
Michel (1991) that the bulk of the baby boomers' problems to date
have not reflected adverse birth cohort size, but rather  a
prolonged slowdown in economic growth.  These authors (along with
Aaron, Bosworth and Burtless, 1989) link this economic slowdown to
low levels of national savings and investment.  Other economists
view the productivity slowdown as an independent source of slow
earnings growth, not merely the effect of low savings.
    
     Kingson takes pains to dispel the notion that the baby
boomers are a homogenous group, fated by their cohort size to a
lifetime of deprivation and frustrated attempts to better the
living standards of their elders.  He argues that other factors
(e.g., economic investment, bio-medical research) can help prepare
for the retirement years of the baby boomers, and accepts the
arguments of Aaron et al. (1989) that if the federal deficit is
reduced and if payroll taxes are increased to keep the OASDI
program afloat, then the additional savings created can increase
productivity to help finance the baby boomers' retirement. 
Similarly, Palmer (1989) estimates that a per capita GNP growth
rate of only 1.5 percent per year would be sufficient to cover the
increased retirement costs of the baby boom generation.  Kingson's
general message is that the baby boomers' cohort size is not the
only determinant of their fate:  he rejects the notion that
demographic trends alone will undermine the well-being of baby
boomers in retirement.
    
     Those in the extreme demographic camp argue that the impacts
of cohort size are much more pervasive.  For example, McMillan and
Baesel (1990), Fair and Dominguez (1991) and Blomquist and
Wijkander (1994, using Swedish data) have suggested that the low
rates of savings observed over the past 20 years have been largely
the result of demographic patterns; namely, the passage of the
baby boomers through the minimum savings points of their life
cycles.  These authors all attempt to document the strong
macroeconomic effects of the age structure of the population. 
McMillan and Baesel (1990:186), for example, use Census Bureau
population data to project the ratio of savers to borrowers into
the future, and find that "(t)he middle population projection
forecasts [the ratio of savers to borrowers] to increase from
0.666 in 1980 to 1.013 in 2005 and then drop rapidly again to
0.796 in 2030. . . . Using the middle [ratio of savers to
borrowers] series, output growth per capita is negative through
1990 and then grows rapidly to 2.5% per year in 2010.  The steady-
state unemployment rate declines from 7.7% in 1985 to 2.7% in 2010
before increasing again.  Equilibrium real interest rates decline
from 6.1% in 1985 to -1.4% in 2010 before climbing back to 4.2% in
2030.''
    
    McMillan and Baesel also explored the effects of raising the
retirement age on productivity and savings patterns.  "We
constructed a 'deferred retirement' middle [ratio of savers to
borrowers] series by gradually increasing the retirement age from
65 to 70 during the period 2000-2030. . . .Surprisingly, this
reaction exaggerates the projected changes in output growth,
unemployment, and interest rates. . . .Why?  Because under the
deferred retirement scenario both the Baby Boom generation and
their children are simultaneously in their prime productivity and
savings years." (p.189)
    
    Blomquist and Wijkander (1994: 47) state that "(t)he results
of our simulations suggest that it would be fruitful to take
demographics into account to a larger extent than done hitherto in
models of the economy.  The simulations also show that, whether
the interest elasticity of individual savings is positive or
negative, there exists no stable relationship between the real
rate of interest and aggregate household savings.  Both the rate
of interest and savings are endogenous in our model.  Depending on
the form of the demographic changes, the changes can for some time
periods create a positive correlation between savings and the
interest rate, and for other periods a negative relationship."
    
    Authors in the third category, the macroeconomic pessimists,
take exception to these conclusions.  For example, Cantor and
Yuengert (1994: 76) suggest that "(w)hile the baby boomers'
savings rates should rise with age, the impact on the aggregate
saving rate will be mitigated by a continuing high rate of early
retirement and a rising share of households headed by individuals
either over 65 or under 35 -- households that tend to have
relatively low saving rates.'' 
    
    Authors in the third category tend to be pessimistic about
baby boomers' prospects, because they see continued high real
interest rates and low savings producing low productivity and wage
growth.  They think that little of the macroeconomic effects
experienced by the baby boomers to date have been attributable to
their cohort size, and they therefore see little relief as the
demographic structure changes.
    
    As can be seen in this research, demographic changes are
easier to predict than are their macroeconomic consequences.  This
conclusion is frustrating because the state of the economy over
the next several decades will be a key determinant of the size of
the pie to be allocated among workers and retirees and therefore
of the state of financial well-being of future retirees.
    
    Asset value uncertainty:  Funded pension plans, both private
and government, face the same future demographic and economic
environment as social security.  Just as social security finances
are predicted to be strained by the retirement of the baby-boom
generation, funded pension plans may likewise face massive net
redemptions, as aggregate benefit payouts exceed contributions and
asset earnings.  Further, housing values could be depressed by the
relative sizes of the elderly cohort and the household formation
cohort, as suggested by Mankiw and Weil (1989).  One conclusion is
that the members of the baby boom generation, because of their
sheer numbers, face added uncertainty about all of their
retirement assets.

         Private pensions have been a major source of net saving in
the economy for the entire post-World War II period.  Figure II-9
shows the change in real national wealth and the change in real
pension wealth (all expressed in 1990 dollars) for 5-year
intervals since 1950, taken from the National Balance Sheets of
the Flow of Funds Division of the Federal Reserve Board.  In the
1950s, 1960s, and 1970s, the change in real pension wealth tended
to be between 10 and 15 percent of the change in the national
wealth.  Since 1981, however, the relationship between the growth
in real pension assets and the growth in real national wealth has
changed dramatically.  It should be noted that the Flow of Funds
accounts attempt to measure the market value of assets.  Pension
assets, particularly stocks and bonds, enjoyed large total real
rates of return during this period and the change in real pension
wealth accelerated somewhat from the levels of the 1970s.  But the
change in real national wealth was much lower in the 1980s than in
the previous three decades and actually turned negative in the
first part of the 1990s.

         Some of this change is due to the sharp fall in national
saving rates discussed above.  The change in the real national
wealth was also depressed in recent periods by depressed farm and
commercial real estate values.  The result is that the growth in
the real wealth in pension funds has exceeded the growth in the
real wealth of the country since 1981.  Although this phenomenon
is not likely to continue, it does reinforce the idea that
pensions are a tremendously important part of the national saving
picture in the United States.

         In a recent study, Schieber and Shoven (1994) superimposed
the 1993 social security intermediate demographic and economic
forecasts on the private pension system, taking into account the
age and gender structure of the working and retired populations,
the pattern of pension plan participation and plan design, the
mobility of the workforce and observed retirement behavior.  They
referred to the long-run real rates of return on assets shown
below, and then made conservative assumptions about future
returns, assuming real rates of return of 5 percent on stocks,  2
percent on long-term corporate bonds and a zero real rate on money
market instruments such as Treasury bills.

         The net saving of private pensions (contributions plus real
asset returns less benefit payouts) is equal to about 3.7 percent
of the total private payroll in the economy, or between 2.5 and
3.0 percent of GDP.  Once again, the importance of pensions is
apparent since the total net saving rate in the economy has not
been above 3.0 percent of GDP since 1985.  The available evidence
indicates that pension saving is at least the same order of
magnitude as national saving.  Shoven and Schieber project that
while this may continue for another decade or so, the demographic
structure is such that pensions are not likely to remain a main
source of saving in the economy.  Their baseline forecast for
private pensions is shown in Figure II-10. The analysis assumes
that the fraction of payroll that corporations contribute to
pensions will remain at approximately current levels.

         The message from this simulation is both clear and dramatic. 
Pensions, which have been a major acquirer of assets -- a source
of saving -- for the past several decades, will soon become a
major liquidator of assets -- a source of dissaving.  The
projection shows aggregate pension benefits exceeding aggregate
contributions for the first time in 2006 and aggregate benefits
exceeding both contributions and real asset returns by 2024. 
Funded pensions become an enormous net seller of assets at
approximately the same time that the social security system begins
to run a negative cash flow and attempts to sell off the assets in
its trust fund.  One wonders, to say the least, what effect this
massive change from buyers to sellers of assets will have on asset
prices.

         It is possible that asset prices will by depressed by the
selling pressure resulting from the sheer numbers of the retired
baby boomers.  The housing price inflation of the 1970s could be
re-played in reverse in the second and third decades of the 21st
century, although this time the affected assets would likely
include stocks, long-term bonds, houses, and other forms of real
estate.  If asset prices are depressed by the simultaneous
liquidation of pension fund and social security trust fund
reserves, it could have a major impact on participants in defined-
contribution plans (including IRAs, Keoghs, and 401(k) and 403(b)
plans), on the sponsors of defined-benefit plans, and on the PBGC. 
Obviously, people who save outside a pension vehicle would also be
disappointed in their realized rates of return if this scenario
occurs.  It should be emphasized that what is being suggested is
that savings will be very scarce, real interest rates high, and
thus the value of real assets and financial assets behind them
reduced.

         The underlying demographic pattern is a given, and will
almost inevitably cause the saving of the pension system to slow,
whether or not the economic assumptions used by the Social
Security Administration and by Shoven and Schieber turn out to be
accurate.  The question of interest here is whether the decreased
pension savings will cause asset prices to fall and by how much. 
The answers depend on economic parameters that are not well known. 
First, there are several reasons why one might not expect the
switch of pension funds from net buyers to net sellers to depress
prices.  Rational expectations theorists would assert that this
occurrence has already been foreseen by market participants and
therefore is already imbedded into today's asset prices.  Because
of the foresight of investors, the occurrence of a widely foreseen
event should have no contemporaneous effect on prices.  This
theory will be put to the test in a significant way with the
impact of the retirement of the baby boomers on asset markets, and
the members of the cohort themselves have more than an academic
interest in the outcome.  The rational expectations theory, at
least in its strongest form, is not widely enough accepted to
suggest that baby boomers need not be concerned.

         Even if one does not subscribe to the strong rational
expectations view, one might hope that the impact of American
retirees on world capital markets would not be sufficient to
affect global asset prices and interest rates.  Even if there are
not enough "Generation X" members to buy the assets of the boomers
without a significant discount, the assets can be sold to other
participants in global capital markets.  The problem with this
argument is that the demographic structures of Japan and Europe
are similar to that of the United States.  It is difficult to
imagine the elderly in Japan, for instance, buying the assets of
America's elderly when the Japanese will also be trying to finance
the retirement of their large elderly cohort.  Perhaps the problem
will be alleviated by China and the other emerging economies in
the world, but considerable doubt exists about that.

         Estimating how much asset prices might be depressed is
difficult and speculative.  It is useful to recall that the United
States currently has 3.2 workers per retiree, and that this ratio
is expected to fall to approximately 2.0 workers per retiree by
about 2030.  These figures are often used to describe the pressure
that the baby boomers would cause a purely pay-as-you-go social
security system.  Two workers (rather than 3.2) would have to
finance the benefits of each retiree, forcing a reduction in
retiree benefits, an increase in worker contributions, or both. 
Of course, reality is not quite so simple; for instance, the
necessary payroll tax rate depends on the level of real wages as
well as on the number of retirees per worker.  However, the ratio
of workers to retirees is very important when assessing social
security finances.  This same ratio can provide some rough
intuition about the potential magnitude of asset price reductions
due to the retirement dissaving of the baby boomers.

         In a closed economy model, for example, the workers would
have to finance retirees' benefits in a pay-as-you-go system and
also buy the assets of the retirees in a funded system (either a
private pension system or a funded social security system).  If
the 2 workers do not save more per capita than the previous
generation's 3.2, and if the amount they save is unresponsive to
changes in the rate of return offered on assets, then asset values
could fall by approximately one-third.  Such a fall in the market
value of the U.S. capital stock relative to its replacement cost
is not unprecedented.  In fact, in the late 1970s U.S. capital
stock was selling for less than 70 percent of its replacement
value.  Despite the fact that assets have been depressed in value
by this much before, it still would have a major impact on the
well-being of the baby boomers in retirement.  It is even
possible, of course, that the 2 workers per retiree will each save
less than previous workers because of the higher income taxes and
payroll taxes that they may face and because of the other impacts
of a higher total dependency ratio in the economy.  In that event,
the depression in asset prices could be larger.

         As mentioned earlier, this analysis of the magnitude of the
price effects is problematic.  In fact, the adjustment to the lack
of pension saving could take place in other ways.  Rather than
sell their assets to the generation of workers, the retired could
simply consume their capital stock; that is, run them down and
extract as much cash as possible.  The adjustment to the dissaving
of the numerous elderly could be disinvestment of the capital
stock -- lower or even negative net investment in the economy. 
Although all of this analysis has been for a closed economy, it is
not at all clear that the outcomes are significantly different in
an open, global economy, given  the demographic similarities in
the developed nations mentioned above.

         A modest and pragmatic conclusion is that the large baby boom
generation does face extra uncertainty about their retirement
assets, including social security.  The government could help the
situation by encouraging private saving and reducing the federal
deficit (that is, reducing government dissaving).

         The health and longevity of older Americans:  Statistics
clearly indicate that the life expectancy of Americans is on the
rise.  Men and women born in 1940 (just after the creation of the
social security system) could expect to live 61.4  and 65.7 years,
respectively.  By 1990, these life expectancies had risen to 71.1
and 78.8 years, 10 and 13 years longer than in 1940 (U.S. House of
Representatives 1994: table A-2).  By 2010, when the oldest baby
boomers will have attained traditional retirement age, the life
expectancy of new-borns is projected to be 74 and 80 years.

         For those who actually reach age 65, similar trends are
observed.  In 1940, the life expectancies for men and women who
reached aged 65 were 11.9 and 13.4 years; by 2010, they will be
15.8 and 19.7 years, increases of 4 and 6 years, respectively.

         These increases play a prominent role in the debate about the
appropriate ages of early and normal retirement in the future. 
But an equally important issue concerns the health status of older
Americans.  Does living longer mean living healthier?  In this
section, the Panel discusses recent trends and projections
regarding the health of workers around early and normal retirement
age and the recent literature on mortality and morbidity.  A key
question is whether increases in life expectancy are likely to
produce longer productive lives (and if so, for whom) or merely
longer periods of morbidity.

         Because the sharply increasing life expectancies in the 1970s
appeared to be accompanied by an increasing incidence of self-
reported health problems, some researchers (for example, Gruenberg
1977; Verbrugge 1984) felt that the life expectancy advances had
resulted from reduced mortality from chronic disease, resulting in
a higher proportion of elderly with long periods of morbidity. 
Others felt that while the first effect of reduced mortality from
chronic disease would naturally be higher levels of morbidity,
these levels could be reduced as medical science turned its focus
toward increasing the age of onset of chronic disease (Fries,
1980).  Crimmins et al. (1994) simulated various patterns of
reduced mortality and morbidity, and showed that the first effect
would be a lengthening of the period of morbidity and dependence,
followed by a shortening as age at onset is increased.

         Data presented by Crimmins and Ingegneri (forthcoming)
indicate that after a period of deterioration in self-reported
health in the 1970s, "there is some evidence that the trend 
toward deterioration in self-reported health among the middle-aged
and older population was arrested and perhaps even reversed in the
1980s."  They reject the hypothesis that the turnaround was caused
by changes in people's expectations regarding health, because no
reason exists for these expectations to have declined in the
1980s.

         Crimmins and Ingegneri's finding of a reversal in the trends
of reported health of the elderly during the 1980s is supported by
Manton, Corder and Stallard (1993), Waidmann, Bound and Schoenbaum
(1994), and Manton, Stallard and Corder (1995).   Manton et al.
(1993) analyzed samples of the Medicare-eligible population found
in the National Long-Term Care Surveys and found a modest drop in
the prevalence of chronic (90 days or more) disability between
1982 and 1989.  Waidmann et al. (1994:1) concluded that
"prevalence rates for the chronic conditions most likely to be
disabling either remained stable or fell."  Finally, in the most
recent study, Manton et al. (1995) used the National Long-Term
Care Surveys to examine 16 specific medical conditions.  They
report that the average number of these medical conditions per
person among U.S. elderly fell by 11 percent between 1982 and
1989.  Declines were observed consistently across age, sex and
disability level groups.

         Bound and Waidmann (1992) went a step further and argued that
average health among the elderly did not actually deteriorate in
the 1970s, despite the declines noted in the self-reported data. 
Rather, they argue, the changes reported in the 1970s were the
result of a combination of social forces affecting the way
individuals perceive their health and report on it.  More generous
disability benefits and easier access to them increased the
proportion of the population who described themselves as impaired,
and then applied and often received disability benefits (Quinn and
Burkhauser, 1994a).  Crimmins and Ingegneri (forthcoming) agree. 
"This explanation certainly fits the time trend for the older
working age and retirement age population of deteriorating health
during the 1970s, a period when benefits became increasingly
available, and improving health during the 1980s, a time when
benefits became more difficult to obtain."
         
         Waidmann et al.(1994) argue that changes in the social
security disability program in 1965 (when workers with temporary
as well as permanent disabilities became eligible for benefits)
and the establishment of the Supplemental Security Income (SSI)
program in 1974, together with increases in real benefits and
increasingly liberal eligibility requirements from 1965 through
the mid-1970s are strongly related to the pattern of self-reported
health during this period.  "When we include SSI, the changes in
the fraction receiving disability income closely match the changes
in the fraction reporting that they are limited in their ability
to perform their major activity. . . . Furthermore, the most
dramatic changes in the fraction of individuals reporting activity
limitations occur for those under the age of 65 -- those who are
eligible for disability programs.  Indeed, for men and women aged
70 or older, who were presumably unaffected by changes in
Disability Insurance (DI) and SSI, levels of activity limitation
remained effectively unchanged throughout the study period.  If
trends in activity limitations reflected mortality declines, we
would expect to see these age patterns reversed, since mortality
declines were greatest for those over 65." (p.14)  Finally, Bound
and Waidmann (1992) add that efforts at disease prevention and
early diagnosis increased dramatically in the 1970s, leading to
increased awareness among the elderly population, rather than
absolute increases in the incidence of disease. 

         As usual with the elderly, the mean or average can be
deceptive.  Feldman (1991) finds a substantial increase in the gap
between the death rates of those with low and high levels of
education between 1960 and 1980.  He suggests a scenario in which
the longevity gains and morbidity declines fall primarily on those
of higher socioeconomic class, while those at the other end of the
spectrum (even if enjoying small absolute gains) fall further
behind.  In this case, increases in the ages of eligibility for
social security benefits, which might be suggested by the health
gains of the elderly on average, should be tempered by a concern
for those not sharing in this good fortune.

         In summary, although the jury is still out on these issues,
the latest available evidence suggests that the health of the
middle-aged and older Americans has increased during the 1980s and
into the 1990s, and probably more so at the upper socioeconomic
levels.  These gains are likely to continue, as medical technology
is re-focused from reducing mortality from chronic diseases (the
primary initial focus) to increasing the age of onset of chronic
disease.  This is expected to compress the period of dependence
and ill-health, at the same time that life expectancy is
increased.  This trend is expected to be reinforced by the
observed relationship between mortality and education (Preston and
Elo, 1994), given projected increases in the educational levels of
the elderly.

         It was the observed pattern of deterioration in self-reported
health among the middle-aged and elderly in the 1970s that led to
the "failure of success'' argument -- the hypothesis that sharply
decreased mortality from chronic disease resulted in increased
proportions of frail and sick elderly (Gruenberg 1977).  Recent
work appears to have undermined that argument, pointing instead to
improvements in the early identification of chronic disease, and
therefore the earlier accommodation of known health problems.

         Conclusions: Research suggests that the economic status of
current retirees is, on average, better than that of their parents
(largely because of social security), that the current economic
position of the baby boom generation is better than that of their
parents at the same age, but that the saving rates of the baby
boomers are lower than necessary to maintain their standards of
living after retirement.  Single people, especially single
mothers, those with low education or irregular work histories,
minorities, those without home ownership, and those without the
option to continue working as they age are at the greatest risk
with regard to their retirement prospects.  Opinions diverge about
how the economy will evolve between now and the time of the baby
boomers' retirement.  One source of concern is the future profile
of asset prices, when private and public retirement systems, both
here and abroad, change from net buyers to net sellers of assets. 
On average, both the life expectancy and the general level of
health appears to be rising for older Americans, but differences
(which may be increasing) occur by socioeconomic class. 

         This analysis of future trends takes the social system as
given, despite the fact that currently legislated contribution
rates are insufficient to pay currently legislated benefits. 
Something has to give, and the decisions about what, when and to
or for whom can have large impacts the future economic well-being
of older Americans.

III.  Policy Options for Dealing with Projected Social Security
Imbalances 

     In this section the Panel describes several evaluation
criteria that it devised  for judging the effects of alternative
policies to correct projected social security imbalances.  The
Panel also outlines what this set of policies might include--
specifically, increases in payroll  taxes and curtailments in
benefits.  Finally, the Panel evaluates these potential changes
using the specific criteria outlined at the outset and  indicates
where possible tradeoffs lie. The Panel s charge, and its goal in
preparing this Report, was to outline and evaluate options rather
than to make policy recommendations, on the understanding that
some combination of benefit cuts and/or revenue increases are
necessary to restore the social security system to actuarial
balance.  It is the Panel s intention to offer a framework for
assessing various policy alternatives but not to make specific
recommendations on which particular package to adopt.

A. Criteria for Evaluating Social Security Benefit and Tax Changes

     The Panel developed six criteria as guidelines for evaluating
the effects of alternative methods of correcting projected social
security imbalances:

Criterion 1. Adequacy of retirement income.  A primary goal of the
social security system is to contribute to an adequate retirement
income for older Americans.  Many Americans approach their late
middle age without adequate sources of retirement income.  Some
experienced poverty all their lives and therefore were not able to
save.  Others may have been myopic (thinking that they would never
retire), may have refused to think about their consumption needs
in old age, may have underestimated their longevity, or simply may
have miscalculated what was necessary to maintain their standard
of living in retirement.  

     From a policy perspective, there are two ways of thinking
about retirement income adequacy. One legitimate goal is the
avoidance of poverty among older Americans (that is, meeting a
minimum income standard).  Another is the provision of a
reasonable replacement rate, meaning that retirement income should
attain at least some minimum fraction of pre-retirement income. 
The Panel understands that both standards are imperfect measures
of the adequacy of a particular retirement package, because they
examine only current levels of income and ignore the possibility
that old-age consumption patterns change over time.  Nonetheless,
these measures are useful and widely discussed ways of judging the
adequacy of retirement income.  Using this criterion, a social
security change that increases retirement income adequacy would be
judged positively.

     In addition to concern about incomes near the time of
retirement, it is also important to examine the continuing value
of benefits afterwards.  The fact that social security benefits
are paid as an annuity indexed to the Consumer Price Index (CPI)
plays a crucial role in maintaining the adequacy of retiree
benefits as people age.  Because employer-provided pensions are
not usually fully indexed, they can shrink in real terms over
time.  Similarly, people may consume their nonannuitized wealth as
they age, again exposing them to the risk of outliving their
command over resources.  Thus adequacy many years into retirement
must be considered, as well as benefit adequacy immediately after
retirement.

Criterion 2.  Insurance against income fluctuations. Social
security is designed to provide some insurance against unforeseen
events that interrupt a worker s flow of income.  These shocks
include death of an earner and events that precipitate early
retirement such as disability.  One could also include here bad
fortune in the choice of an occupation whose skills have become
obsolete, or unanticipated shocks to the value of training and
education (for example, the result of industry downsizing). 
Social security also provides risk pooling, providing income to
those who are eligible for benefits by virtue of having met
benefit eligibility criteria.  For example, a single worker who
contributes to the system and survives to retirement age receives
retired worker benefits, but a single worker who dies before
retirement age does not receive payments to his or her estate.
Similarly, social security offers insurance by transferring from
shorter lived people (men, on average) to those who are longer
lived (e.g. women, on average).  In this way, the social security
system affords a form of insurance by pooling risks across those
who do, and do not, eventually meet eligibility criteria.

     Insurance that cushions the blow of reduced earnings will
inevitably affect people s decisions and behavior.  For example,
research suggests that the availability of social security
retirement benefits induces early retirement and increases the
chance that someone who could work will apply for disability
benefits. Also, workers are covered by Disability Insurance, and
if they have dependents, these receive Survivors Insurance.  These
components of the social insurance program act as labor market
distortions by lowering the worker's effective net labor market
earnings (the difference between what the worker could earn on a
job and the social benefit payments).  Some labor market
inefficiency is an inevitable consequence of providing insurance. 
Thus, the question is not whether labor market distortions exist,
but whether the amount of insurance is too great or too small
given the accompanying distortions.

Criterion 3. Avoidance of market inefficiencies.  With respect to
market inefficiencies, the Panel focused on two important
decisions that individuals and families make, namely:

     i) The labor-leisure choice, or how people allocate their
time both in their early and middle years, and also at the time of
the retirement decision; and
     ii) The savings-consumption choice, or how people allocate
income between consumption during the worklife and consumption
during retirement.
 
     Social security influences both labor-leisure and savings-
consumption behavior, enabling people to retire earlier than they
otherwise would.  For younger workers, social security payroll
taxes reduce the marginal take-home pay of those earning less than
maximum covered earnings.  People will tend to perceive that they
are paying more in social security contributions than they will
receive in the form of social security benefits (that is, if
payroll taxes are considered to be net taxes), which will reduce
the value of working and affect labor supply decisions as do other
taxes on earnings. 

     Savings patterns are affected by social security if promised
benefits induce some people to decrease their own private savings.
How much they are affected is important to national savings, an
issue taken up below.  The Panel is also concerned about whether
people save what they should given their opportunities and
constraints, and about whether these private savings decisions are
influenced by government programs such as social security.  
Although neither assets not asset income directly affect the
computation of a retiree s social security benefits, the program
does interact with both via the income tax and means-tested
benefits programs.  These interactions cause some to save at rates
different from those they would if not confronted by the
distortions inherent in these programs. For example, taxing
retirees  social security benefits may discourage private savings
by those whose asset income would otherwise be high enough to
expose them to benefits taxation.  Alternatively, for some who
retire early with social security, additional private savings may
be generated in anticipation of a longer period out of the labor
force. Overall, a social security reform which reduced labor
market and savings distortions would be viewed positively
according to this criterion.

Criterion 4. Equity of lifetime social security taxes and
benefits.  Social security differs from privately-purchased
insurance in that it includes explicit and implicit
redistributional components.  For example, those who are high
earners over their lifetimes pay more in taxes and receive lower
returns on these taxes than do the lifetime poor.  In addition,
substantial cross-generational differences exist in benefits
received versus taxes paid.  Massive intergenerational transfers
have been delivered to current and past retirees who contributed
to the system in its early years before there were many retirees,
financed by the current generation of workers to whom smaller net
benefits will accrue under current law.  This pattern, often seen
during the start up of certain types of social insurance systems,
is no longer viable.

