Social Security Debate Shapes Up
President Bush, citing the anticipated strain on Social Security when baby boomers start to retire in 2008, has declared Social Security reform his No. 1 domestic policy effort in his second term. But some of his proposals, particularly the idea of personal investment accounts, have generated controversy and may make major reform a difficult sell on Capitol Hill.
Although the president has kept details of his plan close to his
vest until he could negotiate with the new 109th Congress,
he laid out certain tenets early on: no change to benefits
for current and near retirees, no payroll tax increase and
the option for workers to divert some of their payroll contributions
to Social Security into personal accounts.
The personal savings account option is part of the president's vision of an "ownership society," based on the idea that "if you own something, you have a vital stake in the future of our country," he said in June 2004.
Supporters say younger workers should be allowed to control part of their contributions as a nest egg that they could pass on to their families.
But detractors say drawing funds away from Social Security will mean a smaller benefits pool, and the cost of establishing the accounts while paying out benefits to those eligible could cost as much as $2 trillion.
The idea of personal retirement accounts met with resistance from some members of Congress and various organizations even before the president put a full proposal on the table.
"We will not let any president turn the American dream into a nightmare for senior citizens and a bonanza for Wall Street," Sen. Edward Kennedy, D-Mass., told the National Press Club on Jan. 12, 2005. "The biggest threat to Social Security today is not the retirement of the baby boomers. It's George Bush and the Republican Party."
In a letter posted on AARP's Web site, the organization's President Marie Smith and CEO Bill Novelli wrote, "Most of us would then have to pay twice to gamble on this new plan -- first to keep our commitments to current retirees and again to pay into these private accounts. Some critics of these personal accounts think that Wall Street, not retirees, would be the real beneficiaries."
But the Securities Industry Association says Wall Street would only see "modest gains" from the administration of private Social Security accounts, rather than the "free lunch" that many predict, according to a report by SIA Vice President and Director, Industry Research Rob Mills.
Mills said that by using the Thrift Savings Plans model, estimates from the Social Security Administration, and projected participation in personal accounts, he figures the total revenue for Wall Street from the personal accounts would end up being only $39 billion over 75 years. To put that in perspective, he wrote, the total revenues for the entire financial sector over the same period is projected at $3.3 trillion.
For more on the concept of Social Security private accounts, click here.
The Bush administration has pledged not to change benefits for current or near retirees out of fairness to those who have paid into the system their entire work lives.
And the administration does not consider raising payroll taxes an option. Vice President Dick Cheney said at a Jan. 13, 2005 talk at Catholic University in Washington, D.C., that the government has increased Social Security payroll taxes more than 20 times over the 70-year life of the program.
"We need to remember that raising taxes will not fix the current system as long as the costs continue to rise relative to the size of income that could be taxed," he said. "Trying to fix the system by raising taxes would only buy time, and then future generations would need to come back and raise taxes again and again."
But some economists say since Social Security benefits are programmed to rise with price inflation and wages, Congress will at some point have to increase taxes or scale back benefits to future generations, just as past congresses have done.
Is there a problem with the existing system?
One of the challenges President Bush faces is convincing the public, Democrats in Congress and even some in his own Republican Party, that now is the time to make sweeping changes to the Social Security system.
Many analysts are predicting a 30 percent decline in Social Security benefits 40 years down the road.
Mark Weisbrot and Dean Baker, co-directors of the left-leaning Center for Economic and Policy Research and co-authors of "Social Security: The Phony Crisis," wrote in a Jan. 23, 2005 Washington Post opinion piece that the situation is not as dire as some say.
"The projected shortfall for the next 75 years is smaller than shortfalls covered by adjustments in each of the following decades: the 1950s, '60s, '70s and '80s. It is also about one-third the size of the tax cuts enacted during the Bush administration," they wrote. "In other words, it's a non-issue."
According to the Social Security Administration, starting in 2018, Social Security will begin paying out more benefits than taking in funds. In the 1950s, there were 16 workers for every beneficiary, but today, there are only three, the SSA says.
"That's not a good thing," said President Bush at a Jan. 11 event in Washington, D.C. meant to build support for making changes to Social Security. "It means that you're either going to have to raise the taxes of people or reduce the benefits. And the longer you wait, the more severe the pain is going to be to fulfill the promise for a younger generation of workers coming up."
But Weisbrot and Baker said the Social Security trust fund will still have more than $3.7 trillion when 2018 rolls around, and that, combined with payroll taxes, will cover promised benefits until 2042, according to the SSA's trustees report.
The Congressional Budget Office projects a reduction in benefits starting in 2052.
The two economists said that although there will be fewer workers per beneficiary, "productivity (output per hour) will grow substantially during the same period, so we won't need nearly as many working people to support a larger retired population."
And although the federal government borrows from Social Security funds, it still pays interest and always repays the loan, they said.
Prospects for Social Security reform in Congress
The Republican Party, energized with larger majorities in the House and Senate, has pegged reforming the tax code and Social Security as two of its top agenda items.
Although there is a drive for Social Security reform within the GOP leadership, some moderate Republicans are uneasy.
"I'm certainly not going to support diverting $2 trillion from Social Security into creating personal savings accounts," said Sen. Olympia Snowe, R-Maine, a member of the Senate Finance Committee, on CNN's Inside Politics on Jan. 23, 2005.
"The existing program, as it has been developed in the last 70 years, provides a stable monthly income that has prevented seniors, almost 50 percent from falling into poverty," she said. "I don't think we want to erode the principles of that system."
After making comments that appeared to dismiss President Bush's push for Social Security changes, Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee, appeared on NBC's Meet the Press on Jan. 23, 2005, praising the president for putting the discussion about Social Security on the table.
Thomas said rather than looking at the same short-term solutions, including raising income and payroll taxes, Congress should examine other options such as value-added taxes, in other words, taxing products coming into the United States to generate Social Security revenues as other countries do to U.S. exports.
He said Congress shouldn't get caught up in the debate over personal accounts and benefit cuts, and should instead look at broader issues, including health care costs, the way Social Security is funded, how seniors are allowed to use the money in retirement and after death, and ways to help younger workers address future needs of chronic and long-term care.
"The point is if you're going to have a bipartisan solution that the president can sign, I think all of those points at least need to be examined," he said.