President Bush Touts Private Accounts for Social Security Reform
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JIM LEHRER: Now, Jeffrey Brown looks at the details of the president’s proposal.
JEFFREY BROWN: And for that, we turn to two longtime students of the Social Security system.
Peter Orszag, senior fellow in economic studies at the Brookings Institution, and Michael Tanner, director of health and welfare studies at the Cato Institute. Welcome to both of you. Let’s start with the size, the scope of the problem. One thing the president said last night, you just heard, the problem kicks in, in just 13 years. By 2042 it will be “exhausted and bankrupt.” Michael Tanner, help us understand how to think about the size of the problem.
MICHAEL TANNER: Well, within the 15 years, Social Security will begin to spend more money on benefits than it’s taking in, in revenue.
There will be more money going out than it has coming in. Most people would recognize that’s a problem.
Now, at that point, in theory at least, it would go back to the Social Security trust fund and it will withdraw money from that trust fund to pay benefits until about 2042.
However, in reality, as the Clinton administration and others from the CBO and other organizations have made clear for years, the trust fund has no real assets in it.
What it is, is sort of a collection of IOU’s. It is a promise that some day in the future the government will tax someone in order to pay those benefits.
As the president made clear, in 2027, the federal government will have to redeem some 200 billion dollars’ worth of bonds in order to continue to pay benefits, and it doesn’t have that money.
PETER ORSZAG: In 2027, the president noted the current system requires $200 billion. Under his account system it would require $300 billion, and by the way, the tax cuts, if they’re extended, are $344 billion in that year alone.
So this has to be put in context. There is a problem here. We should address it. But it’s not the biggest problem facing the federal government, even over the long term.
JEFFREY BROWN: All right. Let’s move to the private accounts. We have a graphic here that shows who would be eligible. It would be available to people only over 55.
MICHAEL TANNER: Under 55
JEFFREY BROWN: Sorry, under 55. It would be phased in for people and workers can opt out of the accounts. Now, the president was very eager, and we just saw it on the tape, to let current retirees and close to retirees know they would not be affected. That’s important?
MICHAEL TANNER: Well, absolutely. People who are already retired or even people who are getting near retirement should realize that they simply don’t have a dog in this hunt.
They are not going to have their benefits affected. They’re going to remain in the current Social Security system, and they’re going to receive every penny in Social Security benefits as promised to them.
What this is about is their children and their grandchildren; in giving their children and grandchildren the opportunity to have real wealth that they own and that they can pass on to their heirs. It’s about creating a better retirement system for the young people of today.
JEFFREY BROWN: Now, as I understand it, the phasing in element of this is to deal with what’s called the transaction costs.
PETER ORSZAG: The transition costs.
JEFFREY BROWN: The transition costs. These are very controversial, how high those will be. Tell us what you think?
PETER ORSZAG: Well, they’re artificially reduced by this phase in schedule. The accounts don’t even start until 2009 and then are phased in slowly.
In the first ten years in which the accounts were in existence, that is, starting in 2009, they would cost about a trillion dollars. In the second ten years, they’d cost more than three trillion dollars.
The costs extend for many decades and they’re very deep and very large.
MICHAEL TANNER: We have to put that in context. The current Social Security system is in debt to the tune of somewhere between 10.5 and 12 trillion dollars.
So when we talk about some upfront costs in order to reduce that unfunded liability, it’s like someone paying off their credit card debt early, yes, you have to dig a little deeper and find some extra money now, but in the long run, you’re a lot better off.
JEFFREY BROWN: You don’t see that coming?
PETER ORSZAG: What’s most interesting is the straight itself has now admitted the accounts do nothing to improve the long-term deficit in Social Security.
So talking about the long-term deficit in Social Security on the one hand, the accounts on the other, is a non sequitur. The accounts do not do anything to reduce that long-term deficit.
JEFFREY BROWN: Let’s look at our second graphic, which has some of the details of the plan. Now, workers could contribute up to 4 percent of their wages.
The contributions are initially capped at $1,000 a year. There’s a mix of investment options available to people. The accounts could be part of an inheritance and no pre-retirement withdrawals are allowed.
