Social Security as a Theme in the Presidential Campaign
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MARGARET WARNER: Six years from now, in 2010, the baby boom generation will begin retiring and collecting Social Security. And at current rates, by the year 2018, the government will be paying out more in retiree benefits than it collects in payroll taxes. Does this mean the next president will have to do something about Social Security? And how differently would a President Bush or a President Kerry deal with it?
To assess that, we turn to two independent analysts: Maya MacGuineas, president of the Committee for a Responsible Federal Budget at the New America Foundation; and Peter Orszag, senior fellow at the Brookings Institution and co-author of the book “Saving Social Security.”
Well, we heard how Sen. Kerry framed the issue today. He said the choice on Nov. 2 was between the candidate who will “save Social Security and another who will undermine it.” How do you see the choice, Mr. Orszag?
PETER ORSZAG: Well, neither candidate has put forward proposals that would eliminate the long term deficit in Social Security, but Senator Kerry has indicated he’d like to protect benefits that last as long as you’re alive, that don’t fluctuate with the stock market and that are not eroded by inflation. President Bush wants to replace part of that program with individual accounts, and in my view that does not make any sense.
MARGARET WARNER: How would you sum it up in a nutshell?
MAYA MacGUINEAS: Well I see it slightly differently. I agree with Peter that it’s too bad neither candidate has put forward a comprehensive plan about how they would address the problems in Social Security; we know that needs to be done.
But what we’ve heard from President Bush is at least the idea for how he would restructure the program. He wants to include a system of individually owned private accounts to work with the Social Security system. What we haven’t heard is the details for how to create these accounts. On the other hand Senator Kerry has really spent much more of his attention on what he wouldn’t do and pretty much ignored the topic of how he would fix the program.
MARGARET WARNER: All right. Well, let’s look at the Bush plan since it’s the most detailed; and I’ll begin with you, Maya MacGuineas, and ask you about the premise; the underlying premise of the Bush-Cheney plan is that the situation is really dire, and that if something isn’t done to restructure it, given the demographic trends, there just isn’t going to be enough for, as you just heard him say, at least our children’s children. Is he right? Is the situation that dire?
MAYA MacGUINEAS: Well, there are lot of people who say it’s a crisis, there are a lot of people who say it’s not a big deal at all. It’s somewhere in between the two. But the one thing that all experts on Social Security agree on is we can’t pay for the promises we’re making.
So not only is that an economic and a budgetary challenge, how are we going to pay for these promises, it’s a political failure. We’ve known this for years and even decades and to continue to allow to make promises saying this is what will support your retirement when we know it can’t be done isn’t right to younger workers or future generations.
MARGARET WARNER: How dire do you see the situation?
PETER ORSZAG: Well, it’s a problem, but Social Security is like a car with a flat tire. We need to replace the flat tire; we don’t need to replace the car. So it’s a real problem that should be addressed, but we need to put it in context. The deficit over the next 75 years in Social Security for example is only a third the size of the tax cuts that President Bush embraced. So you can’t argue that one is huge and another is really small, which is effectively what he is trying to say.
MARGARET WARNER: All right. Now, you said earlier that you didn’t think the personal accounts is the way to go. Why not?
PETER ORSZAG: Well, I think individual accounts make a lot of sense on top of Social Security. In fact, there’s lots we can do to boost savings in 401-K’s and IRA’s, but for that core layer of financial security, they just don’t make sense; first because they create a big deficit in Social Security, a dollar going into individual accounts is a dollar less for the traditional program. That creates a $2 trillion problem, the so-called transition cost. Having to fill that transition cost is the big magic asterisk in a lot of these plans.
Secondly even if we assume away that problem, as many of the plans do, it’s not a deal that we want to take, especially as the private pension system on top of Social Security is moving from a defined benefit one to a defined contribution one, to assign more risk to workers within that core layer makes no sense in my view.
MARGARET WARNER: What you’re saying, in other words, is that workers already –very few of them have these defined pensions, they are already in 401-k’s, subject to the vicissitudes of the stock market, you don’t think it’s a good idea?
PETER ORSZAG: Right. And we can do a better job of getting them to save more on top of Social Security, but we need a core layer that’s protected.
