Social Security's Ticking Bomb

Author: Julie Kosterlitz and Lisa Caruso

Published: May 22, 2004

Presidents never find it politically easy to tackle this explosive domestic issue, and they often dodge it because it comes with such a nice, long fuse. But unless it's revamped, Social Security will run short of money to pay full benefits -- in 2042. Sure, its cash-flow problems will begin much earlier. And, yes, the fixes get harder the longer Uncle Sam waits. But the long jump has never been Congress's best event.

Since the last tentative effort to tackle the issue -- in President Clinton's second term -- the world has seemingly become more perilous, gigantic deficits have returned, and the two major parties have remained extremely polarized.

Bush made creation of private investment accounts within Social Security a goal early in his term. But the issue faded after 9/11.

Fiscal conservatives fear that the size of the federal deficit has doomed Bush's proposed private accounts, because they would carry hefty start-up costs. "I think it's going to be tough to get that bandwagon going," said Robert Bixby, executive director of the bipartisan Concord Coalition. The same deficits give Democrats an excuse for their own inaction on Social Security.

But Bush's admirers and detractors agree that a second term would allow -- some say compel -- him to try to fulfill the last of his three original campaign promises: cut taxes, overhaul federal education policy, and revamp Social Security.

Meanwhile, presumptive Democratic presidential nominee John Kerry has moved from enumerating changes that he won't consider to hinting at some that he might (scaling back the rich's benefits, for example).

No matter who wins the presidential race, Washington will need intestinal fortitude and creative thinking if it is to change the status quo on Social Security.

John F. Cogan, Senior Fellow, Hoover Institution, Stanford University, 650-723-2585

If President Bush wins re-election and finally decides to tackle Social Security, he's likely to run up some serious long-distance phone bills calling Cogan's Northern California office. "John will surely play a supporting role, were President Bush to advance Social Security," says Princeton University economist R. Glenn Hubbard, former chairman of Bush's Council of Economic Advisers. A current administration aide calls Cogan "an informal sounding board" for Bush and someone who "really has the president's ear."

Raised in South Pasadena, Calif., Cogan earned both a bachelor's degree and a doctorate in economics at the University of California (Los Angeles). His career as an academic was interrupted in the 1980s when he came to Washington to be a senior Reagan administration official, first in the Labor Department and later in the Office of Management and Budget, where his portfolio initially included Social Security matters.

Since then, Cogan, 56, has largely stayed at Hoover, doing only short, advisory stints in Washington. In the 1990s, he served on blue-ribbon panels on health care reform and on a

Social Security benefit anomaly, known as the "notch" problem, in which workers born between 1910 and 1916 got benefits that were overadjusted for inflation.

In 2000, Cogan advised candidate Bush and drafted the outlines of Bush's first federal budget. Insiders say that Cogan could have had the administration's top budget job if he'd been willing to leave his idyllic perch among the eucalyptuses.

In 2001, Bush made Cogan a member of his Commission to Strengthen Social Security. Once on the commission, Cogan helped craft a plan that hewed to Bush's requirements, which included calling for creation of personal investment accounts financed by payroll taxes. An unapologetic advocate of small government, Cogan nevertheless dismisses supply-siders' boast that Social Security reform can be achieved painlessly. He fought off White House factions that had sought to make the commission's final report free of content and controversy. Private accounts, he says, are needed because they would serve "to insulate Social Security's surpluses from the political pressures that inevitably arise to spend them" and because people are "better off in a retirement program if real investment is taking place."

Although financing the overhaul is "an extremely difficult problem," he says, the cost is "very manageable" when viewed as a share of the nation's income. He may yet get a chance to try to prove his point.

Martin Feldstein, President and CEO, National Bureau of Economic Research, 617-868-3900

Harvard economics professor Martin Feldstein is a first-generation supply-sider, leading conservative economist, and standard-bearer for using individual retirement accounts to revamp Social Security. Now head of the National Bureau of Economic Research, the New York City native chaired President Reagan's Council of Economic Advisers from 1982 to 1984 and has been a player in Republican politics for years. At his alma mater, Harvard (his graduate degree is from Oxford), Feldstein has mentored numerous up-and-coming conservative economists, including his CEA successors under President George W. Bush -- Gregory Mankiw and Glenn Hubbard. Feldstein's Social Security plan provided the blueprint for legislation championed by then-Ways and Means Chairman Bill Archer, R-Texas, and Ways and Means Social Security Subcommittee Chairman Clay Shaw, R-Fla.