Michael Tanner, when you look at this mix, what stands out to you?
MICHAEL TANNER: Well, one thing important to say is that while it’s $1,000 cap to begin with, that will rise. And within about five years, half of Americans will be able to put a full 4 percent of their payroll tax, about one-third of their payroll taxes into individual accounts.
So this is the opportunity to create a substantial amount of control and ownership by workers over their retirement funds.
JEFFREY BROWN: The investment mix is fairly conservative?
PETER ORSZAG: Well, it’s a reasonable mix and it’s important that people do invest in diversified index funds.
But I think there is a tension here between the rhetoric of ownership and control and the sorts of restrictions that are being imposed.
For example, no pre-retirement withdrawals; that means that even though you, “own and control the account,” if you’re sick, the kid’s sick, you need a new car, you can’t pull the money out to meet those meet immediate expenses.
I’m not sure that will be politically sustainable over time given the way the accounts have been sold.
MICHAEL TANNER: But, we know under the current Social Security system, there is no legal right to benefits whatsoever. In fact, you’ve actually said that one of the disadvantages of individual accounts is that unlike current benefits, Congress can’t come in and just reduce them whenever it feels like.
In order to save money in the future, Congress can’t come in and take money away from your individual account. This is a matter of ownership and control.
JEFFREY BROWN: What happens to the guaranteed benefit that people now have under this plan if they set up one of these private accounts?
MICHAEL TANNER: Well, there will be a corresponding offset in the guaranteed benefit they they’re going to receive.
If you’re putting money into your individual account to the degree you’re doing that, you’re not contributing that money to the Social Security system, and your benefits will be offset or reduced by a proportional amount.
JEFFREY BROWN: And the idea is over time you will more than make up what you would have had?
MICHAEL TANNER: Over time, if you get the returns that we expect people to get from the market, they will do better than what they would otherwise get from Social Security.
JEFFREY BROWN: But they may not?
PETER ORSZAG: They may not. The way to think about this is you’re taking money and effectively borrowing it.
You’ll pay it back through reduced Social Security benefits later, and you wind up better off if you beat the rate at which you borrowed, and you wind up worse off if the rate of return on your account is lower than the interest rate on the debt that you owe.
JEFFREY BROWN: This is a key point -
MICHAEL TANNER: Even if you put the money in a government bond rate, you would break even.
And if you get any sort of return above the rate that government bonds earn, you’re going to do better than what Social Security can otherwise pay.
And at the same time, this money becomes fully inheritable. If you die before retirement, that money would be passed on to your children and heirs, something that doesn’t exist in the Social Security system.
And this money would not be touchable by the government. Right now the government is free to reduce your benefits at any time it chooses. This money in your account would inviolate; it would belong to you and couldn’t be taken away.
JEFFREY BROWN: Are there any provisions — I think a lot of people wonder about any provisions if you’re retiring when the market is down, when your investments are down. What happens?
PETER ORSZAG: You wind up owing, having your traditional benefits still reduced and not enough money in your individual account to offset it.
In fact, under the scoring of these plans that the Congressional Budget Office has done, not only are the benefits, including the individual accounts, substantially lower than the current benefit formula, they’re even lower than what the system could afford to pay after the trust fund is exhausted and benefits are reduced to match incoming payroll revenue.
MICHAEL TANNER: Well, the Social Security Administration disagrees and others who have scored this. But we just have to look.
We’re not talking about short-term investment, whether the markets go up or down over a two, three, four, five-year period.
We’re talking about people investing for 35, 40, 45 years. Take the lowest point of the market decline in 2002 that we just had.
Someone starting investing 45 years before would have begun when the Dow was around 600. The market would have had to fall an awfully lot more than it did to wipe out all of the gains that we’ve already seen.
PETER ORSZAG: And you could have made the same argument in Japan in 1989 right before the NIKKEI fell from roughly 39,000 to about 11,000 now.
MICHAEL TANNER: And we did make the same argument in 1983, the last time we reformed Social Security.
We told people it’s too risky for them to invest. The market is up over 800 percent since then. Wouldn’t people have been better off if we had let them invest then?
