Experts Consider Social Security Pitch

Feb. 5, 2005 — -- President Bush began telegraphing his intent to convince Congress and the rest of us of a genuine Social Security crisis in December.

"You may not feel it," he said. "Your constituents may not be overwhelming you with letters demanding a fix now, but the crisis is now."

That sense of urgency is essential to the president's pitch. A White House political aide named Peter Wehner clearly spelled out the tactic in an e-mail to political allies in January.

"Our strategy will probably include speeches early this month to establish an important premise -- the current system is heading for an iceberg," the e-mail said.

Soon, the president was sounding a dire alarm for America's youngest workers.

"I want you to think about a Social Security system that will be flat bust, bankrupt, unless the United States Congress has got the willingness to act now," Bush said. "The system will be bust. In other words, there won't be anything available for you. I mean, if you're a 20-year-old person and you look at the math, you realize that you'll inherit a bankrupt system."

But by the administration's own calculations, Social Security won't hit any proverbial icebergs for years to come. Given the complexity and politics of the debate, "Nightline" recently asked two experts from the center of the ideological spectrum to help sort out the reality from the rhetoric.

Robert Bixby, who runs the bipartisan Concord Coalition, the group founded by leading Republicans and Democrats concerned about the government's finances, said describing Social Security as in crisis is "an exaggeration."

"The problem with Social Security is that it does promise more and future benefits than the current system can afford," Bixby said. "That is a problem for today's workers. And it is important that we begin to work on that problem and address it. But the system is not in an immediate crisis."

Peter Orszag, an economist who served in the Clinton administration and directs the tax policy center at the Brookings Institution, said, "There is no immediate crisis with Social Security."

"It's a long-term challenge," he added. "It's like having termites in the foundation of your house. Better address it sooner rather than later."

The Math

Still, the president has said, "The math shows we have a problem."

Here's the math: From every paycheck, 6.2 percent of your salary is sliced off for Social Security. Your employer contributes an equal slice. So an amount equal to 12.4 percent of your pay is set aside until you earn $90,000, when the deductions end.

"The average earner pays about $2,000 or so in payroll taxes directly, and then the worker's firm pays another $2,000 to the Social Security system each year," Orszag said. "That money goes into the system and effectively pays for current beneficiaries for perhaps the worker's grandmother or grandfather.

"Something like three-quarters or so of payroll revenue coming in goes out to pay benefits immediately," Orszag added. "But not all of it."

The rest goes to the Social Security trust fund. The money is invested in government bonds that can eventually be cashed in. So the fund is filled with IOUs to be sure, but historically safe ones backed by the U.S. government.

"The Social Security system is running a surplus right now," Bixby said. "It's taking in more cash than it needs to pay benefits, plus it has a trust fund surplus, which is around $1.6 trillion at the moment."


But the White House has warned of proverbial icebergs ahead. The first, a small one, comes in 2018.

"In 2018, incoming payroll revenue is insufficient to pay for outgoing benefit payments, so there is a cash flow deficit," Orszag said. "At that point, however, the trust fund is still earning interest on the bonds that it holds."

But consider the demographic picture presented by the trustees who oversee Social Security. In 1960, the program could count on the paychecks of more than five workers for every beneficiary. Today, three workers support each beneficiary. By 2040, there will be two.

Assuming nothing is done, Social Security will have to begin cashing in all those trust fund IOUs until the program hits the big iceberg in 2042.

"In 2042, under the trustees' assumption, Social Security runs out of treasury bonds," Bixby said. "At that point, it has no more spending authority beyond that which is coming in from the payroll tax."

But that doesn't mean that come 2042, the system is going to be "flat bust" and "bankrupt," as Bush has described.

"Absolutely not," Orszag said. "Even at that point, incoming payroll revenue would still be sufficient to pay for about 70 percent of promised benefits. That's a lot higher than zero. Talk of bankruptcy and flat bust is just exaggerated rhetoric."

Scare Tactics?

Bankrupt or not, a program destined to fall so far short of its promises certainly needs some shoring up, many argue. But how much exactly?