Democrats disagree with Feldstein's contention that private accounts could generate enough economic activity to keep Social Security solvent and deliver at least the same benefits as the current system without the payroll tax being raised. Former Clinton administration economic adviser Peter Orszag calls the Feldstein plan "the mother of all accounting gimmicks... It doesn't add up."

But Republicans count on Feldstein to provide the intellectual firepower behind their overhaul plans. Shaw said Feldstein "brings immediate credibility to what we want to do. He's not afraid to step up to the plate with a solution." If Congress returns to the issue, Shaw said, "I would certainly rely on him for his counsel and advice."

Feldstein, 64, advocates creating a mixed system that combines traditional pay-as-you-go defined benefits with investment-based, defined-contribution personal retirement accounts, or PRAs. He calls for diverting 1.5 percentage points of the 12.4 percent payroll tax from the Social Security trust fund to the PRAs, and for workers to contribute another 1.5 percentage points themselves. Those funds would then be invested in stocks and in bond mutual funds, a move that would provide a huge influx of capital for business investment. The resulting increase in economic activity would generate additional tax revenues, a portion of which his plan would transfer to the Social Security trust fund. At a 5.5 percent real rate of return, the PRAs plus increased corporate tax revenues for the trust fund, along with an increase in the national savings rate, would be enough, Feldstein says, to keep the trust fund solvent for the next 75 years.

Peter Ferrara, Senior Fellow, Institute for Policy Innovation, 703-582-8466

Peter Ferrara burst onto the Washington scene nearly a quarter-century ago, as a young graduate of Harvard's college and its law school, with a book published by the Cato Institute, Social Security: The Inherent Contradiction. The book, which offered a wide-ranging critique of the program and called for converting it to a system of private investment accounts, was a sort of reveille for conservatives. "He's really the Pied Piper of Social Security privatization," said Stephen Moore, president of the anti-tax Club for Growth, which calls Ferrara its Social Security project director.

Since then, Ferrara, 48, who grew up in Phoenix, has had policy jobs in the Reagan and Bush I administrations, has taught at the George Mason University School of Law, and has cycled through most of the well-known free-market think tanks -- including Cato and the Heritage Foundation. Now, he works independently by way of a succession of grants and titles from like-minded institutions.

With the release of his latest proposal late last year, Ferrara has reclaimed his earlier place in the conservative vanguard. The plan would not only let people direct more than half of their payroll taxes to private investment accounts, but it would also guarantee that they would get no less than what the current system promises -- and possibly much more. It has been embraced by a wide array of influential conservative groups, including Grover Norquist's Americans for Tax Reform, and Jack Kemp's Empower America. Moore calls it "a dream come true for conservatives." Alternative plans, he said, are "all pain, and ours is no pain."

But pain-free hardly means cost-free. The Social Security actuaries concluded that the plan would cost 20 times as much as bailing out the current system, over 25 years, and 55 percent more over 75 years. Ferrara proposes to get the money by cutting federal spending by 1 percent every year for the better part of a decade, and by capturing some of the higher corporate profits that he says his plan will generate. Budget hawks say he's dreaming. Robert Bixby, executive director of the Concord Coalition, said Ferrara's plan "has no credibility whatsoever."

Ferrara, though, calls his plan "the next great breakthrough for working people," and he contends that it should appeal to progressives. He has been feverishly pitching the plan on Capitol Hill and says he's confident that it will soon be introduced, with at least two dozen co-sponsors.

Sen. Lindsey Graham, Republican, South Carolina, 202-224-5972

As one of a handful of Republicans elected to the Senate in 2002 after confronting accusations that they supported "privatizing" Social Security, Lindsey Graham, 48, is already an icon for many Republicans who want to overhaul the program.

