Dec. 19, 2004

Bush Ranks Social Security, Challenges Congress

President Bush is in a hurry to make good on his long standing campaign promises – delayed by 9/11 – to invigorate the economy, reform the tax code and save Social Security.

Where to start?

The president convened a two-day White House conference of economists last week to craft a hurry-up program. Good move. All three objectives are closely related.

Social Security was the big issue, but conferees were intimidated by the third-rail of politics. No matter. Bush jumped up and down on the rail during the election campaign to prove it was not lethal.

No one disputed the facts.

The Congressional Budget Office predicts the program -- as now structured -- will go bust in 38 years.

More unnerving, perhaps, are conclusions of Federal Reserve Chairman Alan Greenspan at an economic conference with his board members several months ago.

He said the country would face “abrupt and painful” choices in 2015 if Congress does not move quickly to trim Social Security benefits promised 77 million “baby boomers.” The retirement age for full benefits already is increasing gradually from 65 to 67.

Greenspan says (1) the age will have to be raised still farther for retirees 10 years hence, (2) future benefits modified and/or (3) worker/employer payroll taxes hiked 50 percent unless a creative solution is adopted soon.

At present, payroll taxes go directly into the general government budget. The bonanza is spent for here-and-now things -- including current Social Security benefits.

An IOU bookkeeping entry dutifully specifies that an equal amount of future payroll taxes be paid future retirees. Forget about the affect of inflation for now.

When Social Security was introduced 70 years ago, the taxes of 41 workers combined to “assist” one retiree in Spartan style. Now the ratio is three workers paying taxes to support one retiree in better style.

When the boomers retire, two workers will have to support one retiree. The present payroll tax rate of $12.5 percent will double.

Retirement benefits paid out over the years have increased faster than payroll taxes coming in. The present Social Security investment in government IOU bookkeeping entries is hocus-pocus.

Bonded debt credited to the Trust Fund exceed $1.5 trillion. This will have to be borrowed to pay Social Security benefits until reform changes take effect.

To ease the short-term shortage, Bush proposes to slow the growth in benefits for newcomers in lieu of raising payroll taxes.

For the long term, post-boomer workers would be allowed to divert up to a third of their share of Social Security taxes into personal retirement accounts of blue-chip securities. No race tracks, lotteries or stock options.

Personal accounts would earn an estimated 4 1/2 percent benefit return – twice that of Social Security promises.

Of course, personal account money could be used to buy U.S. Treasury bonds with the same yield. This seems like borrowing from Peter to pay Paul. It forfeits opportunities to cash in on higher yields offered by sturdy private companies.

Also, personal accounts would be transferable by bequest upon death of the holder. At present, the rule is: “If you die before you use it, you lose it.”

Present retirees, or those retiring soon, would not be eligible for personal accounts. Therefore, they will continue to receive Social Security benefits as now promised.

Before slower growth in benefits enable tax payments catch up to lost revenue, the government would have to borrow, raise other taxes, or cut spending to maintain benefits for social security recipients.

Bush declares raising payroll takes is a non- starter.

Opponents of personal accounts swoon over transition costs. They insist it would add big bucks to the national debt over the next ten years.

Advocates say the increase would be recuperated by transfer of personal accounts out of government and into private capital markets producing new tax-paying enterprises.

Mexico, Sweden and Chile introduced elements of privatization to rescue their retirement plans from bankruptcy. Their results are mixed.

Now it is up to Congress – Republicans and Democrats – to craft something better.

Lindsey Williams is a Sun columnist who can be contacted at linwms@lindseywilliams.org