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Social Security reform has long been a
taboo subject in American politics, with candidates unwilling to risk the wrath of
retirees at the polls with talk of reform.
But, this year's presidential candidates seem
to be finally paying attention to the actuaries' message that sometime in the 21st
century, Social Security won't be able to cover its bills. Both have sketched out plans to
save the creaking program. Is either one viable?
Social Security will run out of money in 2037 according to
widely accepted estimates. It can't deal with a retirement population that is larger than
the work population currently paying into the system — a phenomenon that will occur
when the baby-boomer generation reaches retirement.
This year's presidential candidates have promised to fix
the baby-boomer anomaly. Yet, each one's proposed plan seems more reactionary than
comprehensive, and neither one seems destined to solve the problem once and for all. Let's
take a look at their proposals, as well as the questions the candidates should be
answering when it comes to Social Security reform.
Baby Boomer's Doom Plan
Social Security is currently funded on a
"pay-as-you-go" method. This means that contributions made by today's workers
fund the benefits for today's retirees. For the bulk of its existence, there have been
more workers paying into the system than folks drawing benefits; and these excess payments
have been used to purchase government bonds. So, the program has been able to easily meet
its obligations.
Currently, Social Security pays benefits to retirees,
disabled workers and surviving family members.
What Social Security's creators didn't foresee in the 1930s
was the creation of the huge post-World War II baby-boomer population bulge. This group of
individuals, born between 1946 and 1964, will begin drawing benefits in 2008.
By 2015, the payroll taxes going to Social Security
from the smaller generation X and generation Y workers won't be enough to pay benefits
being drawn by larger numbers of baby boomers. Social Security will survive by cashing in
bonds contained in the Social Security trust fund.
However, in 2037, the money from the bonds is
expected to run out, payroll taxes won't be enough to cover benefits, and the system will
be broke.
That's when it could get ugly. To make payments, the
government will either need to raise taxes or cut programs. Currently, Social Security
payroll taxes are 12.4 percent of the first $76,200 in annual wages. It would take
hiking the payroll tax to 14.26 percent to cover the projected shortfall, said Craig
Copeland, senior research associate with the Employee Benefit Research Institute.
All Hail the Markets
According to what is known about the candidates' proposals,
the one element common to both is the setting up of individual retirement accounts (IRAs)
that people may invest as they see fit.
Finding out that the two offer this option is no surprise
to Sylvester Schieber, vice president of research and information with Watson Wyatt
Worldwide and author of The Real Deal: The History and Future of Social Security.
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"I think more people feel more
comfortable with their 401(k) plan than in Social Security."
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| — Sylvester
Schieber, vice president of research and information with Watson Wyatt Worldwide and
author of The Real Deal: The History and Future of Social Security. |
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As he points out, over the past few decades, workers have
become comfortable: (1) directing their own retirement future with benefits such as
401(k), IRA or 403(b) plans, and (2) with the financial markets through those same plans.
Now, Americans are starting to view Social Security in a
similar light. "I think more people feel more comfortable with their 401(k) plan than
in Social Security," Schieber said.
The candidates' plans do differ in the methodology,
however, and in the amount of detail that has been released publicly. Neither campaign
agreed to comment for this article.
George W. Bush
Bush's plan would allow Americans to set aside a fixed
percentage of their Social Security payroll taxes.
Political observers say bipartisan Social Security reforms
proposed by Sen. Daniel Patrick Moynihan, D-N.Y., Sen. Chuck Grassley, R-Ia., and others
may be the blueprint from which Bush is working.
That proposal outlines a two percent Social Security tax
deferral to individual accounts. Workers could use the money to buy bonds, stocks or
mutual funds, or invest in a standard bank account.
Bush also promises his plan wouldn't require a tax
increase.
It's possible that Bush's plan could genuinely resolve
Social Security's "pay-as-you-go" financial woes, some observers say. This is
because workers saving into private accounts will eventually pay a portion of their own
benefits at retirement, rather than relying entirely on their children's generation, they
say.
"The Bush proposal is a good start," said Andrew
Biggs, Social Security analyst with the Cato Institute, a Washington D.C.-based
independent think tank. "Whether it can solve the (insolvency) problem depends on how
the plan is implemented."
But, the Bush plan isn't without its flaws.
