FIXING SOCIAL SECURITY

February 2005
		President Bush has launched a national campaign to generate support for his plans to reshape Social Security, including the controversial option of personal investment accounts for younger workers. Peter Orszag, senior fellow in economic studies at the Brookings Institution, and Michael Tanner, director of health and welfare studies at the Cato Institute, answer your questions about the voluntary personal accounts and other aspects of the president's plan. Special Report: Social Security Reform

Forum Introduction What are President Bush's plans for Social Security disability? Didn't Great Britain undertake the personal accounts experiment with their version of Social Security to detrimental results? How do the personal accounts affect employers' contributions to Social Security? How would removing the $90,000 income limit on Social Security taxes affect the system's future? What happens if a person's private account runs out? How will the average person who knows nothing about investing fare under President Bush's new plan? How does the federal Thrift Savings Plan differ from Social Security? Under the personal accounts proposal, will there be fees for investing, and who and how will they be paid? If the IOUs in the Social Security trust fund were paid, would the system remain solvent for a much longer time? Why would anyone want to change Social Security, an insurance program, into a savings account? I'm 48, how drastic are my benefit cuts going to be?	Jon Crampton of Coon Rapids, Minn., asks: I've heard nothing about Social Security disability. What are Bush's plans for Social Security disability? Michael Tanner responds: One of the criteria that President Bush has established for any Social security reform is that disability benefits not be changed. In keeping with that, none of the bills currently being considered by Congress make any changes in the program. This is possible, at least in theory, because disability benefits are actually paid through a separate portion of the payroll tax. Of the 12.4 percent of wages paid in Social security taxes, 1.9 percent goes to disability insurance (DI), and the remainder to Old-Age and Survivors Insurance (OASI). In the long-run, the disability program will also have to be reformed because it is not financially solvent over the long-term. However, that reform will be much more complex, and will have to be addressed some time in the future. Peter Orszag responds: Good question -- especially since almost 8 million beneficiaries receive their benefits from the disability component of the program. The White House has claimed that these benefits will be protected, but it is exceptionally difficult to do that while reducing benefits in the retirement and survivors components of the program, since the programs are integrated in various ways. Furthermore, disabled beneficiaries technically transfer status and become retired worker beneficiaries at the normal retirement age, so it is theoretically possible that "disability" benefits would be protected -- but then the disabled worker would experience a sudden reduction in benefits at the normal retirement age. In other words, the devil is in the details. In the two leading proposals that the President's Commission put forward in 2001, disability benefits were assumed to be substantially reduced for the purposes of scoring the plans. For further discussion of this issue, see the paper on the Commission's plans that I wrote with Peter Diamond of MIT (http://www.cbpp.org/6-18-02socsec-pr.htm).

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