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Rethinking Social Security

Experts discuss a presidential commission's draft report that warns of financial trouble for Social Security by 2016.

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  • GWEN IFILL:

    For more on the future of Social Security we turn to Michael Tanner, director of the Project on Social Security Privatization at the Cato Institute, a Washington think tank. He served as an informal adviser to the commission. And Alicia Munnell, professor of finance at Boston College. She was an assistant secretary of the Treasury for economic policy under President Clinton.

    Thank you both for joining us.

  • ALICIA MUNNELL:

    Glad to be here.

  • GWEN IFILL:

    So, Michael Tanner, is the system broken or as Richard Parsons began to backpedal a little bit, is it merely unsustainable and what's the difference?

  • MICHAEL TANNER:

    Well, the system is facing serious financial problems, but more than that it has become an increasingly bad deal for today's workers. Workers are paying 12 1/2 percent of their income into a system that is providing a poorer and poorer return. It's a system in which workers don't own their assets, have no legal rights to their benefits, don't control their money, and a system that penalizes groups like African-Americans and working women.

  • GWEN IFILL:

    Professor Munnell.

  • ALICIA MUNNELL:

    The system is not broken. The commission is trying to create a false sense of crisis because they want to restructure it and cut Social Security benefits and replace it with individual accounts. I think that's a bad idea.

  • GWEN IFILL:

    Now, there's been all this discussion for years that this system is at least in trouble. Would you concede that much?

  • ALICIA MUNNELL:

    Definitely. The system has a long run deficit. If you look at the system over 75 years, benefit payments exceed revenues. We need to fix it. But it's not a crisis. We don't need to dismantle the program.

  • GWEN IFILL:

    So, Michael Tanner, in your opinion, why has this report already just an interim… a draft of an interim report. It doesn't even make recommendations. Why is it stirring up so much fuss?

  • MICHAEL TANNER:

    Well, I think there are people who don't want to make any changes to the Social Security system. And this report has made that position unsustainable. You no longer can say that there is no Social Security problem. And, if there's a problem, then there has to be a solution. Right now we're debating 2016, 2038. That's like being on the Titanic and debating about whether we're going to hit the iceberg in 30 minutes or an hour. We should be looking at how to get off the ship.

  • GWEN IFILL:

    Well, let's talk about 2038 versus 2016.

  • ALICIA MUNNELL:

    Yes. There's no new analysis in this report. There is only bad assessment of what's going on. The 2038 comes from the trustees' report that is put out by the secretary of the Treasury, O'Neill, and a lot of President Bush's other cabinet members. They have said there's adequate money to pay benefits through 2038 and there's enough money to pay 72 percent of benefits thereafter. We need to restore the gap so that we can pay 100 percent of benefits thereafter, but this is a manageable program.

  • GWEN IFILL:

    Well, what's the argument for saying that the program heads into crisis in 2016?

  • MICHAEL TANNER:

    Well, 2016 is the date at which Social Security begins to run a deficit, begins to spend more money on benefits than it's taking in in revenue. Anyone who tries to balance their household budget knows what it means when you have more money going out the door than when it comes in. And no matter how many IOUs you write to yourself, which is essentially what the Social Security trust fund is, you still have a financial problem when you have more money going out the door than you have coming in.

  • GWEN IFILL:

    Now, the commissioners or at least the people who drafted this report used some very strong language, as Susan Dentzer pointed out. They say that anyone who is against reform is for raising taxes, cutting benefits or increasing government debt through borrowing. Your response to that?

  • ALICIA MUNNELL:

    That there's a shortfall in this system, there are only three ways to close it, we're going to have to do some of that. Individual accounts… by themselves don't take you one step in that direction.

  • GWEN IFILL:

    Do taxes have to go up?

  • ALICIA MUNNELL:

    Either taxes have to go up, benefits have to go down or we have to approve the return on some assets or probably all three. The idea that you can just create individual accounts and solve the problem, that's just false.

  • GWEN IFILL:

    Let's talk about the individual accounts separately. I want to talk about this whole idea of what the choices are between cutting benefits and raising taxes. Is all of that inevitable?