PETER ORSZAG: I think we’re at the core issue, which it makes sense to take onto effectively mortgage your future Social Security events to take a risk in the stock market — I don’t think that’s the place to take a risk, and Michael does.
JEFFREY BROWN: What about at a more universal level for the system.
Isn’t one of the key questions here and controversies whether doing this helps the problem that we now have or hurts, whether it adds money or takes money away? You think it hurts the problem?
PETER ORSZAG: Well, the administration itself says it doesn’t help. And what we would have is a very significant increase in debt today, coupled with a very back-loaded reduction in debt, which just washes out over the long run.
So, I think the key question is: why are we doing this if it doesn’t even help address the long-term deficit in Social Security? That’s by the administration’s own accounting.
JEFFREY BROWN: Mr. Tanner.
MICHAEL TANNER: We’re doing it because we can provide a better rate of return, a better retirement benefit and ownership and control to individuals than what we would do if we simply cut benefits or simply raised taxes.
If all you care about is solvency, you can do exactly what Peter suggested. We can cut benefits enough and we can raise taxes enough to keep the system in balance.
But you make the deal for younger workers increasingly worse. They pay more; they get less. With individual accounts, we can raise the amount of money they’re going to get in retirement and they’ll be better off.
PETER ORSZAG: What the president is not talking about are the benefit reductions outside of the accounts that are required to reach solvency because again the accounts don’t do that.
JEFFREY BROWN: Let’s talk about that, because he did say everything is on the table. He put a few things out there.
These are raising the age limit; these are things like indexing benefits to prices as opposed to wages. Is something like that inevitable, something like that have to happen?
PETER ORSZAG: Well, since he’s ruled off the table additional revenue, the only way to close the underlying deficit in Social Security, because again the accounts don’t do that, is through substantial benefit reductions.
And we’re talking about very significant benefit reductions, $5,000 a year for a young worker today
JEFFREY BROWN: He took off the table what you’re referring to is any increase in the payroll tax. You think that’s a bad idea, to take that off the table?
PETER ORSZAG: He took that off the table explicitly and then he didn’t mention any other revenue option, so the implication is that additional revenue is off the table.
That means there’s very heavy pressure on benefits to eliminate the deficit. I think that is unsound.
JEFFREY BROWN: What do you think?
MICHAEL TANNER: Well, I think tax increases would only amount to a great drag on the economy, and would be a job killer. The payroll tax is in effect a tax on employment.
Benefit reductions are inevitable. They have nothing to do with individual accounts. We’re not going to reduce benefits because we create individual accounts.
We’re going to reduce benefits because the promises are unsustainable in the future. Social Security cannot pay the benefits that are promised with the existing level of revenues.
So, what we’re talking about having benefit cuts down to the level that Social Security can pay and then because we create individual accounts, we give people a chance to recoup those otherwise benefit reductions and actually end up with higher benefits than they would when you combine the two.
PETER ORSZAG: I was going to say, we don’t need to limit the revenue here to the payroll tax. For example, a reformed estate tax, which would allow $7 million per couple, in tax free estates.
If we went that way, you could eliminate between a quarter and half of the long-term deficit by dedicating that revenue to Social Security.
So we can broaden the debate beyond just the payroll tax for Social Security.
JEFFREY BROWN: Let me give you both a last quick whack at this, because this debate is going to go on for months now. What should people take away? What are the key one or two points, Michael Tanner?
MICHAEL TANNER: Social Security reform is not an option; it’s a necessity. The current system is unsustainable.
Because we have to act to reform Social Security, we should see this as an opportunity to create a better retirement system, one that actually gives workers ownership and control over their money and allows moderate and low income workers to accumulate real inheritable wealth.
JEFFREY BROWN: Peter Orszag.
PETER ORSZAG: Individual accounts do not address the long-term deficit in Social Security; the right place to build individual accounts is on top of Social Security like the IRA’s and 401(K)’s that we already have and we should doing a lot better job in boosting saving there.
JEFFREY BROWN: Okay. Peter Orszag, Michael Tanner, thank you both very much.
JIM LEHRER: You can send your own questions about the president’s proposal to our guests by going to our Web site at pbs.org.