Not content to be a mere symbol, Graham late last year introduced legislation that would let workers invest up to $1,300 of their payroll taxes each year and would make gradual cuts in traditional benefits, reducing the payouts below what Social Security now promises. He includes some protections and savings inducements for low-income beneficiaries. The plan would add substantially to the program's costs in the first few decades, yet over the long haul, it would halve Social Security's extra cash needs. The bill has won plaudits from some centrist and business groups, who say the legislation is less austere than fiscal conservatives' plans but is not the free lunch promised by anti-tax conservatives.

Perhaps more important is Graham's evident passion for the issue and willingness to break the mold to get something done. A participant in the attempted coup against then-Speaker Newt Gingrich while in the House, and a strong backer of fellow reformist Sen. John McCain, R-Ariz., during McCain's 2000 presidential bid, Graham is unafraid to buck authority. On Social Security, he has already reached out to a Tennessee Democrat, Rep. Harold Ford, as a possible ally, and Graham said in an interview that he'd consider selected tax hikes to finance his private-account plan. "If the goal is to do this without any sacrifice, I don't know how to do that," he said.

Robert Bixby, director of the fiscally conservative Concord Coalition, said, "Graham is an interesting person to watch, because he's looking for something that will work."

Graham's strong conservative credentials could help him rally Republicans, while his modest background and folksy style could help reassure the rank and file. Raised in Pickens County, S.C., he was the first in his family to attend college -- and then earned master's and law degrees from the University of South Carolina. After his parents died when he was in college, he became his teenage sister's legal guardian. "The only way we made it was with Social Security survivors' benefits," he said, adding that his aunt and uncle, retired textile workers, also rely on the program's old-age benefits: "If you think I'd take a system my family relies upon and do anything that jeopardizes it, you're crazy."

Peter Orszag, Senior Fellow, Economic Studies, Brookings Institution, 202-797-6005

As a special assistant for economic policy in the Clinton administration, Peter Orszag grappled with the pleasant problem of what to do with the budget surplus. "Save Social Security first" was the administration's answer. But Republicans are now in power, the black ink has turned to red, and Orszag is at the Brookings Institution, where he's pushing a Social Security reform plan that relies on such politically unpopular solutions as raising payroll taxes and cutting benefits to retain the program's basic structure and to restore actuarial balance without incurring the transition costs of creating private accounts.

The plan, which Orszag and economist Peter Diamond detailed in their 2003 book, Saving Social Security, addresses three of Social Security's basic problems: rising life expectancy, earnings inequality, and what they call "legacy debt." They propose covering roughly half the extra cost associated with beneficiaries' increased life expectancy by reducing benefits and the rest by raising taxes. Because the highest-paid workers' earnings have increased the most but are not taxable above $87,900, Orszag and Diamond call for raising that ceiling while gradually cutting benefits for the highest earners. To pay off the legacy debt that future beneficiaries must bear because earlier generations received more-generous benefits than what their payroll taxes financed, the authors propose mandating Social Security coverage for new state and local government workers, taxing earnings above the current maximum, and reducing the benefits and increasing the payroll taxes of future workers and beneficiaries.

Jeff Lemieux of Centrists.org commended Orszag and Diamond for their "honest" approach. He says it is "the first Social Security reform proposal that is fully 'paid for.' " Orszag calls his proposal "an intellectual response to the claim that you cannot put Social Security on [sound financial footing] without fundamental reform."

The 35-year-old Lexington, Mass., native worked closely in the Clinton era with Gene Sperling, who's now an adviser to John Kerry's presidential campaign. A product of Princeton University and the London School of Economics, Orszag frequently advises congressional Democrats.

Another veteran of the Clinton White House's economic team, Bill Dauster, now deputy staff director and general counsel to the Senate Finance Committee, called Orszag "one of the sharpest economic minds of a ... generation... Peter's book with Peter Diamond is easily the most influential recent work on Social Security in progressive Washington."