  • MICHAEL TANNER:

    Or the third option that you just heard is to get a higher rate of return on the assets. That's what individual accounts are about, allowing individuals to invest in real assets: stocks, bonds, annuities and so on in order to get a higher return of rate than the system. It's about more than that. It's about restoring the dream of Americans have of owning things, of having wealth and having assets that they can accumulate towards retirement, of creating a nation of investors and savers. So we can take the problem within Social Security and use it as an opportunity to create a better retirement system.

  • GWEN IFILL:

    The idea of having your hand on your own retirement money and investing is very appealing to people. But, as you know politically it's run into lots of problems before. What's different now?

  • MICHAEL TANNER:

    I think Americans are more used to the idea of private investment. In 1983, the last time that we set out to save Social Security, which we did by raising taxes and cutting benefits yet again, very few Americans were invested in private markets. Today almost half of Americans are. And I think the rest of Americans want to be. That's what's so important about this.

  • GWEN IFILL:

    Will it close the gap that Professor Munnell is talking about?

  • MICHAEL TANNER:

    It will go a long way towards making the system more sustainable and for making it possible to do the other changes within the system that we can do to keep the system in balance.

  • GWEN IFILL:

    You may respond.

  • ALICIA MUNNELL:

    I may respond. I am for saving, I am for investing. I think all Americans should do it. I think they should have piles of their own. I am not, not, for cutting back on Social Security benefits, taking away promised benefits and replacing them with individual accounts. I think people need a secure, predictable retirement income, and then if they want to invest on their own on top of that, I think that's a great idea.

  • GWEN IFILL:

    Now, one of the other things that this report makes very… makes a very strong point on is how women, minorities and young people can benefit from the changes that it's proposing. Explain it for us.

  • MICHAEL TANNER:

    Well, for example, the amount of money that you get back from Social Security over a lifetime depends to a large degree on how long you live. If you live to be 100, you get a lot of Social Security checks. If you die at 66, it's not such a good deal. African-Americans, for example, at every income and at every age have a shorter life expectancy than do whites. So if you take a black man and a white man who work the same job, earn the same income, pay the identical taxes, retire on exactly the same date, the white man can expect to receive far more in Social Security benefits than the black man. That's a very unfair system.

  • GWEN IFILL:

    Well, what is it about what this commission is prepared to do that would close that gap?

  • MICHAEL TANNER:

    Well, under individual accounts, the black worker would be able to own the money in his account. That means that if he died prematurely, he could pass that money on to his heirs, that they could use to go school or start a small business or simply to save and invest for themselves.

  • GWEN IFILL:

    Is there evidence or is there any indication that women, blacks, Hispanics, young people will take advantage of these individual accounts enough to make up for that gap?

  • ALICIA MUNNELL:

    We just need to straighten out some facts here. There have been tons of studies that looked at how well women do under the system and how well African-Americans do under the system. They both do better than white males. And why is that true? It's true African-Americans have higher mortality. But it's also a very progressive system. It does well for low-income people. And African- Americans, as a whole, have low earnings. Women do great under the system. They also have low earnings. And as Michael said, women live for a very long time so they really benefit from this payment, this annuity that they get each year.

  • GWEN IFILL:

    But how about women who don't get the benefit of what their husbands earned or, say, they were married for less than ten years or they were not working themselves, what about them? They are kind of left out of the system as it is now.

  • ALICIA MUNNELL:

    No, they benefit under the system as it is now. Women who don't have a lot of attachment to the labor force can get a benefit based on their spouse's earnings. If you have individual accounts, you don't have any benefits like that at all, so you just eliminate all those supplementary benefits. Women will be hurt by individual accounts and that's why all the women's groups, as well as all the civil rights groups, oppose privatization.

  • GWEN IFILL:

    So how do you get around this privatization… this basic disagreement about whether privatization works or not?

