Proposed Cuts in Social
Security Benefits
Newsday.com
BY TAMI LUHBY
STAFF WRITER
January 12, 2005
Can do-it-yourself Social Security close the funding gap in
the nation's retirement system? That's the premise President Bush
is pushing in his call for bold reforms that would include
private investment accounts managed by workers.
But a close analysis shows that the gap would be addressed
mainly by steep cuts in benefits to future retirees, and the
private accounts probably wouldn't make up the lost ground.
Anyone under 55 likely would be affected, and some of today's
youngest workers could see their Social Security checks cut by
nearly a quarter.
To be sure, any proposal could prove a tough sell, and not
just because future retirees might not like it. The plan would
carry a huge upfront price-tag in transition costs that could
make the record budget deficit even worse and thus draw political
fire from both sides of the aisle. Opponents, including the
still-powerful AARP and many Democrats, have already lined up
against the idea. And many critics dispute that the system even
needs a drastic fix.
The president, though, says the system is in crisis, pointing
out that Social Security is projected to run out of money to pay
full benefits around the middle of the century. That's because
there are fewer workers contributing to the system, compared with
retirees drawing from it, than in decades past. The imbalance
will grow as more Baby Boomers retire.
"A 20-year-old worker today is being promised retirement
benefits that are 30 percent higher than the system can pay,"
Bush said at the White House Economic Conference last month.
"This problem has got to be confronted now."
Details remain sketchy, but so far Bush has made one thing
clear: The plan wouldn't affect current retirees or those near
retirement age.
The president's plan is expected to draw upon the
recommendations of the bipartisan 2001 President's Commission to
Strengthen Social Security. It suggested changing the formula
upon which initial benefits are calculated, which would cut the
traditional, guaranteed Social Security benefit. On top of that,
it would allow workers to divert part of their payroll taxes to
private accounts, which they could invest in the stock market in
hopes of greater returns than they'd get from Social
Security.
A retiree's initial benefit now is based in part on the
overall growth in wages during his or her working years. The
proposal calls for basing the initial benefit on the inflation
rate. Since inflation has historically grown much slower than
wages, the change would save the system trillions of dollars in
benefits and make it solvent. But it would reduce the guaranteed
benefit for future retirees.
Substantial cuts possible
For some of today's workers, the cut could be substantial. A
typical 48-year-old who retires in 2022 would see nearly a 10
percent drop in guaranteed benefits, according to the
commission's plan. Today's 18-year-olds would suffer a 32.5
percent hit when they reach age 65 in 2052. For those retiring in
2075, the guaranteed benefit falls by 45.9 percent.
"While it's a way to get at the problem, it is really very
bitter medicine," said William Novelli, chief executive of AARP,
which recently launched a $5 million ad campaign against Bush's
overhaul.
The second part of the proposal would allow workers to divert
up to 4 percentage points of their payroll taxes, capped at
$1,000, to private accounts. People could invest in a limited
number of choices, such as a stock index fund, a bond index fund
and a government securities fund.
By allowing workers to control part of their Social Security
benefit, they might reap higher returns in the stock market,
supporters say. A portfolio equally divided between stocks and
bonds would provide an annualized return of 4.6 percent, the
commission said.
"We will have to reduce benefits to something closer to what
Social Security can afford," said David John, research fellow at
the Heritage Foundation, which advocates for privatization. "But
with a personal retirement account, a young person will have the
opportunity to make up at least some of the difference."
Vinny Scicchitano, 47, would love to invest his Social
Security taxes, even if it means a lower guaranteed benefit. An
active investor, the Nesconset resident is confident he could
achieve high enough returns to end up giving him a larger check
when he retires. "I'd rather have the money in my hands to be
able to make some of my own investment decisions," said
Scicchitano, a Vytra Health Plans senior vice president.
But critics say that, even when the money invested in private
accounts is included, the new benefits formula would leave many
people unable to keep up their standard of living. For instance,
Social Security today replaces about 40 cents out of each dollar
of a typical worker's income in the first year of retirement.
Under the proposal, that figure would fall to just 21.7 cents for
someone retiring in 2065, says the Congressional Budget
Office.
Supporters of the plan say the CBO is too conservative, and
note that the Social Security commission assumed higher
investment returns. But even the commission's figures show future
retirees would not get the same benefits as under today's
system.