     The Panel recognizes that the past and future of social
security are very different. Under this criterion, therefore, the
Panel asks how various reform proposals affect the lifetime
distribution of social security contributions and benefits.  In
general, the Panel seeks to identify changes that alter the
distribution of lifetime benefits and taxes both:

     i) Between generations; and
     ii) Within generations.

Criterion 5. Encouragement of national saving.  The Panel shares
many experts  concern that the national saving rate in the United
States is too low.  This low saving rate undercuts investment,
which in turn is a primary determinant of future output. All forms
of saving are important: personal saving, corporate saving and
saving (or dissaving) by the government sector.  When using this
evaluation criterion, the Panel asks whether a specific policy
proposal is likely to increase aggregate national saving. 
  
Criterion 6. Strengthening the financial integrity of retirement
income systems. The Panel s goal is to discuss policy proposals to
help eliminate the long-run fiscal imbalance of the social
security system.  The typical social security analysis forecasts
the system s budget 75 years into the future.  In the Panel's
view, this focus should be broadened to address other concerns
influencing the social security system s integrity. The Panel also
emphasizes that social security reform proposals should be
evaluated in terms of their contribution to strengthening the
financial integrity of the private retirement income system as
well.  In general the Panel believes that:
 
     i) All proposed reforms should ensure that the Social
Security Trust Fund does not approach or dip below zero during the
75-year interval; and

     ii)  A reform that offers a better balance at the end of the
75-year period and thereafter implies stronger financial
integrity.   

     The Panel stresses that these criteria be used to design a
combination of benefit cuts and/or revenue increases necessary to
restore the social security system to actuarial balance.

B. The Scope of Social Security and the Timing of Adjustments  

     This section begins with a description of two baseline
scenarios for social security that frame most of the other reforms
currently under discussion.  In this analysis the Panel compares
and contrasts a "larger" versus a "smaller' social security
system.  A larger system  maintains promised benefits at their
currently legislated levels. This scenario implies that taxes must
be raised to cover these promised benefits.  At the other end of
the spectrum, a smaller system would maintain current payroll tax
rates while reducing benefits to achieve balance with those
implied revenues.  The size of the system can be varied
continuously between those two limits. 
     
     The Panel assesses the pros and cons of both the smaller and
larger systems using the evaluation criteria developed above.  The
Panel then addresses the question of timing, focusing on the
relationship between the timing of benefit cuts or tax increases
and the size of the changes needed to achieve actuarial balance.

     Larger versus Smaller Systems:  The Panel believes that the
social security system must be restored to actuarial balance. 
Many combinations of revenue increases and benefit decreases could
achieve this.   To list them all, comparing each one with each
other one, would be tedious and difficult to follow.  Instead, the
Panel chose to describe what we believe to be the most important
types of revenue increases and benefit decreases.  The Panel
selects what it terms a baseline tax increase option, along with a
companion baseline benefit decrease option, and then proceeds in
four logical steps.  First, the Panel uses the evaluation criteria
described above to discuss the baseline tax increase and benefit
decrease.  Second, the Panel considers alternative timing paths
for the baseline reforms.  Third, it examines other ways to cut
benefits with the baseline benefit cut.  Fourth, other tax
increase policies are compared with the baseline tax increase
option.  

     Comparing tax increases and benefit decreases:  Our
hypothetical baseline benefit decrease is a proportional decrease
in the Primary Insurance Amount (PIA) formula.  In this scenario,
all persons born in or after a particular year, which is
arbitrarily taken here to be 1940, will experience the same
percentage decrease in their PIA amounts.  The hypothetical
baseline tax increase is a rise in the payroll tax rate beginning
in the year 2002 -- when workers born in 1940 attain age 62 --
with equal increases levied on employers and employees (and a
matching increase for the self-employed).  These two baselines are
chosen for their simplicity, not because the Panel has selected
them as particularly desirable changes to make.  

     In the first baseline scenario, the Panel assumes that
benefits would be cut by reducing the Primary Insurance Amount
(PIA) by the same percentage for all.  This reduces the benefit as
a fraction of the worker's Average Indexed Monthly Earnings
(AIME).  For example, in 1995, a worker s PIA is computed as 90
percent of his first $426 of AIME, plus 32 percent of the next
$2,567 of AIME, plus 15 percent of AIME above that.   (Thus $426
is the "first bend point" and $2,567 the "second bend point" in
the PIA formula.) A 10-percent reduction in benefits would be
achieved by proportionally reducing the percentages in the PIA
formula, such that the smaller PIA would be 81 percent of the
first $426 of AIME, plus 28.8 percent of the next $2,567 of AIME,
plus 13.5 percent of AIME above that.  This formula change
reduces benefits proportionately for all those covered by the new
formula, on the presumption that family maximums and disability
benefits are treated symmetrically.

     The second baseline scenario increases payroll taxes
beginning in the year 2002 by enough to raise the same amount of
revenue that is generated by the "baseline" benefit cut described
above.  It would not alter the maximum earnings subject to tax or
the definition of earnings subject to tax (for example, employee
benefits), and would maintain the current division of the tax
among employers, employees, and the self-employed.
 
     Magnitudes of Benefit Cuts or Tax Increases:  Table III.1
shows three combinations of proportional PIA decreases and payroll
tax increases that would be sufficient to restore actuarial
balance over the next 75 years, assuming they were legislated to
begin in the year 2002, and no other changes were effected beyond
those already legislated.  Looking from left to 


Table III.1. 
Combinations of PIA Decreases and Payroll Tax Increases Adequate
to Restore 75-year Actuarial Balance, Three Start Dates
______________________________________________________________
                    Size of social security retirement program
                    
                         Larger..................... Smaller
______________________________________________________________

Start date 2002:
Percentage cut in benefits       0      10.25          20.5
Tax rate increase              2.5       1.25             0

Start date 2012:
Percentage cut in benefits       0      12.75          25.5
Tax rate increase             3.12       1.56             0

Start date 2022:
Percentage cut in benefits       0      16.75          33.5
Tax rate increase             4.04       2.02             0
_____________________________________________________________
Note:  Each proposal is structured so as to restore actuarial
balance over the next 75 years, assuming changes implemented as of
the start date given and no other changes beyond those already
legislated.  Computations are based on assumptions and time
horizons relevant in 1994.
Source:   SSA, Office of the Actuary.

right, benefit decreases become larger and tax increases grow  
smaller.  Now the Panel asks how alternative combinations of
changes in taxes and benefits would be assessed by policymakers,
applying the criteria developed above.


Criterion 1. Adequacy of retirement income. Changing the PIA
formula reduces benefits proportionately for all social security
claimants.  Such a benefit decrease would reduce some retirees 
and survivors  benefits and total retirement incomes below a
minimally adequate level.  The larger the PIA benefit cut, of
course, the larger will be the number of people with inadequate
incomes. Replacement rates, or the ratio of social security
benefits to preretirement earnings, would also be reduced for all
retired workers.

     One group likely to be affected by PIA cuts is very old
widows whose deceased husbands had low lifetime earnings:  a
proportionate reduction in all social security benefits may
eventually produce higher levels of hardship among very elderly
widows.  To the extent the elderly experiencing benefit cuts apply
for and receive Supplemental Security Income (SSI) or food stamps,
they would be somewhat protected from poverty.  Some are reluctant
to apply for means-tested benefits after they have worked and
contributed to social security over a lengthy career.  The SSI and
food stamp amounts are also quite low, currently insufficient to
lift the indigent over the poverty line.  Finally, older people
can qualify for SSI on the basis of age only after age 65, but
some of the people affected will be between 62 and 65.  In
general, then, a reduction in benefits thus reduces adequacy of
retirement income.  
     
     By contrast, raising payroll taxes threatens retirees 
benefit adequacy far less because most are not earning much income
subject to this tax (Leonesio 1990).   Some people both work (and
pay payroll taxes) and receive benefits, but for the most part,
this is not a low-income group.  In consequence, raising payroll
tax rates would do little to harm retirement income adequacy.

Criterion 2. Insurance against income fluctuations.  A
proportionate cutback in OASI benefits (the baseline scenario)
reduces the insurance protection provided by social security for
workers and survivors at all income levels.  The larger the
benefit cut, the greater the loss of income insurance.  In
contrast, raising payroll taxes threatens retirees  insurance
against inadequate incomes far less because most are not earning
much income subject to the payroll tax.

Criterion 3.  Avoidance of market inefficiencies.  If retirement
benefits were smaller, older workers with good employment
prospects would be less likely to withdraw from the labor force to
collect social security benefits. The magnitude of this effect may
be modest:  research suggests that a 20 percent reduction in the
PIA would cause healthy older men to postpone their retirement by
fewer than six months (Fields and Mitchell 1984b).  Of course, a 
link exists between labor market inefficiencies and providing
insurance against inadequate income.  The length of one's earnings
career is a critical determinant of lifetime economic well-being,
subject both to individual decisions and to random events. An
inevitable tradeoff arises between the level of insurance the
system provides and the degree to which retirement decisions are
distorted.

     Social security benefit cuts may also alter the labor-leisure
choices of younger workers.  Peoples' decisions about work and
human capital accumulation patterns can be influenced by the
social security payroll taxes they pay and the future benefits
they expect to receive. For workers with very low lifetime
earnings, additional years of covered earnings might increase the
lifetime return from social security, with the expected (present)
value of future benefits rising by more than an additional year s
taxes.  For higher paid workers, working longer often raises
future benefits by less than extra taxes paid.  Similarly, many
two-earner couples (along with middle and high income single
workers) tend to earn few extra benefits from the social security
system for another year of work at the end of the worklife.   As a
result, a smaller system offering lower benefits is likely to
reduce these potential labor market inefficiencies.  In contrast,
a larger social security system with higher tax rates makes work
less appealing, though greater need for income as a result of
higher taxes encourages work.  On net, the labor market
distortions probably encourage earlier retirement.

     Other problems may arise when a larger system influences
peoples' saving and consumption choices.  One possibility is that
because social security benefits are tied to earnings rather than
income from saving, the system does not unduly distort saving
decisions.  Nevertheless, other programs that are means- (or
asset-) tested do interact with social security benefits, which
produces a similar result.  For example, Medicaid coverage for
nursing home care is only available to those with limited assets
and little income, all factors that interact with saving and
social security benefit policy.  How large these effects are is
currently not well known, and the topic requires further study.

     Another way that social security probably influences saving
patterns is that the system  forces deferred consumption for the
subset of (myopic) people who save too little to live comfortably
in retirement.  From this perspective, a larger social security
system represents an improvement in this group's well-being.  Even
for these people, however, the fact that benefits are paid as an
indexed annuity can affect saving.  Those who desire an indexed
annuity, but cannot obtain it in the private market, may save less
since social security offers such an annuity.   On the other hand,
social security also forces saving in a way that cannot be offset
by some people who already save adequately; for this group, having
a smaller system diminishes distortions.  On net, whether a
smaller system is preferred depends on whether Americans would be
more likely to save too little, or adequately, on their own.  Many
studies have sought to answer which behavior is more prevalent,
but as yet the evidence remains controversial. 

Criterion 4.  Distribution of taxes and benefits. Proportional
social security benefit cuts or tax increases leave the relative
distribution of both taxes and benefits within a generation
unchanged.  For instance, if a low-wage worker currently receives
two-thirds of the social security benefit received by an average-
wage worker, this ratio would continue were PIAs proportionally
reduced.  However, the absolute difference between the benefits
received by low-wage and average-wage workers would obviously
decline.  Reduced social security benefits would thus have a
smaller redistributive impact on the incomes of older Americans
than they do under the current formula.

     Other dimensions of within-generation redistribution have
concerned some analysts.  For example, the long-lived elderly
would be better served by reforms that raised taxes more and cut
benefits less.  Conversely, short-lived workers and survivors
would favor larger benefit reductions and smaller tax increases. 
(A single worker who dies at age 60 gains if payroll taxes are
reduced and does not suffer any loss in retirement benefits if
OASI pensions are scaled back.  By contrast, a worker who lives
until age 90 gains from the payroll tax reduction but loses a
substantial amount of lifetime benefits if pensions are scaled
back.)  

     Social security insures workers and their spouses and
dependents against the risk of exhausing their assets due to
higher than expected longevity.  For this reason, many observers
do not think social security's redistribution from the short-lived
to the long-lived is redistribution in any meaningful sense.  At
age 18, when people enter the work force and begin to contribute
to social security, workers are uncertain whether they will live
to 60 or to 100.  Hence, from the perspective of an 18-year-old
worker, a reduction in both social security benefits and taxes
does not favor or harm the worker in comparison with other workers
of the same age.  A problem arises, however, when some entering
workers expect to live longer than other workers.  Healthy workers
on average live longer than unhealthy ones; and higher income
workers on average live longer than lower income workers.  A
reduction in both social security benefits and taxes will thus
harm some and benefit others, as compared with the status quo. 
From this perspective, a smaller social security system would
redistribute less within a generation, as compared with a larger
system.

     Regarding between-generation distribution, a smaller system
brought about by a proportional reduction in the PIA (initiated in
the future and not made retroactive) would leave the entitlements
of older people unchanged, though to the extent that they worked
past 2002, they would be subject to lower payroll taxes.  This
older generation would therefore benefit from  changes in the
baseline package that embody the smaller tax increase.  However,
these effects are likely to be small.  In contrast, for non-
retired persons currently age 54 or younger, the younger the
worker, the more that he or she would favor having a lower social
security tax and lower benefit because younger cohorts will have
more years ahead paying taxes than receiving benefits.

     Whether this pattern of redistribution is viewed favorably or
unfavorably depends on a number of factors.  One of the most
important is the prospect for real wage growth.  If real wages
seem likely to rise, younger workers will enjoy higher living
standards than the older generations, irrespective of social
security benefit cuts.  On the other hand, if wage growth
prospects are poor, the living standards of younger workers may be
similar to or worse than those of older workers.

     In assessing lifetime tax and benefit comparisons, it is
worth noting that under current law the normal retirement age will
be 67 for workers attaining age 65 after 2024, whereas the normal
retirement age is 65 for workers attaining age 65 before 2003. 
The generation now aged 30-54 can therefore expect to receive
larger lifetime benefits than will the generation younger than 30. 
This effect is somewhat counterbalanced, however, by the
expectation that currently younger workers will, on average, have
longer lives.  Moreover, the increase in the payroll tax rate
already legislated will have a larger impact on younger workers
than older workers.  In general, then, a larger social security
system is likely to be viewed more favorably by today's retirees
and near retirees, but less so by today's younger workers.

Criterion 5.  Encouragement of national saving.  A small social
security system, with lower tax rates and low benefit levels,
would probably boost rates of national saving above what they
would be in a larger system.  This effect is likely to be small,
however, reflecting differences in propensities to save of people
of different ages and different life expectancies.  Also, smaller
benefits and taxes may not have a clear-cut effect raising
national saving.  The uncertainty arises because lower benefits
could cause workers to retire later, and facing less time in
retirement, they might choose to accumulate less retirement saving
while at work. This effect would be offset if workers anticipating
smaller social security benefits decide that a larger retirement
nest egg is needed. 

     Many studies have attempted to measure the net impact of
social security on saving, but the studies remain inconclusive. 
For example, some believe saving has been substantially depressed
by social security, implying that a cutback in benefits will boost
private saving.  Others show no consistent negative effect of
social security on saving.  The Panel concludes that a somewhat
smaller social security system would have at best a small positive
effect on saving.

Criterion 6.  Financial integrity of retirement income systems. 
By this construction, the baseline comparisons in this section
produce no difference in the social security system s actuarial
balance over the next 75 years.  Nevertheless additional
considerations for financial integrity are important.  One key
concern, in the Panel's view, arises from the fact that the
system s financial problems do not end in 75 years.  Indeed,
current projections show larger deficits in the distant future
than in the near term.  Thus with a rolling 75-year horizon, the
model replaces a financially sound year with a less sound year in
each new projection for the foreseeable future.  

     For this reason, the Panel believes that the cash-flow
patterns are important on a year-by-year basis, particularly the
contrast between early and late years, and beyond the traditional
75-year projection period.  The baseline benefit cut examined here
affects a smaller fraction of benefits over the next 75 years (by
exempting everyone 55 or over), while the baseline tax increase
affects all earnings after 2002.  As a result, a larger benefit
decrease and smaller tax increase produces a better balance over
the 75-year horizon.

     Why Timing Matters:  The baseline comparisons discussed above
considered tax and benefit changes beginning in 2002.  Here the
Panel reviews four issues pertinent to timing.  First is the
question of timing of legislation, as opposed to implementation. 
Second, are the implications of alternative implementation dates. 
Third, is whether baseline changes should be phased in smoothly or
abruptly.  Fourth, the Panel considers adjusting benefits for
those already retired.

     The Panel finds that any significant changes in social
security benefits should be announced with considerable lead time
to allow workers to adjust to the changes by adapting their
retirement, saving and consumption plans. Implementation delays
will require more substantial adjustments in benefits, taxes, or
both, which may take a larger economic and political toll in the
future.  

     Delaying legislation does not help people plan for the
future.  Rather, promptly legislated policy changes combined
with delayed implementation of some benefit cuts and tax
increases better fulfills this goal. Another reason to make
changes sooner rather than later is the increased flexibility
that comes from making changes when the national dependency
rate is lower--when fewer retired individuals have their
immediate livelihoods at stake.  The urgency of prompt
legislation is increased by the desirability of having
implementation lags incorporated in the legislation. Gradual
implementation also reduces the magnitudes of notches
(different treatment of cohorts close in age) and the
perception of unfairness that notches engender.

     Having argued that timing is of the essence, the question
arises as to when specific changes could be made.  Various
alternatives include a delayed start of tax increases and/or
benefit cuts, and benefit reductions by year rather than by birth
date.

     Delayed start of tax increases and/or benefit cuts:  The
baseline tax increases in the Panel's hypothetical scenario are
scheduled to begin in 2002, while the baseline benefit decreases
started for the cohort turning 62 in 2002.  Although this date is
relatively near for large changes, it is not too soon for either
the financial needs of social security or for the beginning of a
phased-in set of changes.  The implications of delaying the start
of the baseline changes by one or two decades are substantial, as
is evident from Table III.1 which depicts alternate starting
dates of 2012, and 2022.  In each calculation, the proposal is to
enact immediate legislation with delayed implementation; as a
result, the calculations are undertaken for the current 75-year
planning period, not for a 75-year period beginning at the date
of change.  With an increase in net revenues that happens quickly
enough, little concern exists that  the Trust Fund will run out
of money in the middle of the 75-year projection period.  As
start-dates for implementation are pushed later and later,
insolvency becomes a greater and greater risk.

     Evaluating the effects of delayed implementation is
facilitated using the criteria described above.  The Panel
confines its discussion to the half-and-half mix of baseline
changes.

Criterion 1.  Adequacy of retirement income.  Delaying reform in
social security taxes and benefits means that even larger benefit
cuts will be required, making more widespread the problem of
inadequate income replacement.  In other words, delay worsens the
impact of the reforms by the adequacy criterion.

Criterion 2.  Insurance against income fluctuations.  Decreasing
the size of the social security  program decreases its insurance
component.  Delaying the reforms produces a larger insurance cut
for those affected.

Criterion 3.  Avoidance of market inefficiencies. Labor market
inefficiencies depend on the size of the implicit net taxes on
work due to social security benefit and tax rules. Economic
analysis implies that market distortions increase more than in
proportion with the size of the distortion; in this instance,
smaller cuts starting sooner have smaller labor market distortion
effects.  Conversely, delaying the date when benefits and taxes
are altered makes necessary larger system changes, which in turn
produces worse market inefficiencies.

Criterion 4.  Distribution of taxes and benefits.  Delaying a tax
increase and making it larger later increases the relative
lifetime taxation of those with more of their earnings occurring
late in life.  Because higher income people, on average, have
steeper earnings profiles, such a tax is more progressive within
a generation.  Delaying a benefit decrease at the expense of
having to cut benefits more later has no similar
intragenerational effect because each cohort will experience
benefit cuts depending on their year of birth, not on when they
retire.
   
     Delaying implementation of benefit and tax changes also
changes the extent of redistribution between generations. 
Deferring a tax increase favors older workers near the end of
their working lives, and means that younger workers will be
subject to the higher tax rates over  more years of their
worklives.  Similarly, delaying benefit cuts favors generations
whose benefits are spared the cut and hurts later generations who
receive larger cuts.  Whether this pattern of redistribution is
viewed positively or not depends on several things, including
future real earnings growth prospects.   If the prospects for
future wage growth are good, younger workers will enjoy higher
living standards than the older generations, however much social
security benefits are scaled back.  On the other hand, if the
prospects for future wage growth are poor, the living standards
of younger workers could be similar to or worse than those of
older workers.  Also, older workers have paid lower lifetime
contributions to social security than younger workers can expect
to pay in the future.  Although real future wage growth cannot be
predicted precisely, actual wage growth in the United States has
been very low and for some groups even negative for almost two
decades.

     In assessing lifetime losses, it is also worth noting that
under current law the normal retirement age will be 67 for
workers reaching age 65 after 2024, whereas the normal retirement
age is 65 for workers reaching 65 before 2003.  The generation
now aged 30-54 can therefore expect to receive larger real
lifetime benefits than the generation younger than 30.  This
effect is somewhat counterbalanced, however, by the expectation
that currently younger workers will have longer lives on average. 
Moreover, the increase in the payroll tax rate already legislated
will have a larger impact on younger workers than older workers.

Criterion 5.  Encouragement of national saving.  Because these
alternative scenarios are designed to have similar impacts on the
social security system's actuarial balance over the 75-year
accounting period, timing differences should not have a
significant effect on public saving over this entire period.  Of
course delays could increase the extent of uncertainty about what
reforms will eventually be passed, which might increase private
saving for those losing confidence in the social security system. 
On the other hand, younger workers face larger, if delayed,
increases in taxes which could depress their saving.  Although
existing research does not definitively prove that a smaller
social security system would increase national saving, the Panel
believes that delaying needed system reforms would probably not
increase saving by very much.
 
Criterion 6.  Financial integrity of retirement income systems. 
The comparisons made here have been structured so they produce
the same actuarial balance over 75 years.  Nevertheless, some
concerns arise for retirement system financial integrity.  One is
that the financial problems of social security do not end 75
years hence; indeed, some projections have shown larger deficits
in the distant future than in the near term.  Thus with a rolling
75-year horizon, a financially sound year will be successively
replaced with a less sound year in each new projection.  The
Panel is also concerned with the pattern of balances on a year-
by-year basis, particularly the contrast between early and late
years.  The later the change in benefits and taxes the greater
the annual change has to be.  As a result, delay increases the
size of annual change and so improves this aspect of long-run
financial integrity.   

     Some concerns also arise about the responsiveness of the
system to uncertainties inherent in any forecast.  In many recent
years forecasts of the social security system's integrity have
worsened.  It is likely that earlier implementation of needed
changes (and the fact that changes implemented sooner would be
smaller) would make it easier to respond to future adverse
developments, should they occur.

     Phase-in benefit reductions by year rather than birth date: 
For convenience, the discussion thus far has focused on changes
in taxes and benefits that begin in 2002.  For reasons of equity
and macroeconomic impact, however, it may be more appropriate to
implement payroll tax increases and benefit decreases in a series
of small steps--using a gradual phase-in approach.  An appeal of
this gradual approach is that it would smooth the treatment of
members of nearby generations, both on an annual and a lifetime
basis. 

 C. Alternative Means of Lowering Benefits  

     This section describes six different methods of reducing the
level of social security benefits.  Each approach is assessed
using the criteria developed earlier in this report, and 
compared with the baseline benefit cuts.  Specifically, the
proposals considered are as follows:

      Reducing PIAs of high-wage workers;
      Raising the normal retirement age;
      Adjusting automatic cost-of-living adjustments;  
      Means-testing social security benefits;
      A double-decker system; and
      A double-decker system with means testing. 

These changes all have at least one feature in common:  they will
reduce social security outlays below the level that would occur
if the current benefit formula and eligibility conditions were
left unchanged.  The earlier discussion focused on a
comparatively neutral form of benefit reduction -- a proportional
reduction in the benefits for all future retirees.  The remaining
discussion focuses on less neutral reforms -- reforms that will
impose larger benefit reductions on some classes of new retirees
than on others.

     The Panel's evaluations consider all but one of the criteria
enumerated above.  The Panel does not ask how the financial
integrity of social security is affected by these reforms,
because each of the changes is conceptualized so as to achieve
the same reduction in future outlays and hence strengthen the
system s integrity.  For example, the Panel's evaluation of an
increase in the retirement age should be conceptualized as
follows:  compared with a proportional reduction in social
security benefits, what are the effects of a retirement age
increase that achieves the same reduction in future outlays over
the 75-year planning horizon?

     Reducing PIAs of high-wage workers:  One way to maintain
benefit adequacy while reducing benefit outlays is to cut PIAs
more for high-wage than for low-wage workers.  This change in
benefits could be accomplished by reducing the earnings
replacement rate on AIME above the first or second bend points in
the PIA formula, while holding the earnings replacement rate
below the first bend point unchanged.  The earnings replacement
rates on are now 90 percent, 32 percent, and 15 percent.  A
change might lower the 32 percent to 30 percent, and/or the 15
percent  to 10 percent.

     An alternative that might accomplish the same goal is to
reduce the dollar amount of the bend points in the PIA formula,
for example by linking the annual adjustment in the bend points
to changes in prices rather than changes in economy-wide average
wages. Another alternative might be to raise the formula bend
points in line with the lesser of price changes and economy-wide
wage changes; in this event social security benefits would never
be higher and would frequently be lower than under the present
system.  The actual amount of future benefit reduction would be
uncertain, however, and would depend on the exact future
relationship between price and average wage changes.

     In the following discussion, the Panel points out the
similarities and differences between the two simple methods of
reducing PIAs of high-average-wage workers, one that reduces the
earnings replacement rates in the PIA formula and the second that
reduces the bend points in the formula.

Criterion 1.  Adequacy of retirement income.  Both approaches to
cutting benefits fully protect the well-being of retired workers
who had very low lifetime wages, most of whom probably have low
retirement incomes.  But some low/average-wage workers are
members of high-income families (for example, the retired spouses
of highly paid workers).  Neither method protects the benefits of
workers who may qualify for average or above average benefits but
who have low retirement incomes.  On balance, both methods should
be preferred to a proportional benefit reduction if the goal is
to provide a minimally adequate retirement income.

Criterion 2.  Insurance against income fluctuations.  Both
methods provide better insurance protection for workers earning
less than average, and both provide worse insurance protection
for higher paid workers.

Criterion 3.  Avoidance of market inefficiencies: Both proposals
increase labor-market distortions compared with a proportional
PIA reduction for all workers.  In this respect, reducing the
earnings replacement rate(s) above the first or second bend
points probably introduces more distortion than the proposal to
reduce the bend points.