  • MICHAEL TANNER:

    Well, I think we're going to have a debate and it's going to be a debate over the facts. We just heard about women and Social Security, for example. But we should recognize that about a third of women don't get all the benefits they would be entitled to on their own; because of the duel entitlement rule, they get spousal benefits. But even though they pay Social Security taxes, it doesn't earn them any additional benefits.

    Women who are married but get divorced and are only married for less than ten years don't get any spousal benefits. They lose out under the current system. I think we're going to have to have that sort of debate going forward. And then we'll see where the American people come down.

  • GWEN IFILL:

    You wanted to respond.

  • ALICIA MUNNELL:

    I mean, under individual accounts, there will be no spousal benefits. And just a point of fact: Women are treated exactly like men under the Social Security system. Their earnings count towards benefits just like male earners count towards benefits. Plus they're entitled generally to the spouse's benefits. So they get everything that men get under the current system plus more. They will get less in an individual account environment.

  • GWEN IFILL:

    Let's talk about economic growth assumptions. Assuming that what the report says is true, which that economic growth is not robust enough to assume that the Social Security system will last for an additional, until 2038, why are the assumptions about economic growth not good enough for Social Security but they are good enough for a tax cut?

  • MICHAEL TANNER:

    Well, economic growth assumptions for Social Security are pretty much in the middle. These are sort of the intermediate assumptions. And we should also recognize that economic growth, while it helps more income come into Social Security, because Social Security benefits are linked to wages, increases the outgo from Social Security. So if we get more economic growth, we'll have more money coming in, more money going out, it doesn't help the system.

  • ALICIA MUNNELL:

    The way that Michael gets at this 2016 number instead of the 2038 number is he looks at the $5 trillion in the Social Security trust fund in 2016 and says it's irrelevant, that those bonds are worthless. The secretary of the Treasury has said those bonds are worthless. That is preposterous. If those bonds were in the General Motors trust fund, they would be worth something. And are you telling me that the government is going to redeem General Motors bonds and not going to redeem the bonds in the Social Security trust fund?

  • MICHAEL TANNER:

    Where is the money going to come to redeem them? It's not a question that they're worthless. It's a question that they have to be paid for. And my only question is: You have $5 trillion in there. Where is the government going to get the $5 trillion? Are they going to raise taxes, are they going to borrow it, or are they going to wipe out most other government spending?

  • ALICIA MUNNELL:

    And where are they going to get the money to pay off General Motors bonds? It's not a big deal that they have to raise money. And it's important that there are assets…

  • MICHAEL TANNER:

    It's a big deal to the taxpayers.

  • ALICIA MUNNELL:

    … in the Social Security trust fund. Those are economically relevant assets. It means that workers have paid in more than they needed to to cover current benefit payments. We have pre-funded the system. And that means we have increased national saving which will make it easier for us to pay benefits in the future.

  • GWEN IFILL:

    If it's a pre-funded system, why not?

  • MICHAEL TANNER:

    Well, it's not a pre-funded system. That money has come in and it has been taken and used to finance other government spending. Essentially what we did was camouflage the size of the deficits we're running in the past. For the next few years we have a temporary situation in which we will have a surplus. That's going to go away very shortly and then we won't have any increase in the economic savings as a result of this.

    But we need to get back to the primary thing. Even if Social Security was solvent, even if it was sustainable, it would still provide a poor rate of return to young workers. They're going to get far less than they can get from a market rate of return. It would be a bad deal even if the system was working.

  • GWEN IFILL:

    The critics of this draft report say that it was unnecessarily alarmist. Is it?

  • ALICIA MUNNELL:

    Yes.

  • MICHAEL TANNER:

    Scary things are sometimes really scary.

  • GWEN IFILL:

    So it's worth it to scare people over this?

  • MICHAEL TANNER:

    It's not a matter of being scary. The facts are scary. They're not trying to alarm people. The facts are alarming. We have to deal with the facts as they are.

  • ALICIA MUNNELL:

    It's misleading; it harms the debate.

  • GWEN IFILL:

    Okay. That was very quick. Thank you both so much for joining us.

  • ALICIA MUNNELL:

    Thank you, Gwen.