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Social Security checks go out on Wednesday to more than 52 million Americans, but the viability of the program has recently taken center stage in the GOP presidential nomination race. Ray Suarez discusses the economics of Social Security with David John of the Heritage Foundation and Henry Aaron of the Brookings Institution.
Next, the politics of Social Security, separating the rhetoric from the reality.
Ray Suarez has that.
The checks go out on Wednesdays to more than 52 million Americans, and those Social Security payments and the viability of the program have recently taken center stage in the race for the Republican presidential nomination. It's been a major point of debate between two of the early front-runners: Rick Perry and Mitt Romney.
GOV. RICK PERRY, R-Texas presidential candidate: I call it a Ponzi scheme. I call it a monstrous lie for our kids.
MITT ROMNEY, (R) presidential candidate: I don't think everything that comes out of Democrats is good, but this one came out of FDR. I think this one's pretty darn good. And I'm going to make sure, like Ronald Reagan, we keep it.
Social Security began in the midst of the Depression, signed into law in 1935 by President Franklin Roosevelt. When Social Security payments started, the average life expectancy was 64 years old. But an average American now lives to 78, and spends 20 of those years in retirement.
Those demographics are part of the reason why the trust fund itself would be exhausted in 25 years, and taxable income would pay for 77 percent of scheduled benefits in 2036.
In a book published last year, Texas Gov. Rick Perry outlined his idea to shift the program to the states. He was criticized for that in the most recent Republican debate.
GOV. RICK PERRY:
We never said that we were going to move this back to the states. What we said was, we ought to have as one of the options the state employees and the state retirees, they being able to go off of the current system, on to one that the states would operate themselves.
There's a Rick Perry out there that is saying — and almost to quote, it says that the federal government shouldn't be in the pension business, that it's unconstitutional, unconstitutional and it should be returned to the states.
So you better find that Rick Perry and get him to stop saying that.
For his part, former Massachusetts Gov. Mitt Romney advocates raising the retirement age and slowing the growth rate of benefits for wealthy retirees. He's called on President Obama to explain how he would fix the finances.
And, yet, after three years in office, he has proposed no solutions. Can you imagine being president of the United States and offering no ideas at all for how you would assure coming generations a strong and stable Social Security? I find it extraordinary.
President Obama has said he's open to finding ways to fix the program's problems.
But he said in the White House Rose Garden last week that any changes to Social Security should be separate and distinct from the current deficit reduction efforts.
PRESIDENT BARACK OBAMA:
I have said before, Social Security is not the primary cause of our deficits, but it does face long-term challenges as our country grows older, and both parties are going to need to work together on a separate track to strengthen Social Security for our children and our grandchildren.
Polls frequently show many Americans remain wary of, or opposed to, adjustments to benefit levels or eligibility age.
We go beyond some of the politics now to look at the economics of Social Security with two longtime watchers of the program.
David John of the Heritage Foundation has served on expert panels and testified before Congress on the subject many times. And Henry Aaron is with the Brookings Institution. He formerly served as chairman of the Advisory Council on Social Security, a government appointed board tasked to review the program.
And, gentlemen, if we begin from the agreement that there is a problem, given the number of future retirees and the future revenue stream that's projected for them to collect from, how would you describe its size and extent?
DAVID JOHN, Heritage Foundation:
I would say that it's serious, but not critical. We have a number of — well, the baby boomers are going to be retiring fairly soon. And the more baby boomers that retire, the worse the program is going to be.
It's already running cash flow deficits at the moment. It will continue to run cash flow deficits, according to the Social Security Administration, for the next 75 years at least.
HENRY AARON, Brookings Institution:
I would describe the situation as one where the system is fundamentally sound, but has modest long-term problems that should be addressed as soon as a political agreement can be reached between the two parties to address both an increase in revenues and, if necessary, a modification in the benefits as well.
But it's not a crisis. There's no great urgency to do so, given the other problems that the nation faces today, unemployment and a budget deficit stretching into the future. I think the president was quite right to say that this should be on a separate track to be addressed when and as we are successful in addressing those first two more important problems.
A moment ago, you said soon and then you said no great urgency. You heard Gov. Romney suggest that the president has been biding his time. Is there a cost to waiting?