     Distortions are increased relative to a proportional benefit
reduction because high-wage workers face a heavier net tax on
their lifetime earnings.  The marginal net tax imposed on workers
by the social security system is (approximately) the difference
between the payroll tax they pay on additional earnings and the
present value of the extra lifetime benefits they and their
survivors will receive as a result of the increase in their AIME. 
How this net tax changes with additional earnings is the marginal
net social security tax, which is relevant for many decisions. 
Full-career single workers with AIME above the second bend point
currently receive an additional $0.15 in monthly PIA benefits for
each additional dollar in AIME.  A reduction in PIAs that is
targeted on high-wage workers would reduce the increment in
benefits that high-wage workers receive as a result of boosting
their AIME.  It would increase the marginal net tax on their
earnings by more than a proportional reduction in PIAs, thus
introducing a larger distortion in their labor-leisure choice. 

     A reduction in the bend points introduces a similar
distortion in the labor-leisure choice, but for a narrower class
of workers.  If the second bend point is reduced, for example,
fewer workers would see their PIAs raised by $0.32 for each $1.00
increase in AIME; more workers would see their PIAs raised by
only $0.15 for each $1.00 increase in AIME.  The net social
security tax faced by the affected workers would rise
substantially.  Reducing the bend points increases the net social
security tax by a very large amount for each affected worker, but
the tax rate is increased for a smaller number of workers than
would be the case if the earnings replacement rate above the
first and/or second bend points were cut.

     Of course, a proportional reduction in PIAs raises the net
marginal social security tax faced by all workers who expect to
collect social security benefits, including low-wage workers. 
The distortion is larger and more economically significant if the
PIA reductions are concentrated on high-wage workers, however. 
This is true for two reasons.  First, many low-wage workers do
not presently pay a net marginal social security tax at all. 
Many workers with average lifetime earnings below the first bend
point receive a net subsidy from social security for each $1.00
increase in AIME -- they will receive more additional discounted
benefits than they will pay in additional payroll taxes.  A
proportional reduction in their PIA will reduce the net subsidy;
it will not impose a heavier marginal tax.  Second, the amount of
the labor supply distortion rises faster with a 1 percentage
point change in taxes when the tax rate is initially high than it
does when the tax rate is low.  High-wage workers currently face
higher net tax rates than do low-wage workers.  A reduction in
PIAs that is concentrated on high-wage workers would yield a
larger increase in the net tax increase on those workers than a
proportional PIA reduction for all covered workers.  Reducing the
PIA-formula bend points is slightly favored over reducing the
earnings replacement rate above the second bend point because the
top net social security tax is left unchanged by the first
reform.  A larger distortion does not necessarily imply that
high-wage workers will work less than they would if PIAs were
reduced proportionally for all workers.  They might delay their
retirement because they are forced to accept lower social
security pensions than they could obtain if PIAs are reduced
proportionally.  (Low-wage workers on the other hand, would
probably retire earlier under the disproportionate cuts, because
their benefits would not change.)   

Criterion 4.  Distribution of taxes and benefits.  The previous
discussion makes clear that either alternative to a proportional
reduction in PIAs favors low-average-wage workers at the expense
of high-average-wage workers.  So either alternative
redistributes more within a generation than does  the baseline
case.  Between generations, all three proposals favor cohorts
currently age 60 or older, in comparison with the generations
under age 60.  Neither proposal, however, favors the older
generation any more or less than the proposal to impose
proportional reductions in PIAs on future generations of
retirees.

Criterion 5.  Encouragement of national saving.  A reduction in
PIAs targeted on high-wage workers might be expected to boost
saving if those affected offset lower promised social security
retirement benefits with higher personal saving.  Moving the PIA-
formula bend points places more of the benefit burden on lower
earners, as compared with cutting the lowering the earnings
replacement rate above the first or second bend point.   

     Raising the normal retirement age:  The most common proposal
to reduce future social security benefits is to raise the normal
retirement age (NRA), that is, the age at which full social
security retirement benefits (100 percent of the PIA) can be
claimed.  The NRA is already scheduled to increase from the
current age 65 to 66 (for those reaching age 62 in 2005) and then
to 67 (for those reaching age 62 in 2022).  What is under
discussion here is an additional rise in the NRA. (A proposal to
raise the age for early retirement benefit eligibility is
discussed in the next section along with eligibility ages for a
variety of programs including SSI and DI).  

     Lifting the retirement age while leaving the early
entitlement age (EEA) unchanged produces almost exactly the same
effect on retired workers' social security benefits as a
proportional reduction in PIAs.   (Some differences exist between
the two proposals for workers who attain the NRA before 2009. 
But for workers who attain the NRA after 2008, when the delayed
retirement credit will equal 8 percent per year of delay, the
difference between the two methods of reducing benefits is
small.)

     To see why, compare a 7 percent reduction in the PIA with a
one-year increase in the NRA for workers who attain age 66 after
2009.  If the PIA is reduced 7 percent, all workers claiming
benefits will receive a monthly benefit check that is 7 percent
smaller than promised under current law.  If, instead, the NRA is
raised by one year but the PIA formula is left unchanged, persons
claiming benefits at age 66 in 2010 will not be able to receive
an unreduced pension.  Instead, their monthly benefit will be
subject to an actuarial reduction and will be approximately 6.67
percent less than their benefits would have been if the NRA had
remained unchanged.  The percentage reduction in benefits below
what benefits would be under current law is similar to the
reduction when PIAs are reduced 7 percent.  Similar calculations
for workers who choose to claim benefits at ages 62, 65, and 70
show that advancing the retirement age by one year has an effect
on benefits that is similar to a proportional reduction in PIAs.

     Using the Panel's evaluation criteria, raising the
retirement age may be seen to be as attractive, or as
unattractive, as proportionally reducing PIAs.  Two potential
noneconomic differences arise between the two proposals.  First,
raising the NRA signals to workers that the same monthly benefit
can be obtained by postponing retirement, encouraging some to
delay retirement rather than accept a lower pension.  Employer-
sponsored pension plans might also be modified to encourage
retirement at the later age; on the other hand they might be
refashioned to encourage early-outs.  Second, many Americans may
find increases in the retirement age to be more understandable
and perhaps "fairer" than equivalent reductions in PIAs, given
increases in life expectancy.  The message would be that the
benefit amount is appropriate, but the timing no longer is.
 
     An important difference between the two proposals is that
under current rules, DI benefits received at any age are linked
to the worker's unreduced PIA.   If the PIA formula were cut in
relation to the AIME,  DI benefits would also be reduced.  By
contrast, raising the NRA while leaving the PIA formula unchanged
would not change DI benefits.  Instead, early retirees' OASI
monthly benefits would fall relative to DI benefits.  As a
result, older workers below the NRA and in poor  health might be
more likely to apply for DI benefits, preferring a (relatively
larger) DI benefit as compared with a (reduced) OASI benefit. 
Such workers would be better off if the retirement age were
raised and the PIA formula left unchanged. Reducing PIAs versus
raising the normal retirement age would therefore affect mainly
retirees who could meet the disability criteria of the DI
program, and they would prefer the latter option.  People in poor
health who did not meet the eligibility test for DI would have to
accept a reduced early OASI pension, which would be true if the
PIA were reduced or the NRA were increased.  A general point
worth emphasis is that for a given revenue gain, larger DI cuts
imply smaller OASI cuts and vice versa.  

Criteria 1 and 2.  Adequacy of retirement income and income
insurance. Raising the NRA while leaving the EEA unchanged
contrasts with the baseline scenario of reducing PIAs uniformly. 
Workers in good health, ineligible for DI benefits, would receive
less adequate protection from the social security system at some
ages and better income protection at other ages. Insurance
protection against the hazard of very long life is improved,
because workers are discouraged from claiming early, but low,
OASI benefits.  Workers in poor health who can meet the DI
eligibility test receive disability benefits unaffected by the
NRA; under the baseline scenario, as pointed out above, DI
benefits would be reduced by a change in the PIA formula.  
Hence, raising the NRA decreases income insurance for workers who
do not meet the test.  An issue about which relatively little is
known is whether DI recipients are needier than OASI recipients
and therefore less well able to absorb a cut.

Criterion 3.  Avoidance of market inefficiencies. In terms of the
proposal's effect on the saving-consumption choice, raising the
normal OASI retirement ages would require people to rely more on
their own earnings, pensions, and private saving to finance
consumption if they desired to retire prior to their NRA.  In
addition, people might work longer, offsetting the need to
increase private saving.   On the other hand, the increased
appeal of DI benefits may produce a more distorted labor-leisure
pattern: workers in marginal health might reduce their labor
supply so as to enhance their eligibility.
 
Criterion 4.  Distribution of taxes and benefits. Advancing the
NRA reduces lifetime benefits paid to workers and survivors who
die young, and increases the amount of lifetime benefits
available to workers and survivors who live to an advanced age. 
On the whole, this change favors workers with high lifetime
incomes relative to low-wage workers, because higher earners on
average live longer than lower earners.  Nevertheless, raising
the retirement age protects DI payments which helps lower earners
in as much as disabled workers tend to have low average and
lifetime incomes.  As a result, the protection of DI payments
tends to favor some workers who have low wages as compared with a
plan that reduces PIAs.

Criteria 5 and 6.  Encouragement of national saving and
strengthening retirement income systems.  Compared with a
proportional cutback in PIAs, increasing the normal retirement
age may boost private and national saving slightly.  If DI
benefits were made more accessible, this could reduce the need
for precautionary saving.  To the extent that private and
employer-sponsored pension saving would be raised to pay for
retirement prior to the NRA, other non-OASI elements of the
retirement income system might be strengthened. 

     Adjusting automatic cost-of-living adjustments:  Some policy
makers have recently proposed reevaluating the cost-of-living
(COLA) mechanism that links annual increases in social security
benefits to changes in the Current Price Index for All Urban Wage
Earners and Clerical Workers (CPI-W).  Critics of the price index
believe it is inappropriate as an index for social security
benefits because it overstates inflation.  One  proposed remedy
for this bias is to limit social security benefit adjustments to
the annual change in the CPI-W minus 1 or 2 percentage points.  A
preferred remedy, in the Panel's view, is to seek technical
improvements in the measurement of price changes and their
influence on consumer well-being, with particular attention to
the market basket consumed by the elderly.  

     Reform in the Cost of Living Adjustment (COLA) procedure has
also been suggested as a method of reducing social security
outlays, regardless of the proposal's technical merits.  In the
following discussion it is assumed that COLA reform occurs in
such a way that benefits fall in real terms, and that the wage
indexing method used to calculate workers' PIAs is not altered;
only the adjustment in benefits in force is assumed to be
affected.  Once again, this method of reducing benefits is
compared with a proportional reduction in PIAs that achieves the
same reduction in the 75-year time frame used by social
security.  The remainder of this section assesses the
comparative effects of permanently reducing COLA adjustments
below the amount that would be needed to keep the purchasing
power of benefits from falling.

Criterion 1.  Adequacy of retirement income.  Decreasing the
social security COLA reduces benefit adequacy for workers and
survivors who collect benefits for many years.  Of course, if the
real social security benefit declined far enough, some low-income
beneficiaries would become eligible for SSI and food stamp
benefits.  The adequacy of retirement income would be improved
during the first few years of disability or retirement, when real
benefits would be somewhat higher than they would otherwise be,
because the PIA formula was not cut. Poverty and inadequate
income appear to be more severe problems among the long-lived
than for new retirees, so it is plausible that COLA reductions
will increase poverty more, especially among widows, than would a
proportional cutback in PIAs that achieved the same total benefit
reduction.  COLA reduction thus is rated as harmful to the goal
of ensuring adequate retirement income, except to the recently
retired.
     
Criterion 2.  Insurance against income fluctuations.  Economists
believe that real annuities are an efficient form of insurance
for retirees.  Reducing the indexation of social security
benefits makes retirees' income more subject to fluctuations in
real value, which reduces retirement well-being.

Criterion 3.  Avoidance of market inefficiencies.  Because social
security is the only CPI indexed annuity available to most
workers, those who understand its value have an incentive to work
longer to receive more of this valuable insurance.  Therefore
reducing the indexation of benefits makes this insurance less
valuable, and is less of an encouragement for continued work. 
Workers who are short-sighted might be more tempted to myopically
retire with initially high but eroding benefits.  Reducing
benefit indexation induces more saving among those who have
reason to believe that they face a long retirement period, unless
they would be willing to accept lower consumption if and when
they survived into their 80s and 90s.  Conversely, workers in
poor health who do not expect to survive much past age 70 might
save less.

Criterion 4.  Distribution of taxes and benefits.  Within a
generation, cutting COLAs rather than PIAs probably makes the
OASI system more redistributive toward the lifetime poor since
reducing COLAs increases the relative benefits paid to those who
die young and high-wage workers on average live longer than low-
wage workers.  Focusing on between-generation changes, if COLAs
were reduced immediately, some of the burden would be borne by
the current retired generation which has contributed much less to
the social security system than it will receive in benefits. 
Because the proposal achieves some cost-saving from benefit
reductions from current elderly, younger cohorts will not have to
accept as large a loss in benefits to achieve a target reduction
in the 75-year cost rate.  In this way,  the intergenerational
consequences of this proposal differ from those of the proposals 
discussed earlier; it is the only one to reduce payments (in
real, not nominal terms) paid to people now collecting benefits.
     
Criteria 5 and 6.  Encouragement of national saving and
strengthening retirement income systems.  Compared with a
proportional cutback in PIAs, reducing COLAs may increase private
and national saving slightly, thus strengthening non-OASI
elements of the retirement income system somewhat.

     Means-testing social security benefits:  Another way to
reduce social security outlays would be to introduce an explicit
means test, which restricts benefits to persons with low or
moderate retirement incomes (or wealth).  High-income (or high
wealth) retirees and survivors would be prevented from receiving
benefits or would receive substantially lower benefits than they
presently do.  One option is to phase out social security as
family income (or wealth) rises above a certain threshold, say
$50,000 per year.  For example, benefits might be reduced by 40
cents for every dollar of income in excess of the threshold.  A
person who is entitled to $10,000 in social security benefits
under current law would receive just $6,000 in benefits if
countable income apart from social security was $60,000.  The
same person would receive no social security at all if countable
income exceeded $75,000.

     Another option would be to permit people to collect a
specified percentage of their  entitlement regardless of income,
with the remainder of their social security benefits subjected to
a means test. This option reduces rather than eliminates benefits
available to high-income families.

     Some people regard benefit taxation as a means test.  Up to
85 percent of social security benefits are already subject to
income taxes, so it would be difficult to achieve significant
additional tax revenue from this source unless benefits received
by lower income families were also taxed.  In other words,
further increases in social security taxation will come at the
expense of moderate income families rather than the well-to-do. 
The remainder of this discussion assumes that means-testing will
involve reductions in social security benefits to persons or
families with high incomes apart from their social security
benefits.

Criterion 1.  Adequacy of retirement income.  The adequacy of
retirement income will be substantially improved in comparison
with a proportional PIA reduction that achieved the same
reduction in the 75-year cost rate.  By definition, the only
people who suffer losses in benefits under a means test are those
with high incomes from other sources.  In fact, no proposal the
Panel considered provides such strong protection against low
retirement income, even the proposals that disproportionately
reduced PIAs among workers with high lifetime wages.  Under those
proposals, workers with moderately high lifetime earnings but low
retirement incomes from other sources could suffer large
proportional reductions in retirement incomes.
     
Criterion 2.  Insurance against income fluctuations.  If a higher
PIA is accomplished by implementing means testing, all workers
who are not subject to the means test would receive better
insurance protection.  Those who would be means tested because of
high levels of income or assets receive less income insurance,
though a means-tested benefit still provides insurance to
affluent workers if they live to a very advanced age and exhaust
their retirement assets.

Criterion 3.  Avoidance of market inefficiencies. The effects of
means testing on the labor-leisure choice are complicated and
depend on a worker's circumstances and age.  Some workers would
anticipate receiving higher social security benefits under a
means-tested system, and consequently would work less and retire
earlier than under the current system.  On the other hand these
same workers might pay lower net lifetime taxes under social
security, because their net benefits are  higher than they would
be if PIAs were proportionally reduced.  Consequently their labor
supply decisions as young workers may thus be less distorted than
they would be if PIAs were cut.  People having assets that place
them at or above the means test threshold face a sharply higher
tax, and on balance this higher tax could reduce work over the
entire lifetime.  Additionally, the extent of labor supply
distortions would probably be worse, since high earners are
already more heavily taxed by social security over their
lifetimes and means testing exacerbates this effect.

     On the saving-consumption choice, the most serious problem
created by a means test is that it strongly discourages employees
from saving in any form that generates periodic repoted income. 
People who anticipate being near  the threshold might reason that
it is better to consume while young so as to fall below the asset
threshold when old.  Also people might be induced to save in
assets that are less likely to count in an asset test, or which
are more easily hidden.   

     One group would certainly face stronger incentives to save
under this reform: workers who believe they will have too much
non-social security income as retirees to qualify for social
security benefits.  They would have to save more than they now do
to achieve the same level of retirement consumption.  Their
saving decisions will be less distorted by the availability of
social security than they would be if PIAs were proportionally
reduced.   

Criterion 4.  Distribution of taxes and benefits.  Within
generations, a means test clearly benefits low-income retirees
and survivors who would not suffer benefit reductions.  High-
income retirees and survivors, by contrast, would lose all or a
substantial portion of the benefits otherwise available to them.

     If means testing were imposed soon, older retirees would be
affected in addition to those from younger generations.  Such a
policy contrasts with most of the other options discussed in this
Report, which are structured to affect only the younger cohorts. 
Whether such targeting makes a proposal politically more
appealing is difficult to say.  To the extent that the proposal
achieves some saving from benefit cutbacks imposed on the current
elderly, future generations will not have to accept as large a
loss in benefits in order to achieve a target reduction in the
75-year cost rate.  In any event, comparing a means-tested option
implemented across the board with a proportional reduction in
PIAs that affects only future retirees, the means test on social
security benefits allocates the burden of social security cost
saving more evenly across generations.

Criterion 5.  Encouragement of national saving.  Compared with a
proportional cutback in PIAs, a means test on social security
benefits has ambiguous effects on private and national saving.
The  proposal would depress employer pensions and assets that
count in an asset test.   Better-off workers who believe they
will be eliminated from the means-tested payment will seek to
save more privately to achieve the same level of retirement
consumption.  On the other hand, people expecting to be near the
threshold might reason that it is better to consume rather than
save while young, so as to fall below the asset threshold in
retirement.  

Criterion 6. Strengthening the financial integrity of retirement
income systems.  Compared with a proportional cut in PIAs, means
testing would tend to weaken other non-OASI elements of the
retirement income system.  In addition, means testing might
seriously erode political support for the system, although it is
unclear whether this would be any more problematic in a means-
tested regime than in a regime that cut PIAs at the top.

     A double-decker system:  The final set of benefit reforms
the Panel considered involve fundamental restructuring of the PIA
formula, restructuring that would probably also require
significant changes in the role of SSI in providing income to the
old and disabled.  Instead of retaining the structure of the
current PIA rules, these alternative formulas provide a fixed
basic benefit (perhaps subject to a means test, and probably
varying with years of service) and a constant rate of increase in
the social security benefit for each $1 increase in a worker's
AIME.  

     Three examples of a non-means-tested benefit formula help
illustrate the essential idea of benefit restructuring under this
heading.  Consider three hypothetical ways of determining the
retiree s full benefits:

     1)   B1 = $400 + (0.22 x AIME);

     2)   B2 = $550 + (0.15 x AIME); or

     3)   B3 = $800.

Under each option, part or all of a worker's benefit consists of
a flat-rate component.  In two of the formulas, (1) and (2 ), the
benefit also includes a component that is strictly proportional
to the worker's AIME.  Formulas such as 1 and 2 are sometimes
referred to as "double-decker" social security systems.  (The
first "deck" consists of the flat-rate pension; the second
consists of a benefit that is strictly proportional to covered
earnings.)  Formula 1 is the most generous formula for workers
with high lifetime incomes, because it is the formula where the
benefit rises fastest with increases in AIME.  Formula 3 is the
most generous to workers with low lifetime incomes, because the
entire benefit consists of the flat-rate component.  Of course,
formula 3 is also least advantageous for workers with high
lifetime earnings because they receive benefits that are no
higher than those received by low-wage workers.

Criterion 1.  Adequacy of retirement income.  Available evidence
is sparse, but suggests that adequacy of retirement income under
double-decker formulas could improve relative to a proportional
cutback in PIAs that achieved the same reduction in the 75-year
cost rate.  The  alternative benefit formulas outlined here
ensure all retirees a fixed minimum benefit, regardless of their
average earnings, so social security would assure disabled and
retired workers and survivors at least a minimal income under all
circumstances in which they become entitled to receive benefits. 
The particular parameters of the system matter a great deal,
however, and those at the bottom may or may not do better under a
double-decker system, depending on how it is constructed. 
Replacement rates for low earners would probably increase
(depending on the size of the bottom deck), while replacement
rates for higher earners would likely fall.  
     
Criterion 2.  Insurance against income fluctuations.  The double
decker benefit formulas would offer better insurance protection
to workers with low average earnings, unchanged insurance
protection to many workers with low-to-moderate earnings, and
worse protection to workers with moderate or high lifetime
earnings.  The current PIA formula creates a strong link between
benefits and average earnings, so that earnings losses after
disability, death, or retirement are replaced by benefits that
offset a large percentage of the loss, especially in the case of
low- and moderate-income workers.  Formula (3) completely severs
the link between benefits and previous earnings; formulas (1) and
(2) retain the link but in many cases reduce the percentage of
earnings loss that is replaced by benefits.  

Criterion 3.  Avoidance of market inefficiencies. A two-tier
reform such as this would probably reduce work incentives for
low-wage employees when they reach the early or normal retirement
age, and also would impose a sharply higher "net" social security
tax on earnings when young.  This point can be illustrated in the
hypothetical case of a worker whose AIME is below the first bend
point.  On the margin, a $1 increase in AIME could boost his PIA
by $0.90 under the current formula, by just $0.22 under
alternative formula (1), by $0.15 under formula (2), and by
nothing at all under formula (3).  Thus, in comparison with the
current formula, all three of the alternative formulas provide a
smaller reward on the margin for increases in work effort and
earnings when workers are young, implying that work decisions of
low- and moderate-wage workers could become more distorted than
if PIAs were cut.

     High-wage workers could anticipate receiving substantially
lower social security benefits under these double-decker options
that will probably increase work incentives around the early and
normal retirement ages.  These workers may also face higher "net"
lifetime taxes for social security (or receive lower net
benefits), depending on the alternative formula selected.  If the
alternative formula offered a marginal replacement rate that is
much below 15 percent, the "net" lifetime tax on social security
will be higher than it would be if PIAs were proportionally
reduced.  This is certainly the case under alternative formula
(3), where the marginal replacement rate is 0 percent.  On the
other hand, if the marginal replacement rate in the reformed
formula is 15 percent or higher, as it is under formulas (1) and
(2), the "net" tax imposed by social security (on the margin)
would actually be lower than under a reform with proportional PIA
reductions.  Labor supply distortions for high-wage workers could
be reduced under these circumstances.

     On balance, the alternative social security benefit formulas
probably lead to larger labor market distortions overall.  A
larger fraction of social security contributions is used to
finance fixed basic benefits that are not linked to workers'
contributions into the system.  For a much higher percentage of
workers, extra contributions into the system are not matched by
increases in future benefits that are as large or larger than the
increase in contributions.  A larger fraction of the social
security tax will therefore represent a pure tax on labor
earnings, increasing the labor supply distortions caused by the
program.

     In terms of the saving-consumption choice, little reason
exists either to favor or oppose the alternative PIA formulas in
comparison with a proportional reduction in all PIAs.

Criterion 4.  Distribution of taxes and benefits.  The discussion
thus far suggests that the double-decker formulas favor low to
average-wage workers at the expense of high-average-wage workers,
in comparison with the proposal to reduce PIAs proportionally. 
Also, each of the benefit formulas favors the current generation
that is age 60 or older, relative to the generations under age
60, but neither proposal favors the older generation any more or
less than the proposal to impose proportional reductions in PIAs
on future generations of retirees.

Criterion 5.  Encouragement of national saving.  Compared with a
proportional cutback in PIAs, these alternative formulas might
boost private and national saving.  Little evidence exists on the
question of whether workers with high lifetime earnings would
save more in response to a change in social security benefits
than would those with low lifetime earnings.  If they did, the
highly paid would raise their pension and other saving assuming
the reduction in retirement benefits is concentrated on high-wage
workers.  Among the three, formula (3)--least generous to high-
wage workers--might induce the largest increase in national
saving.

Criterion 6. Strengthening the financial integrity of retirement
income systems.  To the extent that pension saving was increased
to offset the redistributive formula, other non-OASI elements of
the retirement income system might be strengthened.  As before,
implementing a double-decker system could erode the system's
political support, although it is unclear whether political
difficulties are any greater than those under a means-tested
regime. 

     A double-decker system with means testing:  The double-
decker PIA formulas considered above (formulas 1 and 2) each
include a flat-rate component and a second component proportional
to the worker s AIME.  To reduce the net cost of the flat-rate
component, this portion could be subject to a means test. 
Retirees with large assets or high current incomes apart from
social security might receive reduced flat-rate pensions or no
flat-rate pensions at all.  The earnings-related component of
their pension would not be subjected to a means test.

     Such a partial means-testing scheme would substantially
reduce the cost of the flat-rate component of the social security
benefit. Because fewer retirees would receive this portion of the
benefit (and many fewer would receive the full amount of the
flat-rate component), at any given contribution rate for social
security, the system could afford to offer either a larger flat-
rate component in the benefit formula or a larger earnings-
related component.  If the flat-rate component were made more
generous, the income adequacy of social security benefits would
be improved.  If the earnings-related component were made more
generous, the insurance value of social security would be
improved for high-wage workers.   

     An important disadvantage of means-testing has already been
mentioned.  The labor supply decisions of low to moderate-income
retirees would be much more distorted than they are under the
current system, and the labor supply decisions of low- to
moderate-wage workers would also be more distorted.  Work and
retirement decisions of high-wage and high-income workers would
be less distorted than under the current system, if the earnings-
related component of social security benefits gives workers at
least $0.15 in extra benefits for each $1 in extra AIME;
otherwise, the decisions of high-wage and high-income workers
would be at least as distorted as under the current system.  The
saving decisions of workers would be more distorted than they are
under a proportional reduction in PIAs.  The larger the flat-rate
component in the social security benefit formula, the larger
these distortions would be.  As a result, national saving would
probably fall.

     The current system is similar to the means-tested double-
decker system in one crucial respect.  An elderly or disabled
household is eligible for a SSI and food stamp benefits if it has
low enough assets and income, and these benefits are phased out
as the household's income rises.  The current system thus enjoys
some of the same advantages that are claimed for the means-tested
double-decker system.  In particular, it ensures minimal incomes
to low-income people who are old enough or disabled enough to
claim benefits.  Combined SSI, social security, and food stamp
benefits currently amount to about 85 percent of the poverty line
for a person 65 or older living alone, and more than 100 percent
of the poverty line for an aged couple.     