"The Social Security system is in the black today," Bush has said. "But in the long term, it has $10.4 trillion in unfunded liability. That's trillion with a 'T.' "

But Bixby said the number is "an economic abstract -- it really doesn't have a lot of practical application to the task at hand, which is reforming Social Security."

Orszag takes the argument further.

"Over the next 75 years, which is the traditional period for measuring Social Security solvency, the gap is $3.7 trillion," he said. "So using a $10 trillion number, frankly, is probably intended to scare people."

Such forecasts are always fuzzy, experts say, because not even the best economists can predict that far ahead. But the consensus among experts is that, crisis or not, the government eventually will have to cut benefits, raise taxes or borrow more money to keep its Social Security promises.

The question now is whether the fixes that Bush has in mind really avoid those icebergs ahead.

Private Accounts

In every State of the Union speech since he was first elected, Bush has tied the financial future of Social Security to one of his favorite ideas -- private retirement accounts.

"We must make Social Security financially stable and allow personal retirement accounts for younger workers who choose them," Bush has said.

The Bush fix would allow those workers to set aside a portion of their payroll taxes, up to $1,000 a year, to fund a private account. Individuals could invest that money in stock and bond funds and pass it along to their heirs.

"I love promoting ownership in America," Bush has said.

He's not alone. Over the years, prominent Democrats, including Bill Clinton, have also embraced the merits of private accounts.

"Individual accounts, on their face, are neither a good idea nor a bad idea," Bixby said. "It depends on how they're funded."

"All of that money is now going into the federal government; most of it is used to pay benefits for current retirees," Bixby added. "So if you take some of that money and put it into private accounts, there's less flowing into the federal Treasury to pay benefits."

How to Pay?

The president's team has repeatedly insisted it won't cut current benefits or raise taxes to replace all that money diverted from the Treasury into private accounts.

"If you're not going to make contemporaneous benefit cuts, which the president has said he wouldn't do, the only way you can get the money is to borrow it," Bixby said.

To set up such a private-accounts plan without cutting off current beneficiaries, the government's going to have to borrow "trillions of dollars," Orszag said.

"That's simple arithmetic," Orszag added.

Such arithmetic demands the government would have to borrow up to $2 trillion just to fund private accounts in the first 10 years.

Even if they do earn better returns than traditional accounts, as the president promises, the expense of borrowing all that money means Social Security still would not avoid those icebergs ahead when the program begins to shell out more money than it's taking in.

Specifically, for the projected issue in 2042, "Private accounts alone do not solve that problem," Bixby said.

"That's one of the bait and switches here," Orszag said. "The president talks about a long-term problem and then offers up the individual accounts as the solution."

Even Bush, when pressed at a news conference, conceded that the individual accounts alone will not save Social Security.

"You know, I fully understand that accounts is not the only thing that will be necessary to make sure the system is permanently secure," Bush said.

Stealth Cut?

The president doesn't spend much time talking about the other fundamental fix his administration has in mind. It comes up in that e-mail from Wehner.

"We're going to take a very close look at changing the way benefits are calculated," the e-mail said.

It may just be a trial balloon, and the White House has yet to fully spell out details of its proposal. But the impact of such a change, if implemented, could amount to a big cut in benefits over the long haul.

Here's why: Now, your Social Security benefits are pegged to the growth in wages while you're in the work force. The White House is considering a change that would instead peg them to inflation, which grows at a slower rate than salaries do.

"The effect on retirees would be that the Social Security benefit would no longer keep pace with living standards," Bixby said.

"It would mean Social Security would increasingly replace less of your previous wages once you've retired," Orszag said. "That replacement rate is currently about 33 [percent], 35 percent. It would go down to 20 percent for today's young workers and keep falling under this plan.

Orszag added that it may be a case where what is not being said is really more important than what is being said.

"All of the action in terms of reducing the Social Security deficit comes from changing the way that benefits are computed," Orszag added. "It does not have to do with individual accounts."

Bixby said, "You only have basically three options" -- raise taxes, cut benefits or borrow trillions of dollars.

"At some point, all the cards need to be on the table here so people can debate what the best options are," Bixby said. "But there aren't any free lunches."

ABC News reporter Chris Bury and producer Peter Dencheck originally reported this story for "Nightline" on Feb. 1.

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