Social Security watershed

A Senate committee is set to open hearings on changing the system

Author: Larry Eichel

Published: April 24, 2005

The national debate over Social Security is approaching a pivotal moment.

On Tuesday, the Senate Finance Committee opens hearings on overhauling the federal retirement system. Early next month, the clock runs out on the White House's seemingly ineffectual 60-day campaign to make the case for personal accounts.

Faced with unified Democratic opposition, lukewarm Republican backing, and dwindling public support in the polls, the Bush administration has some decisions to make.

Does it forge ahead and make a serious run at legislation this year, perhaps by presenting a full-fledged bill to Congress? Does it signal a willingness to abandon or modify the personal-account concept? Or does it opt to concentrate on other issues and put off Social Security for another year?

To this point, there have been no obvious signals.

"I don't know if we're legislating or educating," Rep. Mike Pence (R., Ind.), a leader of House conservatives, said here last week at a conference run by the Heritage Foundation.

Even if the education-only phase is to continue, there's still much to be done, by both the administration and its critics.

Nearly three months after Bush started pushing for personal accounts, the national conversation on Social Security remains plagued by misconceptions and oversimplifications - about the way the system works and about how that might change were Bush to get his way.

Here are a few of the statements often made by supporters and opponents of the Bush approach that merit clarification:

There would be no problem if Congress hadn't raided the Social Security Trust Fund and used the money to finance other federal spending.

This claim comes up whenever a member of Congress holds a public meeting on Social Security. Unfortunately, it's not true, at least the part about how the problem wouldn't exist.

"Even if the money had been saved, Social Security would still be facing a funding shortfall in the future," said Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities.

Since the money has been spent, the trust fund is filled with IOUs rather than cash. But the official projections - the ones that say the system has the ability to pay 100 percent of promised benefits until 2041 - assume that Congress will honor the IOUs, as the law requires. In that sense, it's as if the money were saved.

Of course, the money wasn't saved, which complicates life for the government (and taxpayers) starting in 2017, when the system is projected to begin paying out more than it collects. Coming up with the money to make good on the IOUs will create pressure on the overall federal budget.

But the long-term problem would exist regardless. And remember this: Had Social Security surpluses over the last four decades been saved rather than spent, the result would have been higher income taxes and/or less government.

The Bush plan would cut guaranteed benefits by about 40 percent.

As of now, there is no Bush plan. So despite the claims of Democrats, there's no way to know for sure how much (or how) he intends to reduce projected benefits to help make the system solvent.

But the real problem with this assertion is the word guaranteed. Your benefits are not guaranteed. It says so right there in the annual statement you get from the Social Security Administration.

In a 1960 case, Flemming v. Nestor, the U.S. Supreme Court ruled that an individual's entitlement to benefits is not the equivalent of a contractual right.

"That's why we think the ownership you'd get with personal accounts is a fundamental, first principle of reform," said Michael Tanner, who has championed accounts for years on behalf of the libertarian Cato Institute.

Indeed, Congress has cut promised benefits several times, most recently by raising the retirement age and making some benefits taxable. Lawmakers will likely have to reduce promised benefits again as part of any package of changes.

Personal retirement accounts would help solve Social Security's long-term funding woes.

On several occasions, White House aides have admitted this just isn't so.

Throughout most of his 60-day campaign, Bush has talked around the question, often calling personal accounts a way to "strengthen" the system. But in his most recent speeches, he has indicated that he considers achieving solvency and creating voluntary personal accounts two separate matters.

Some economists say that the diversion of tax revenue from Social Security to create the accounts would worsen the system's funding picture, depending on how personal accounts fit into a broader reform plan.

"We're not going to save our way out of this problem," said economist Eugene Steuerle of the Urban Institute, who considers raising the retirement age the least painful solution. "It's a labor-supply issue."

Wall Street stands to make a killing on personal accounts.

This claim, made frequently by Bush's opponents, falls more into the category of the uncertain than the wrong.

Like everyone else, the people who run mutual-fund companies, brokerage houses, and other financial institutions don't know enough about how a personal-account system would function to know whether they would hit pay dirt.

Having billions of dollars more to manage can't be a bad thing for the financial-services industry. But some companies think that the handling of millions of small accounts would be an administrative nightmare.

And the White House says that account holders would be restricted in their investment choices to a limited number of index funds, for which management fees would be low.

Creating personal accounts would increase savings, a huge plus in a nation with a low savings rate.

Whether the accounts would actually increase the nation's savings, as proponents claim, depends on how the accounts are created.

By and large, economists agree that the United States will see no new net savings if accounts are funded with money diverted from payroll taxes.

"You're not creating new savings with personal accounts," said David Certner, director of federal affairs at AARP. "You're just moving money around."

Advocates of so-called add-on accounts - which would not be funded by the diversion of payroll taxes - say their proposals would increase overall national savings.

But some analysts think those accounts would have limited value, since many people presumably would use them for money they'd be saving anyway.