MARGARET WARNER: What’s the argument against that?
MAYA MacGUINEAS: Well, I think there are really three fundamental decisions we have to make with regard to how we fix Social Security. The first is: are we going to raise revenues or are we going to reduce benefits or slow the growth of benefits in the system? I would argue we need to do both, the problem is that big.
MARGARET WARNER: But the president is saying he would not change benefits for those in or near retirement.
MAYA MacGUINEAS: Right. He made it very clear —
MARGARET WARNER: And would also not increase payroll taxes.
MAYA MacGUINEAS: That’s right. He’s made it very clear that he would not touch benefits for anybody who is retired or near retirement, I think both candidates agree on that. Nobody’s talking about today’s seniors.
MARGARET WARNER: He’s also saying he wouldn’t raise the payroll taxes, so I guess my real question –
MAYA MacGUINEAS: Yes.
MARGARET WARNER: — is not in a blue sky what’s the perfect plan. I should have made it more focused. Do you think the Bush plan, which talks about personal accounts, that in it of itself would be enough to restructure it?
MAYA MacGUINEAS: Well, he’s never said that accounts alone would be the solution. I mean, Peter was saying you could have Social Security accounts along with the Social Security system. That’s expanding a new entitlement program. What you want to do is you want to use accounts as a way to restructure Social Security in a way that makes sense. And by that I mean we’ve been running Social Security surpluses, and we’ve been putting them in the government, quote unquote, trust fund.
But those trust funds really just co-mingle the dollars and those surpluses for Social Security are spent on everything from defense, to the prescription drug program and Medicare. The purpose of individual accounts is can we save the money that we need for Social Security in individual accounts so that it’s not spent anywhere else, really it’s the only lock box that would work.
MARGARET WARNER: Do you think — do either of you think the president is right when his argument is that the young workers who are putting this money in, and it would belong to them, that they will get a higher rates of return. Is that true?
PETER ORSZAG: It’s misleading. The rate of return comparison is disingenuous for two reasons. First stocks are riskier than bonds and the president just ignores that. Secondly, a lot of the dollars going into the account now are already spoken for. He ignores the cost of continuing to pay benefits for today’s retirees and that kind of comparison.
MARGARET WARNER: Do you think the higher rate of return?
MAYA MacGUINEAS: Higher rate of return works, it’s not the answer to everything, but the president has also said because there’s more risk in some of these accounts he wants to increase the minimum benefit for long-term workers, that’s something at least his commission was interested in doing.
MARGARET WARNER: How would, answer Mr. Orszag’s question about the transition cost. In other words, how would the Bush plan as you understand it pay for first of all Senator Kerry says it’s something like 2 trillion, how do you continue paying out the benefits to the current retirees while the younger workers are peeling off part of their contributions to put in these private accounts?
MAYA MacGUINEAS: And let me be clear, I don’t disagree that that is the fundamental question we need the answers to, and we need to talk about how to pay for those accounts. But the key is these aren’t new expenses. These are ways to save money for promises that have already been there, and the use of the accounts can actually decrease the current liabilities to the program, which are in the range of $10 trillion, so $2 trillion isn’t that much when you think about the savings it can lead to.
MARGARET WARNER: Let’s look at Sen. Kerry’s approach. How do you understand it?
PETER ORSZAG: Well, I think what Sen. Kerry is really saying is that the current structure of the program is something that he wants to protect. And he’s also acknowledged that if the time came, an auspicious time for reform, he’d put together a group of bipartisan people to reform the program.
The kinds of options I think make sense requires some adjustments on both the benefit side and the revenue side and we should be combining them in a sensible way, rather than as President Bush has suggested just completely ruling off one of the major options.
MARGARET WARNER: But Sen. Kerry has also taken raising payroll taxes off the table, and raising the retirement age.
PETER ORSZAG: And he’s left open the possibility that if things don’t turn out as he expects we need to get people together and given the current projections that is not an unlikely scenario.
MARGARET WARNER: One of the things he doesn’t talk about on the campaign trail, Ms. MacGuineas but he says on his Web site is that while he wouldn’t cut benefits for people who “rely on Social Security,” he says, “he will consider making sure that high income beneficiaries don’t get more out than they pay in.” What does that say to you?
