Saving Social Security?
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RAY SUAREZ: And for more, we’re joined by Alicia Munnell, professor of finance and director of the Retirement Research Center at Boston College. She is an economic advisor to the Gore campaign. Kenneth Blackwell is secretary of state for Ohio, and a supporter of the Bush campaign. Edith Rasell is an economist with the Economic Policy Institute, a Washington research and policy group. And Michael Tanner, director of the Project on Social Security Privatization at the Cato Institute.
Kenneth Blackwell, let’s start with you. This Bush plan has been termed a “partial privatization.” How would that work?
KENNETH BLACKWELL, Secretary of State, Ohio: Well, essentially what Governor Bush is saying is that people at the lower end of the economic ladder have a right to have a stake in the ownership of America and their retirement security. This really speaks to the needs of people who are right now on the wrong side of the asset gap and the wealth gap in this country.
This is a bold plan, which really understands that the demographics of the “pay as you go” tax transfer system no longer works. But more importantly it no longer provides an opportunity for lower-income workers to have a real stake in the asset base of this country. One of the things that I find a bit hypocritical is that I would imagine that the vice president doesn’t have all of his money, all of his assets, tied to treasury bonds or notes. The reality is that he benefits from the power of compounding interest. What we want to do is to give working people that same benefit.
And I think Governor Bush has established a framework for us to think differently about this and to think in a bipartisan fashion. He is not saying this alone. You have Senator Kerry and Senator Moynihan both saying that this is a logical completion to the Social Security system that was begun in 1935 and that it is this sort of gradual approach, responsible approach, that will lend itself to building a bipartisan base to get this done. This is a ticking demographic time bomb that Al Gore is willing to let explode on our children’s future.
RAY SUAREZ: So if this were to become a reality, we would have 105, 110 million American workers each with a privately managed retirement account from this portion of their Social Security?
KENNETH BLACKWELL: From the small portion of the Social Security taxes. The reality is that Governor Bush’s plan would protect the core of the present program. It would… but it would allow some personal ownership and personal involvement in shaping the Social Security destiny of each individual worker. That is the American way.
RAY SUAREZ: Michael Tanner, were you pleased by what you saw?
MICHAEL TANNER, Cato Institute: I think this is a dramatic step in the right direction. Governor Bush is the first major party presidential candidate since Barry Goldwater to be willing to talk about true Social Security reform. Social Security faces two distinct problems, not just one. The one we hear about is the solvency problem. The fact, as your report indicated, that within just about 15 years it will begin to run a deficit and the fact that overall it’s about $21 trillion — that’s trillion with a “t” — dollars in debt but there’s an additional problem. And that is the fact that for most young workers are receive a remarkably poor return on their money. Many young workers will receive 1 percent return on their money or less. Others are going to receive a negative return, actually lose money on the current Social Security program.
We need to find a Social Security reform that fixes both of those problems at once — not only keep the program solvent into the future but also increases the rate of return for young workers and also guarantees them a legal property right in their benefits, a legal right of ownership and an ability to pass on benefits to future generations.
RAY SUAREZ: And the Bush plan does this in your view.
MICHAEL TANNER: The Bush plan goes a long way towards doing this. I’d like to see more, but it’s a good start.
RAY SUAREZ: Edith Rasell, does this satisfy some of the built-in requirements that you would have a national retirement system?
EDITH RASELL, Economic Policy Institute: Not at all. It’s a step in the wrong direction. It introduces risk into a program that now is a guarantee, provides guaranteed income to people in retirement. This program instead is more of an investment program. We know the stock market can go up. It can also go down. And this program also means that we’re going to have winners and losers. Right now nobody gets rich off Social Security. But everybody gets by, for the most part. And when we have an investment program like he is describing and people put away 2 percent or whatever percent of their income is the final proposal, if you’ve got a high income and put away 2 percent in a private account and make good investments because you’re more experienced at doing that, then you might end up doing very well.