     Differences arise between the current system and a means-
tested double-decker system, of course.  SSI and food stamps are
currently financed out of general revenues rather than payroll
taxes.  SSI benefits are phased out quite rapidly as an eligible
person's income from other sources (including social security)
rises.  For that reason, the percentage of old and disabled
persons who are eligible for SSI benefits is small.  In addition,
people who may be eligible for these benefits must apply for them
in a process separate from their application for social security. 
As a result, many eligible people do not apply for SSI or food
stamps. (Just over half of the elderly poor participate in the
SSI program; some nonparticipants may be asset-ineligible.  See
U.S. House of Representatives 1994, pp. 241-242)   In a means-
tested double-decker system, the application for the flat-rate
and earnings-related components of social security benefits would
occur at the same time and could be combined., resulting in a
substantially higher take up rate.  Finally, the earnings-related
component of the current social security formula is more
complicated than the earnings-related component of the formulas
we have described.

D. Alternative Means of Increasing Revenues  

     An earlier subsection described how social security's long
run fiscal gap might be closed either by raising taxes or
reducing benefits -- that is, by expanding or reducing the
overall size of the system.  Here the Panel considers other
methods of increasing revenues to the social security trust
funds, evaluating them relative to the simple increase in the
payroll tax using the criteria described at the outset.  Three
proposals are considered:

     (1) Raising the earnings limit on which payroll taxes apply;
     (2) Expanding the definition of taxable income; and    
     (3) Introducing additional general revenues.

     It should be noted that evaluation Criteria 1 and 2 are not
particularly relevant in this discussion.  Adequacy of retirement
income and insurance against income fluctuations are primarily
benefit and not tax issues, although higher net lifetime taxes do
lower disposable income and therefore diminish households'
ability to save for retirement.  In addition, the Panel is
considering proposals that raise the same amount of revenue over
the 75-year projection period, so they will have the same effect
on social security financing (Criterion 6).  For this reason, the
Panel concentrates here on the remaining three criteria.

     Raising the earnings limit on which payroll taxes apply: 
The proposal examined here is an increase of the taxable payroll
ceiling instead of an increase in the payroll tax rate as
described in the baseline case.  In 1995, social security OASDI
payroll taxes were paid by employers and by employees (6.2
percent each) on the first $61,200 of each worker's earnings. 
After this maximum taxable amount, raised annually by the rate of
increase of average wages, the OASDI payroll tax rate drops to
zero.  The HI tax of 1.45 percent each is paid on all earnings. 
The self-employed pay both parts (12.4 percent for OASI; 2.9
percent for HI) on the same taxable amounts.    

     The proposal here is to raise the real level of income
subject to the taxable limit or to  eliminate the tax ceiling
altogether.  Unless there were a simultaneous change in the
benefit formula, increasing the taxable limit would also increase
the social security benefits eventually paid to those affected,
because benefits are based on average covered earnings, which
would rise under this proposal.  Benefits would not rise in the
baseline case, because covered earnings would not change.  
Specifically, the Panel compares two payroll tax changes: raising
the baseline increase from 6.2 percent (for employer and
employee) to something higher for all those earning less than the
maximum taxable amount, versus an increase from zero to 6.2
percent (for employer and employee) on all those earning more
than the old and less than the new maximum taxable amount (or on
everyone earning more than maximum taxable amount, were the
ceiling eliminated altogether).  How do these two proposals
differ?

Criterion 3.  Avoidance of market inefficiencies.  The baseline
case is a pure tax increase because it would not result in higher
social security benefits later.  In contrast, raising the taxable
income limit would be only a partial tax, because individuals'
AIMEs and therefore subsequent benefits would also rise.  (Most
of those paying the increment would be beyond the 15 percent
bend-point, where the return on additional earnings taxed is the
lowest.)  Moreover, because of the increase in future benefits
under this taxable ceiling proposal, more taxes would have to be
raised than under the baseline to have the same net effect on
social security finances.  

     The number of people affected at the margin differs
significantly under the two scenarios.  The baseline case
increases the marginal tax rate of all those under the maximum
taxable limit.  Raising the taxable limit, on the other hand,
affects only some of those over it at the margin.   Currently,
fewer than 15 percent of workers covered by social security earn
above the maximum (Steurle and Bakija 1994).  Some of them would
have their marginal tax rates increased by the full tax rate
(depending on how high maximum taxable earnings were raised), but
far fewer than the 85 percent or more whose marginal tax rates
would be increased by an increase in the payroll tax rate.  Also,
the magnitudes of the increases in marginal tax rates are very
different in the two cases.  Raising the taxable pay limit
increases the marginal tax rate from 0 to 12.4 percent (assuming
the employer's share is eventually taken from workers' pay). 
This increase is on top of the marginal federal and state taxes
these individuals already pay, which tend to be at the high end,
given the earnings levels of those affected.  By contrast, in the
baseline case, the increase in the marginal tax rate would be
much more modest, and much of it would fall on those who face
lower combined federal and state marginal tax rates.  

     The trade-off here is between a large marginal tax rate
increase on a small number of high earners, and a smaller
increase on a much larger number of low- and middle-level
earners.  Both of these tax increases will probably increase
labor-leisure inefficiencies for younger workers.   Because the
magnitudes of these effects are not firm, it is difficult is
quantify the size of the two distortions and decide which of the
proposals does more damage.  Finally, for people near retirement,
the two plans have different effects.  Increasing the taxable pay
limit reduces net earnings for some highly paid workers, while
raising the tax rate lowers net earnings for all workers (though
not at the margin for those earning more than the new limit).  
Both changes would be expected to induce earlier retirement, on
net, although more would be affected by the baseline case.

Criterion 4. Equity of lifetime social security taxes and
benefits.  The distributional impacts of these two proposals are
very different. The baseline plan, which raises the payroll tax
rate, represents a pure tax increase on all those with taxable
earnings since taxes rise but eventual benefits do not.  Raising
the taxable limit, by contract, is a tax on some or all of those
earning more than the old taxable limit, even factoring in the
eventual increase in benefits.  Raising the taxable limit,
therefore, is more consistent with the progressive nature of
social security's tax and benefit structure.  

     On the other hand, because of this progressive nature of
social security, workers with high earnings are already more
likely to be suffering negative expected returns on their social
security contributions now and in the future.  An increase in the
taxable limit would make the returns even more negative, further
weakening the link between contributions and benefits for the
upper income population.  To make the same point at the other end
of the income distribution, low wage workers are more likely to
receive positive rates of return, both because of the social
security benefit structure and because of the Earned Income Tax
Credit (EITC), which was specifically designed to compensate for
the regressivity of social security taxes.  Those preferring that
social security imitate a pure insurance scheme, with less
intergenerational redistribution, might favor the baseline case
(increasing the payroll tax) for this reason. 

Criterion 5. Encouragement of national saving.  Both tax increase
proposals reduce the social security deficit by the amount of the
net taxes raised.  The question is where these taxes would come
from -- peoples' consumption or saving.  To the extent that taxes
are paid out of private saving, then national saving may not
change at all;  instead, there is merely a change in the party
doing the saving. Alternatively, the loss in disposable income
may come from consumption, resulting in a larger increase in net
national saving.  Some analysts argue that raising the taxable
limit will affect saving negatively since upper income households
are most targeted by the tax increase, and they do much of the
nation's saving.  Relatively little is known about this
proposition empirically.

     Expanding the definition of taxable income:  Social security
payroll taxes are paid only on money income, because employer-
provided benefits are (for the most part) not subject to either
income or payroll taxes (elective contributions for 401(k) and
403(b) plans are included in the payroll tax base).  Total
employer payments for benefits amount to roughly one-third of
payroll, up from close to zero in the 1920s.  The erosion of the
tax base over time has meant that payroll taxes on the portion of
income that is taxable were set at a higher rate than would be
the case otherwise, to raise a given amount of revenue.  As a
result, some policymakers have proposed expanding the definition
of taxable income, subjecting all currently tax-protected
employer-provided benefits to both income and payroll tax.

     One practical problem is that significant measurement
problems arise in evaluating employee benefits.  While
determining the values of some is relatively straightforward (for
example, an employer's contribution to a 401(k) pension plan),
other benefits are more difficult to price, for example,
projected benefits in a defined-benefit plan or health insurance
premiums for a given employee.  Health insurance is particularly
problematic to value for younger workers, because many group
plans cross-subsidize the high health costs of older workers by
charging more for relatively healthy (and hence inexpensive)
younger workers.  If health insurance costs were simply allocated
per capita, young workers would be forced to pay taxes on a
health benefit amount that far exceeded their actuarially fair
premium.  Despite these practical difficulties, the Panel
proceeds with an evaluation of this proposal.       
     
     Non-taxable employee benefits are more common among higher
paid workers, and thus from a vertical equity perspective, many
have argued that these benefits should be included in the income
tax base.  The argument is less persuasive for the OASI payroll
tax, becaise social security benefits were designed to replace
money earnings, but not other nonwage benefits.  When retirees
lose their active-worker benefits by retiring prior to age 65,
some replace their former medical coverage by purchasing it,
while others receive extended coverage from their previous
employers.  One might therefore argue that some benefits could be
included in the tax base and also in the eventual social security
benefit calculation.  This proposal would decrease the favorable
impact of the tax inclusion on social security system finances,
because future benefits would rise as well. 

Criterion 3.  Avoidance of market inefficiencies. Expanding the
definition of taxable income to include employee benefits would
raise the covered income of everyone with employee benefits.  For
those already over the OASI taxable limit, neither total payroll
taxes paid nor the marginal tax rate would change.  For those
with income under the limit, total payroll taxes (and eventual
benefits) would increase, but their marginal tax rate would not. 
Some people, pushed over the limit by the redefinition, would
face increases in total payroll taxes (and eventual benefits),
but their marginal payroll tax rates would drop to zero.  On the
whole, this proposal would result in less labor market distortion
than the baseline payroll tax increase, because it keeps constant
or lowers the marginal tax rate, whereas the baseline proposal
increases the tax rate for all those under the taxable limit.   

     Subjecting benefits to tax could have a more potent effect
on peoples' saving and consumption choices.  For example, the
fact that (many) employee benefits are not subject to payroll and
income tax has lowered the price of group health and retirement
insurance, encouraging employees to buy more than they would have
obtained if they could only be purchased at after-tax prices. 
The tax subsidy has increased consumption of health insurance,
and raised the amount of private saving held in the form of
pensions. Removing the tax protected status of pensions would
make pensions less attractive to those under the taxable limit,
and would probably decrease the total amount saved.  Whether this
result is viewed as a beneficial or negative outcome depends to a
large extent on whether people would be likely to underconsume
the benefit without the subsidy.  For example, those believing
that retirement saving are too low see the tax qualified status
enjoyed by pensions as a beneficial public policy.  Others who
think there is too much health insurance think that including
health benefits in taxable earnings would be reducing a
distortion.

Criterion 4. Equity of lifetime social security taxes and
benefits.  This proposal would reallocate taxes and benefits
within a generation, because the costs fall primarily on the
middle class (for whom social security taxes would rise).  
Compared with the baseline increase in the payroll tax, this
proposal is more favorable for low-income workers without
significant employee benefits and those already earning over the
taxable limit, but worse for those in the middle-income category.
Within an income bracket, the proposal would tax those with
benefits more heavily than those without benefits, probably a
move toward horizontal equity.  In general, the proposal does not
radically change the distribution of taxes and benefits across
generations.   

Criterion 5.  Encouragement of national saving.  As noted above,
making pension contributions taxable would probably decrease the
total amount saved.  Whether this effect is larger or smaller
than the baseline tax increase is not clear, but the Panel
believes that saving would probably be decreased.  Taxing health
benefits might not have this effect.

     Introducing additional general revenues:  Some portion of
OASDHI is currently finance from general revenue, namely Medicare
Part B (Supplemental Medical Insurance) for physicians and other
care outside of hospitals, and the income tax collected on
taxable social security benefits (at each individual's highest
marginal tax rate), some of which goes to the OASDI Trust Funds
and some of which goes to Medicare.  The proposal examined here
is to add an extra flow of general revenues from the federal
income tax to pay for retirement benefits.

     The use of general revenues rather than the payroll tax has
certain attractive features.   It is administratively simple and
is potentially more redistributive within generations than is an
increase in the payroll tax. It would also generate a
contribution from those already retired, for whom expected
benefit payments over the retirement years far exceed payroll
taxes over the worklife.  On the other hand introducing general
revenues to balance the system would substantially change the
nature of social security, and it might also eventually erode
public support.  The additional use of general revenues would
change the public's perception of social security benefits as
earned rights, and might further politicize social security by
drawing it more explicitly into annual budget debates.  There are
also analysts who argue that the redistributional component of
social security should be explicitly identified and recognized,
and funded from the same sources used for other public programs.

     Despite these political economy objections, it is useful to
employ the Panel's by-now familiar evaluation criteria to this
proposal.

Criterion 3.  Avoidance of market inefficiencies.  This proposal
would have labor market consequences because some workers'
marginal income tax rates would rise to generate these additional
revenues.  Exactly whose taxes would rise, and by how much, would
affect how this proposal compares with the baseline payroll tax
increase.  

     The baseline payroll tax increase would raise the marginal
tax rates of all those under the taxable limit.  (Payroll tax
payments on earnings below the threshold would rise for those
above this limit, but their marginal OASDI tax rate would remain
at zero.)   By contrast, suppose that new revenues were raised by
a proportionate increase on all federal income tax payers. 
Because the federal tax base is larger than the social security
tax base, a smaller rate increase would be required in the
federal income tax.  Also, unlike the payroll tax, this income
tax rate increase would affect those above the social security
taxable limit, those whose total marginal tax rates tend to be
the highest already.   Assessing what effect raising payroll
taxes would have on work and retirement is unclear, because
higher marginal tax rates not only lower net earnings
(encouraging less work and earlier retirement), but also reduce
income (inducing more work).   On net, the policy might encourage
earlier retirement (Fields and Mitchell 1984b), although the
effects of both this and the baseline proposal would probably be
small.   

     Other decisions would also be affected by this proposal,
including the way people allocate their income to saving versus
consumption.  Compared with the baseline proposal, raising
federal income taxes would probably reduce saving more: the
increase in the federal income tax is levied on asset earnings
and therefore discourages saving and asset accumulation, whereas
the payroll tax does not.  The size of this effect is difficult
to determine.

Criterion 4.  Equity of lifetime taxes and benefits. Raising
social security revenue through the federal income tax system
increases within-cohort redistribution more than the baseline
approach, inasmuch as the federal income tax system is more
progressive than the payroll tax.  By using additional revenues
unrelated to the earnings base on which social security benefits
are calculated, this proposal will probably be seen as weakening
the connection between individuals' social security taxes paid
and benefits received.  This perception would arise because
payroll taxes are levied on a tax base directly tied to social
security benefits, while increases in general revenue are not. 
If one turns attention to cross-generational redistribution, it
must be concluded that raising the income tax is also more
redistributive.  The burden of payroll tax increase falls
entirely on future earners, exempting those already retired. 
Raising general revenues would distribute the social security
financing burden more widely, requiring support from all those
with taxable income, rather than just those with earnings.

Criterion 5.  Encouragement of national saving.  As mentioned
above, this proposal will change the way people allocate their
income to saving versus consumption and might reduce private 
saving more than the baseline case. 
 
E. Extending Social Security Coverage to State and Local Workers
     
     Few groups of employees -- mainly selected state and local
government employees -- remain outside the social security system
today.  An argument in favor of including these is that of
attaining universal coverage.  Also people with careers spanning
both public and private employment would be treated more
uniformly.   Objections to placing these workers in the social
security system are that the federal government would be seen as
intruding into the business of states (which may raise
constitutional problems) and the fact that covering these workers
will generate some additional payroll tax revenue now, at the
expense of having to pay them social security benefits later.  As
a result, this change alone will not solve the social security
system's solvency problems.

F. Investing Trust Funds in Private Capital Markets

     By law, Social Security Trust Funds are currently invested
in special issue Treasury securities.  These are government
obligations with maturities ranging up to 15 years, and the
interest rate paid on them is equal to the average market
interest rate for all marketable interest-bearing Treasury
obligations that are not due or callable in the next 4 years. 
Technically, these are redeemable at par.  Because these are
government securities, interest and principal are virtually free
of default risk.  (The Treasury obligations are subject to
inflation risk since they are not indexed bonds).
  
     Some analysts have proposed that some or all of the Social
Security Trust Funds be invested in private capital markets, in
particular in the U.S. stock market, on the theory that doing so
could earn a higher rate of return.  In this discussion the Panel
examines some of the pros and cons of this course of action.  

     A judgment requires an assessment of the opportunities and
the costs of this investment strategy, as compared with the
current policy.  If investing the Trust Funds in stocks carried
no risk and provided a higher return in every state of the world,
then a stock portfolio would always dominate the current
investment portolio.  This argument is made by some analysts who
examine long holding period returns over the past 70-190 years in
the United States (Siegel 1994).  For example, if one examines
holding periods of 22 years, stocks outperformed long-term
government bonds, intermediate term government bonds, and 3-month
Treasury-bills in every 22-year period beginning in 1926 (Zeldes,
in progress).  If this held true in the future, it would make
sense for SSA to hold its entire portfolio in stocks rather than
in Treasury securities of any maturity; in fact, the SSA in this
case should borrow in order to purchase additional stocks.  More
generally, under this scenario, the entire government sector --
and in fact every individual with the appropriate length horizon
-- would put all available funds in stocks. (Of course liquidity
needs would still have to be met).

     The fact that all individuals with long horizons do not
invest their entire portfolios in stocks suggests that there is a
risk-return tradeoff, despite the past history of returns.  That
is, the future cannot be predicted with much precision, and even
if the stochastic processes generating future capital market
outcomes were the same as in the past, past outcomes are unlikely
to be representative of the entire distribution of potential
returns.  There are fewer  than four independent 22-year
historical periods since 1926, and it is difficult to estimate
confidently the empirical distribution using four observations. 
An additional concern is that risk-return characteristics of
capital markets could change.

     If stocks are not certain to outperform bonds in every
possible state of the world, then sensible policy must take into
account tradeoffs between risk and return.  To analyze this,
the Panel  must investigate social security's goals and
constraints, to assess what the agency would take into account in
determining the risk-return tradeoff after which one could derive
the optimal portfolio for the SSA--the ideal fraction of the
portfolio to invest in each available asset.  Although it seems
unlikely that the optimal portfolio would hold 100 percent in
nominal intermediate-term government bonds, it is possible that
the fraction in equities could be positive or negative.  Only if
the optimal fraction were positive would it make sense to invest
in the stock market.

     There has been little public discussion of SSA's goals and
objectives under conditions of uncertainty.  One simple way to
think about how the agency might make decisions is that it seeks
to minimize some function (such as a weighted average) of the
mean payroll tax rate and the variation in that tax rate, while
at the same time maintaining a constant real average social
security benefit level.  A large economic literature on tax
smoothing shows that the government will tend to smooth tax rates
so as to reduce the larger distortions resulting from
proportionally higher tax rates (Barro 1979; Bohn 1990). Whether
the share in stocks is positive would then depend on the
relationship between payroll tax revenue and stock and bond
returns over some horizon (as well as liquidity needs).

     For example, imagine that, relative to trend, real wages and
payroll tax revenues tend to fall at the same time that the
excess return of stocks over intermediate term Treasury bonds is
low.  In this case, investing the Trust Funds in equities rather
than current government securities could make it necessary to
raise tax rates even further when real wages fall.  This positive
correlation between wages and the excess return of stocks could
increase the variation in tax schedules and add to the risk faced
by the system.  Conversely, if, relative to trend, real wages
rise when the excess return on the stock market is low, then
holding stocks in the Trust Funds could  reduce the risk.  What
this correlation has been in the past (and what it might be in
the future) remains to be investigated, but more knowledge of
this relationship is critical in evaluating the proposal.  In
addition, the relevant horizon for examining these correlations
is not clear.  Intuition suggests that what might be relevant is
the correlation over long horizons, such as decades.

     Whether investing a positive fraction of the social security
Trust Funds in stocks is optimal in this model depends both on
the risk, as just discussed, and also on the difference between
the expected returns on stocks and bonds. If covered earnings and
stocks were positively correlated and the risk premium from
holding stocks were small enough, then SSA would optimally hold
no stocks at all in its portfolio--in fact, it would prefer to
short-sell stocks.  Alternatively, if covered earnings and stock
returns were negatively correlated (or if the risk premium were
large enough), the optimal SSA portfolio would include some
holdings of stocks.   Bohn (1990) explored this risk from the
perspective of the government as a whole (rather than that of a
single agency), and concluded based on an examination of
quarterly data for the U.S. that the covariances are such that
the optimal holding of a U.S. stock market index (the Standard &
Poor 500) would be negative, at least in the absence of any risk
premium.  The government should take a short position in the
stock market.  Taking into consideration a large equity premium
might reverse this theoretical prescription, but the finding
makes it clear that the government's optimal holdings of stock
are not necessarily positive, and the work gives the Panel an
additional reason to question whether stock market investment is
appropriate for the Trust Funds.

     To determine the optimal portfolio for the Social Security
Administration, the agency should explicitly evaluate how it
weights risk versus return, something that has not been done
systematically to date.  More broadly, the agency should
undertake explicit stochastic modeling.  Currently the agency
examines only a handful of different scenarios (low,
intermediate, and high cost), a strategy that implicitly assumes
each economic and demographic variable can take on only three
values and that these variables are perfectly correlated.  A more
comprehensive treatment of uncertainty would require taking a
stand on the joint probability distribution of these variables,
including allowing these variables to be less than perfectly
correlated, and explicitly writing down the objective function of
the agency.  Such an undertaking is necessary before deciding
whether Trust Funds managers should be encouraged to invest in
equities.

     A different way to think about the proposal is to realize
that the risks and returns in the social security agency s
portfolio would be passed on to households, perhaps with some
lag.  When portfolio returns are high, this improves social
security benefits or reduces social security taxes in the future;
when returns are low, this approach reduces social security
benefits or increases taxes in the future.  As a result,
households receiving these benefits and paying these taxes may
take the Trust Funds portfolio into account in forming their own
portfolios.  One hypothetical but useful benchmark is the case
where households consider SSA's portfolio to be entirely their
own.  In this instance, as long as households have sufficient
private wealth, any change in the SSA portfolio would give rise
to an offsetting adjustment in their private holdings. Thus, if
the trust fund reduced holdings of Treasury bonds and increased
holdings of equities, households could offset this by increasing
their holdings of T-bonds and decreasing their holdings of
equities. A key implication of such a benchmark scenario is that
social security trust fund portfolio investment policy is
neutral: that is, it does not change the risk-return
characteristics of households' overall portfolios.  It follows
that, if households behave in this manner, no reason exists to
oppose equity investment by the Trust Funds, but there is also no
particular reason exists to favor it.

     This neutrality result does not hold true if people are
prevented from investing in stocks to the extent they would like
to:  in this instance, holding equities in the Trust Funds could
make them better off.  One such case would arise if people have
no wealth other than expected future social security benefits. 
Indeed recent evidence suggests that a significant fraction of
the population enters retirement with little other than housing
and social security wealth (Smith 1994).  Another possibility is
that trust fund risk will fall on as yet unborn generations, who
have no opportunity to hold stocks now on their own accounts. 
Holding equities in the fund could give future generations
exposure to current stock returns, thus improving risk sharing
across generations.  In both cases, as long as households are not
implicitly being exposed to stock market risk through other
channels, adding some equities into their social security
portfolio would make them better off.  Of course, this policy
leaves open the question of how large the fraction held in
equities should be.  Increasing this fraction too much would make
some households (those relatively more risk averse) worse off. 

     The next question that must be addressed is whether
investing the Trust Funds in equities will increase national
saving.  Focusing first on government saving, proponents assert
that holding social security funds in private assets will
increase pressure on politicians to reduce the government
deficit.  The importance of this political argument is difficult
to gauge.  It is plausible, however, that if legislation allowed
the Trust Funds to invest in equities, legislation could also
require that the purchase of equities would not count as an
expenditure and thus would not alter the measured unified budget
deficit.  Turning next to private saving, whether placing
equities in the Trust Funds would alter private household saving
is far from clear.  People might respond to having a riskier
asset in their social security portfolio by increasing
precautionary saving, although this effect migh be offset by the
higher expected return on equities.  And for people who have no
wealth, investing the Funds in equities would have no effect on
saving.  They are unable to save any less, and unwilling to save
any more.  Overall, this change is unlikely to have a large
effect on national saving. 

     Finally, some critics argue that the proposal to have
equities in the Trust Funds would expose people to additional
political risk, in that government officials would have to select
investment options and might not make these decisions purely on
risk-return criteria.  If the SSA were allowed to choose its
investments, it might not remain immune from pressure to direct
investments toward economically targeted firms, industries, and
nations.  This problem becomes more serious the larger is the
size of the Trust Funds.  One solution is to require SSA to
invest in an index fund, thus reducing discretion on the part of
the SSA.  Another option is to subcontract with private money
managers, although again selection of these managers might not be
determined purely on risk-return grounds.  Another option would
be to transfer these funds to individual accounts, a topic to
which the Panel turns in the next section.  Several other
questions also remain to be investigated in future research,
including the matter of how quickly a shift to equities should
occur to avoid massively altering capital market prices.

     The Panel concludes that a judgment on the proposal to
invest some of the Trust Fund in equities should depend on an
assessment of its opportunities and its costs.  Given the lack of
literature on many of these questions, we did not reach a
consensus on the proposal, but instead propose that this issue
deserves additional study before a clear policy prescription can
be made.

G. Individual Social Security Retirement Accounts

     In this section the Panel takes up a different policy
proposal attracting debate of late, namely that of converting a
portion of the social security payroll tax into individual
pension accounts.  The purpose of the discussion is to identify
the most important advantages and disadvantages of such a policy
change. 

     Assuming that the necessary adjustments have been made in
order to make the social security system solvent, the system will
run a current annual surplus for a number of years.  One 
approach would be to redirect a portion of this social security
surplus to individual accounts (Porter, forthcoming).  Of course,
paying this surplus to workers in the form of individual accounts
would require compensating reductions in future social security
benefits.  The contributions to and income from the private
system would replace a portion of the taxes paid to and income
promised under social security.  

     A substantial departure from the existing approach would
entail a move to a two-pillar  system.  As an example of a two-
pillar model, the first pillar could be designed to guarantee a
minimum flow of retirement income after some age, perhaps an
amount that was higher if the retiree had spent more years
contributing to the system.  This bottom tier would provide
minimum or poverty-line income to the aged, and might be payroll
tax-financed or perhaps paid for out of general revenue. The
second pillar of such a revamped retirement income system could
be thought of as a mandatory defined-contribution plan funded by
payroll taxes that depended on each worker's earnings.  This
second pillar would therefore entail a conversion of part of
workers' social security payroll taxes into a mandatory
individual account system.  Participants' funds in this second
pillar plan would be invested in a range of capital market
assets, presumably directed by the individual contributors
themselves. 

