Nati Harnik  /  AP
President Bush explains his Social Security proposal during a visit to Omaha, Neb., Friday.
By Tom Curry National affairs writer
updated 2/4/2005 5:38:17 PM ET 2005-02-04T22:38:17

From the U.S. Capitol to Fargo, N.D., President Bush this week launched his crusade to restructure Social Security, changing its basic operations by giving younger workers the option of investing some of their payroll tax payments in personal retirement accounts.

The questions outnumber the answers as the administration and Congress prepare to write the legislation and vote on it later this year. Among the questions:

  • Where will the revenue needed to pay current retirees come from? If, as Bush says, for Americans age 55 or older, the Social Security system will not change in any way, then that will mean the taxpayers will need to provide benefits for those people for the next 20 or 30 years. The existing Social Security system is a pay-as-you-go structure in which today’s workers pay for the benefits of today’s retirees.

The revenue that will flow into the Treasury will need to be sufficient to pay for retiree benefits. But under Bush's proposal, some payroll tax payments will be diverted to private accounts.

One possible solution: federal borrowing to pay for current retirement benefits, which would then free up the money that younger workers could put into retirement accounts invested in accounts similar to mutual funds, composed of stocks and bonds.

  • Bush has rejected increases in the 6.2 percent Social Security payroll tax on workers. But would he and congressional Republicans accept some increase in other taxes (income taxes, corporate taxes, excise taxes, etc.) to help pay for benefits, as part of a compromise that allowed the creation of personal retirement accounts?
  • If voluntary accounts are enacted, how much of the average worker’s Social Security tax payments will he decide to put into his or her account?

Bush proposed allowing workers under age 55 to put as much as two-thirds of their Social Security tax payments into their retirement accounts, once the program was fully phased in. For a worker earning $50,000 a year, that would be $2,046 invested in his retirement account in one year, with that amount growing as his earnings presumably increased annually.

Depending on how the law is written, some workers might opt for putting much less into their retirement accounts, or none at all. Workers’ choices about the voluntary accounts will affect the solvency of the “legacy” Social Security system.

  • A big selling point of the president’s proposal is, as he said in Fargo on Thursday, “It's money that you can decide to leave to whomever you want. It's money that the government can never take away.”

If future retirees must spend large amounts of money on medical care or on long stays in nursing homes, then they could exhaust their accounts. How many retirees with modest-sized retirement accounts will have any money left from their accounts to leave to their heirs?

Will withdrawals be taxed?
And while the retirement account might be “money that the government can never take away,” the government usually “takes away” some of citizens' income through taxation. Would retirees' withdrawals from their retirement account be treated as taxable income, just as withdrawals from 401k plans and IRAs (with the exception of Roth IRAs) are taxable income? For today's retirees whose income exceeds a certain threshold ($25,000 for an individual, $32,000 for a married couple filing a joint return), their Social Security benefits are subject to income tax — so the principle of taxing benefits is already established.

  • Bush said Wednesday night all of the following ideas “are on the table” in his negotiations with Congress: limiting benefits for wealthy retirees, indexing benefits to prices rather than wages, increasing the age at which people could begin collecting retirement benefits, increasing the disincentives for early collection of benefits (prior to age 67), and slowing the growth of benefits by not pegging them to the full increase in the consumer price index, as is now done.

Which of these ideas, all of which entail future reduction in benefits, would Bush and a congressional majority be willing to accept?

  • Does the American public understand that under the current system, if Congress does not increase taxes, cuts in future Social Security benefits are inevitable?

According to the Social Security trustees, starting in 2042 (when today’s 30-year-old workers are retired) the system as currently designed will be able to pay only 73 percent of scheduled benefits, in effect a 27 percent cut in retiree benefits. That cut will grow larger each year after 2042.

  • Does the public understand that what is held in the so-called trust fund is neither cash nor the ability to pay cash, but bonds, which are promises to pay?

What's in the trust fund?
“There are no economic resources in the trust fund,” Congressional Budget Office director Douglas Holtz-Eakin told the Senate Budget Committee in testimony Tuesday. “In order to avoid defaulting on the bonds in the trust fund … the Treasury will have to come up with funds from some source. There'll be higher taxes or lower spending on other programs, or the Treasury will borrow from the public as a whole.”

  • If Bush is using hyperbole when he uses the word “bankruptcy” to describe Social Security, then does that hyperbole damage his credibility enough to jeopardize enactment of his plan? The Social Security system’s inability to pay 100 percent of promised benefits in 2042 does not mean a total inability to pay any benefits.
  • Is the idea of private accounts an electoral winner or a loser for Republicans? Some Republicans in Congress are fearful. “I've talked to some of my colleagues and they're panic-stricken," Rep. Mark Foley, R-Fla., told the Associated Press on Thursday.

But other Republicans think Bush’s proposal or some version of it will be both good policy and good politics. They think it will be quite popular with voters under the age of 40, who, after all, will dominate the electorate in the years ahead when today’s 70-year old voters are dead.

“Name me an incumbent member of Congress that has campaigned supporting the idea of private accounts, personal accounts, and lost,” Sen. John Sununu, R-N.H., challenged reporters Thursday.

Sununu won his seat in 2002 with 51 percent of the vote. The idea of personal retirement accounts “was the single most visible issue in my campaign,” he said. “More money was spent on ads attacking me on this issue than on any other issue. I made the case to people that … I firmly believed that allowing younger workers the option of creating a personal account would result in a better system for them.”

Sununu asked reporters, “What’s the only age cohort that still votes Democrat in this country? Eighteen- to 30- (year-olds). Why am I as comfortable making this case as I am?” Because, he said, whenever the case has been made to the public, they have recognized that Social Security must be restructured.

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