Somebody else who has a more moderate income and puts away 2 percent is going to have not much to start with and if they are unlucky in their investments or happen to retire at a time when the market is down, then they’re going to do poorly. And instead of having everybody getting by with their core retirement benefit, as they do now with Social Security, we’re going to have some people who do very well and other people who do very poorly. And then the question is what are we going to do about these folks, this growing number of elderly people that are now living in poverty, who are really not security in their retirement. Bush’s plan just doesn’t really address that.
RAY SUAREZ: Alicia Munnell, don’t we have winners and losers today with the current set-up of those who are more economically able to provide fairly well for their retirement? Mr. Blackwell pointed out that Vice President Gore is unlikely to have all his future plans based on treasury notes.
ALICIA MUNNELL, Boston College: I would like to make two comments. The first is that Social Security is a well functioning program. The trustees are very prudent. They make financials projections over 75 years. Over the 75-year period, this program is running a small deficit. That deficit can be fixed within the context of the current program. There is just absolutely no need for a dramatic restructuring of this program. The second point I want to make is the benefits provided under this program are very modest. For the average person it’s roughly $800 month. Is $800 a month an amount that we want to put at risk? It just does not make any sense at all.
KENNETH BLACKWELL: Well, you know, that’s off the point. What Governor Bush is saying is that we should put 2 percent, we should preserve the core of the program. Now essentially this is the duplicity of the Gore campaign once again. Let me just give you a for instance. He wants to hold a lot of children hostage in schools that don’t work but he sends his kids to private schools. Now he wants to benefit from the power of compounding interest and ownership but he doesn’t want people — Latinos and African-Americans — at the lower end of the economic ladder to have ownership stake.
What we are talking about is a very responsible approach to preserving the core of the program. This is not an effort to supplant the core of the program but to supplement and strengthen it. And I can tell you right now, you would have a substantially higher number of losers — they happen to be our children. And they would probably happen to be losers when Gore, if he was president, was out of office. That is why Governor Bush’s position is a true leadership position because what he’s talking about is not a risky scheme. The risky scheme is to stay attached at the hip with the status quo.
RAY SUAREZ: Well, the governor has talked also about no reduction in benefits. I’m wondering how you divert away 2 or 2.5 percent of what Americans are paying in taxes now and not reduce benefits because that money is supposed to be channeled into the system and going out to people as checks.
KENNETH BLACKWELL: What he essentially said is that over the next 10 years, there will be a surplus of about $2 trillion. What he wants to do is to put that $2 trillion against the cost. What that does, it guarantees to people who are presently in the system that their benefits will not be cut and it guarantees to those folks who are right at the margin of becoming retirees that their benefits won’t be cut. But it gives the younger generation an opportunity to invest in their future and to have a Social Security, socially secure future. Now, I can just tell you right now, this is typical Al Gore. It is, you know, divide, divide, divide. What Governor Bush has proposed is a proposal of win, win and multiplication. He is avoiding inter-generational warfare and I think that’s good for the country.
RAY SUAREZ: Alicia Munnell.
ALICIA MUNNELL: Yes. I think your point about putting the system at risk is very right. We have a deficit equal to 2% of payrolls right now. If everybody took advantage of the Bush proposal and put 2% of their payrolls into the individual accounts, we would double the deficit. Then you would either have to put more money into the system or cut benefits. Governor Bush has made a pledge not to put any more money into the system. Therefore his plan involves an enormous cut in benefits.
RAY SUAREZ: Alicia Munnell, give us the simplest explanation of what the Vice President would like to do instead.
ALICIA MUNNELL: The vice president wants to stay with the current structure of the program. He understands that this program is particularly beneficial for low-income individuals. He would meet part of the deficit in the program by putting in some general revenues that are equal to the interest savings that come from using the Social Security surpluses to pay down the debt.
MICHAEL TANNER: The vice president essentially is not reforming the system. Both the Congressional Budget Office and the General Accounting Office have looked at the vice president’s proposal and said, “This is not reform. It is simply a promise that we’re going to tax people in the future in order to continue to pay benefits at the levels that are promised.” The system needs fundamental, structural reform. It is $21 trillion in debt. And it is going to provide a poor rate of return to young workers and it does not give individuals ownership. The vice president doesn’t address any of those problems. He doesn’t keep the system solvent. He doesn’t increase the rate of return, and he doesn’t give individuals ownership and investment in this economy.