     Variants of a two-tier system have become popular in this
hemisphere over the past decade and a half.  The most widely
discussed example is that of Chile, where the national pay-as-
you-go social security system began to be phased out in 1981, and
replaced with a national, mandatory, defined-contribution (DC)
system paid for by a new 13 percent payroll tax on covered
workers  earnings.  Of course even after the old system stopped
accruing new benefit promises, retirees had to continue to be
paid and vested active workers still held benefit promises from
that system. In addition, this DC plan is backstopped by a
general-revenue-financed social safety net system that provides a
minimum retirement benefit.  To bring about the transition, the
Chilean government decreed substantial cuts in promised social
security  benefits, but as it still faced a major revenue
shortfall to the social security system, it turned to government
budget surpluses totaling about 4 percent of GDP to  finance the
switchover.  This surplus continued since the 1981 startup of the
system and is projected to continue for another decade, falling
after that for the next fifteen years.  The fact that Chile had a
budget surplus at the onset of the reform contrasts with the U.S.
economic situation where budget deficits have been a fact of life
for decades.   

     Despite the fact that Chile s situation was, and remains,
somewhat unique, the rapid growth of Chile's economy and the fact
that the pension fund shared in this growth has gained that
system many supporters (World Bank 1994). Others following in
Chile's footsteps include Argentina, Bolivia, Colombia, Peru and
Mexico, and other nations expressing an interest include Brazil
and some of the nations of the former Soviet Union (Davis 1995). 

     One argument offered in support of a privately-managed
mandated pension pillar in the United States is that it would be
perceived as reducing political risk surrounding retirement
income.  In the current environment, workers increasingly realize
that promised social security benefits are unsustainable, and
believe that benefits will fall or taxes rise to maintain system
solvency.  Giving people individual private plans would probably
reduce uncertainty regarding the politics of the future social
security system, although it must be recognized that a private
system still faces certain political risks as well.  If political
risk were in fact reduced with a two-tier plan, some of the
benefits flowing from this change could be captured by social
security to improve the long term solvency of the system.  This
result could occur, for instance, if middle-aged and younger
workers would be willing to pay social security payroll taxes
required to maintain a larger system for current retirees, in
exchange for some level of contributions devoted to individual
plans they could manage themselves.   The government might reduce
its long term promises to social security system participants by
cutting future retirees' defined-benefit promises, in exchange
for individually-managed defined-contribution plans owned by
workers themselves.

     Another argument in favor of allowing workers to invest part
of their payroll tax in an individual retirement savings account
is that  it affords participants the opportunity to allocate
investments as they see fit. Some people have also suggested that
this program would promote financial literacy, because households
would be given control over some of their social security funds
and would have more of an incentive to learn how saving and
portfolio choices affect their standard of living in retirement. 

     There are also those who offer more macroeconomic rationales
for favoring the proposal.  One is that individual accounts could
create political pressure to reduce the deficit, because the
unified budget would show a larger measured deficit and thus
would put pressure on politicians to reduce it.  Another is that
a second pillar pension might create a source of new investment
funds.  For example, advocates of the Chilean pension reform
believe that Chile's private pension pillar increased net
national saving because the pension system created capital
markets that did not previously exist in that nation; this is
probably not a potent argument here in the United States. 
Whether net new national saving would occur in the United States
under a mandatory redirection of the payroll tax would depend on
whether saving outside of these accounts increased--by both
households and governments.  If the reduction of future benefits
were relatively small, other private saving would likely fall due
to a reduction in future benefits relative to what was previously
expected.

     A number of disadvantages have been noted with the type of
two-pillar system described above.  One is that the individual
account second-tier plan might not provide adequate income to those
with low lifetime earnings.  This might occur because the two-
pillar plan is likely to be less redistributive than the current
social security system, or because political support for the first
pillar might weaken once it is explicitly separated from the second
pillar.  
          
     Another concern is that the second pillar plan exposes
participants to capital market risk, as do defined-contribution
pension plans more generally (see Section II).  That is,
portfolio allocations yielding low returns reduce the
individual's pension account at retirement.  Additionally, there
is a question as to whether workers are well-equipped to direct
their own retirement accounts, particularly if the social safety
net of the social security system is weaker than it is now.  

     A different problem with individual mandated pension
accounts is that workers might want to take lump-sum cash-outs
prior to retirement, but permitting people to spend their
individual account accumulations while young would no doubt leave
some in poor economic condition during their retirement years. 
There is a related concern that some workers would, if permitted,
take lump-sum cash-outs at the time of retirement--perhaps
because they would like to include these assets in bequeathable
wealth.  Unfortunately, allowing such cash-outs erodes the market
for retirement annuities.  Under current social security system
rules, benefits are paid out only as a life annuity and the
current risk pool for that annuity is national,  mandatory, and
multi-generational.  People with shorter-than-average life
expectancies subsidize via the national risk pool the annuities
for those who expect to live past their cohort's life expectancy. 
If individual pension accounts were permitted to be cashed out,
those expecting to die younger than average would not annuitize
their pensions, which in turn would lead to a potentially large
problem with adverse selection.
     
     Another insurance-related concern regarding individual-
account pensions is that social security benefits are currently
indexed to the CPI, while private annuities in the United States
are typically defined in nominal terms or tied to asset market
performance (which does not guarantee real retirement income). 
In the Panel s view, there are serious risks from replacing
indexed social security benefits with mandated individual
pensions, unless a mechanism were available to obtain indexed
private annuities.  One answer might be for the Treasury to offer
indexed federal government debt, which would help private
insurers create indexed annuities. (Indexed bonds are taken up in
Section IV below).  It is again interesting to note what happened
under the Chilean reform.  There, retirees purchasing annuities
(rather than making phased withdrawals from their accumulations)
are permitted to purchase only CPI-indexed annuities.

     Experts discussing the design of a two-pillar retirement
system also raise questions about the costs of a mandatory second
pillar pension -- costs which could vary depending on the precise
way a second-tier individual account plan is formulated.  Tax
collection costs could rise substantially if contributions had to
be collected person by person, as in Chile, instead of by the
government as is now the case.  Clearly the scale economies
enjoyed by the current system, due to the central role of the
Internal Revenue Service which oversees collection of the payroll
tax, could be eroded under a decentralized collection scheme --
which would also increase the possibility for evasion.  Money
management costs would also rise in an individual account pension
system, inasmuch as the Social Security Administration currently
spends little on the money management and investment function.
Also it is worth noting that money management costs are often
considerably higher for individual accounts, as compared with
group pension plans.
 
     A different, and potentially more significant, concern is
that of the remaining political risk that a second-tier
individual account pension plan might face.  A worry is that the
individual accounts could become the basis for asset-based means
testing for other government programs such as Medicaid or SSI, or
even programs that are not currently means tested such as
unemployment insurance and Medicare.  Accumulations in these
accounts could make households ineligible for other government
programs, producing incentives for evasion and retirement
insecurity (Hubbard, Skinner, and Zeldes, 1995).  Also, workers
likely to receive first-pillar social security benefits might
face a substantial incentive to avoid contributing to the second
tier, and evasion is a possibility that cannot be ignored.

     The Panel discussed several other points raised by analysts
evaluating a two-pillar proposal.  One is that making individual
accounts more prevalent might crowd out employer-sponsored
pensions, though this is less likely if a portion of current
payroll taxes were redirected toward a small second-tier pension. 
A second is that private defined-contribution holdings might fail
to provide investors a good inflation hedge. This concern
underscores the appeal of government-issued indexed bonds, a
topic taken up in Part IV of this report.  A third is that people
might find individual social security accounts more appealing if
they were permitted to deposit their funds into a government-run
indexed passively managed mutual fund, which offered a low-cost
option competing with private money managers.  In addition it
seems clear that it would be necessary to require money managers
to disclose and report individual investors' costs and returns in
a standard format with comparable information across programs to
help investors make better-informed retirement account investment
decisions.

     Some of the disadvantages raised in this discussion could
possibly be overcome if the government were to offer a simple
indexed, passively managed, low-cost investment option. Concerns
arising from imperfections in private annuity markets remain to
be resolved.  Regarding the distributional concerns mentioned
above, it might be feasible to design the second pillar in such a
way that, though it was a defined-contribution system, it
 credited  a smaller rate of return to high-earners' pension
contributions, and a higher return to those earning low wages. 
Such a modified second pillar plan might be adequate to address
concerns about income inadequacy and to some extent income
insurance. In addition, mandatory reporting of fund management
costs might help alleviate concerns over high administrative
costs experienced by some individual account pension plans.  On
balance, many Panel members find this approach potentially
promising, though it urges additional study of all of these
issues.

H.  Conclusions and Assessment

     The Panel was charged with outlining and evaluating a range
of options to return the nation's social security system to long
term balance. Here we collect our assessment of the various
benefit and revenue changes examined in this section of the
Report.

     First, the Panel believes that some combination of benefit
cuts and/or revenue increases is necessary to restore the social
security system to actuarial balance. Second, we believe that
timing is crucial: appropriate legislation should be enacted
promptly.  The Panel also suggests that it is important to
combine immediate legislation with delayed implementation of some
benefit cuts and/or tax increases.  Indeed, the urgency of prompt
legislation is increased by the desirability of implementation
lags. Gradual implementation reduces the magnitudes of notches
(different treatment of cohorts close in age) and the perception
of unfairness that notches engender.  Significant changes in
social security benefits should be announced with considerable
lead time to allow workers to adjust to the changes by adapting
their retirement, saving and consumption plans.    

     The analysis examines two baseline reform options that span
the range of options most commonly discussed in public policy
circles.  One scenario reduces benefits (PIAs) by a fixed percent
for all persons born in and after some year, which we arbitrarily
take to be 1940.  The size of the PIA cut would have to be
sufficient to bring the system into long-term balance.  The
alternative baseline scenario would impose an across-the-board
payroll tax increase beginning in the year 2002, when those born
in 1940 turn age 62.  These two alternatives frame most of the
other reforms currently under discussion, and are useful as
comparison standards in assessing several other changes as well. 

          
     The Panel finds that the criteria adopted do not
unequivocally favor either raising taxes or decreasing benefits. 
Rather, some criteria -- such as adequate retirement income --
favored tax increases, while others -- such as equity of lifetime
social security taxes and benefits between generations -- favored
benefit cuts.  Thus closing the fiscal imbalance with additional
revenues rather than benefit decreases is suggested if one
emphasizes the first two criteria, adequate retirement income and
insurance against unforeseen income fluctuations.  Social
security benefit cuts would increase the number of Americans with
inadequate retirement income, and lower the insurance protection
offered to workers, survivors and dependents.  Within a
generation, the use of tax increases rather than general benefit
cuts favors those with the longest life expectancies -- those
most likely to receive benefits for a long time -- and those with
lower incomes for any given life expectancy.  
     
     On the other hand, closing the fiscal imbalance with benefit
decreases rather than tax increases is suggested if one
emphasizes the fourth and fifth criteria, equity between
generations and the encouragement of private saving.  The
expected return on social security contributions is already going
to be lower for baby boomers than for past, current, and near-
future recipients (and this return will decline even further when
either social security taxes are raised or future benefits are
cut).  Younger participants would pay the higher taxes for many
more years than would participants planning to retire soon.  A
smaller social security system (lower benefits) would also
encourage some individuals to offset part of the loss through
their own saving behavior (see below). 
     
     Focusing on the other criteria, the Panel concludes that
social security retirement benefits induce some older workers to
leave the labor force earlier than they otherwise would.  Benefit
cuts, especially if combined with an increase in the early age of
entitlement (now age 62), are likely to reduce this effect.  In
addition, payroll taxes may discourage the labor supply of
younger workers, a labor market distortion that is more likely to
decline if benefits are cut than if payroll taxes are increased. 
The Panel finds little professional consensus on the size of the
impact of social security on private saving.  To the extent that
social security benefits substitute for private saving, a smaller
system (benefit cuts rather than tax increases) would encourage
private saving.  But many workers with little or no saving beyond
their home equity are unlikely to make significant changes in
their saving behavior in response to the changes in social
security benefits being contemplated.  The Panel concludes that
reducing benefits might have a small positive effect on private
saving.

     The Panel also compares the effects of the baseline benefit
cut (an across-the-board decrease in the PIA formula) with those
of several alternatives, including reducing disproportionately
the benefits of high-wage workers, delaying retirement ages,
reducing the cost-of-living adjustment, and means testing
benefits.   If benefits were to be reduced, strong arguments
support  increasing the ages of eligibility for early and normal
social security benefits.  Delaying these retirement ages is a
sensible response to increases in life expectancy, and one that
prevents lifetime benefits from automatically increasing as
recipients live longer.  Specifically, if benefits were to be
reduced, most Panel members agree that the normal retirement age
for social security benefits could be increased and eventually
indexed to life expectancy.  A suggestion along these lines is to
eliminate the scheduled hiatus in the normal retirement age rise
to age 66 (2000-2005) and 67 (2017-2022).  

     If benefits were to be reduced by means other than, or in
addition to, increases in the NRA (for example, if the PIA
formula became less generous), there is some support for the
notion of disproportionate cuts at the top, versus an across-the-
board decrease.  The Panel also discussed how to allocate the
burden of benefit reductions across different cohorts -- those
already retired, those about to retire (for example, within 5
years), and those further away from retirement.  If benefits were
cut, it is difficult to argue that people already retired or
about to retire should be exempted entirely; however, there was
support for smaller benefit reductions for these groups than for
future retirees.

     The Panel also studied two other methods of cutting
benefits:  means testing, and less-than-full inflation
indexation.  There are strong arguments against means-testing
social security benefits on the basis of other retirement income
or accumulated wealth.  To avoid loss of social security
benefits, some workers might reduce their own retirement saving
or persuade employers to shift compensation from pension
contributions to earnings.  Either response would lower saving
and private retirement incomes.  Focusing on indexing, the Panel
recognizes that social security benefits are the only fully
indexed annuity available to (nearly) all workers.  The threat of
inflation would be a very serious concern to retirees, especially
those with long lives after retirement, if full indexation were
eliminated.  For this reason, the Panel opposes permanently
indexing social security benefits by less than the cost-of-
living.  On the other hand, the Panel urges that the Bureau of
Labor Statistics investigate whether the specific Consumer Price
Index currently used to adjust benefits correctly measures the
cost-of-living.  If this measure is found to be biased, the Panel
would support corrective changes in the method of calculation. 
There was also extensive discussion on whether a temporary delay
or reduction in the cost-of-living adjustment would be desirable;
with some arguing that if benefit were decreased for future
retirees, a temporary delay in indexation for current recipients
would spread the burden more equitably. 

     The Panel then compared the effects of several different tax
increase proposals with the baseline revenue increase (a simple
increase in the payroll tax rate).  Three options received the
most attention: raising the earnings limit on which payroll taxes
apply, expanding the definition of taxable income to include
employee benefits, and infusing additional general revenues into
the Social Security Trust Fund.  On the basis of our analysis,
most Panel members would favor raising the payroll tax rate
rather than increasing the taxable earnings threshold, if
additional revenues were to be raised. The threshold increase,
unless applied only to the employers' portion or combined with a
change in the benefit formula, would increase future benefits for
those at the upper end of the income distribution, which a
payroll tax increase would not.  There was little enthusiasm for
including employee benefits in the taxable wage base primarily
due to significant measurement problems.  Furthermore, the
Panel's review of the evidence suggested little advantage to
seeking an additional direct infusion of general revenues,
instead supporting the maintainance of a link between social
security contributions made and benefits received. 

     Turning next to the issue of the Trust Funds, the Panel
suggests that they should continue to be at least partly funded,
meaning that a significant and stable margin of income over
annual expenditures should be maintained over the foreseeable
future.  The Trust Funds currently have assets exceeding one
year's outlays, an amount projected to grow for about two decades
as revenues exceed benefit payments.  The Funds are currently
invested in special issue Treasury securities, whose interest and
principal are virtually free of default risk.  The Panel examined
the question of whether the Trust Funds should be invested in
private capital markets, in the hope that investments would earn
a higher rate of return than if invested solely in Treasury
securities.  The Panel believes that a judgment on this proposal
should depend on an assessment of its opportunities and its
costs.  Given the lack of literature on some of these questions,
the  Panel concluded that this issue deserves additional study
before a clear policy prescription can be made. 

      The Panel also discussed the pros and cons of converting
all or part of the social security Trust Funds (or the annual
surplus) to individual social security accounts, over which
participants would exercise some investment discretion.  The
Panel noted that distributing the annual surpluses to individual
accounts would require additional adjustments to benefits and/or
taxes beyond what would be required to achieve system solvency
without this distribution.  Several advantages of this proposal
were identified, along with some disadvantages.   

     Despite these questions and concerns, the Panel is open to
the idea of converting part of the Trust Funds to individual
accounts, if the remainder of the social security system could be
made solvent.  The Panel recognizes the need to coordinate the
pattern of any benefit cuts with the pattern of benefits that
would be received from these individual accounts.  Many Panel
members would recommend prohibiting access to the funds for any
reason other than retirement, and most would recommend mandating
that the benefits be wholly or in part distributed in the form of
an annuity, rather than permitting a full lump-sum cashout. 
There is a division of opinion on whether the annuity could be
best managed by the government or the private sector, though
there are strong arguments for having the government offer one of
several possible investment vehicles that workers might chose.
  
IV.  Other Policy Options Regarding Future Retirees' Incomes  

                              Having considered a series of changes in social security
benefits and taxes, we now discuss additional ways to improve
retiree well-being including changes in eligibility ages and
proposals to alter private pension incentives and regulations. 
Several other options to improve retiree well-being are also
examined, including expanding the role of the SSI program,
issuing indexed bonds, and utilizing reverse annuity mortgages.  
These proposals were not evaluated in as much detail as were the
policy options investigated earlier, but the Panel thought it
important to go on record on several of these items nonetheless. 
                              
A. Integrating Social Security Eligibility Ages
       
     The Panel believes that several changes in social security
are important enough on their own merits that they should be
considered as high-priority reform areas whether or not they
contribute to improving system balance.  The most salient of
these is the development of an integrated approach to
coordinating the ages at which Americans become eligible  for
benefits under different components of the social security
system, including disability, survivors, early entitlement, and
normal as well as delayed retirement benefits, as well as the
supplemental income program (SSI).  The other topic that the
Panel deemed important to discuss was social security rule
changes that could equalize the treatment of one- and two-earner
couples, widows, and changes in indexation policy after age 60. 
This section takes up each in turn.

     Integration of eligibility ages in social security benefit
calculations:  The normal retirement age (NRA) plays two roles in
the process of determining benefits.  First, retirement benefits
depend on the number of years before or after the NRA that they
are first claimed.  Second, the NRA is also the maximum age at
which a worker can apply for disability benefits; that is, the
maximum disability age (MDA) is set to equal the NRA.  Under
current law, the MDA is scheduled to increase along with the NRA
for future cohorts. This lock-step linkage should be contrasted
with the way the system handles the earliest eligibility age
(EEA) for retirement benefits; under current rules, the EEA will
not increase beyond 62.  Similarly, the maximum age for applying
the earnings test (ETM) does not increase beyond 70 under current
legislation, and the minimum age for receipt of SSI (based on
age) is scheduled to remain fixed at age 65.  Finally, under
current law, the earliest age at which survivor benefits (ASB)
can be received is age 60. 

     In this section, the Panel discusses linkages among the NRA,
EEA, MDA, SSI, ETM, and ASB.  The values for these ages under
current rules and currently legislated changes for the future are
listed as follows:

     Ages        Present         Future
     EEA           62              62
     SSI           65              65
     MDA           65              67
     NRA           65              67
     ETM           70              70
     ASB           60              60

The discussion  proceeds by examining why minimum and maximum
ages exist at all under the social security system, versus
extending benefits to the entire population that now are
available to only an age-restricted subsection of the population.

     Normal Retirement Age (NRA):  As noted above, raising the
NRA to age 67 or later is a method of reducing benefits for
future retirees, and as such was compared with other benefit
reduction options in Section III. Nevertheless the Panel agrees
that raising the NRA has considerable political appeal since it
avoids the vocabulary of benefit cuts, and may alter the public
view of the "socially acceptable" age at which to leave the
workforce.  Because most people do not retire at the NRA, a more
potent change in the nation's retirement vocabulary would
probably result from raising the early entitlement or early
retirement age.

     Early Entitlement Age (EEA):  If there were no minimum age
at which one could apply for actuarially reduced social security
benefits, then a worker of any age with enough quarters of
coverage and sufficiently low earnings could claim and receive
retirement benefits.  This arrangement would involve a number of
differences from the current situation.  Lifetime low earners
might receive benefits for much of their working lives without
cutting back on work very much.  Individuals who stopped working
(for child care, for example) could receive benefits irrespective
of whether single or married (this possibility would hold even
though another member of a couple had high earnings).  Workers
retiring early could choose lower benefits for the rest of their
lives rather than having to wait until age 62.

     In contrast, under current social security rules, workers
with lifetime low earnings (and no saving or pension) must wait
until age 62 to receive benefits.  If people filing for early
benefits received true actuarial reductions, then the only policy
concern would be that some people might have too little income in
later years because they had chosen to take benefits too early.  
It is because of this form of myopia that social security does
not permit too-early retirement.   There remains the problem that
the current system does not reduce benefits exactly actuarially,
so that people may retire earlier than optimal in order to
benefit from early retirement subsidies.  Because recomputation
rules are complex, some people may be making early retirement
choices erroneously.  Additionally, people vary in both their
perceived and actuarially calculated life expectancies, which
makes it impossible for a uniform actuarial reduction to be
actuarially neutral for every single individual.  This fact
creates retirement incentives that vary across members of the
population.  

     Permitting people to retire early under a non-actuarially
neutral benefit formula induces labor market distortions by
encouraging earlier retirement than would be the case in a more
neutral environment.  This effect is offset by the fact that
having access to early retirement benefits is a useful form of
insurance for  those who experience seriously curtailed earnings
opportunities through no fault of their own, who cannot qualify
for disability benefits, and who have no other sources of saving. 
The key question is how to weigh the market distortions offered
by early retirement against the societal gains of having an early
retirement option that is not actuarially neutral.  The  choice
of an early entitlement age (EEA) depends on balancing these two
considerations.

     No research has estimated the relative size of these two
groups, making it in principle  impossible to assess the ideal
EEA.  If health and functioning improve in step with life
expectancy, then a healthier population has less need for an
early EEA. According to this view, the early entitlement age
should be raised over time, although perhaps not in lock-step
with life expectancy because morbidity rates probably improve
more slowly than mortality rates fall.  Analysts agree that much
of the long-term trend toward earlier retirement in the United
States is probably not attributable to poor health; indeed people
in their 60s appear to be at least as healthy, and probably more
able to work than in the past.  For this reason, increases in the
EEA might be feasible.  Offsetting this is the view that
retirement is a normal good, and a social security system
reflective of the preferences of wealthier cohorts over time
should allow earlier access to benefits, so that  early retirees
need not live solely from privately accumulated wealth and
pension benefits. 

     Eligibility Age for Supplemental Security Income (SSI):  The
Supplemental Security Income (SSI) program is a means-tested,
federally administered income assistance program authorized by
Title XVI of the Social Security Act (U.S. House,  1994).  It
provides monthly cash payments in accordance with uniform,
nationwide eligibility requirements to needy, aged, blind, or
disabled persons.  To qualify for SSI payment based on age, a
person must be 65 or older and a resident of the United States
and either a U.S. citizen or a legal   immigrant. SSI currently
pays what is necessary to bring an individual to a statutorily
prescribed income 'floor," and benefits are indexed by statute to
the Consumer Price Index (CPI).  Most states supplement the
federal benefit for at least some participants.  SSI plus food
stamps ensures an income floor near the official poverty line for
most older people.   The mix of people receiving program benefits
has changed over time, mainly because retirement benefits have
increased faster than SSI payments.  During the early days of the
SSI program, more than half of all SSI recipients were aged; now
only about one-quarter are aged, and the majority of SSI
recipients are now categorized as disabled.  

     If SSI benefits could be received at any age without being
blind or disabled, SSI would be in effect a guaranteed minimum
income program for everyone, but would subject all to very high
implicit taxes for work.  Such a hypothetical system is not in
place for everyone because of the expense, and because of
concerns that work would be strongly discouraged.  In contrast,
SSI is  made available to older persons -- currently those age 65
and older -- without being disabled for two reasons.  One is that
the fraction of the eligible population for whom work is a
reasonable alternative is probably smaller than for the
population as a whole.  Second, the presence of social security
benefits makes the program less expensive, because claiming
social security benefits is a necessary condition for receipt of
SSI benefits.  

     Some have proposed that this latter argument is just as
relevant for people younger than age 65; that is, SSI could be
made available earlier -- say, age 62 -- as a mechanism for
protecting older people against poverty if the early retirement
age were raised.  How much would such a change cost, and how
large a population would likely apply for SSI if it were made
available at a younger age?   Approximately 2.5 million people
aged 62 to 64 received retired worker benefits in  December 1993,
and many of these early retirees would probably have been
continued working or would have had other income sufficient to
rule out SSI eligibility if the early retirement age were raised
to, say, age 65.   But for others, lowering SSI eligibility to
age 62 would increase retirement income adequacy and insurance
against low retirement income, because current social security
benefits do not guarantee an income floor.  Having access to SSI
benefits at a younger age might discourage work and possibly
private saving because of the high implicit tax rate on earnings
and asset accumulation.  In terms of the criteria developed
earlier,  these market distortions and costs  would have to be
weighed against improved protection against old-age poverty.  
Also this type of system reform would probably not raise private
saving, and would increase the burden on general revenue.

     Maximum Age for Disability Insurance (MDA):  Under current
social security rules, disability benefits are equal to
retirement benefits at the normal retirement age.  Under current
law, as the NRA rises in the future so will the  maximum age at
which a worker may file for disability benefits (MDA).  Thus
someone older than the NRA has no reason to apply for DI (unless
he or she were to receive DI benefits offsetting an early
retirement adjustment for leaving work prior to the NRA).  In
particular, a worker who retires and then becomes disabled can
apply for DI benefits, although not beyond age the NRA (and
limited by the need for recent labor force attachment). There is
no apparent logic in allowing increased benefits for disabilities
that occur after retirement.

     One question worth pondering when restructuring the system
is whether the NRA is a reasonable age to collapse the disability
and regular retirement plans into a single program. Current
practice has evolved as a result of having a benefit structure
for the disabled that is independent of the age at which the
retiree claimed benefits.  It may be that the right range for the
MDA is between the EEA and NRA.

