Social Security: Crisis? What
crisis?
CNN International
January 12, 2005: 5:20 PM EST
By Jeanne Sahadi, CNN/Money senior writer
Some experts say the urgency to reform Social Security
is manufactured -- and very troubling.
NEW YORK (CNN/Money) - The debate over Social Security is well
under way, with President Bush Thursday giving guidelines for
addressing what most acknowledge will be a shortfall in the
program's funding in 40 or so years.
The president and some others support overhauling the system
by partially privatizing it by giving younger workers the option
of creating personal accounts and diverting some of their Social
Security taxes to fund them.
But critics say the current proposals are dangerous. And some
argue that it's wrong to characterize the eventual shortfall as a
crisis. CNN/Money will be covering the Social Security debate on
an ongoing basis. This week, we're mapping out some of those
critics' arguments.
Not only is Social Security not in crisis, it is as
financially sound as ever, according to the liberal Center for
Economic and Policy Research, run by Mark Weisbrot and Dean
Baker, coauthors of "Social Security: The Phony Crisis."
Here's their argument:
Social Security can pay full benefits as promised until 2042
according to this year's Social Security trustees report (or 2052
if you use projections from the Congressional Budget Office).
Thereafter it will be able to pay about 75 percent to 80 percent
of promised benefits.
Even if benefits were cut to 75 percent of what's promised,
that reduced level would still be more than what today's retirees
get, Weisbrot said.
For example, according to CBO estimates, a person born in 1940
would get about $13,300 in their first year of retirement, while
someone born in 1990 would get $16,700 -- in today's dollars.
Weisbrot also claims that the projected revenue shortfall is
not nearly as worrisome as privatization proponents claim.
Currently, Social Security takes in more in payroll taxes than
it needs to pay out. By 2018, it will start to receive less in
payroll taxes and will need to tap its surplus, held in U.S.
Treasurys, to meet its obligations. By 2042 (or 2052), that
surplus will be tapped out, and payroll taxes will only be able
to cover a portion of Social Security's obligations.
One way to measure the size of that projected shortfall is as
a percentage of taxable payroll. It's 1.89 percent, according to
the Social Security trustees' report.
That's less, Weisbrot said, than the payroll tax increases
made to shore up the system in each of several decades -- the
1950s, the 1960s, the 1970s and the 1980s.
"The problem for Social Security is no different than the
problem it's faced previously, except that it's smaller,"
Weisbrot said.
So what should be done?
Those calling for changes now say the longer we wait to make
the changes the more painful they'll be.
Weisbrot sees a need for changes to address the eventual
shortfall, but not ones as drastic or as immediate as those
advocated by supporters of privatization.
First, he suggested, "leave it alone until the public has a
chance to figure it out." (Articles like these can only cover
some of the critical issues involved in the reform debate.)
Then consider tax increases on higher income earners. In the
next five to 10 years, he suggested, raise the cap on income
subject to Social Security tax. For 2005, it's the first $90,000
of wages.
"Payroll tax no longer captures as much income of wage earners
as it did 20 years ago," Weisbrot said, noting that today 85
percent of payroll is subject to Social Security tax versus 90
percent in 1982.
That's because more of national income goes to earners making
more than the income cap for Social Security. Raising that cap
"gets you a long way" toward taking care of the shortfall, he
said.
Beyond that, he suggested repealing some of the recent tax
cuts and earmarking the money for Social Security, and, if
necessary, raising the payroll tax by one or two percentage
points in coming decades.
Currently, you pay in 6.2 percent of your wages and your
employer contributes another 6.2 percent.
Perhaps, but ...>
There may be sufficient wage growth to help cover the
shortfall, but there have been periods when wage growth was less
than expected, and "not everyone grows at the average," said
Craig Copeland, director of the EBRI Social Security Research
Program, a nonpartisan voice in the debate.
What's more, Copeland said, if you keep raising taxes to
provide the same promised benefits, the effective return on those
benefits for each generation may be less because more taxes will
have been paid in.
And, he noted, some will argue that raising taxes impinges on
economic growth, which can hamper wage growth.
On the other hand, it could cost as much as $1 trillion to $2
trillion to convert to a partially privatized system since some
workers will divert part of their Social Security taxes to
individual accounts. If the government borrows to finance that
shortfall, that could drive interest rates higher, hurting
investment and job creation, Copeland said.
What other critics say
Critics of privatization argue that having money in personal
accounts and investing it in the markets takes the "social" and
the "security" out of Social Security.
But they have many other concerns, too. The leading proposal
calling for partial privatization also calls for a change in how
initial benefits are determined. Currently, starting benefits are
indexed to wage growth, but some suggest they be indexed to
inflation.
Social Security is intended to replace about 40 percent of
your pre-retirement income. If starting benefits were indexed to
inflation rather than wages, it would only cover about 20 percent
two to three generations from now, said Kenneth Apfel, a
commissioner of the Social Security Administration under
President Clinton, speaking at a briefing of the Economic Policy
Institute.
Henry Aaron, a senior fellow at the Brookings Institution at
the same briefing, said that's "optimistic" because it doesn't
account for the rising costs of the Part B premiums for Medicare
paid out of Social Security benefits.
As it is today, Aaron said, "the real take-home-pay
replacement rate that workers receive is already below 40
percent. ... Benefit reductions in a system that's already
parsimonious is not desirable.
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