And not everyone wants their Social Security benefits to
depend on unpredictable stock market returns. "It makes me kind
of nervous that something that should be set may not be set,"
said Erin Tenenbaum, 51, a West Islip resident who works for the
U.S. Postal Service, noting she has other money in the stock
market. "I didn't think Social Security was something I had to
worry about."
Frederic Stark, 36, who would face about an 18 percent cut in
guaranteed benefits, said he wasn't counting on Social Security
to fund his retirement, but he still feels he should get the
amount promised to him when he joined the work force. "I have a
problem with changing the rules in the middle of the game," said
Stark, an Oceanside resident and a Hewlett High School
teacher.
The system now can pay full benefits until either 2042 or
2052, according to the Social Security trustees and the CBO,
respectively. Critics say Bush is exaggerating the size and
immediacy of Social Security's problems, pointing out that robust
economic growth could extend the system's solvency.
What's more, they say the new plan would undermine a basic
tenet of retirement planning: having a guaranteed income stream
from Social Security as a safety net to supplement income from a
private pension and ordinary savings. "The plan really eliminates
much of the protection Social Security afforded retirees," said
Laurence Kotlikoff, economics professor at Boston University.
There are other risks, too. As 401(k)s have shown, some people
take on too much risk while others put everything in
ultra-conservative investments, leaving them far short of their
retirement needs. If the market plunges just as people retire,
they could wind up receiving much less than anticipated.
Critics argue there are less-radical ways to fix the system.
Among the suggestions: raising the cap on wages subject for
Social Security contributions, currently $90,000; reducing
benefits for the highest earners, and including all newly hired
state and local government workers in the program.
"People should take risks with their own private savings for
retirement," said Lee Price, research director for the Economic
Policy Institute, which opposes privatization. "Social Security
was never designed, nor should it be designed, to add to those
risks."
Q&A
Here's what a Social Security overhaul could mean to you.
I'm already retired. Is this going to cut my benefits?
No. It should affect only those age 55 and under.
How does the idea work?
The traditional guaranteed benefit would be cut on a sliding
scale tied to your age and income; the younger you are, the
bigger the cut.
Part of the cut in guaranteed benefits could be made up by
greater returns in the stock market.
The plan would allow you to invest up to 4 percentage points
of your payroll tax.
How big a cut in benefits will this mean for today's
workers?
For the typical worker born in the 1950s, the lifetime benefit
would be trimmed 1.2 percent, according to Congressional Budget
Office estimates.
Those born in the 1970s would see a 14 percent cut. If you
were born in this century, your benefits would be slashed 37
percent.
Those figures include what you'd get from both the guaranteed
benefit and an estimate of what you'd earn in your private
account.
Do I have to do this? Can they force me to invest part of my
Social Security taxes in the stock market?
No, but then you could see a smaller monthly check after you
retire.
Can I invest in any stock or mutual fund?
Probably not.
Your choices would likely be limited to a handful of stock and
bond index funds and a short-term government securities fund.
With broad, diversified funds, risk is minimized.
How benefits might be cut
President Bush is expected to model his Social security reform
after a proposal from his 2001 Social Security reform commission
that would cut benefits for future retirees.
Benefit Cut (%)
|
Decade of Birth |
Current
|
Proposed
|
1940
|
42.9% |
42.8%
|
1950
|
43.0% |
39.9% |
1960
|
41.0% |
34.8% |
1970
|
40.5% |
30.9% |
1980
|
39.8% |
27.4% |
1990
|
39.5% |
24.6% |
2000
|
39.6% |
21.7% |
|
The percentage of your
income that Social Security replaces in your firstyear of
retirement would go down.
Cut deeply into the estimated amount you'll receive over
your lifetime.
(In thousands of dollars) |
1940
|
$138.8 |
$138.7 |
1950
|
$148.2 |
$146.4 |
1960
|
$160.8 |
$149.7 |
1970
|
$187.1 |
$161.2 |
1980
|
$223.5 |
$174.5 |
1990
|
$264.2 |
$186.2 |
2000
|
$302.5 |
$190.6 |
How soon will the money run out?
Social security trustees and congressional experts disagree on
when the system will run out of money. Their estimates:
Year in which payouts of benefits exceed tax revenues
Social Security trustees - 2018
Congressional Budget Office - 2019
Year in which trust fund is exhausted
Social Security trustees - 2042
Congressional Budget Office - 2052
SOURCE: SOCIAL SECURITY ADMINSTRATION; CONGRESSIONAL BUDGET
OFFICE
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