     One rationale for having two separate benefit programs is
that it permits the government to give larger benefits to some
workers, those for whom the labor disincentives associated with
the benefits are believed to be fairly small (Diamond and
Sheshinski, 1995).  The age at which the programs should be
combined should be set by comparing the administrative and
economic costs and benefits of running a separate disability
program, including labor market disincentives and inequities
associated with inevitable errors in classification of
applicants, versus the costs and benefits of having them operate
separately.  Most broadly, the MDA could be set in terms of the
social desirability of having people work, at the age where it is
difficult to distinguish between people who are truly disabled
and those who are not.  A problem is that experts disagree about
how to measure disability:  some focus on health problems, while
others wish to include the willingness of people to take
available jobs given their age, training, skill level, and
working conditions. After that age when a majority of workers
chooses retirement, it is not clear that further applications for
DI would allocate funds any better than would general benefits. 
It should be recognized that choosing an age less than the NRA
will result in some disabled workers suffering an actuarial
reduction, equal to that experienced by those "voluntarily"
retiring at that age.  Alternatively, all disability benefits
could be adjusted for assumed retirement at the MDA.
     
     On balance, the Panel suggests that a comprehensive
rethinking of the DI entitlement and benefit structure is
necessary, with greater recognition of the wide range of ages at
which people claim benefits.  

     Maximum Age for the Earnings Test (ETM):  At present,
workers attaining age 70 apply for and can begin receiving social
security benefits irrespective of their level of earnings.  In
addition, there is no delayed retirement increment for work
beyond age 70, although the AIME may be recalculated for a worker
with sufficiently high earnings. Under current law, the maximum
age for the earnings test, the ETM, will remain at age 70. 

   There have been frequent proposals for lowering the ETM to
the NRA.  To investigate this proposal, the Panel begins by
asking why there is an ETM at all.  Those continuing work beyond
the NRA who earn above the earnings limit are better off, on
average, than those retiring earlier.  This fact might imply that
the ETM should be above the NRA, but does not lead directly to
any particular choice of age.  Indeed the fact that people
employed beyond the NRA are better off seems more relevant for
the choice of the delayed retirement credit, than for the choice
of the ETM itself.  Instead, the focus should probably be on the
incentive to continue working.  With no ETM, some workers would
get little or no benefits if they continued working for as long
as they were able.  With an ETM, all benefits are being foregone
by the decision to work; that is, having an ETM reduces
incentives to retire earlier.  Thus the choice of an ETM must
balance the need for incentives for continued work against the
cost of giving benefits to a group with higher than average
earnings. The current setting at 70 seems reasonable based on
available empirical evidence of these tradeoffs.

     Private pension experts also raise the concern that the
social security NRA is currently the age at which maximum
allowable benefits from a private defined-benefit plan may
legally be paid without actuarial reductions. A full review of
the links between pension and social security ages should be part
of the reform process.

B. Reducing Older Widows' Risk of Poverty   

     A notable achievement of U.S. social policy over the past
three decades has been that of reducing poverty in old age.  For
most married couples, the risk of poverty is small, even many
years after retiring.  When one partner dies, however, the
surviving spouse often faces a much greater risk of falling into
poverty.  And this risk disproportionately affects older women,
who are nearly three times as likely as older men to be widowed
(49 percent vs 14 percent) and can expect to remain widowed an
average of 17 years (Population Resource Council, 1994). 
Currently, older women are more likely to be poor than older men
(16 percent versus 9 percent) mainly because the average older
woman is older than the average older man.  At all ages, women
are less likely to be married, and single people in general have
lower incomes than do married couples.

     One suggestion to diminish widow's high risk of old-age
income insecurity, is to redistribute social security benefits
across members of a married couple, so as to produce relatively
lower incomes while both parties are alive, and relatively higher
incomes for widowed survivors.  This view is motivated by the
observation that work patterns have changed dramatically since
the social security system was instituted while benefit payout
rules have not.  As a result, differences between two- and one-
earner households have emerged that become more pronounced after
the death of a spouse.  One option is an "earnings sharing"
approach, in which households allocate social security-covered
earnings of a married couple equally between them to calculate
retirement benefits (Burkhauser and Holden, 1982; Burkhauser,
1984).  At retirement, each married partner would receive a
benefit based on his or her individual covered earnings record,
and the spouse benefit under current social security rules would
be abolished. These benefit reductions could then be used to
raise all survivor benefits to three-quarters of total social
security benefits while married.  A three-quarter survivor
benefit is consistent with the official Department of Health and
Human Services equivalence scale used to evaluate the needs of
two- and one-person families for all its transfer programs.  This
plan would decrease poverty among older widows and widowers,
slightly increase poverty among couples, end the arbitrary
relationship between couple benefits and survivor benefits that
results in replacement rates of between .5 to .67 for survivors,
and treat equally one- and two-earner couples who pay the same
amount into the system.

     Other proposals to shift benefits from couples to survivors
include reducing the spouse benefit as a fraction of the PIA,
reducing the PIA for all married couples, and sharing AIMEs
instead of earnings. Although the Panel did not review all
proposals, most agree that mechanisms should be considered to
raise the ratio of survivor's to couple's benefits.

   Linkages between the Age for Survivor Benefits (ASB) and
Other Ages:  At present, widows (and widowers, although for
convenience both will be referred to here as widows) can
claim early retirement benefits at age 60, with a benefit
reduction factor determined by a linear interpolation
between age 60 and the NRA.  Benefits are computed as 71.5
percent of the PIA for filing at age 60 and 100 percent at
the NRA.  For this reason, raising the NRA delays the age at
which widows can receive full benefits, and raising the EEA
lengthens the period during which widows must receive
reduced survivor payments. Both proposals therefore reduce
survivor benefit protection, and lower the value of income
insurance provided by the system.  Labor market incentives
for widows are also altered, although the precise effects
are difficult to predict. If the early age of entitlement
for widows' benefits is increased, then the calculation of
actuarial reductions for widows could be changed to preserve
benefit levels or limit benefit cuts for this population. 
In general, the Panel suggests careful attention should be
devoted to linkages between other ages used in social
security benefit programs and those applying to widows' (and
widowers') benefits.

C. Expanding the SSI program

     The Panel has discussed above the SSI program in general
terms and the pros and cons of lowering the age of SSI
eligibility.  In addition, other proposals for changing the SSI
system have been offered, with the intention of raising the level
of income support offered by this plan.

     Social security benefits are currently the single greatest
source of income for SSI recipients.  The SSI program considers
social security benefits as  unearned  income and thus counts all
but $20 of it in determining monthly SSI benefit amounts.  This
policy imposes a 100 percent  tax  on all social security
benefits over the $20 disregard.  In contrast, the first $65 of
monthly  earned  income plus one-half of all remaining earnings
are excluded from counted income.

     One reform some have suggested is to change the SSI's
monthly $20 disregard amount -- established in 1972 for unearned
income -- by raising it to its inflation-adjusted equivalent in
1994 (approximately $70 per month) and then to index this
protected amount in the future.  This change would increase
income adequacy for the 65 percent of aged SSI recipients now
receiving social security benefits, and is extremely target
efficient because all beneficiaries are in or near poverty.  This
proposal would also increase the income floor for people with low
social security benefits, affording them more retirement income
insurance.  Because SSI is paid out of general revenues, its
revenue burden is the same as all other government expenditures
paid via the federal income tax.  The benefit increase would also
go to social security DI recipients, so that benefits would be
spread across age cohorts.  It is unlikely to have much of an
effect on national saving, but would place a small additional
burden on general revenues.  If one considers OASDI and SSI as
two parts of a system for providing transfers and social
insurance to older people and people with disabilities, then an
alternative method of payment would be a small decrease in PIA. 
Any general reduction in PIA that shifted money to SSI would mean
a shift from higher to lower income recipients.  Transfers (as
opposed to benefits linked in an actuarially fair way on
contributions) made via SSI rather than social security will
always be more target efficient.

     A different proposal would entail cutting SSI benefit
reduction rates from 100 to 50 percent, by treating social
security benefits as earned income.  An argument in favor of this
proposal is that some believe that work at younger ages "earns"
them eventual social security benefits, to which they remain
entitled irrespective of SSI recipiency.  All the consequences
discussed under the previous reform hold true here as well, but
it reduces old-age poverty more effectively than do increases in
the first tier of social security benefits  (Burkhauser and
Smeeding 1981). 

D.  Mandating Private Employer-Sponsored Pensions

     Americans on the whole save very little; in fact housing and
employer-sponsored pensions are the major sources of private
saving, and saving in these assets have not increased over the
past several decades.   As was demonstrated, about half the
workforce is not covered by a pension at any given time, and many
workers reach retirement with small (or no) pension benefits. 
Some policy makers suggest that this pattern of uneven coverage
would be rectified by mandating employer-sponsored private
pensions, and this view has received support as the prospect of
cuts in social security benefits looms larger. 

     Whether mandated private pensions would help increase
retirement income security was a topic discussed in Sections
III.F and G of this report, where we evaluated arguments for and
against converting a portion of the social security system to
individual accounts.  In this section we focus specifically on
the question of whether employer pensions would be an efficient
and/or equitable way to handle pension mandating, if it were
deemed beneficial to require additional private saving in the
form of a pension.  Two foreign experiences relevant in this
regard are that of Australia where a system of mandated private
pensions is in its early stages, and Switzerland which also has
mandated private pensions (Davis 1995).  A major contrast between
the experiences of pensions in these countries and that of Chile,
described above, is that the former countries have placed the
mandate on employers to collect the funds, rather than on
individual employees.   This has the advantage of using current
payroll systems to collect the funds, which is presumably easier
for the government to monitor and less expensive than having
pension plans collect contributions employee-by-employee.  If
such a system were implemented in the United States, employers
might be able to obtain pension group services less expensively
than could individual workers, could research and select pension
money managers more efficiently, and might resolve contested
claims and queries more effectively.  On the other hand, small
and medium size employers would almost certainly find that
overall labor costs would rise under a mandated employer-provided
pension system, particularly those firms which do not currently
offer a pension plan.  

     One factor the Panel deems worthy of emphasis is that a
mandated employer pension is not a "free lunch".  Rather, a
pension mandate would raise labor compensation, implying that
wages and other benefits would have to fall to offset to the
extent this raised labor costs.   Hence, after some adjustment
period, a pension mandate would be expected to result in a
relatively full pass-through to other forms of compensation for
most uncovered workers, and some disemployment for employees at
or around the minimum wage.  Most employers would not experience
a change in total labor costs, but on the whole, employees would
tend to see work as less attractive.  This could result in some
net reduction in labor supply (given small estimated labor supply
elasticities), and perhaps some decrease in employment.   Of
course the average impact would not hold for all workers and
would depend on whether all employees were uniformly covered. 
For instance, if employers were exempted from making pension
contributions for workers near retirement (e.g. workers older
than the normal retirement age under social security), then this
group would become relatively less expensive --and might benefit
from increased employment opportunities.

     Mandating might also have a variety of other effects on the
labor market (Gustman, Mitchell, and Steinmeier 1994). 
Currently, employer-based pensions serve as a sorting device as
some employees prefer relatively high nonwage employee benefits,
while other employees who have a choice select higher wages and
lower benefits.  A pension mandate would shrink cross-employer
differences in benefit packages, and would decrease this type of
sorting.  The extent to which this effect is good or bad for the
economy depends on whether workers are making an informed
tradeoff between current income and retirement benefits when
selecting their jobs and pay/benefits packages, and whether
employers can still design compensation packages that attract and
keep the most appropriate workers.   There is also the
possibility that mandating employer-sponsored pensions could
strengthen aspects of the private retirement income system--on
the assumption that individuals would not be permitted to take
lump-sum cash-outs of their pension accumulations prior to
retirement (see Section III.G, above).   

     An Opt-Out Variant:  An alternative approach popular in some
circles would allow voluntary, rather than mandatory, switching
from social security to employer-provided pensions.  The Panel
saw this option as not manageable.  This is because a great deal
of the implicit taxation that occurs under the existing social
security benefit and tax structure would be undermined if
voluntary opting out were permitted.  
     
     There are two dimensions to the implicit taxation that
occurs under the national mandatory social security system. 
Substantial intragenerational taxation takes place.  First, the
social security PIA benefit formula is progressive relative to
lifetime earnings (AIMEs).  As a result, if opting out were
permitted, high-wage earners facing relatively high payroll taxes
compared with expected social security benefits would be
anticipated to opt out of the system.  In addition, different
groupings for annuitization are part of the system s implicit
taxation; that is, people with different expected lengths of
lives have different lifetime needs, earning capacity held
constant.  Therefore, based on optimal social insurance
principles, a well-functioning system redistributes toward those
with longer expected lives, lifetime earnings held constant. 
Allowing an opt-out would undermine within-generational
redistribution because the funds would simply not be there to
ensure retirement benefits for poor people and those likely to
live longer than average.  

     A second type of redistribution in social security occurs
across generations.  Today's  retirees will receive much more in
benefits than they paid into the system under current rules, and
additional sums have been promised to those near retirement in
excess of the (present) value of their contributions.  These
promises can only be sustained by taxing future enrollees of
social security, who, if faced with an opt-out possibility, might
bankrupt the system by pulling out.  Of course this implicit
national debt could be shifted to other groups of taxpayers, but
it cannot be made to vanish without wiping out promised benefits
in excess of current accumulations.  

     In general, the Panel believes that an opt-out plan is not
manageable without acknowledging and making explicit the implicit
tax liability of current and future cohorts from lifetime
participation in social security.
 
E. Encouraging Employer Pensions and Private Saving

     As noted in Section II above, many workers reach retirement
with little or no employer pension benefits. A full analysis of
private pension reform proposals is beyond the scope of this
group s charge, but many Panel members find persuasive the
argument that tax rules under which employer pension plans
operate should be simplified, in order to reduce the
administrative costs discouraging small firms interested in
establishing company-sponsored pension plans.  Many also support
the idea of having a streamlined set of regulations that
companies can follow when establishing a tax-qualified defined-
benefit or defined-contribution plan.  Some Panel members favor
raising both contribution and benefit limits permitted under
employer-provided pensions, as a means to spur pension coverage
and saving, and most advocate better coordination between
permissible contribution and benefit levels across defined-
benefit and defined-contribution pensions offered by the same
firm.   
     
     In addion, the Panel shares with others a concern about the
effect of worker mobility on pension accumulation. In today's
labor market, people who frequently change employers suffer
reductions in their pension benefits relative to workers who do
not.   While the Panel does not favor mandating employer pensions
for reasons give above, there is reason to believe that people
with high turnover rates could benefit from participating in a
pension associated with their profession or occupation rather
than with a specific employer or job.  This would help ensure
that job changes would not imply that a worker loses pension
rights or changes pension plans.  One example of a national
occupational pension is TIAA-CREF, a pension plan which allows
many college and university staff to move among employers without
suffering breaks in coverage or loss in pension benefits.  A
national pension plan for other types of employees  could be
established that permitted irregular contributions, contributions
from multiple sources and full portability.  Employers of part-
time, seasonal, temporary, or domestic workers, as well as full-
time low-wage workers, could then contribute regularly or
irregularly to workers' pension accounts.   

     In its discussion of possible changes in the pension
environment that would enhance retirement income security,
the Panel also reviewed the wide range of ages currently used
in retirement income policy.  These include ages used for
benefit eligibility under social security as well as ages
specified in IRS tax code pertaining when people can withdraw
payments from tax-qualified pension plans without incurring
special penalties.  In our view, all of these ages should be
coordinated while undertaking social security reforms.  For
example, tax law specifies that employer-provided pension
benefits under qualified plans may not exceed a certain
dollar level when the worker attains the social security NRA,
and an actuarially reduced amount at earlier ages.  These
linkages should be considered as the NRA increases. 
Similarly, tax law requires that workers receive minimum
distributions from their private retirement accounts once
they attain age 70.5. This age should probably be reevaluated
in light of other proposed reforms and increasing life
expectancies.

   The Panel also examined policies to increase other non-
pension forms of private saving.  As pointed out above, many
experts believe that net saving in the U.S. is alarmingly
low, so low as to have negative consequences for the future
growth of income and consumption in the U.S.  Since current
workers  future retirement consumption must ultimately be
derived from the output produced by future employees, the
Panel agrees that one goal of retirement income policy
should be to increase the size of the economic pie available
in the next century -- a target which requires higher saving
rates today.  Some Panel members believe that this goal
would be well-served by increasing incentives for individual
saving such as raising the limits on 401(k) accounts or
IRAs;  on the other hand, as noted in Section II, there is
doubt about the net effect of 401(k) and IRA plans on
overall saving.  If withdrawals and lumpsum cashouts were
prohibited, and benefits only paid in annuities, this would
probably increase eventual retirement saving for those who
chose to participate in the plans.  Offsetting this is the
likelihood that fewer people might contribute to these
plans, if the money became less accessible.
 
F. Issuing Indexed Bonds 

     One valuable feature of the social security benefit promise
is that it is the only inflation-protected life annuity currently
available to nearly all private sector employees (some public
employees have fully indexed government pensions).  If social
security benefits must be reduced to achieve system solvency,
however, the federal government might respond by offering
inflation-indexed bonds which people could be permitted to buy. 
These bonds could then generate retirement annuities protected
from erosion by inflation.   In practice, the U.S. Treasury would
issue inflation-indexed bonds carrying a real interest rate that
would be determined in a competitive auction, just as the
interest rate is determined on existing nominal debt.  If the
outcome of the competitive bidding was that the real interest
rate on long-term debt were 3 percent, then each bond originally
issued for $1000 would pay $30 in interest the first year.  The
principal or face value of the bond would increase by the amount
of inflation.  For instance, if the actual inflation rate in year
1 were 8 percent, the face value would rise to $1,080 at the end
of the year; the following year the bondholder would receive 3
percent of $1,080 ($32.40) and the face value would again be
marked up for the existing inflation.  In this manner, both the
face value and interest payments would be fully adjusted for
inflation.

     One of the primary advantages of inflation-linked bonds is
that they would take the place of indexed social security
benefits in workers' and retirees' portfolios -- particularly if
social security payments may have to be cut to restore system
solvency.  A useful tradeoff for reduced social security payments
may be an inflation-indexed annuity which workers can then elect
to place in their pensions both during the accumulation phase and
after retirement. It would also be straightforward for private
insurers to offer inflation-linked life annuities once inflation-
linked bonds are marketed, though some adverse selection would
persist.

     Another reason that indexed bonds may be appealing is that
they offer a safe long-term investment for those who are
insufficiently aware of the riskiness of nominal long-term
government bonds.  As the society moves to an environment where
more and more pension assets are directed by participants
themselves, it is becoming increasingly important to offer them
easy-to-understand investment options.

     Inflation linked bonds might have an additional beneficial
side-effect: namely, they might reduce the total interest cost of
government debt.  The interest rate on long-term government bonds
currently includes two premiums:  one reflecting the expected
future rate of inflation, and a second representing uncertainty
about future inflation. The cost of indexed bonds should be
lower, because the uncertainty premium would be avoided.  It is
difficult to know how large this premium might be, but estimates
range from 0.25 percent to 1 percent.  Even with the lower bound
estimate, the government would save $1 billion in interest costs
each year if it issued $400 billion of indexed bonds.  It is also
likely that the government's commitment to low inflation is more
credible when it has indexed debt rather than non-indexed
liabilities.  Currently the government is issuing new 30-year
non-callable bonds with an interest rate of 7.5 percent.  If
inflation fell to zero, then the real interest cost of that debt
would be 7.5; on the other hand if inflation rose to 15 percent,
the real cost is zero.  Clearly taxpayers gain (and bondholders
lose) with unexpected increases in inflation.  If the government
issued 3 percent inflation-indexed debt, then the real cost to
taxpayers would be independent of the rate of inflation.

     Arguments against the issuance of government inflation-
linked bonds may be grouped into two general categories.  One
group contends that any indexation of the economy amounts to
giving up on the fight against inflation.  The argument is that
holders of long-term government nominal debt are a strong
political force against accelerating inflation.  If these same
institutions and people held indexed securities, perhaps they
would not exert downward pressure on inflation. An unanswered
question, of course, is whether the nominal bondholders or
taxpayers are a stronger force.  A second objection to inflation-
indexed bonds is that they might prove to be thinly traded, so
the market will be less liquid than for traditional bonds.  This
assertion is difficult to assess, although indexed bonds have
become a reality in several other countries recently and this
problem has not developed. Britain has by far the most developed
market and its experience (since 1981) is encouraging.  One-
fourth of all new U.K. government debt is now indexed, with a
real yield on these securities averaging around 3.5 percent;
these instruments have been purchased by the pension system.

     In sum, having the government sell indexed bonds is an
option that some private savers might find appealing,
particularly if social security benefit levels were to be
reduced. The Panel recognizes that there would be some general
equilibrium adjustments to the introduction of this new credit
instrument -- for example, the yields on other assets such as
non-indexed bonds, stocks, and real estate would likely be
altered somewhat -- and these should be further investigated.  If
they are not be significantly detrimental, it would strengthen
the case for these new instruments.    

G. Encouraging Reverse Annuity Mortgages

     Some analysts have suggested that encouraging wider usage of
reverse annuity mortgages (RAMs) might be an answer to the
problem of old-age retirement income insecurity.  A RAM permits
homeowners to sell their homes to a financial institution, in
exchange for a monthly sum paid to the resident and permission
for the homeowners to continue living in the home until the party
dies or must move.  

     Could converting home equity afford the elderly a reasonable
amount of income in retirement?  One issue is how much income
could be released using this financial mechanism.  A study using
1990 survey data found that people age 62 and older held an
average of $39,000 in home equity (in 1990 dollars); among the 70
percent of homeowners, net equity totaled $61,000 (Mayer and
Simons 1994).  A second question is how much of this equity can
be accessed via a RAM.  In practice, RAMs tend to be restricted
to 80 percent of the home s value.  Based on these numbers,
experts conclude that typical RAM income flows would be fairly
small.  Thus for the median couple with a head age 55 or older, a
RAM payment would equal only about 6 percent of income.  Somewhat
higher figures are estimated for people age 85 and older -- 35
percent of annual income -- but the dollar value is quite small
(about $3000 per year; Venti and Wise 1991).  Among widows,
annuity payments might amount to about 20 percent of annual
income.  RAM dollar values for low-income single men and women
are potentially higher, perhaps $5000 per year, amounting to
between a third and a half of their annual income.  
      
     To the extent that RAMs are available, they could
improve the lot of low-income elderly by giving them access
to their home equity.  At least two factors appear to limit
the growth of the RAM market.  One is adverse selection: 
lending institutions are apparently concerned that elderly
who  avail themselves of a RAM option will outlive aggregate
life tables.   A second is that there appear to be limits on
the supply of such mortgages (Mayer and Simons 1994), making
RAMs costly for individual purchase.  On the other hand, the
availability of home equity loans in the past decade
suggests a limited rationale for government intervention in
the housing annuity market.  

H. Conclusions and Assessment

     This section examines several options for reforming the
nation s retirement income system, including the mandating of
private pensions, and the possibility of a voluntary opting-out
of the social security system using the criteria developed above.

     The Panel reviewed the range of ages currently used in
retirement income policy including the normal and early
retirement ages, the age of entitlement for survivor
benefits, ages at which SSI and DI can be paid, and the
maximum age at which the earnings test is applicable.  The
Panel finds that a more coherent and integrated policy is
needed concerning these eligibility ages. The evidence
suggests that raising the early retirement age would be
reasonable, though perhaps it need not be done in precise
lock-step with life expectancy and should be accompanied with
some provisional steps (such as lowering the SSI or DI age)
to offset hardships that might result.  Panel members
expressed some concern about the well-being of workers in
poor health if the early age for social security benefits
were raised, and recognized that both DI and SSI might
experience large increases in applications if the age-of-
eligibility rules were changed, highlighting the fact that
altering one piece of the social security benefit structure
can have profound effects on other components of social
security and on other programs.
     
     This discussion persuaded some Panel members that
persons as young as 62 should be allowed to apply for SSI
benefits or face relaxed DI rules if the EEA is raised, in
order to provide a safety net for those unable to support
themselves until eligible for retirement benefits under the
new EEA rules.  Some members think that DI benefits should
continue to equal 100 percent of PIA, regardless of the age
of the disabled recipient, while others feel that DI benefits
should be set equal to the early retirement amount, to avoid
increased incentives to seek DI benefits if early retirement
benefits are reduced.  How such a reduction would affect the
well-being of young and old disabled beneficiaries is a topic
requiring further investigation.

     Other non-social security changes were also explored
including the introduction of indexed bonds and the expansion
reverse annuity mortgages. The Panel notes that ages
specified in IRS tax code for tax-qualified pension plans
should also be coordinated with any new ages recommended for
social security purposes.  We also examined proposals to
mandate employer-provided pension plans as a way to increase
worker saving for retirement, additional tax inducements to
save, and simplified pension regulations to reduce the
regulatory burden.  The Panel sees little positive in
mandating employer-provided pensions at the present time,
preferring instead that any mandated individual accounts be
considered as part of a national retirement system -- rather
than employment-based plan.  Although not supporting mandated
employer pensions, the Panel urges an overhaul and
simplification of the tax rules under which pension plans
operate.  Options for reforming the tax code and
nondiscrimination legislation include raising the
contribution and benefit limits covering employer-provided
pensions, and/or coordinating the very different benefit
levels for different types of defined-contribution vehicles. 
Another was to develop a streamlined set of regulations that
companies can follow when establishing a tax-qualified
defined-benefit or defined-contribution plan.  Finally, some
would favor increased incentives for private saving (for
example, raising the limits on or 401(k) or Individual
Retirement Accounts).

     A valuable attribute of social security benefits is that
they are the only life annuities that are fully inflation-
protected and currently available to (almost) all workers in the
United States  If social security benefits are reduced to achieve
system solvency, the federal government could respond by issuing
inflation-indexed bonds that firms or individuals could buy. 
These could be used to generate private sector retirement
annuities protected from inflation.  Panel members favor
government issue of Treasury bonds indexed to price inflation,
recognizing that some phasing in of this new credit instrument
would be necessary.

V. Overview and Conclusions
  
     The charge of the Technical Panel on Trends and Issues in
Retirement Savings (TIRS) was to "assist the 1994-95 [Social
Security] Advisory Council with respect to its charge to analyze
the relative roles of the public and private sectors in the
provision of retirement income, particularly how underlying
policies of public and private programs, including relevant tax
laws, affect retirement decisions and the economic status of the
elderly."  This Report represents the Panel's assessment of
trends and available options.

     The Panel recognizes that the social security system is not
in long-term actuarial balance.  The Social Security Trustees
project that currently legislated OASDI tax revenues will be less
than currently legislated benefits after the year 2013 based on
their intermediate assumptions.  Projected benefits begin to
exceed the sum of OASDI taxes and interest earned in 2020,
resulting in a decline in the OASDI Trust Funds and projected
depletion in 2030.  Over the 75-year long-range planning horizon,
the difference between the projected income and cost flows is a
deficit equal to an annual 2.17 percent of taxable payroll.  In
addition pressing financing problems confront the Hospital
Insurance component of Medicare, whose Trust Fund is projected to
run out in 2002.  Moreover, Congressional Budget Office analysis
of the President's proposed budget for fiscal year 1996 projects
continued federal budget deficits through 2000.  These trends
imply that some combination of benefit decreases and/or revenue
increases will be required to solve social security s solvency
problem.

