Social Security Debate Off to
a Misleading Start
Sitnews
by Michelle Bazie
January 09, 2005
In its campaign to build public support for private accounts
in Social Security, the White House has said repeatedly in recent
weeks that the program is in financial crisis. Meanwhile, the
Administration is defending the so-called "price indexing"
proposal to close Social Security's long-term funding shortfall
-- a proposal that is likely to be part of the Administration's
Social Security plan -- against charges that it would leave
retirees worse off. On both of these issues, Administration
claims have been incomplete or misleading.
Is Social Security "in crisis"?
The Administration has portrayed the Social Security shortfall
as so massive that it threatens to destroy the program and engulf
the rest of the budget. Such rhetoric seems designed to further
the impression that the program will eventually go completely
bankrupt, leaving today's younger workers with no Social Security
benefits at all in exchange for their years of contributions.
* Social Security isn't about to
disappear. The Congressional Budget Office (CBO) estimates that
even if no changes are made to Social Security, it will be able
to pay full benefits until 2052 and about 80 percent of promised
benefits after that. Using somewhat more pessimistic assumptions,
the Social Security Trustees estimate that Social Security will
be able to pay full benefits until 2042 and about 70 percent of
promised benefits after that.
In 2018 Social Security will start paying out more each year
in benefits than it receives each year in tax revenues. But
contrary to recent claims by supporters of private accounts, this
does not mean the program will begin "collapsing" at that point.
In 2018 the Social Security Trust Fund will contain $5.3 trillion
in U.S. Treasury bills, and the Trust Fund will grow by another
25 percent over the next decade because of the interest it earns
on those Treasury bills.
Some supporters of private accounts argue that the Treasury
bills in the Trust Fund are nothing more than paper IOUs that may
never be honored. To the contrary, Treasury bills are widely
regarded as among the world's safest investments. The U.S.
government cannot choose not to repay them -- with interest --
unless it is willing to default on its obligations for the first
time in U.S. history.
* The real budgetary crisis. It is
certainly true that the federal government will face serious
fiscal problems by the 2020s. But those problems will be in the
federal budget as a whole, and their two main causes will be: (1)
the cost of the Administration's tax cuts, if they are extended
permanently, and (2) growing Medicare costs, which are being
driven primarily by rising health care costs throughout the
economy.
Over the next 75 years, the combined cost of the tax cuts and
the Medicare prescription drug benefit -- the President's two
principal domestic priorities during his first term -- will be at
least five times as large as the Social Security shortfall.
Specifically, the Social Security shortfall over that 75-year
period is projected to be 0.4 percent of GDP (according to CBO)
or 0.7 percent of GDP (according to the Social Security
Trustees). In contrast, the tax cuts will cost 2.0 percent of GDP
over that period, based on cost estimates from CBO and the Joint
Committee on Taxation. (Experts from the Brookings Institution
and other leading organizations have produced a similar
estimate.) The Medicare drug benefit will cost 1.4 percent of
GDP, according to the Medicare Trustees.
The reality is that the Social Security shortfall, while
sizeable, is not gargantuan. It can be closed without undermining
the program's basic structure, through a mixture of modest
benefit reductions and revenue increases phased in over several
decades.
Problems with "Price Indexing" Even Larger than Advertised
Press accounts this week reported that the Administration's
Social Security plan is likely to include a fundamental change in
the formula used to determine a worker's Social Security
benefits. Though this change is usually called "price indexing,"
its real effect would be to reduce significantly the share of
their pre-retirement earnings that workers receive in Social
Security benefits.
Moreover, this benefit cut would apply to all beneficiaries,
whether or not they elect to forego a portion of their benefits
in return for an individual account.
The magnitude of the cuts under price indexing can be seen in
this example: under price indexing, an individual who works at
average wages throughout his career and retires in 2075 would
receive monthly Social Security benefits that replace just 20
percent of his pre-retirement earnings. Under the current benefit
structure, his benefits would replace about 36 percent of his
pre-retirement earnings. Price indexing, in other words, would
cause a 46-percent drop in this worker's Social Security benefits
compared to current law.
* Better than nothing? The
Administration has defended price indexing by arguing that while
benefits under the proposal would be much lower than those
promised by current law, they would still exceed the benefits
Social Security could afford to pay if nothing were done to close
its funding gap.
This claim is contradicted by the Congressional Budget
Office's analysis of the so-called "Model 2" reform plan put
forth by the President's Social Security Commission, which
includes price indexing. CBO found that under price indexing, the
combined income from Social Security and individual accounts
would be below the benefits that would be paid if policymakers
took no action and Social Security benefits were reduced to the
levels that the program's revenues could support after its trust
fund was exhausted.
CBO estimates, for example, that workers born between 1990 and
2000 who earned median wages and retired at age 65 would receive
combined benefits from Social Security and individual accounts
that, on average, would be 20 percent - or $3,600 a year in
today's dollars - below what would be paid if no action were
taken to shore up Social Security's finances (i.e., under a "do
nothing" scenario). (1)
* Living in the past. It is true that
benefit levels under price indexing would keep pace with changes
in prices. But beneficiaries would be excluded from the general
increase in the standard of living from one generation to the
next. Upon retiring, workers of future generations would
essentially be pushed back to today's standard of living, where
Social Security benefits would be frozen in perpetuity.
Edward Gramlich, a noted economist who
chaired the Advisory Commission on Social Security in the
mid-1990s and is now a Federal Reserve governor, made this same
point when he noted that "If the system had not been wage
indexed, (retirees) would be living today at 1940 living
standards," since that was the time Social Security began.
* Effects on people with disabilities,
widows, and orphans. Another problem with price indexing is that
it poses special risks to recipients of Social Security
disability and survivors' benefits. This fact has not been
acknowledged by the Administration or noted in initial media
reports on this issue.
These people will experience the same
cut in Social Security benefits as everyone else, since Social
Security uses a common benefit formula for all categories of
beneficiaries. Yet they will be much less likely than other
recipients to have significant funds in their private accounts
that can offset the benefit cut. This is because workers who die
or become disabled at a young age will not have had the
opportunity to build up much in their individual accounts before
they are compelled to leave the work force.
* The price of ruling out new
revenues. The reason the Administration appears set on price
indexing, despite its serious problems, is that the
Administration "needs" the savings from big benefit cuts to close
Social Security's long-term funding shortfall. The creation of
private accounts would do nothing by itself to close that
shortfall, and in fact would worsen it by draining money out of
the system that is needed to pay current beneficiaries.
As Peter Wehner, a Bush aide, wrote in a private email to
conservative allies that was leaked this week, "If we borrow $1-2
trillion to cover transition costs for personal savings accounts
and make no changes to wage indexing, we will have borrowed
trillions and will still confront more than $10 trillion in
unfunded liabilities."
But closing the Social Security shortfall entirely through
benefit cuts is hardly the only option. Instead, the
Administration and Congress could adopt a more balanced approach
that combined much more modest benefit adjustments with modest
revenue increases. They could, for example, retain a smaller
estate tax rather than repealing it permanently, or scale back
the tax cuts for the highest-income 1 percent of households, and
dedicate these revenues to Social Security. They also could made
modest changes to the payroll tax, such as raising the level of
wages subject to the tax.
Thus far, however, the Administration has rejected using new
revenues to help close the Social Security shortfall. This means
the entire load of closing the shortfall must come through deep
benefit cuts, such as those imposed under price indexing.
Michelle Bazie
Center on Budget and Policy Priorities
Washington, DC - US
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