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Solvency, ownership, or both?

For President Bush, the focus of the Social Security battle is what he calls “an ownership society,” allowing workers to invest some of their tax payments in private retirement savings accounts. For his foes, the root of the matter is the existing system's solvency.
GOP Convention Convenes For Third Night
Rep. Paul Ryan, R-Wisc., seen here speaking to last summer's Republican  convention, has sponsored a Social Security bill featuring private accounts.Alex Wong / Getty Images file
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As the debate over the future of Social Security begins building to its crescendo, President Bush and his critics seem to be speaking different languages. So far, they have no translators.

For the president, the focus of the battle ahead is what he calls “an ownership society,” exemplified by allowing younger workers to invest some of their Social Security tax payments in private retirement savings accounts.

For his adversaries, the root of the matter is the solvency of the existing Social Security system. From their point of view, private accounts are not only risky, but a glittering diversion from what they see as the real issue.

If one takes the president at his word — and Bush spoke about trying to redesign Social Security in almost every campaign speech this fall — he thinks ownership is socially, economically and politically better than the Social Security income-transfer system we now have.

His goal is not so much an actuarially balanced retirement system as it is a reoriented citizenry. The Supreme Court ruled in 1960 that retirees had no legal right to claim ownership over Social Security benefits promised to them; it is precisely that which Bush wants to change through legislation.

Forecast of benefit cuts
Under either a system that permits private accounts as Bush envisions, or the existing Social Security system, the government-provided benefits for retirees in 2040 and beyond will be smaller than the current law’s schedule of promised benefits — if taxes are not increased.

In 2042, retirement benefits provided by Social Security will be about 30 percent less than the current law’s schedule of promised benefits, according to the 2004 annual report of the Social Security trustees.

The trustees do say that the problem over the next 75 years could be remedied by:

  • Increasing the combined payroll tax rate in a manner equivalent to an immediate and permanent increase of 1.89 percentage points, from the current 12.4 percent to 14.29 percent. For a worker making $60,000 a year, that would amount to a tax increase of $567 a year on the portion of Social Security tax that he pays.
  • Reducing benefits in a manner equivalent to an immediate and permanent reduction of 12.6 percent.
  • Shifting $3.7 trillion in general tax revenues into the Social Security system.
  • Some combination of all of the above.

The trustees noted, “Significantly larger changes would be required to maintain solvency beyond 75 years."

Using different economic assumptions than those used by the Social Security trustees, the Congressional Budget Office projected that the system will begin to be unable to pay the full benefits in 2052, with revenues sufficient to pay 81 cents of every dollar promised, and declining from that point on.

No legal obligation
Even though members of Congress often speak of an implied social contract underlying Social Security, the Supreme Court has ruled that the federal government has no legal obligation to pay a specific promised amount of Social Security benefits.

"The fact that Social Security benefits are financed in part by taxes on an employee's wages does not in itself limit the power of Congress to fix the levels of benefits under the Act or the conditions upon which they may be paid. Nor does an expectation of public benefits confer a contractual right to receive the expected amounts," said the court in 1971.

Congress has reduced benefits in the past: in the 1983 reform bill, benefits were cut by raising the eligibility age to 67.

Given that Bush rejects any tax increase, reduced benefits would be inevitable for future retirees. The president pretty much concedes this by implication. He pledges only that retirement benefits will not be reduced for any current retirees and those “near” eligibility for Social Security benefits.

When Los Angeles Times reporter Edwin Chen tried at Monday’s press conference to get Bush to explain exactly what he meant by the word “near,” Bush evaded the question.

Accepting that reduced Social Security benefits — at least as benefits have been traditionally defined — are inevitable for those workers born after about 1975, Bush has decided to go about the business of something much larger than accounting or actuarial fixes.

Behavioral shift
He seeks a cultural/behavioral shift: to convert Americans from a citizenry that expects a government entitlement, to a citizenry that owns assets, or as he says, seeing to it that each American owns "a nest egg you can call your own, and government can never take away."

Bush confronts the conundrum of how to make a nation of investors if the household making $60,000 a year (about the current average household income) already has its money committed to mortgage payments, car loan payments, grandmother’s nursing home bill, and the occasional vacation trip.

Bush’s solution: allow that family to shift some of the $3,720 that it is required to pay in Social Security taxes into a retirement account.

Some of Bush's opponents, such as AFL-CIO president John Sweeney, have been candid and specific about what they want: They say a tax increase is the solution to the solvency problem.

Last week, Sweeney suggested that “Congress could make a substantial down payment on the system with some of the money that President Bush wants to use to pay for permanent tax cuts for the wealthy. Congress should transfer revenues from the estate and gift tax each year to Social Security. Congress could make the highest wage earners pay their share to Social Security by raising the cap on earning subject to the payroll tax.” That cap will be $90,000 as of Jan. 1, 2005.

Proposed tax increases
The tax increases Sweeney is proposing would fall on "the wealthy" (which he defined by implication as those with over $90,000 annual earned income), and "they would hardly notice it," said Roger Hickey, co-director of the Campaign for America's Future, a Democratic-allied advocacy group.

At least two of the Republicans in Congress who have already put on the table specific legislation have candidly said a cut in future "guaranteed" benefits is one part of making the system solvent.

Rep. Jim Kolbe, R-Ariz. and Rep. Paul Ryan, R-Wisc., have each offered bills that would allow private accounts within Social Security.

Kolbe’s bill, co-sponsored by Democrat Rep. Allen Boyd of Florida, would, among other things, raise the limit on earnings subject to the Social Security tax; Ryan’s bill would not.

Both bills would reduce the traditional defined benefits in the future, but would offer workers the opportunity of higher rates of return from their private accounts than from the current system.

The allure of higher rates of return is powerful: In 1999, when budget surpluses were forecast, House Democratic Leader Dick Gephardt endorsed investing part of the expected surpluses in the stock market in a federally-managed portfolio. “Why should Social Security recipients be disadvantaged by not getting to be able to have higher returns out of the stock market?” he asked. But Gephardt was not advocating individual accounts with private ownership of them.

“The ownership society not only gives people a better rate of return on their money, but it gives them better benefits in retirement and ownership of their own accounts, so that it’s part of their property,” Ryan told Tuesday. “From the societal standpoint, the positive changes to our country are enormous and probably immeasurable because everyone becomes an owner of our free enterprise system and a stakeholder in the American system of capitalism.”

Understandably, Bush so far has only spoken in terms of his opening negotiating position, but if the “ownership society” is a truly vital goal for him, the endgame maneuver worth watching may be if he will be willing to give in on measures to achieve solvency in return for getting some version of private accounts.