Politics

Social Security, Stocks Scenario

December 11, 2001 / 1:43 AM EST / AP

President Bush's Social Security commission recommended three plans Tuesday to let younger workers invest some of their payroll taxes in the stock market. All would come with a cost.

The report is being issued as policy-makers focus on a war on terrorism and face disappearing federal budget surpluses.

The commission tried to soften what could be a political time bomb in next year's elections by sending the president three separate proposals for private accounts rather than a single solution. It suggested policy-makers discuss an overhaul for at least a year before taking action.

Q&A

Q: Why does Social Security face financial difficulty?

A: The retirement plan is a pay-as-you-go system, with today's workers paying for current retirees' benefits. As the large baby boom generation starts retiring, there will be fewer workers contributing and more people collecting benefits.

Q: What about money built up in the Social Security trust fund?

A: The trust fund actually doesn't contain money. It's been spent as part of the government's general revenue. But I.O.U.'s are building up in the trust fund and the government will have to find the money to repay the promised obligations, starting in 2016. Once the money owed to Social Security starts getting spent, it would be depleted by 2038.

Q: Why is there a push for personal investment accounts?

A: President Bush promoted the idea in his 2000 campaign. He wants to let workers invest some of the 12.4 percent of their wages being paid to Social Security in the stock market. Proponents say it would create ownership and encourage saving, and the return on the investments would mean workers could rely less on the traditional system.

Q: What's wrong with that?

A: Opponents argue that if money is diverted into a personal account, it can't be used to pay for current retirees. That money has to be made up somehow or benefits must be cut. Opponents also question whether it is a good idea to expose people's retirement income to the risk of the stock market.

Q: When would one of these plans be implemented?

A: Not likely anytime soon. The commission has suggested that Congress study the issue for a year before acting on anything. Many politicians don't want to tackle the issue until at least after next year's congressional elections.

And with the war on terrorism, disappearing budget surpluse, an economic recession and the stock market slump, the political will isn't there to take up the issue now.

Q: How much would an overhaul to personal accounts cost the government?

A: The commission pegged transition costs at $2 trillion to $3 trillion over 75 years.

Q: If lawmakers changed the formula to calculate benefits, how big are the cuts workers face?

A: Benefits now are tied to inflation, but the commission is proposing linking them to wage growth. Workers who will retire in 30 years could see cuts of 1 percent to nearly 33 percent in the traditional benefits they are being promised today. Supporters of private accounts say that returns on the investment accounts would make up those losses. (AP)

The proposals would require $2 trillion to $3 trillion in new government spending over the next 75 years.

And in some cases, workers retiring in 30 to 50 years would face cuts in annual benefits from 1 percent to nearly 33 percent.

"We're going to face a lot of criticism I'm sure for cutting benefits," Commissioner John Cogan said, adding that current retirees or people nearing retirement would not be affected.

Mr. Bush formed the commission last spring to recommend a plan to restore fiscal stability to the retirement system by creating personal investment accounts. Because of the retiring baby-boom generation, by 2016 Social Security is expected to start paying out more in benefits than it takes in from payroll taxes.

The commission acknowledged its proposals would not shield the system from the financial strains it faces as fewer workers are paying into the system.

But the plans "all move the ball down the field," said Richard Parsons, commission co-chairman.

The commission did not suggest how the government could pay for the $2 trillion to $3 trillion in transition costs to private accounts. Cogan said a tax increase would be one potential source of revenue.

The 141-page report doesn't spell out how much benefits would be cut, and argues that future retirees actually will get much less in benefits than they are being promised because the system is going broke.

"The program is financially unsustainable in its current form," said Commissioner Gerald Parsky. "Doing nothing is not a real option."

The commission wants to let younger workers invest 2 percent to 4 percent of their taxable wages in a personal account. In exchange, that amount — plus interest — would be deducted from a person's traditional Social Security benefits. Interest earned on the stock market account should make up shortfalls, the report said.

Because Social Security is a pay-as-you-go system and today's workers are funding today's retirees, the government would have to help prop up the system for decades to make up for the money going into personal accounts.

Also, in two of its three options, the commission proposes changing the formula used to calculate futue benefits — resulting in smaller benefits than now being promised.

If that was done, according to report figures, a low-wage worker retiring in 2032 could expect $84 to $384 less a year in guaranteed benefits than what is being promised today. A high-wage worker's annual guaranteed benefits could be cut $3,300 to $3,876. But the commission is counting on returns from the personal accounts to cover the cuts.

That's where the commission's critics jump in, arguing that the current recession and stock market slump illustrate the risk involved in personal accounts.

"Gone are the days when any stock index fund was expected to make money, not wipe out savings," said Roger Hickey, co-director of the Institute for America's Future, which opposes personal accounts.

Some politicians scrambled to distance themselves from the report. Rep. Clay Shaw, R-Fla., Chairman of the Ways and Means Social Security subcommittee, introduced a resolution Tuesday night in the GOP-led House pledging to save Social Security without reducing benefits or increasing taxes.

By Leigh Strope
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