Social Security, Fact vs. Fiction

Feb. 1, 2004 — -- The chatter surrounding Social Security reform heated up last month as President Bush and the administration began making their case for privatizing the nation's retirement benefits system. With the impending retirement of millions of baby boomers, beginning as early as 2008, the Social Security system faces funding deficits over the next 40 years that could force lawmakers to raise taxes, lower benefits or take money out of the general budget to keep pace with the country's aging population.

Saying the time to act is now, Bush and Vice President Dick Cheney have pushed the idea of private investment accounts for younger workers. The president has said the government will not raise payroll taxes to pay for funding shortfalls, noting that by 2018 the system will be paying out more than it takes in, and by 2042 the system will be "bankrupt."

Critics of the president's push for privatization noted that nonpartisan experts from the Congressional Budget Office have said that characterizing Social Security as bankrupt by 2042 is not correct. They point out that the system will always be able to pay benefits if Americans are working and paying payroll taxes. The Social Security trust fund will be depleted between 2040 and 2050, but even then retirees will receive between 70 percent to 80 percent of their promised benefits thanks to the current system's structure.

Administration officials have suggested one way to make up the shortfall is to reduce benefits by changing the way they are calculated. By pegging increases to inflation rather than wages, benefit levels would rise much more slowly.

As the campaign to sell the president's plan begins in earnest, with President Bush expected to focus on his privatization plan in Wednesday night's State of the Union address, ABC News business correspondent Betsy Stark offers a reality check on claims the president is making about the urgency of the problem and whether private accounts are the best way to fix it.

The following quotes are from remarks by the president on Tuesday at his Social Security forum in Washington, D.C.:

"There is plenty of money in the system to take care of those who have retired or near retirement ... But the structure of Social Security is such that you can't avoid the fact that there is a problem, and now's the time to get something done."

The only thing to argue here is whether "now" is the time to act. Actuaries agree that the existing pay-as-you-go formula -- in which revenue collected from the payroll taxes of current workers pays the benefits of current retirees -- will fund benefits at current levels through 2018. After that, there will be too few workers and too many retirees for payroll tax revenue to fully cover retiree benefits. But actuaries estimate there is enough money in the Social Security trust fund to make up the difference through 2042.

"By the time today's workers who are in their mid-20s begin to retire, the system will be bankrupt. So if you're 20 years old, in your mid-20s, 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."

This is a reference to what happens in 2042 and is a scary half-truth. In 2042, the surplus accumulated in the Social Security Trust Fund -- from decades of workers paying in more than retirees took out -- will indeed be exhausted. But it does not mean workers retiring at that point would get nothing. If the system continues to operate on a pay-as-you-go basis, actuaries estimate retirees would collect Social Security income worth about 70 percent of today's benefits.

And while the president vowed again on Tuesday not to raise taxes to fix Social Security, actuaries further estimate benefits could be maintained at current levels through 2078 by raising payroll taxes 1.89 percent, or less than 1 percent on workers, and less than 1 percent on employers.

"You realize that the system of ours is going to be short -- the difference between obligations and money coming in -- by about $11 trillion unless we act."

This is the biggest and one of the most controversial numbers the president has been using to make his case. First, some perspective on that number: $11 trillion is the size of the annual GDP of the U.S. economy! What the president is suggesting is that unless Congress acts now, Americans will have to make up a shortfall equal to the entire U.S. economy. It's unlikely this shortfall will ever occur. It's an estimate of the gap between promised benefits and revenues to pay for them if the government does nothing between now and the end of time.

"A personal savings account which would earn a better rate of return than their money currently held within the Social Security trust ..."

There is no way to know whether this would be true. Certainly historical averages suggest the president is right. While stocks have returned, on average, 6.3 percent annually since 1871, the average return on the Social Security trust fund is around 2 percent. But the reason stocks have a higher average rate of return is because they carry a higher risk. The president suggested today that one way to avoid risk is to impose some "guidelines." He mentioned as a model the "Thrift Savings Plans," which invest conservatively in stocks on behalf of federal employees and return about 6 percent a year.

"Owning your own personal savings account … allows you to pass on your savings to whoever you choose. You can't do that in Social Security today. If you pass away earlier than expected, that money that you put in the system is gone."

The president is right that private accounts come with fewer limitations than a Social Security account. But Social Security benefits can be passed on in certain circumstances. Currently, if you die and your spouse makes less than $20,000 and is over 60 years old, she/he is entitled to survivor benefits. Children under 18 are also entitled to survivor benefits.