RAY SUAREZ: Edi Rasell.
EDITH RASELL: Vice President Gore’s plan does provide for a secure future for people. He makes the system totally solvent for the next 50 years. Beyond that, if we do nothing different than what we’re doing now, we have more than two-thirds of the money we need to pay all benefits. So there is no need to get rid of really the most important feature of the system, and that is the guaranteed income — the social insurance feature of the program. We can make small adjustments in the future, if need be. The projections that we all use are based on fairly pessimistic projections for the economy. If the economy does well, the problem is even smaller than what we’ve described. There is no need to dramatically restructure this program.
I think one of the most dangerous parts of what’s been proposed today is voluntary nature, evidently, we don’t know all the details– but it appears that Governor Bush is proposing voluntarily — sorry — that people will volunteer to opt into these private accounts. Now what this means is that some people probably will. And I think it’s more likely that the upper-income people will because they stand to gain the most from doing it. And that means the more moderate-income people who actually benefit most greatly under the current program would stay in the current program. This is dangerous both economically and politically, I think.
RAY SUAREZ: Let’s talk a little bit more about the assumptions built into the Gore plan. You’re assuming surpluses that stretch out into the future for a while and also making a sort of sophisticated macro economic argument, aren’t you, Alicia Munnell, that there are effects in paying down the national debt that would be felt in the broader economy and help spur on the solvency of the system?
ALICIA MUNNELL: I wish I could claim that it was sophisticated. It’s not that sophisticated. It’s very fundamental notion that if we save today and invest today, we’ll have more equipment, we’ll have more highly trained workers, we’ll have a higher GDP in the future and that will make it easier to support workers in the future, so it’s based on paying down the debt and saving, which is very sensible when you have a large, aging population.
RAY SUAREZ: But you’re proposing using interest savings, aren’t you, to pay future benefits?
ALICIA MUNNELL: The interest savings are just a metric to determine how much of general revenues should be put into the system. So it’s a fixed dollar amount that will be put in over a period of time.
KENNETH BLACKWELL: What he is talking about doing is propping the system up with IOUs. Those IOUs will come due, they will come due, you know, to our children. That means that at that point when they come due that they’re going to have to increase taxes 20, 25 percent. That’s a wallop.
RAY SUAREZ: Would they have to increase taxes if there’s no longer any national debt?
ALICIA MUNNELL: Because we save today –
KENNETH BLACKWELL: Yeah.
ALICIA MUNNELL: — the economy will be much stronger and able to bear that burden and the Treasury will be in a much stronger position because it will not have a huge debt outstanding by the public.
KENNETH BLACKWELL: This is simple.
ALICIA MUNNELL: And then they will be able to finance that amount.
KENNETH BLACKWELL: This is simple. Al Gore is talking about the typical big government expansionist intrusion approach. And George Bush is talking about developing a bipartisan — working in concert with Senator Moynihan and Senator Kerry and other Democrats and Republicans to make sure that we have a solution that is broadly based and doesn’t divide us generationally, doesn’t divide income wise and doesn’t divide us by race and ethnicity. This is truly a coalition-building approach that will benefit all but particularly low-income workers who want a stake in America’s prosperity. Al Gore is slamming a door in their face. He is a 21st century public policy Luddite –
RAY SUAREZ: He’s been talking about generational — I’m sorry. Go ahead. Alicia Munnell.
ALICIA MUNNELL: Dramatic change in a program that functions extremely well on which many people depend for their retirement income and will in the future is not necessary and will not improve the security of older workers in the future. It will harm them.
KENNETH BLACKWELL: A dramatic change? 2%. Come on, Alicia.
ALICIA MUNNELL: Two percentage points is a large portion of a 12.4 percent payroll tax. It will double the size of the deficit in the program.
RAY SUAREZ: You can be sure that we’re going to be discussing this again down the road. Guests, thank you all.
KENNETH BLACKWELL: Thank you.