     In this Report, pursuant to its charge, the Panel devotes
the bulk of our attention to the nation s retirement income
system. The Panel was not charged with examining the important
role of the nation's overall economic health insofar as it
affects the social security system's fiscal health.  Of course,
to the degree that social security encourages, or at least does
not discourage, work and savings, it enhances the prospects for
economic growth.  Nor was the Panel charged with examining how
changes in the medical care and health insurance markets will
interact with the Medicare and Disability Insurance programs,
which were the subjects of reports by previous Social Security
Advisory Councils.

     This Report's main contributions lie in identifying key
evaluation criteria for sound social security policy analysis;
using the framework to assess the two baseline benefit cut and
tax increase scenarios; using the framework to assess other
system-wide changes; and assessing even more fundamental changes
in a consistent framework. 

Trends in labor markets, pensions, savings, and the well-
being of the elderly

     The Panel believes that the next several decades will
bring a slow and modest reduction in early retirement, with
Americans retiring slightly later. This trend is projected to
occur barring other major institutional changes in labor
market and other economic forces.  It is attributable in part
to the already-legislated change in the Normal Retirement Age
for social security from 65 to 66 and then to 67, and it will
also reflect continuing improvement of workers' health into
their 60s.  The Panel also believes that there is little hope
of a dramatic turnaround in U.S. saving rates unless there is
major institutional change, although there is some
expectation of modest increases in private savings if future
social security benefits were to be decreased.  Similarly,
unless the regulatory environment changes dramatically, it is
unlikely that pension coverage will increase significantly
over the next several decades.  Benefit entitlement will grow
because of faster vesting, and the trend toward more
participant-directed, defined-contribution plans will
continue.

     Given further anticipated increases in life expectancy
along with improving health trends, the Panel's consensus is
that delayed retirement would be the most likely and easiest
response for the majority of older Americans who leave career
jobs and the labor market voluntarily and in good health. 
For others, however, poor health or poor labor market
prospects late in life would make this adjustment difficult
or impossible.

Policy Options for Dealing with Projected Social Security
Imbalances

     The Panel arrived at severe conclusions based on its
findings.  First, prompt legislation is required combining
benefit cuts and/or revenue increases to restore the social
security system to actuarial balance.  The appropriate mix of
benefit cuts and revenue increases is an issue for policy makers
to decide.  This Panel analyzed the pros and cons of achieving
balance with different mixes of reduced benefits and increased
taxes and compared alternative means of decreasing benefits and
increasing revenue.  
     
     Second, it is essential to have evaluation criteria for
assessing available policy options.  The Panel offers six
such criteria and uses them throughout the analysis. The
Panel compares the effects of a basic baseline benefit cut
(an across-the-board decrease in the PIA formula for future
retirees) with a basic baseline revenue increase (an increase
in the OASI payroll tax rate).   
     
     On balance, the Panel finds that the criteria adopted do
not unequivocally favor either raising taxes or decreasing
benefits.   Rather, some criteria (such as adequate
retirement income) favor tax increases, while others (such as
equity of lifetime social security taxes and benefits between
generations) favor benefit cuts.  In particular, closing the
fiscal imbalance with additional revenues rather than benefit
decreases is suggested if one emphasizes the first two
criteria, adequate retirement income and insurance against
unforeseen income fluctuations.  Social security benefit cuts
would increase the number of Americans with inadequate
retirement income, and lower the insurance protection offered
to workers, survivors and dependents.  Within a generation,
the use of tax increases rather than general benefit cuts
favors those with the longest life expectancies -- those most
likely to receive benefits for a long time -- and those with
lower incomes for any given life expectancy.  By contrast,
closing the fiscal imbalance with benefit decreases rather
than tax increases is suggested if one emphasizes the fourth
and fifth criteria, equity between generations and the
encouragement of private savings.  The expected return on
social security contributions is already going to be lower
for baby boomers than for past, current, and near-future
recipients, and this return will decline even further when
either social security taxes are raised or future benefits
are cut.  Younger participants would pay the higher taxes for
many more years than would participants planning to retire
soon.  Lower benefits would also encourage some individuals
to offset part of the loss through their own savings
behavior. 

The OASI Trust Fund

     The OASI Trust Fund currently exceeds one year's
outlays, and is projected to grow for about two decades, as
long as revenues exceed benefit payments.  The Panel
concludes that the OASI portion of the social security system
should continue to be at least partly funded, meaning that
the Trust Fund should maintain a significant and stable
margin over annual expenditures over the foreseeable future.
On the assumption that a Trust Fund of significant size will
continue to exist, the Panel discussed how to invest it.
Given the lack of literature on some key considerations, the
Panel concludes that proposals to invest some of the Trust
Fund in equities deserves additional study before they are
adopted.

Individual Accounts within Social Security

     The Panel discussed the pros and cons of converting all or
part of the Trust Fund to individual social security accounts,
over which participants could exercise some investment
discretion.  Many Panel members found promising the idea of
converting part of the Social Security Trust Fund to individual
accounts, if the remainder of the social security system can
still be made solvent.  The Panel recognizes the need to
coordinate the pattern of any social security benefit cuts with
the pattern of benefits from and the taxes needed to fund these
individual accounts.

Other Retirement System Changes

     The Panel addressed several other policy proposals that
might help strengthen the national retirement system.  The Panel
found strong arguments for including all state and local
employees in the social security system.  In addition, the Panel
reviewed the range of ages currently used in retirement income
policy, and concluded that much more coherent and integrated
policy is needed.  Along the same lines, the Panel concluded that
ages specified in IRS tax code for tax-qualified pension plans
should be coordinated with any new ages recommended for social
security purposes.  

     The Panel devoted substantial attention to the troubling
habit of many Americans to save very little, meaning that many
workers reach retirement with little or no private savings or
employer pension benefits.  Mandated employer pensions do not
seem desirable at this time; rather any mandated savings in the
form of individual accounts should be part of a national
retirement system rather than an employment based system. 
Nevertheless, many Panel members believe that tax rules under
which employer pension plans operate should be simplified, and
incentives for retirement savings, such as raising the limits on
401(k) and Individual Retirement accounts, should be increased. 
Finally, the Panel examined in some detail the question of
inflation protection of retirement benefits and concluded that
the government issue a new type of Treasury bonds that would be
indexed to price inflation would be desirable, given some
phasing-in of this new credit instrument.


SSA Policy Modeling and Research

     Now that the Social Security Administration (SSA) has a new
independent agency status, the Panel hopes that it can seize the
opportunity to strengthen its policy research and forecasting
functions.  The Panel also urges SSA to make available to the
research and policy community the actuarial and economic models
it uses for forecasting and analysis, and urges that the data
used in modeling social security system outcomes be made
available to the research and policy community, in ways that
preserve confidentiality while permitting analysts outside SSA to
evaluate forecasts and simulate alternative policy scenarios. 
Specifically, longitudinal databases like the Health and
Retirement Survey should receive support as a means of answering
the policy questions raised in this report and others that will
confront the system as it continues to evolve.

     The Panel suggests that SSA could make more use of outside
policy and periodically invite academic and practicing experts to
review and advise it on its assumptions and methods and on
broader research and policy issues facing the nation's retirement
income system. 

Conclusion
     
     Social security in the United States has been an extremely
successful and popular program since its inception.  The program
has been instrumental in improving the well-being of millions of
American retirees, their dependents, and their survivors.  When
fiscal problems have been forecast in the past, adjustments have
been made to address them.  The same is needed now.  The earlier
the adjustments are legislated, the better, because early warning
of impending changes gives people time to adjust their saving and
retirement plans accordingly.  The system's fiscal problems
currently anticipated with the greying of the baby boom
generation are manageable, and the Panel urges policy makers and
politicians to decide on the appropriate mix of benefit decreases
and revenue increases to return the nation's social security
fiscal house to order.
    
                                    
                               REFERENCES

     
    
A. Foster Higgins & Co., Inc.  1993.  Health Care Benefits Survey, 1992, Report 2: Retiree
         Health Care.  Princeton, NJ:  A. Foster Higgins & Co., Inc.

  Aaron, Henry J., Barry P. Bosworth and Gary Burtless.  1989.  Can America Afford to Grow
            Old?  Paying for Social Security.  Washington, DC:  The Brookings Institution.

Allen, Steven, Robert Clark and Ann McDermed. 1992. "Post-retirement Benefit Increases in
         the 1980s."  In John Turner and Daniel Beller, eds., Trends in Pensions 1992 . 
         Washington, DC:  USGPO, pp. 319-340.

Allen, Steven, Robert Clark and Ann McDermed. 1993. "Pensions, Bonding, and Lifetime
         Jobs."  Journal of Human Resources  28:463-481.

Allen, Steven, Robert Clark and Daniel Sumner. 1986. "Post-retirement Adjustments of
         Pension Benefits."  Journal of Human Resources  21:118-137.

Allen, Steven G. and Richard B. Freeman. 1994 "Quantitative Flexibility in the U.S. Labor
         Market."  Unpublished.

American Association of Retired Persons. 1989. Business and Older Workers: Current
         Perceptions and New Directions for the 1990s.  Washington, DC: AARP.

Andrews, Emily S.  1985.  The Changing Profile of Pension in America.  Washington, DC: 
         Employee Benefit Research Institute Education and Research Fund.

Andrews, Emily S.  1992.  "Retirement Savings and Lump Sum Distributions." Benefits
         Quarterly  2.

  Andrews, Emily S. and Deborah J. Chollet. 1988.  "Future Sources of Retirement Income: 
            Whither the Baby Boom."  In Susan M. Wachter, ed., Social Security and Private Pensions. 
            Lexington, MA:  Lexington Books, pp. 71-95.

Anzick, M. 1993. "Industrial Shifts: Implications for Worker Security." EBRI Notes  14:7.

Atkins, G. Lawrence. 1986.  Spend It or Save It? Pension Lump-Sum Distributions and Tax
         Reform. Washington, DC:  Employee Benefit Research Institute Education and Research
         Fund.

  Barro, Robert J.  1979.  "On the Determination of the Public Debt." Journal of Political
            Economy   87(5):940-971.

  Beller, Daniel J. and Helen H. Lawrence.  1992.  "Trends in  Private Pension Plan Coverage." 
            In John Turner and Daniel Beller, eds., Trends in Pensions 1992.  Washington, DC:
         USGPO, pp. 59-96.

Belous, Richard S. 1989. The Contingent Economy: The Growth of The Temporary,
         Part-Time, and Subcontracted Workforce. Washington, DC: National Planning
         Asociation.

Belous, Richard S. 1990. "Flexible Employment: The Employer's Point of View." In
         Peter B. Doeringer, ed., Bridges to Retirement: Older Workers in a Changing Labor
         Market.  Ithaca, NY: ILR Press, pp. 111-129.

  Bernheim, B. Douglas. 1993.  "Is the Baby Boom Generation Preparing Adequately for
            Retirement?"  Summary Report,  Merrill Lynch & Co., Inc.

Bernheim, B. Douglas.  1994.  "Adequacy of Savings for Retirement and the Role of
         Economic Literacy."  In Dallas Salisbury, and Nora Super Jones, eds., Retirement
         in the 21st Century...Ready or Not... Washington, DC: Employee Benefit Research
         Institute, pp. 73-82.

Blinder, Alan S, Roger H. Gordon and Donald E. Wise. 1980. "Reconsidering the
         Work Disincentive Effects of Social Security."  National Tax Journal 33:431-442.

Bloom, David and Richard Freeman.  1992.  "The Fall in Private Pension Coverage in
         the U.S."  American Economic Review  82:539-545.
         
              Blomquist, N.S. and Hans Wijkander.  1994.  "Fertility Waves, Aggregate Savings
 and the Rate of Interest."  Journal of Population Economics  7:27-48.

  Bluestone, Barry and Bennett Harrison.  1982.  The Deindustrialization of America. 
            New York: Basic Books.

  Board of Trustees of the Federal Hospital Insurance Trust Fund. 1995 Annual Report
            of the Board of Trustees of the Federal Hospital Insurance Trust Fund. 
            Washington, DC.

  Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability
            Insurance Trust Funds. 1995 Annual Report of the Board of Trustees of the Federal
            Old-Age and Survivors Insurance and Disability Insurance Trust Fund. 
            Washington, DC.

Bodie, Zvi.  1991.  "Shortfall Risk and Pension Asset Allocation."  Financial Analysts
         Journal  47(3):57-61.

Bodie, Zvi, Olivia S. Mitchell, and John Turner.  Forthcoming.  Securing Employer
         Based Pensions:  An International Perspective.  Philadelphia, PA:  The Pension
         Research Council and the University of Pennsylvania.

Bohn, Henning.  1990.  "Tax Smoothing with Financial Instruments."  American
         Economic Review  80:1217-1230.

  Bosworth, Barry, Gary Burtless and John Sabelhaus.  1991.  "The Decline in Saving: 
            Evidence From Household Surveys." Brookings Papers on  Economic Activity 
            1:183-241.

Bound, John and Timothy Waidmann.  1992.  "Disability Transfers, Self-Reported Health, and
         the Labor Force Attachment of Older Men: Evidence From the Historical Record." 
         Quarterly Journal of Economics 107:1395-1419.

Brown, Charles. 1980. "Equalizing Differences in the Labor Market." Quarterly Journal of
         Economics  95:112-134.

Burkhauser, Richard V. 1979. "The Pension Acceptance Decision of Older Workers."  Journal
         of Human Resources  14:63-75.

Burkhauser, Richard V. 1984. "Alternative Social-Security Responses to the Changing Roles
         of Women and Men."  In Colin D. Campbell, ed., Controlling the Cost of Social Security. 
         Washington, DC:  American Enterprise Institute, pp. 141-162.

Burkhauser, Richard V., J.S. Butler, and Karen C. Holden. 1991. "How the Death of a Spouse
         Affects Economic Well-Being After Retirement:  A Hazard Model Approach." Social
         Science Quarterly  72:504-519.

Burkhauser, Richard V. and Karen C. Holden. 1982.  A Challenge to Social Security: The
         Changing Roles of Women and Men in American Society.  New York:  Academic Press.

Burkhauser, Richard V. and Timothy M. Smeeding.  1981.  "The Net Impact of the Social
         Security System on the Poor."  Public Policy  29:159-178.

Burkhauser, Richard V. and Timothy M. Smeeding.  1994.  "Social Security Reform:  A
         Budget-Neutral Approach to Reducing Older Women's Disproportionate Risk of Poverty." 
         Syracuse University   Policy Brief No. 2.

Burtless, Gary and Robert A. Moffitt. 1984. "The Effect of Social Security Benefits on the
         Labor Supply of the Aged."  In Henry J. Aaron and Gary Burtless, eds., Retirement and
         Economic Behavior. Washington, D.C.: The Brookings Institution, pp. 135-171.

  Cantor, Richard and Andrew Yuengert. 1994. "The Baby Boom Generation and Aggregate
            Savings."  Federal Reserve Bank of New York Quarterly Review 19(2):76-91.

Chang, A. 1993. "Tax Policy, Lump Sum Pension Distributions and Household Savings." 
         Federal Reserve Bank of New York, Mimeograph.

Citro, Constance F. and Robert T. Michael, eds. 1995.  Measuring Poverty: A New Approach. 
         Washington, DC: National Academy Press.
 
Clark, Robert and Ann McDermed. 1988. "Pension Wealth and Job Changes: The Effects of
         Vesting, Portability and Lump-sum Distributions."  The Gerontologist  28:524-532.

Clark, Robert and Ann McDermed. 1990.  The Choice of Pension Plans in a Changing
         Regulatory Environment.  Washington, DC:  American Enterprise Institute.

Clark, Robert, Ann McDermed and Michelle White Trawick.  1994.  "Firm Choice of Type of
         Pension Plan:  Trends and Determinants."  In Raymond Schmitt, ed., The Future of
         Pensions in the United States.  Philadelphia, PA:  University of Pennsylvania Press, pp.
         115-125.

Clark, Robert and Elisa Wolper.  1993.  "Pension Tax Expenditures:  Magnitude, Distribution,
         and Economic Effects."  Presented at New Perspectives on Public Policy Towards
         Pensions, sponsored by Association of Private Pension and Welfare Plans and the Center
         for Economic Policy Research, Stanford University.

Congressional Budget Office. 1986. Earnings Sharing Options for the Social Security System. 
         Washington, DC: USGPO.

Council of Economic Advisors. 1994.  Economic Report of the President.  Washington, DC: 
         USGPO.

Council of Economic Advisors. 1995.  Economic Report of the President. Washington, DC: 
         USGPO.

Crawford, Vincent P. and David M. Lilien. 1981. "Social Security and the Retirement
         Decision." Quarterly Journal of Economics. 96:505-529.

Crimmins, Eileen M., Mark Hayward and Yasuhiko Saito. 1994.  "Changing Mortality and
         Morbidity Rates and the Health Status and Life Expectancy of the Older Population." 
         Demography  31:159-175.

Crimmins, Eileen M. and Dominique Ingegneri. "Trends in Health of the U.S. Population: 
         1957-89.''  In Julian Simon, ed., The State of Humanity  (Forthcoming).   Oxford, UK:
         Blackwell Publishers.

Danziger, Sheldon and Peter Gottschalk, eds. 1993. Uneven Tides: Rising Inequality in
         America.  New York: Russell Sage Foundation.

Davis, E. Philip.  1995.  Pension Funds: Retirement Income Security and Capital Markets: An
         International Perspective.  Oxford, UK: Clarendon Press.

de Lissovoy, Gregory, Judith D. Kasper, Steven Di Carlo, and Jon Gabel.  1990. "Changes in
         Retiree Health Benefits:  Results of a National Survey."  Inquiry  27:289-293.

Diamond, Peter.  1993.  "Privatization of Social Security: Lessons from Chile."  Cambridge,
         MA: National Bureau of Economic Research Working Paper No. 4510.

Diamond, Peter and Eytan Sheshinski. 1995. "Economic Aspects of Optimal Disability
         Benefits."  Journal of Public Economics  57:1-23.

Diamond, Peter and Salvador Valdes-Prieto.  1994.  "Social Security Reforms."  In Barry
         Bosworth, Rudiger Dornbusch and Raul Laban, eds., The Chilean Economy:  Policy
         Lessons and Challenges.  Washington, D.C:  The Brookings Institution, pp. 257-328.

Diebold, Francis, David Neumark and Daniel Polsky.  1994.  "Job Stability in the United
         States."  Cambridge, MA: National Bureau of Economic Research Working Paper No.
         4859.

Easterlin, Richard A., Christine Macdonald and Diane J. Macunovich.  1990a.  "How Have
         American Baby Boomers Fared?  Earnings and Economic Well-Being of Young Adults,   
         1964-1987.   Journal of Population Economics  3:277-290.

  Easterlin, Richard A., Christine Macdonald and Diane J. Macunovich. 1990b.  "Retirement
            Prospects of the Baby Boom Generation:  A Different Perspective."  The Gerontologist 
            30:776-783.

  Easterlin, Richard A., Diane J. Macunovich and Eileen M. Crimmins. 1993. "Economic Status
            of the Young and Old in the Working-Age Population, 1964 and 1987."  In V.L. Bengtson
            and W.A. Achenbaum, eds., The Changing Contract Across Generations.  New York: 
            Aldine de Gruyter, pp. 67-85.

  Easterlin, Richard A., Christine M. Schaeffer and Diane J. Macunovich.  1993.  "Will the
            Baby Boomers Be Less Well Off Than Their Parents?  Income, Wealth and Family
            Circumstances Over the Life Cycle in the United States.''  Population and Development
            Review  19:497-522.

Employee Benefit Research Institute. 1995. EBRI Notes, Vol. 16, No. 8. Washington, DC.

Engen, Eric M., William G. Gale, and John Karl Scholz.  1994.  "Do Savings Incentives
         Work?" Brookings Papers on Economic Activity  1:85-181.

Fair, Ray C. and Kathryn M. Dominguez. 1991. "Effects of Changing U.S. Age Distribution
         on Macroeconomic Equations."  American Economic Review  81:1276-1294.

  Farber, Henry S.  1993.  "The Incidence of Job Loss: 1982-1991."   Brookings Papers on
            Economic Activity: Microeconomics 73-132.

  Farber, Henry S.  1995.  "Are Lifetime Jobs Disappearing: Job Duration in the United States:
            1973-1993."  Princeton University, Industrial Relations Section Working Paper No. 341.

  Feenberg, Daniel and Jonathan Skinner. 1989. "Sources of IRA Savings." In Lawrence H.
            Summers, ed., Tax Policy and the Economy. Cambridge, MA: M.I.T. Press, pp. 25-46.

Feldman, Jacob J.  1991.  "Has Increased Longevity Increased Potential Worklife?''  In
         Proceedings of the Second Conference of the National Academy of Social Insurance.  
         Washington DC:  National Academy of Social Insurance, pp. 17-21.

Fields, Gary and Olivia S. Mitchell. 1984a. Retirement, Pensions and Social Security. 
         Cambridge, MA:  MIT Press.

Fields, Gary and Olivia S. Mitchell. 1984b. "The Effects of Social Security Reforms on
         Retirement Ages and Retirement Incomes." Journal of Public Economics 25:143-159.

Financial Accounting Standards Board (FASB).  1985.  Statement of Financial Accounting
         Standards.  (SFAS) No. 87.

Freeman, Richard B. 1993. "How Much Has De-Unionization Contributed to the Rise in Male
         Earnings Inequality."  In Sheldon Danziger and Peter Gottschalk, eds., Uneven Tides:
         Rising Inequality in America.  New York: Russell Sage Foundation, pp. 133-193.

Fries, James F.  1980.  "Aging, Natural Death and the Compression of Morbidity."  New
         England Journal of Medicine 303:130-35.

Fronstin, Paul. 1995. "The Availability of Retiree Health Insurance."  EBRI Notes, Vol. 16,
         No. 1, Washington, DC.

Gale, William G. and John Karl Scholz. 1994. "IRAs and Household Saving."  American
         Economic Review 84:1233-1260.

Gardner, Jennifer M.  1995.  "Worker Displacement: A Decade of Change"  Monthly Labor
         Review 118(4):45-57.

Gittleman, Maury B. and David R. Howell. 1995. "Changes in the Structure and Quality of
         Jobs in the United States:  Effects by Race and Gender, 1973-1990." Industrial and Labor
         Relations Review 48:420-440.

Gohmann, Stephan F. and Robert L. Clark.  1989. "Retirement Responses      to Social Security
         Changes." Journal of Gerontology 44/6:S218-S225.

Goodfellow, Gordon P. and Sylvester J. Schieber.  1993.  "Death and Taxes:  Can We Fund
         for Retirement Between Them?"  In Ray Schmitt, ed., The Future of Pensions in the
         United States.  Philadelphia, PA:  Pension Research Council, pp. 126-179.

  Gottschalk, Peter and Sheldon Danziger.  1995.  America Unequal.  New York: Russell Sage
            Foundation.

  Grad, Susan. 1992.  Income of the Population 55 and Older, 1990.  Department of Health and
            Human Services, Social Security Administration. Washington, DC: USGPO.

Gravelle, Jane. 1991. "Do Individual Retirement Accounts Increase Savings?" Journal of
         Economic Perspectives 5:133-148.

Gruenberg, Ernest M. 1977. "The Failures of Success.'' Milbank Memorial Fund Quarterly 
         55:3-34.

Gulotta, Michael J.  1994.  "Changing Private Pension Plan Funding Rules and Benefit
         Security."  In Dallas L. Salisbury and Nora Super Jones, eds., Pension Funding and
         Taxation.  Washington, DC:  Employee Benefit Research Institute Education and Research
         Fund, pp. 119-126.

Gullason, Edward T., Bharat R. Kolluri, and Michael J Panik.  1993.  "Social Security and
         Household Wealth Accumulation." Review of Economics and Statistics 75:548-551.

Gustman, Alan L., Patricia M. Anderson, and Thomas L. Steinmeier. 1995. "Trends in Male
         Labor Force Participation and Retirement: Some Evidence on the Roles of Social Security
         and Pensions in the 1970s and 1980s."  Dartmouth College, Department of Economics,
         Mimeograph.

Gustman, Alan L., Olivia S. Mitchell and Thomas L. Steinmeier. 1994. "The Role of Pensions
         in the Labor Market."  Industrial and Labor Relations Review 47:417-438.

Gustman, Alan L. and Thomas L. Steinmeier. 1985, "The Effects of Partial Retirement on the
         Wage Profiles of Older Workers." Industrial Relations 24:257-265.

Gustman, Alan L. and Thomas L. Steinmeier. 1992. "The Stampede Toward Defined
         Contribution Pension Plans:  Fact or Fiction?"  Industrial Relations 31:361-69.

Gustman, Alan L. and Thomas L. Steinmeier. 1993. "Pension Portability and Labor Mobility: 
         Evidence from the Survey of Income and Program Participation."  Journal of Public
         Economics  50:299-323.

Gustman, Alan L. and Thomas L. Steinmeier.  1994.  "Employer-Provided Health Insurance
         and Retirement Behavior," Industrial and Labor Relations Review  48:124-140.

Haber, Sheldon E., Enrique J. Lamas, and Jules H. Lichtenstein.  1987.  "On Their Own: The
         Self-Employed and Others in Private Business."  Monthly Labor Review 110(5):17-23.

Hamermesh, Daniel S. 1993. Labor Demand.  Princeton, NJ: Princeton University Press.

Hamermesh, Daniel S.  1985.  Expectations, Life Expectancy and Economic Behavior."
         Quarterly Journl of Economics 100:389-408. 

Harrison, Bennett and Bluestone, Barry. 1988. The Great U-Turn.  New York: Basic Books.

Hausman, Jerry A. and David A. Wise. 1985.  "Social Securitry, Health Status, and
         Retirement." In David A. Wise, ed., Pensions, Labor, and Individual Choice.  Chicago, IL:
         University of Chicago Press, pp. 159-191.

Hay/Huggins.  1990.  Pension Plan Cost Study for the Pension Benefit Guaranty Corporation. 
         Washington:  Pension Benefit Guaranty Corporation.

Hendershott, Patric. 1994.  "Housing Finance in the United States." In Yukio Noguchi and
         James Poterba, eds. Housing Markets in the United States and Japan .  Chicago, IL: The
         University of Chicago Press, pp. 65-86.

Herz, Diane E.  1995.  "Work After Early Retirement: An Increasing Trend Among Men." 
         Monthly Labor Review 118(4):13-20.

Herz, Diane E. and Philip L. Rones. 1989, "Institutional Barriers to the Employment of Older
         Workers," Monthly Labor Review 112(4):14-21.

