AARP Bulletin on Social Security

The following is from the AARP bulletin. I don't endorse increasing payroll taxes, but, as the article points out, there are other ways to make the relatively small adjustments required to make social security solvent forever Notably, the Bush Administration's plan doesn't actually address the easily soluble problem at all, since it would sequester much of the revenue and actually cost more. Instead, it is their intention to use the relatively minor problems with social security's funding to further a supply-side right-wing agenda that would put this country even further into stupendous debt. Even many Republicans in Congress are unwilling to endorse such a brazenly risky and irresponsible scheme.

Don’t Mess With Success
There’s nothing wrong with Social Security that a few changes can’t fix
By Merrill Goozner
January 2005

After 65 years Social Security is, like America, facing the challenges of aging. Fewer workers will be paying into the system to support those who receive benefits. By 2040 there will be just two workers for each retiree, compared with more than three today, seriously affecting the solvency of the system. But just how dire is the financial picture? Will Social Security be there for our grandchildren?
Designed to provide a basic income for retirees and their families, Social Security has done remarkably well in achieving that goal and is considered the most successful government program in the nation’s history.
Despite some problems, many analysts maintain there is no crisis and that moderate adjustments can keep the system sound. The most recent Social Security trustees’ report shows that the system can pay all scheduled benefits until 2042. That year, if no changes have been made, benefits would have to be cut about 30 percent to bring payments in line with incoming payroll taxes.
While 2042 may seem far off, experts agree that it’s better to make moderate changes earlier rather than later to avoid the "cliff" of a drastic benefit reduction or a hefty tax increase. Here are some ideas being discussed:
TAXES
The simplest adjustment would be a slight increase in the payroll, or FICA, tax. According to the Social Security trustees, if the tax on wages today were raised by less than 1 percent each for employee and employer (from the current rate of 6.2 percent each), Social Security would be solvent through 2077.
Another proposal is to "pop the cap"—to raise the point at which wages are no longer subject to Social Security taxes. Congress set the level in 1983 to cover 90 percent of all wages. The wage cap today is $90,000. But top earners today have a larger share of the income pie, and the portion subject to tax for Social Security has fallen to 84 percent. Using the projections of the Social Security trustees, raising the wage cap to about $140,000 would provide almost one-third of the requirement for solvency for 75 years.
It’s worth noting that a recent report by the Center on Budget and Policy Priorities, a Washington-based research group, concludes: "If the 2001 and 2003 tax cuts are made permanent, as the Administration has proposed, their cost over the next 75 years [using Congressional Budget Office projections] will be more than five times the Social Security shortfall over this period."
Another source of payroll taxes could be newly hired public employees. Edith Fierst, a lawyer who was a member of President Clinton’s Social Security Advisory Council, says that currently nearly 7 million local and state employees are not covered by Social Security but rather by employer-operated retirement funds. Bringing new workers into Social Security would help fund the system.
BENEFIT CHANGES
Some adjustments have been made, and more are likely. The rise in the normal retirement age from 65 to 67 already constitutes a benefit cut. And more people are paying taxes on their Social Security benefits. Other changes to benefits could include modifying the cost-of-living adjustment, raising the normal retirement age even higher and calculating a person’s initial benefits using price increases rather than wage increases.
PRIVATE ACCOUNTS
President Bush has declared that he intends to make Social Security reform a priority of his administration, because "the system is not going to be whole for our children or our grandchildren." His solution is to let workers create private accounts using part of their Social Security payroll taxes. Though few specifics have been released, the hope is that private plans invested in the market will generate equal or greater benefits than the traditional Social Security benefits. The risk is that they won’t.
At a time when fewer people have pensions and most individual retirement accounts are already subject to stock market risk, many question if private accounts are a good idea.
"All private accounts do is transform the nature of the benefit," says Robert D. Reischauer, president of the Urban Institute, a nonpartisan research group. If taxes and benefits stay the same, he says, "there’s still a problem." In fact, he and others say that private accounts will only make things worse because they would require benefit cuts and run up huge federal deficits in order to finance the transition.
Proponents of private accounts point to 2018 as the year when Social Security benefits will exceed revenue from FICA taxes and taxes on benefits. That’s when the system will have to use interest earned on its Treasury bonds to pay benefits.
To prepare for this, Congress passed legislation in 1983 that would create a surplus in the Social Security trust fund to help pay for the boomers. As a result, by 2018 the trust fund’s holdings will balloon to $3.7 trillion, up from $1.5 trillion today. This is the boomers’ nest egg.
Backers of private accounts say these trillions aren’t a real asset, since future taxpayers will have to repay the Social Security trust fund . "We don’t pay any attention to the trust fund," says Michael Tanner of the Cato Institute, a libertarian group in Washington. "We only care about the actual cash flows from the government."
Others disagree. They maintain that the Treasury bonds owned by the trust fund are assets. Says Reischauer, "If Social Security were run like other quasi-governmental agencies like Fannie Mae, which also buy Treasury bonds, there would be no question about repaying the loans."
John Rother, AARP’s director of policy, adds: "Redeeming the trust funds is a sacred commitment, since they represent prior contributions from workers to fund their own benefits. Failing to do so would break the intergenerational compact that’s the foundation of Social Security."
Indeed, if current workers divert some of their Social Security payroll taxes into private accounts, the government would have to make up the difference to cover benefits. Estimates for such transition costs range between $1 trillion and $2 trillion over 10 years.
At a time when the government is already running record deficits, many economists worry what the transition costs could do to the overall economy. Says Christian Weller, senior economist at the Center for American Progress, a nonpartisan research institute based in Washington: "It will lead to higher interest rates that hurt households directly—not abstractly in the future but immediately. You are hurting people today and cutting benefits in the future."
Eugene Steuerle, a senior fellow at the Urban Institute, says private accounts may have a role to play. But, he adds, they’re getting too much attention and detracting from other Social Security issues.
"Social Security could do a much better job," he says. "With or without private accounts, it needs to be better targeted to those who are most elderly and truly needy."
Barbara B. Kennelly, head of the National Committee to Preserve Social Security and Medicare, says private accounts change the intent of Social Security. "What the president’s plan does is take Americans out of the community pool, where we share the risk, and put each of us into our own pool of one to fend for ourselves," she says. "That’s fine if you’re rich.
"Of course, we have to make changes in years to come. What we don’t have to do is dismantle the current program to do it."
Merrill Goozner, a Washington-based writer, covered economics for the Chicago Tribune. He wrote The $800 Million Pill: The Truth Behind the Cost of New Drugs. Carol Simons and Susan Crowley contributed to this article.