The main one is that Bush hasn't explained how his plan can
afford to continue paying full benefits to existing and near retirees, and at the same
time proposes allowing younger workers to reduce the amount they contribute to the Social
Security coffers.
The problem is how Bush's plan will manage the money,
Schieber says. "He is … going to have some tremendous cash-flow demands."
Rep. Earl Pomeroy, D-N.D., has a special interest in
retirement legislation. In an interview for this article, he pointed out that the folks
who might really be vulnerable under Bush's plan are workers currently in their 40s and
50s. These folks won't be eligible for full benefits and won't have enough time to build a
large enough balance, in the individually directed account, to be worthwhile.
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"The Bush proposal is a good
start ... whether it can solve the (insolvency) problem depends on how the plan is
implemented."
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| — Andrew Biggs,
Social Security analyst with the Cato Institute, a Washington D.C.-based independent think
tank. |
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Another concern observers raise is what happens if market
returns are lower than the estimated 2 percent that Social Security is earning.
A third concern is whether 2 percent of payroll taxes will
be enough to make a difference for low-income workers. Take someone earning $20,000 a
year. Two percent provides only a $400 annual investment. "That's not a lot of
money," said Evelyn Morton, legislative representative with AARP. "Suddenly
those visions of huge returns don't materialize."
Questions for the candidate
- How will you pay full benefits to existing retirees, while
at the same time starting the investment program, and not raise taxes?
- Is there any guarantee of benefits if the stock market takes
a tumble or investors make poor investing decisions?
- Will the program aid those who need the most help saving for
retirement — low income workers?
Al Gore
In comparison to Bush, Gore offers more details. He
proposes a 10-year, $200 billion program to reform Social Security by using 62 percent of
projected federal-government surpluses to bolster Social Security reserves.
Further, the surpluses will help pay for tax credits
Americans can use to invest in the markets, through a savings-account program called
"Retirement Savings Plus."
The most attractive element of Gore's plan is his promise
that Social Security benefits will remain at their current levels. Retirees, present and
future, will be guaranteed their benefits.
When it comes to private investment, Gore offers a separate
savings plan. The plan is modeled after President Clinton's Universal Savings Accounts.
Gore's plan offers a tax-free savings account with a government-matching contribution,
sort of a federal 401(k) program, with the government-matching employee contributions on a
sliding income scale.
The account would allow a maximum $2,000 annual
contribution, including the government match. The matching contribution would be phased
out for higher-income families. For low-income families, government-matching contributions
could be as large as $3 for $1. Families with annual income over $100,000 wouldn't be able
to participate in the "Retirement Savings Plus" program.
Pomeroy hailed Gore's plan, precisely because it offers
additional savings incentives to those who find it toughest to save — lower- and
middle-income workers. "What Gore is on to is a progressive need to save," he
said.
The Gore plan has several major drawbacks, experts say.
The first is that it doesn't address reforming the current
"pay-as-you-go" system.
Gore promises that the budget surpluses used to pay for the
program would keep Social Security solvent until at least 2055. In other words, in about
45 years, we could be right back at this debate again.
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"What Gore is on to is a
progressive need to save."
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| — Rep. Earl
Pomeroy, D-N.D. |
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"The Gore plan would mean that for Social Security to
pay full benefits in the future, you would see large increases in income taxes or cuts to
other programs to pay the debt in the trust program," Biggs said.
Gore's plan, by his own admission, won't permanently solve
the Social Security problem, said Schieber.
Second, if federal-government surpluses don't materialize
as expected, the Social Security system could be back in trouble quicker than expected.
Gore's plan assumes that federal surpluses won't be touched by Congress. That could be a
dangerous assumption given Congress' penchant for pork-barrel spending and tax cuts.
The Gore campaign counters that federal surpluses are
estimated to run $1 trillion in the next decade and should be adequate to pay for the
plan.
The Gore campaign has not said how it will address the
issue of surpluses that don't materialize.
Questions for the candidate
- Why not take this opportunity to save Social Security once
and for all, rather than leave a loose end to be resolved by our grandchildren in 50
years?
- What happens if government surpluses fail to materialize to
pay for Social Security?
- How will you counteract what some say could be the negative
effect on 401(k) contributions, by some workers, when your plan offers generous government
matches?
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