Hitschler, Pamela.  1993.  "Spending By Older Consumers: 1980 and 1990 Compared." 
         Monthly Labor Review  116(5):3-13.

Hoynes, Hilary and Daniel McFadden. 1994. "The Impact of Demographics on Housing and
         Nonhousing Wealth in the United States."  Cambridge, MA: National Bureau of Economic
         Research Working Paper No.4666.

Hubbard, R. Glenn and Jonathan Skinner. 1995. "The Effectiveness of Saving Incentives: A
         Review of the Evidence."  Mimeograph.

Hubbard, R. Glenn, Jonathan Skinner, and Stephen P. Zeldes. 1994.  "The Importance of
         Precautionary Motives in Explaining Individual and Aggregate Saving."  Carnegie-
         Rochester Conference Series on Public Policy 40:59-125.

Hubbard, R. Glenn, Jonathan Skinner, and Stephen P. Zeldes. 1995. "Precautionary Saving
         and Social Insurance."  Journal of Political Economy 103: 360-399.
 
Hubbard, Richard. L. 1994. "The Tax Treatment of Pensions."  In Dallas L. Salisbury and
         Nora Super Jones, eds., Pension Funding and Taxation.  Washington, DC:  Employee
         Benefit Research Institute Education and Research Fund, pp. 43-57.

  Hurd, Michael D. 1990.  "Research on the Elderly:  Economic Status, Retirement, and
            Consumption and Saving."  Journal of Economic Literature 28:565-637.

Hurd, Michael D. and Kathy McGarry.  1993.  "Evaluation of Subjective Probability in the
         HRS."  Cambridge, MA: National Bureau of Economic Research Working Paper No.
         4560.

Hutchens, Robert.  1994.  "The United States: Employer Policies for Discouraging Work by
         Older People."  In Frieder Naschol and Bert de Vroom, eds., Regulating Employment and
         Welfare: Company and National Policies of Labour Force Participation at the End of
         Worklife in Industrial Countries.  Berlin: Walter de Gruyter, pp. 395-431.

Ibbotson Associates. 1993.  Stocks, Bonds, Bills and Inflation. Chicago, IL: Ibbotson
         Associates.

Ippolito, Richard A. 1986. Pensions, Economics, and Public Policy. Homewood, IL:  Dow
         Jones-Irwin.

Ippolito, Richard A. 1989.  The Economics of Pension Insurance.  Philadelphia, PA: Pension
         Research Council and Irwin.

Ippolito, Richard A. 1990. "Toward Explaining Earlier Retirement After 1970." Industrial and 
         Labor Relations Review 43: 556-569.

Ippolito, Richard A. 1995. "Selecting and Retaining High-Quality Workers: A Theory of
         401(k) Pensions." Mimeograph.

Joines, Douglas H. and James G. Manegold. 1995. "IRAs and Saving: Evidence From a Panel
         of Taxpayers."  University of Southern California, Mimeograph.

Jondrow, Jim, Frank Brechling and Alan Marcus. 1987. "Older Workers in the Market for
         Part-Time Employment."  In Steven H. Sandell, ed.,  The Problem Isn't Age: Work and
         Older Americans.  New York, NY: Praeger, pp. 84-99.

Juster, F. Thomas and James Smith. 1994. "Improving the Quality of Economic Data: Lessons
         from the HRS."  University of Michigan, Institute for Social Research, Mimeograph.

Kahn, James A. 1988. "Social Security, Liquidity, and Early Retirement." Journal of Public
         Economics 35:97-117.

Karoly, Lynn A. 1993. "The Trend in Inequality Among Families, Individuals and Workers in
         the United States: A Twenty-Five Year Perspective."  In Sheldon Danziger and Peter
         Gottschalk, eds., Uneven Tides: Rising Inequality in America.  New York: Russell Sage
         Foundation, pp. 19-97.

Karoly, Lynn A. and Jeannette A. Rogowsky. 1994. "The Effect of Access to Post-Retirement
         Health Insurance on the Decision to Retire Early."  Industrial and Labor Relations Review 
         48:103-123.

  Kingson, Eric. 1992. "The Diversity of the Baby Boom Generation:  Implications for the
            Retirement Years."  Prepared for Forecasting and Environmental Scanning Department,
            AARP.

  Kosters, Marvin H. and Murray N. Ross. 1987. "The Distribution of Earnings and
            Employment Opportunities: A Re-Examination of the Evidence." American Enterprise
            Institute Occasional Papers.


Kotlikoff, Laurence and Avia Spivak. 1981. "Families as an Incomplete Annuity Market." 
         Journal of Political Economy 89:372-391.

Kotlikoff, Laurence and Alan J. Auerbach. 1994. "U.S. Fiscal and Savings Crises and Their
         Impact for Baby Boomers."  In Dallas L. Salisbury and Nora Super Jones, eds.,
         Retirement in the 21st Century...Ready or Not...   Washington, DC:  Employee Benefit
         Research Institute Education and Research Fund, pp. 85-119.

Kotlikoff, Laurence and David Wise.  1989.  The Wage Carrot and the Pension Stick. 
         Kalamazoo, MI:  W.E. Upjohn Institute.

Kramer, Natalie. 1995. "Employee Benefits for Older Workers."  Monthly Labor Review
         118(4):21-27.

Kreuger, Alan and Jorn-Steffen Pischke.  1992.  "The Effect of Social Security on Labor
         Supply:  A Cohort Analysis of the Notch Generation."  Journal of  Labor Economics
         10:412-437.

Lakonishok, Josef, Andre Schleifer, and Robert W. Vishny.  1992.  "The Structure and
         Performance of the Money Management Industry."  Brookings Paper on Economic
         Activity pp. 269-326.

Lazear, Edward P.  1979.  "Why Is There Mandatory Retirement?"  Journal of Political
         Economy 87:1261-1284.

Leonard, Paul A, Cushing L. Dolbeare and Edward B. Lazere. 1989. A Place To Call Home:
         The Crisis of Housing for the Poor. Washington, DC: Center on Budget Priorities.

Leonesio, Michael. 1990. "The Effects of the Social Security Earnings Test on the Labor
         Market Activity of Older Americans:  A Review of the Evidence."  Social Security
         Bulletin 53(5):97-117.

Leonesio, Michael. 1991.  "Social Security and Older Workers."  Social Security
         Administration, Office of Research and Statistics, Working Paper No. 53, December.

  Levy, Frank. 1987. Dollars and Dreams: The Changing American Income Distribution. New
            York: Russell Sage Foundation.

Levy, Frank and Ricahrd C. Michel. 1985 The Economic Future of the Baby Boom.     
         Washington DC: The Urban Institute Press.

  Levy, Frank and Richard C. Michel.  1991.  The Economic Future of American Families.  
            Washington DC: The Urban Institute Press.

  Levy, Frank and Richard Murnane. 1992. "U.S. Earnings Levels and Income Inequality: A
            Review of Recent Trends and Proposed Explanations." Journal of Economic Literature
                 30:1333-1381. 

  Liston, Fiona E and Adrien R. LaBombarde. 1994.  "Decreasing the Compensation Cap for
            Pensions: Consequences for National Retirement Policy."  In Dallas L. Salisbury and Nora
            Super Jones, eds., Pension Funding and Taxation.  Washington, DC:  Employee Benefit
            Research Institute Education and Research Fund, pp. 131-137.

Long, James and Frank Scott. 1982. "The Income Tax and Non-Wage Compensation." 
         Review of Economics and Statistics 64:211-219.

  Macunovich, Diane J., Richard A. Easterlin and Christine M. Schaeffer. 1995. "Echoes of the
            Baby Boom and Bust:  Recent and Prospective Changes in Living Alone Among Elderly
            Widows in the United States."  Demography 32:17-28.

Madrian, Brigette C. 1994. "The Effect of Health Insurance on Retirement."  Department of
         Economics, Harvard University, Department of Economics, Mimeograph.

Manchester, Joyce. 1994.  "Baby Boomers in Retirement: An Early Perspective."  In Dallas
         Salisbury, and Nora Super Jones, eds., Retirement in the 21st Century...Ready or Not...
         Washington, DC: Employee Benefit Research Institute, pp. 63-68.

  Mankiw, N. Gregory and David N. Weil.  1989.  "The Baby Boom, the Baby Bust, and the
            Housing Market."  Regional Science and Urban Economics 19:235-258.

Manton, Kenneth G. 1982. "Changing Concepts of Morbidity and Mortality in the Elderly
         Population."  Milbank Memorial Fund Quarterly 60:182-244.

Manton, Kenneth G., Larry  Corder and Eric Stallard. 1993. "Estimates of Change in Chronic
         Disability and Institutional Incidence and Prevalence Rates in the U.S. Elderly Population
         From the 1982, 1984 and 1989 National Long Term Care Survey."  Journal of
         Gerontology 48:S153-S166.

Manton, Kenneth G., Eric Stallard and Larry Corder. 1995. "Changes in Mordibity and
         Chronic Disability in the U.S. Elderly Population: Evidence From the 1982, 1984, and
         1989 National Long Term Care Surveys."  Journal of Gerontology, forthcoming.

Marcotte, Dave E. 1995. "Declining Job Stability: What We Know and What It Means." 
         Journal of Policy Analysis and Management, forthcoming.

Mayer, Christopher and Katerina V. Simons. 1994. "A New Look at Reverse Mortgages: 
         Potential Market and Institutional Constraints."  New England Economic Review 
         March/April.

  McMillan, Henry M. and Jerome B. Baesel.  1990.  "The Macroeconomic Impact of the Baby
            Boom Generation."  Journal of Macroeconomics 12:167-195.

  Merrill Lynch. 1994. Saving the American Dream: An Economic and Public Opinion Study.

Merton, Robert C. 1969. "Lifetime Portfolio Selection Under Uncertainty: The Continuous
         Time Case."  Review of Economics and Statistics 51:247-257.

Milne, Deborah, Jack VanDerhei and Paul Yakoboski. 1995. Can We Save Enough to Retire? 
         Participant Education in Defined Contribution Plans .  EBRI Issue Brief No. 160.
         Washington, DC: Employee Benefit Research Institute.

Mitchell, Olivia S.  1988.  "Worker Knowledge of Pension Provisions."  Journal of Labor
         Economics 6:21-39.

Mitchell, Olivia. 1992. "Trends in Pension Benefit Formulas and Retirement Provisions."  In
         John Turner and Daniel Beller, eds., Trends in Pensions 1992. Washington, DC:  USGPO,
         pp. 177-216.

Mitchell, Olivia S. and Emily Andrews. 1981. "Scale Economies in Multiemployer Pension
         Plans."  Industrial and Labor Relations Review 34:522-530.

Mitchell, Olivia S. and Annika Sunden. 1994.  "An Examination of Social Security
         Administration Costs in the United States."  The Wharton School, University of
         Pennsylvania, Pension Research Council Working Paper No. 94-7.

Moffitt, Robert A. 1984. "Trends in Social Security Wealth by Cohort." In Marilyn Moon,
         ed., Economic Transfers in the United States. Chicago, IL: The University of Chicago
         Press, pp. 327-347.

Monheit, Alan C. and Philip F. Cooper. 1994. "Health Insurance and Job Mobility: Theory
         and Evidence."  Industrial and Labor Relations Review 48:68-85.

Munnell, Alicia H. 1974. The Effect of Social Security on Personal Savings. Cambridge, MA: 
         Ballinger Publishing Co.

Munnell, Alicia H.  1989.  "It's Time to Tax Employee Benefits."  New England Economic
         Review  July/August:49-63.

Munnell, Alicia H. 1991. "Are Pensions Worth the Cost?"  National Tax Journal 44:393-403.

Murphy, Kevin M. and Finis Welch. 1993. "Industrial Change and the Rising Importance of
         Skill."  In Sheldon Danziger and Peter Gottschalk, eds., Uneven Tides: Rising Inequality
         in America.  New York: Russell Sage Foundation, pp. 101-132.

Myers, Robert J. 1993. "Is the 85-Percent Factor for Taxing Social Security Benefits
         Perpetually Correct?  58 Tax Notes 1545.

Myers, Robert J. and Bruce D. Schobel. 1983. "A Money s Worth Analysis of Social Security
         Retirement Benefits.  Transactions (Society of Actuaries) 44:247-275.

  Palmer, John L. 1989. "Financing Health Care and Retirement for the Aged."  Business, Work
            and Benefits: Adjusting to Change.  Washington DC:  Employee Benefit Research
            Institute.

Pauly, Mark. 1990. "The Rational Nonpurchase of Long Term Care Insurance."  Journal of
         Political Economy 98:153-168.

Population Resource Council. 1994. "Executive Summary: The Feminization of Aging." 
         Prepared by Nancy Fifield McConnell and reviewed by Cynthia Taeuber, U.S. Bureau of
         the Census. Princeton: Population Resource Center.

Porter, John.  "Individual Social Security Retirement Accounts."  In Michael S. Gordon,
         Olivia S. Mitchell, and Marc M. Twinney, eds., Positioning Pensions for the Year 2000, 
         forthcoming.  Pension Research Council.

Poterba, James. 1994a.  "Personal Saving Behavior and Retirement Income Modelling: A
         Research Assessment."  Paper Prepared for the Committee on National Statistics, Panel on
         Retirement Income Modelling Conference.

Poterba, James.  1994b.  "Public Policy and Housing in the United States."  In Yukio
         Noguchi and James M. Poterba, eds., Housing Markets in the United States and Japan.
         Chicago:  The University of Chicago Press, pp. 239-256.

Poterba, James, Steven Venti and David Wise.1994. "Targeted Retirement Saving and the Net
         Worth of Elderly Americans." American Economic Review 84(2):180-185.

Poterba, James, Steven Venti and David Wise. (Forthcoming.)  "Do 401(k) Contributions
         Crowd Out Other Personal Saving?" Journal of Public Economics.

Preston, Samuel H. and Irma T. Elo.  1994. "Are Educational Differences in Mortality
         Increasing in the United States?"  University of Pennsylvania, Population Studies Center,
         Mimeograph.

Quinn, Joseph F.  1987.  "The Economic Status of the Elderly: Beware of the Mean." 
         Review of Income and Wealth 133:63-82.

Quinn, Joseph F.  1995.  "The Roles of Part-time Work and Self-Employment in the
         Retirement Transition." Boston College, Department of Economics, Mimeograph.

Quinn, Joseph F. and Richard V. Burkhauser. 1994a. "Retirement and Labor Force Behavior
         of the Elderly." In Linda Martin and Samuel Preston, eds., Demography of Aging. 
         Washington, DC:  National Academy of Science, pp. 50-101.

Quinn, Joseph F. and Richard V. Burkhauser.  1994b. "Public Policy and the Plans and
         Preferences of Older Americans."  Journal of Aging and Social Policy 6(3):5-20.

Quinn, Joseph F., Richard V. Burkhauser, and Daniel A. Myers. 1990. Passing the Torch: 
         The Influence of Economic Incentives on Work and Retirement. Kalamazoo, MI: 
         W.E. Upjohn Institute.

Quinn, Joseph F. and Timothy M. Smeeding. 1993. "The Present and Future Economic Well-
         Being of the Aged."  In Richard V. Burkhauser and Dallas L. Salisbury, eds.,  Pensions in
         a Changing Economy. Washington, DC:  National Academy on Aging, pp. 5-18.

Radner, Daniel. 1992. "The Economic Status of the Aged." Social Security Bulletin 55(3):3-
         23.

Reno, Virginia F. 1993. "The Role of Pensions in Retirement Income." In Richard V.
         Burkhauser and Dallas L. Salisbury, eds., Pensions in a Changing Economy. Washington,
         DC:  National Academy on Aging, pp. 19-32.

Rhine, Shirley H.  1984. Managing Older Workers: Company Policies and Attitudes.  New
         York: The Conference Board.

Rosen, Sherwin. 1974. "Hedonic Prices and Implicit Markets."  Journal of Political Economy
         82:34-55.

Rosenthal, Neal H.  1995.  "The Nature of Occupational Employment Growth: 1983-93." 
         Monthly Labor Review 118(6):45-54.

Ruhm, Christopher J.  1995.  "Secular Changes in the Work and Retirement Patterns of Older
         Men."  Journal of Human Resources 30:362-385.

Ruhm, Christopher J.  (Forthcoming.) "Do Pensions Increase the Labor Supply of Older
         Workers?" Journal of Public Economics.   

Russell, Louise B.  1982.  The Baby Boom Generation and the Economy. Washington, DC:
         The Brookings Institution.

Sabelhaus, John and Joyce Manchester. 1993. "Baby Boomers and Their Parents:  How Does
         Their Economic Well-Being Compare in Middle Age?"  Urban Institute and Congressional
         Budget Office.

Salisbury, Dallas L.  1993. Pension Tax Expenditures:  Are They Worth the Cost?  EBRI
         Issue Brief No. 134.  Washington, DC: Employee Benefit Research Institute.

Salisbury, Dallas L. 1994. "The Costs and Benefits of Pension Tax Expenditures."  In Dallas
         L. Salisbury and Nora Super Jones, eds., Pension Funding and Taxation.  Washington,
         DC:  Employee Benefit Research Institute Education and Research Fund, pp. 85-103.

Salisbury, Dallas L. and Nora Super Jones, eds. 1994.  Pension Funding and Taxation. 
         Washington, DC:  Employee Benefit Research Institute Education and Research Fund.

Salisbury, Dallas L. and Celia Silverman.  1994.   "Social Security and Medicare Programs
         Face Reform."  EBRI Notes, 15(6), Washington, DC: Employee Benefit Research
         Institute.

Saltford, Nancy and Sarah Snider. 1994. Characteristics of the Part-Time Work Force.  EBRI
         Special Report and Issue Brief No. 149. Washington, DC: Employee Benefit Research
         Institute.

Samuelson, Paul A.  1994. "The Long-Term Case for Equities and How It Can Be Oversold."
         The Journal of Portfolio Management 21(1):15-24.

Schieber, Sylvester J.  1990. "Benefits Bargain: Why We Should Not Tax Employee
         Benefits."  Paper prepared for the Association of Private Pension and Welfare Plans,
         Washington, DC.

Scheiber, Sylvester J.  1983. Retirement Program Tax Expenditures: A Case of
         Unsubstantiated, Undocumented, Arbitrary Numbers.  EBRI Issue Brief No. 17.
         Washington, DC.

Schieber, Sylvester J.  1995.  "Why Do Pension Benefits Seems So Small?"  Mimeograph.

Schieber, Sylvester J. and Gordon P. Goodfellow. 1994a  "Pension Coverage in America:  A
         Glass Two-Thirds Full or One-Third Empty?"  Pension Coverage Issues for the '90s .
         Washington, DC: U.S Department of Labor, Pension and Welfare Benefits Administration,
         pp. 125-137.

Schieber, Sylvester J. and Gordon P. Goodfellow.  1994b.  "Fat Cats, Bureaucrats, and
         Common Workers:  Distributing the Pension Tax Preference Pie."  In Dallas L. Salisbury
         and Nora  Super Jones, eds., Pension Funding and Taxation.  Washington, DC:  Employee
         Benefit Research Institute Education and Research Fund, pp. 105-116.

Schieber, Sylvester J. and John Shoven.  1994.  "The Consequences of Population Aging on
         Private Pension Fund Savings and Asset Markets."  Cambridge, MA: National Bureau of
         Economic Research Working Paper No. 4665.

Shapiro, David and Stephen H. Sandell.  1985.  "Age Discrimination in Wages and
         Displaced Older Workers," Southern Economic Journal 52:90-102.

Shapiro, David and Stephen H. Sandell.  1987.  "The Reduced Pay of Older Job
         Losers: Age Discrimination and Other Explanations."  In Steven H. Sandell, ed., 
         The Problem Isn t Age: Work and Older Americans.  New York: Preager.

Siegel, Jeremy J. 1994. Stocks for the Long Run. New York: Richard D. Irwin.

Silverman, Celia.  1993. "Pension Evolution in a Changing Economy."  EBRI Special Report
         and Issue Brief,  No. 141. Washington, DC: Employee Benefit Research Institute.

Silverman, Celia and Paul Yakoboski.  1994.  "Public and Private Pensions Today: An
         Overview of the System."  In Dallas L. Salisbury and Nora Super Jones, eds., Pension
         Funding and Taxation.  Washington, DC:  Employee Benefit Research Institute Education
         and Research Fund, pp. 7-42.

Skinner, Jonathan.  1994.  "Housing and Saving in the United States."  In Yukio Noguchi and
         James Poterba, eds., Housing Markets in the United States and Japan.  Chicago, IL:  The
         University of Chicago Press, pp. 191-214.

Sloan, Frank and Killard Adamache.  1986.  "Taxation and the Growth of Nonwage
         Compensation."  Public Finance Quarterly 14:115-138.

Smeeding, Timothy M., Lee Rainwater, and Barbara Boyle Torrey. 1993. "Going to Extremes: 
         An International Perspective on the Economic Status of the U.S. Aged."  Syracuse
         University, the Maxwell School, Mimeograph.

Smith, Robert.  1979.  "Compensating Wage Differentials and Public Policy:  A Review." 
         Industrial and Labor Relations Review 32:339-352.

Smith, James. 1994  "Wealth Inequality Among Older Americans". Rand Corporation,
         Mimeograph..

Steuerle, C. E. and M. Bakija.  1994.  Retooling Social Security for the 21st Century: Right
         & Wrong Approaches to Reform.  Washington, DC, The Urban Institute Press.

Straka, John W.  1992. The Demand for Older Workers.  U.S. Social Security Administration,
         Office of Research and Statistics, Studies in Income Distribution No. 15.

Swinnerton, Kenneth A. and Howard Wial.  1995.  "Is Job Stability Declining in the United
         States?"  Industrial and Labor Relations Review 48:293-304.

Turner, John and Daniel Beller, eds.  1992. Trends in Pensions 1992. Washington, DC: 
         USGPO.

Thaler, Richard.  1994.  "Psychology and Savings Policies." American Economic Review 
         84:186-192.

  U.S. Bureau of the Census.  1993a.  Poverty in the United States: 1992.  Current Population
            Reports, Series P-60, No. 85.  Washington, DC: USGPO.

  U.S. Bureau of the Census.  1993b.   Measuring the Effect of Benefits and Taxes on Income
            and Poverty: 1992.   Current Population Reports, Series P-60, No. 186RD. Washington,
            DC:  USGPO.

U.S. Bureau of Labor Statistics.  1993.  Employee Benefits in Medium and Large Private
         Establishments, 1991.   BLS Bulletin No. 2422. Washington, DC:  USGPO.

U.S. Bureau of Labor Statistics.  1994a.  Employee Benefits in Small Private Establishments,
         1992.  BLS Bulletin No. 2441. Washington, DC:  USGPO.

U.S. Bureau of Labor Statistics.  1994b.  Employee Benefits in State and Local Governments,
         1992.  BLS Bulletin No. 2444.  Washington, DC:  USGPO.

U.S. Bureau of Labor Statistics.  1994c.  Employment and Earnings. Washington, DC: 
         USGPO. January.

U.S. Department of Labor. 1994a.  Abstract of 1991 Form 5500 Annual Reports. 
         Washington, DC:  Pension and Welfare Benefits Administration.

U.S. Department of Labor.  1994b.  Pension and Health Benefits of American Workers:  New
         Findings from the April 1993 CPS.  Washington, DC:  USGPO.

U.S. House of Representatives, Committee on Ways and Means. 1985. Report on Earnings
         Sharing. Washington, DC: USGPO.

U.S. House of Representatives, Committee on Ways and Means. 1987. Retirement Income for
         an Aging Population. Washington, DC: USGPO.

  U.S. House of Representatives, Committee on Ways and Means. 1993. 1993 Green Book. 
            Washington, DC:  USGPO.

  U.S. House of Representatives, Committee on Ways and Means. 1994. 1994 Green Book. 
            Washington, DC:  USGPO.

  U.S. Senate, Special Committee on Aging.  1991.  Aging America. Washington, DC:  U.S.
            Department of Health and Human Services.

Van Derhei, Jack. 1994.  "Pension Funding and Private Pensions."  In Dallas L. Salisbury and
         Nora Super Jones, eds., Pension Funding and Taxation.  Washington, DC:  Employee
         Benefit Research Institute Education and Research Fund, pp. 59-84.

Venti, Steven and David Wise. 1990a. "But They Don't Want to Reduce Housing Equity."  In
         David Wise, ed., Issues in the Economics of Aging.  Chicago, IL: The University of
         Chicago Press, pp. 13-29.

Venti, Steven and David Wise.  1990b.  "Have IRAs Increased U.S. Savings? Evidence from
         the Consumer Expenditure Surveys," Quarterly Journal of Economics 105:661-698.

Venti, Steven and David Wise.  1991.  "Aging and the Income Value of Housing Wealth." 
         Journal of Public Economics 44:371-397.

Venti, Steven and David Wise.  Forthcoming.  "The Wealth of Cohorts: Retirement Saving
         and the Changing Assets of Older American." In Sylvester Schieber and John Shoven,
         eds., Public Policy Toward Pensions.  Twentieth Century Fund.

Verbrugge, Linda M.  1984.  "Longer Life but Worsening Health?  Trends in Health and
         Mortality of Middle-Aged and Older Persons."  Milbank Memorial Fund Quarterly 
         62:474-519.

Waidmann, Timothy, John Bound and Michael Schoenbaum. 1994.  "The Illusion of Failure: 
         Trends in the Self-Reported Health of the U.S. Elderly."  University of Michigan, Survey
         Research Center, Mimeograph.

Woodbury, Stephen. 1983. "Substitution Between Wage and Nonwage Benefits."  American
         Economic Review  73:166-182.

Woodbury, Stephen and Wei-Jang Huang. 1991. The Tax Treatment of Fringe Benefits. 
         Kalamazoo, MI:  W.E. Upjohn Institute.

Woods, John.  1989.  "Pension Coverage Among Private Wage and Salary Workers: 
         Preliminary Findings from the 1988 Survey of Employee Benefits."  Social Security
         Bulletin  52:2-19.

World Bank.  1994.  Adverting the Old Age Crisis.  New York, NY:  Oxford University
         Press.

Yakoboski, Paul. 1994.  Retirement Program Lump-Sum Distributions: Hundreds of Billions
         in Hidden Pension Income. EBRI Issue Brief No. 146.  Washington, DC: Employee
         Benefit Research Institute.

Yakoboski, Paul and Celia Silverman.  1994.  Baby Boomers in Retirement:  What Are Their
         Prospects?   EBRI Special Report and Issue Brief No. 151.  Washington, DC: Employee
         Benefit Research Institute.

Yakoboski, Paul et al.  1994.  Employment-Based Retirement Income Benefits. EBRI Special
         Report and Issue Brief No. 153.  Washington, DC: Employee Benefit Research Institute.

Zeldes, Stephen P.  In progress. "Should the U.S. Social Security Trust Fund Invest in the
         Stock Market?" The Wharton School, University of Pennsylvania.
    Endnotes