SOCIAL SECURITY

February 2005
		President Bush's call for reforms to Social Security is part of a broader philosophical effort to promote an "ownership society" in the United States. Dinesh D'Souza of the Hoover Institution at Stanford University and professor Jacob Hacker of Yale University answer your questions about the philosophical differences in the Social Security debate. Special Report: Social Security Reform

Forum Introduction After we baby boomers die off will the imbalance of workers to retirees correct itself? Why not just pay out less to those who have high assets? Why not just have the SSA invest a percentage of the current contributions in index funds? What happened to the "lockbox" idea? Has the Social Security trust fund been used for other purposes?	David Grant asks: I have two questions: 1. What has happened to the now-forgotten "lockbox" that was widely discussed in the 2000 presidential debates? If the government had not borrowed all the funds in this lockbox, would the program be in financial straits now? 2. Has anyone run the numbers on an individual earning the minimum in salary investing in Bush's private account program, to see what the potential income at retirement might be? Jacob Hacker responds: 1. The lock was picked -- to fund large tax cuts and, to a lesser extent, new federal spending. (In essence, then, regressive payroll taxes have helped pay for big tax cuts for the rich.) But it should be made clear that the very long-term problems of Social Security -- that is, 40 or 50 years from now -- are not a result of the trust fund having been "spent." Indeed, the Trustees whom I cited earlier assume that Social Security will be able to draw on the trust fund for roughly 20 years. That is a fair assumption. Social Security is loaning the rest of the government money -- money raised through taxes on hard-working Americans -- and it should be paid back. Plus, because Social Security is building up assets in its trust fund, it is probably helping to lower the national debt. (I say "probably" because whether it is depends on how much Congress and the president would spend or cut taxes if the trust fund was not hiding the true size of the deficit.) The real problem with federal finances is not Social Security for the foreseeable future -- it is the rest of the budget. 2. Yes, and they are not encouraging. The Congressional Budget Office estimates that workers at all income levels will see big benefit cuts. The cuts are biggest for the youngest. So, for example, a worker retiring in 2065 who is at the bottom of the income ladder will receive about 70 percent of his or her pre-retirement income upon retirement under the current system, and worker in the middle of the income ladder will receive about 40 percent. Under the president's proposal, by contrast, the low-income worker will receive about 44 percent, and the middle-income worker about 22 percent. That is, benefits would be cut roughly in half. This is not entirely a fair comparison because Social Security cannot pay full benefits forever unless it gets new money or benefits are cut. But even if Social Security is not adjusted at all, as I noted earlier, it will be able to pay around three-quarters of promised benefits. And it is not as if the accounts are free. They will require trillions in new government borrowing that will have to be paid for down the line (with interest). I should note that the Congressional Budget Office does not really estimate how much individual workers will earn on their accounts. Rather, it assumes that for workers as a whole, the higher returns that some accounts may earn will come with higher risk. When you adjust for that risk, according to the Congressional Budget Office, the accounts will only earn the rate of return of long-term bonds. It could be that private accounts will earn more, bringing up the benefits for workers. However, those higher benefits will come with higher risk. Also, if stocks do grow at faster rates, that will only be because the economy grows more quickly than the Trustees are projecting. And if the economy grows more quickly, Social Security will be in a much better financial position even without private accounts. Indeed, if the economy grows as slowly as is currently projected by either the Social Security Trustees or the Congressional Budget Office, then there is simply no way that returns on stock can come close to making up the cuts in the Bush plan. In fact, they will barely cover the administrative costs of the accounts. Dinesh D'Souza responds: 1. There never was a "lockbox." This was a classic example of politicians coming up with a term that was calculated to fool the citizens. 2. With respect to your second question, even a minimum-wage worker paying into the Social Security system would still get the level of benefits that the program pays out (using a complicated formula that redistributes benefits in favor of lower-income payees). The main thrust of Bush's program is not to change how much retirees get, but to give retirees the choice of staying in the current system or putting a fraction of their benefits into private investments.