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Q-and-A on potential Social Security changes
by Mary Deibel
Scripps Howard News Service


January 08, 2005

Private Social Security accounts are a top priority for President Bush, who warns that "crisis is here" unless Congress fundamentally recasts the nation's 70-year-old retirement safety net.

Bush has endorsed broad principles and left specifics to others as aides and congressional allies float trial balloons detailing possibilities.

Q: Will Congress and the public agree?

A: Bush has his work cut out for him, given that 50 percent of Americans told a Wall Street Journal-NBC poll that it's a "bad idea" to let workers put some Social Security taxes in the stock market. (Just 38 percent approve.) Also, there's no consensus in Congress on what, if anything, to do.

Q: Bush says he must get across to Congress that "crisis is here" and "it's a lot less painful to act now than if we wait." Is that true?

A: Sooner is better than later, but Congress knows there's no imminent crisis: Social Security's trustees, all Bush appointees, say the system can pay full benefits until 2042 and 73 percent thereafter with no change.

Using more optimistic economic assumptions than the trustees' 1.8 percent annual U.S. growth rate, the nonpartisan Congressional Budget Office predicts Social Security will pay full benefits through 2052 and 80 percent thereafter. And if the U.S. economy grows 2.6 percent a year, far less than the average of the last 60 years, Federal Reserve Chairman Alan Greenspan says there's no solvency problem at all.

Q: How would private accounts work?

A: You and your employer each pay 6.2 percent in Social Security payroll taxes, most of which pays benefits to current retirees.

The proposal getting the most attention was an option advanced by Bush's 2001 Social Security commission to let workers divert two-thirds of their payroll tax - or 4 percent of their paycheck - up to $1,000 a year to private investments, although other proposals suggest different percentages and maximum contributions.

Q: How free would workers be to invest on their own?

The commission wanted the money invested in a few conservative stock index and bond funds with trades allowed once a year to hold down brokerage fees and costs. But one administration idea would free workers to invest on their own once the account held $5,000.

Bush's Social Security commission would ban pre-retirees from withdrawing money or borrowing against the account for a house, car or college tuition. But that's up for debate.

Some proposals would make workers buy annuities with private account proceeds on retirement to provide a regular monthly payment. That way retirees couldn't cash out everything on a whim.

Other plans would have Uncle Sam guarantee a minimum benefit if account holders suffer steep market losses, given inherent market risks. Nobody wants America's seniors reduced to the poverty levels that led to Social Security's creation in the Depression's depths, proponents argue.

Q: Just who are the current or "near" retirees Bush promises to protect?

A: That's open to negotiation. Maybe people 60 and over, maybe 50 and above.

"Younger" workers, however defined, could open private accounts with some of their Social Security taxes. But as Bush Council of Economic Advisers Chairman Gregory Mankiw made clear in a recent speech, their Social Security benefits will be less than current law.

Substitute price inflation for wage inflation in Social Security's formula, as Mankiw and others suggest, and someone retiring at 65 in 2021 with a two-earner income of $35,277 would draw $1,088 a month in monthly benefits instead of $1,194. And the younger the worker, the deeper the cut: Someone retiring at 75 in 2075 with that same income would see the $2,032 monthly benefit cut to $1,099. AARP chief Bill Novelli calls the formula change "Draconian" because it would slash Social Security checks that make up 40 percent of most seniors' income.

Q: Why not raise Social Security taxes instead?

A: Bush says no new taxes, which appears to nix a number of plans including the proposal by Sen. Lindsey Graham, R-S.C., to temporarily raise the cutoff on wages subject to payroll tax from $89,000 now to $200,000 a year.

Besides, Social Security collects more payroll taxes than it pays in benefits: It has since 1983, when Congress and President Ronald Reagan agreed with a bipartisan commission that Greenspan chaired to pre-fund Social Security. That action generated a $1.5 trillion "trust fund" so far that's invested in interest-bearing Treasury bonds, and Social Security's surplus will grow $100 billion or so a year until 2018, when the system starts paying more in benefits than it takes in taxes and government starts redeeming those IOUs.

Q: Won't the markets make up the difference in benefit payouts?

A: Even many privatization proponents say private accounts don't solve Social Security's long-term solvency. As for whether a worker's private account would make up the difference in lower benefit payouts, the answer depends on how savvy that worker is when picking investments and how well the markets perform.

By Wharton finance professor Jeremy Siegel's calculation, stocks have returned 6.9 percent annually since 1802, but that's an average that doesn't account for the fact that markets go up and markets go down, as Wall Street financier J.P. Morgan famously said.

As workers with 401(k) retirement accounts learned firsthand in the recent bear market, money invested for retirement depends on the market's state when you retire, the investment choices you've made and brokerage fees and taxes you paid over time.

Q: How will government pay for all this?

A: The White House doesn't want to pay now but to borrow up to $2 trillion to create private accounts and pay current benefits initially with more loans later, leaving future generations to pay the debt.

Bush press secretary Scott McClellan characterizes this borrowing as "saving" money on $10 trillion in future Social Security obligations, even though $10 trillion is a hypothetical number you might get if you spin out Social Security obligations to infinity, something sound budgeters never do.

That whopping new debt atop the deficit could push up interest rates and roil financial markets. "The bond market could look at this and say: 'It doesn't pass the smell test,' " says market-watcher Greg Valliere of Stanford Washington Research Group.


E-mail Mary Deibel at deibelm(at)
Distributed by Scripps Howard News Service,

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