The system can pay its benefits, all — every penny of benefits promised under current law, even if we did nothing whatsoever, for next quarter-century.
That means that there is time to address what I think both David and I would agree is a projected long-term deficit in the program. Measured against the other problems that we face today, it is really quite modest in size and in the future, rather than now.
Contrary to what David said, the system is actually running a surplus still, adding to reserves every year. And it's projected to do so for several years into the future through the combination of payroll taxes, income taxes and interest earnings on its own reserves.
David John, your response?
The interest earnings comes from general revenue money, as would repaying the trust fund and the like.
So the pool of taxpayer collections?
Exactly. The must be we would normally use for schools, defense and other things like that.
But up until this point, up until about two years ago, Social Security financed itself and ran at considerable deficits just from its payroll taxes and similar revenues alone. It didn't have to dip into the interest on the trust fund.
And that's all, as I say, money that we'd normally use for other purposes. And that's only going to grow. Right now, it's at $40 billion. In a fairly short period of time, not counting inflation, it will be $100 billion. Five years after that, it's $200 billion, five years after that, $300 billion. And then it settles down at $300 billion to $350 billion.
You heard Gov. Perry describe the plan as a Ponzi scheme, and he's called it a monstrous lie. Given that it is promising certain things to beneficiaries that it can't satisfy all the way out into the future, does it outwardly resemble one? It is one?
No, it's not a Ponzi scheme. There are certain superficial similarities.
As you pointed out, it's paying out current benefits from the revenues of current workers at this point. And a Ponzi scheme pays out the earnings, supposedly investment earnings, to early investors from that that comes in, in later investors. But that's very superficial.
Henry Aaron, what do you think of that…
I agree completely with what David just said.
Using the term Ponzi scheme would be about as sensible as if I said, Ray, your father is just like Bernie Madoff. They're both men. You would respond, that's nuts. What's really important — what is important is my father was honest and Madoff is a convicted criminal.
In this case, Social Security is an up-front program carefully analyzed involving an intergenerational compact between workers who earn rights through their employment to future benefits that future workers will pay taxes to support. This is a long-term contract. And under any long-term commitment of this kind, circumstances are going to change and adjustments are going to have to be made.
You heard Gov. Romney talk about the possibility of means-testing, of phasing in raises in benefits over a slower schedule, raising the retirement age.
Would these help secure the program into the future?
There's a gap projected for the future between revenues and expenditures. Either you have to raise revenues or you have to cut benefits.
The political debate today is about the mix between the two. That's part of the debate, in any event. My own view is that the benefits currently are relatively modest in size. They're lower relative to earnings than they have been in the past and are scheduled under current law to go down.
And they are very modest compared to the benefits paid in other developed nations. So I think the bulk of the adjustment should occur through increases in revenues, but I want to acknowledge this is a political debate. It's going to require compromise.
And I think the most important thing over the long haul, when a good deal can be struck, is to restore balance, so that Americans can be confident, as they should be today, that they are going to receive Social Security benefits.
David John, quick response, same question.
Well, I think that actually what Gov. Romney is proposing is actually probably the way to go.
The fact is, we're living longer than we have in the past. We have a situation where lower-income workers get benefits that are too low, and, frankly, upper-income workers don't really need their benefits, and I don't see a need to necessarily put that in.
I would rather go into a social insurance system that is heavily weighted on the insurance, so that we can guarantee all Americans don't live in poverty in retirement.
With us living a lot longer, there's some appeal in the simplicity of just raising the retirement age.
But aren't the lowest-paid workers those the most likely to be spent by 65…
… and working until 70 is not only a hardship, but in many cases impossible?
Absolutely. And what we need to do is to look at the disability system, so that workers who cannot physically work longer are taken care of through the disability system, until their retirement benefits kick in.
Quick to add, Henry Aaron?
I think it's important to recognize that the increase in life expectancy that has occurred is overwhelmingly concentrated among high earners.
Low and moderate earnings have not experienced the increase in life expectancy that is the average for the whole nation. So I think we need to be extremely careful in undertaking measures such as the benefit cuts that are really what an increase in the retirement age represents.
We have to be very careful that those don't result in a large collection of moderate earners ending up living their retirement years in poverty. That's why I think we need to be very careful about any cuts in benefits at the present time.
Henry Aaron and David John, gentlemen, thank you both.
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