MAYA MacGUINEAS: Well, I think that’s sort of the only thing he’s left on the table, so we have to take seriously that he’s willing to consider reducing benefits for high end earners. That happens to be a policy I think makes an awful lot of sense; in itself though it’s not enough to fix the problems facing Social Security.
And both the president and Sen. Kerry have been unwilling to talk about the realistic things we have to think about. We have to think about raising the retirement age. Both of them have taken it off the table. They really shouldn’t.
MARGARET WARNER: Do you agree that that in and of itself, even if you change the formula, the benefits for high income people, would not be enough?
PETER ORSZAG: Well, first I think it’s justified in part because life expectancy while it’s going up for everyone, it’s going up really fast for higher earners and better educated people. So in my view that justifies some adjustment in the monthly benefit, particularly for higher earners.
MARGARET WARNER: You mean because they’ll be living longer so they’ll be getting an awful lot over time.
PETER ORSZAG: Yes, they are increasingly living longer than lower earners and less educated workers. In and of itself it’s not enough to address the long-term problems of Social Security, though.
MARGARET WARNER: What about Sen. Kerry’s critique that President Bush’s plan, he says will just, and this is what his ad says, will amount to cutting benefits 30 to 45 percent, is he right about that?
MAYA MacGUINEAS: Senator Kerry has been I think disingenuous and misleading on his attacks of the president. He’s not willing to talk about what the accounts would also provide; under a system of individual accounts you have two revenue streams, your traditional Social Security benefits, which would be smaller than are promised, but we can’t afford to pay what’s promised, plus you would have the money in your account. So that’s how you would fill in the gap in the Social Security benefits.
PETER ORSZAG: The Congressional Budget Office, when it analyzed one of the leading plans proposed by the president’s commission to strengthen Social Security, suggests that even if you add the money coming out of individual accounts, Social Security would go from replacing 40 percent of your previous wages to 25 percent. That is about a 40 percent reduction.
MARGARET WARNER: And you both bemoan the fact that this campaign has not really seen a vigorous debate with competing plans. Why do you think that is, Ms. MacGuineas?
MAYA MacGUINEAS: I think the problem is whoever is willing to sort of be honest first and say we’re living longer, we should talk about raising retirement ages, we’ve over promised, we have to raise revenues, we have to slow the growth of benefits, is going to get attacked by the other person. And that’s the real problem.
We need a cease-fire, we need some kind of agreement so that we can as a country discuss this issue of this huge federal program that doesn’t have the money to pay for benefits, and so that when somebody comes into office and as the president when the first baby boomer starts to retire in 2008, we know what we’re dealing with. Right now we haven’t had a worthwhile discussion at all; it’s just been a lot of fighting and sort of emphasizing the easy parts but not the tough choices.
MARGARET WARNER: Why do you think we haven’t seen a real debate and particularly why do you think Sen. Kerry hasn’t put forward a real competing plan?
PETER ORSZAG: Well, I think as Maya said, that the American public is not demanding that from politicians and therefore that’s what they get. But given that, I don’t think it would be constructive at this point for either candidate to put forward fully specific proposals because it’s like a turkey shoot, it would just engender a negative reaction from the other side and make reform less likely rather than more likely, unfortunately.
MARGARET WARNER: So how realistic do you think it is to expect that given the demographic trends, given when the baby boomers start retiring that the next president will have to tackle this?
PETER ORSZAG: Oh, I think it’s important for the next president to tackle it because the longer we wait the harder the problem gets, but I don’t know that it’s going to be an urgent crisis that will demand action during the next administration.
MARGARET WARNER: So, in other words you think that the next president could if he wished kick the can down the road?
PETER ORSZAG: The next president should address this but probably won’t be forced to.
MARGARET WARNER: What do you think about the political realities?
MAYA MacGUINEAS: The only risk we run is if the financial markets start to get worried about how this country is ignoring both our costs in the retirement and the health care system for the baby boomer. But short of that, we can continue to delay; we all know it’s the wrong thing to do and it will hurt us in the end if that’s the path we choose.
MARGARET WARNER: Maya MacGuineas, Peter Orszag, thank you both.
PETER ORSZAG: Thank you.