Robert Pozen, Chairman, MFS Investment Management, 617-954-5707

Robert Pozen began wading into the Social Security reform debate as a top executive at Fidelity Investments, the Boston-based mutual fund behemoth, when experts looking into a role for private investment came to tap his expertise. But it wasn't until he stepped down at Fidelity in 2001 and was invited to join President Bush's Commission to Strengthen Social Security that he got fully immersed in the issue -- and felt its strong political crosscurrents.

Joining the commission was a controversial move for Pozen, a Democrat. Bush's requirement that members hew to his basic principles -- including calling for creation of private investment accounts -- made the commission anathema to most liberals. But although Pozen has contributed generously to Democratic campaigns, including those of Sen. John Kerry, and was widely touted for a post in the Clinton administration, he describes himself as "pretty much middle-of-the-road." He says the commission's principles, as read to him over the phone, were "vague enough" that "most of us did not realize the degree to which we were then constrained." He managed to have his variations on Bush's themes included as an option in the commission's report.

Since then, through different day jobs, Pozen, 57, has stayed involved. He teaches at Harvard's Kennedy School of Government and at its law school, did a stint as a dollar-a-year adviser to Massachusetts Republican Gov. Mitt Romney, and earlier this year signed on to help rehabilitate MFS Investment Management, a scandal-scarred Boston mutual fund company.

He has also been convening a politically diverse group of experts to discuss the latest developments and research on Social Security. And he has devised a new reform plan that attempts to find a middle ground, and has been promoting it in newspaper op-eds and congressional testimony. "He's a bottom-line type of guy, who wants to see things get done," said Maya MacGuineas of the New America Foundation.

Although neither side of the aisle in Congress has bought into his plan yet, Pozen finds that to be no surprise in an election year. But Pozen, a native of Bridgeport, Conn., and a graduate of Harvard University and Yale Law School, doesn't give up easily. His credentials and drive make him a likely player if and when an administration of either party gets serious about reform.

Robert Reischauer, President, Urban Institute, 202-833-7200

Washington seems incapable of having a serious budget debate without former Congressional Budget Office Director Robert Reischauer, now president of the Urban Institute. At 63, Reischauer is a veritable eminence grise in the budget world; despite his Democratic leanings, he is widely respected across the political spectrum.

Rep. Robert Matsui of California, the ranking Democrat on the House Ways and Means Subcommittee on Social Security, said that Reischauer "has great bipartisan credentials, in the sense that people on both sides of the aisle listen when he speaks." If Congress gets serious about Social Security reform, Matsui said, Reischauer "will have a significant role. There's just no question about it." Congressional Democrats, Matsui added, "would want to be briefed by him regularly."

In 1998, Reischauer and then-Brookings Institution colleague Henry Aaron wrote Countdown to Reform: The Great Social Security Debate, which critiqued the major reform proposals of the day -- including individual accounts -- and outlined the authors' own reform plan to preserve Social

Security as a defined-benefit program. Their innovation, proposed during the brief period of budget surpluses, was the concept of a Social Security Reserve Board that would invest trust fund reserves in excess of one and a half year's benefits in a broad mix of private securities.

Although he remains an advocate of "collective investment" as a politically appealing compromise, a pessimistic Reischauer says that with the return of deficits, the shift in national priorities to fighting terrorism, the more-urgent financial problems of Medicare, and the reduced public confidence in the stock market, Social Security reform is unlikely to soon top the national agenda.

"There's no pressing political reason why the issue has to be addressed. And any serious attempt to do so is fraught with political risk," particularly in an election year, he says.

Reischauer is on his second stint with the Urban Institute, after serving as its senior vice president from 1981 to 1986. Following his years at CBO, which culminated with his tenure as director from 1989 to 1995, Reischauer joined Brookings before becoming head of the Urban Institute in 2000. A Boston native, Reischauer earned an undergraduate degree in political science from Harvard and a master's in international affairs and Ph.D. in economics from Columbia.

Gene Sperling, Director of Economic Programs, Center for American Progress, 202-518-3472

In an episode of NBC's West Wing earlier this year, top White House aide "Toby Ziegler" boldly unplugs the third rail of politics and almost single-handedly engineers a bipartisan compromise to save Social Security -- all in a day's work. Although some of the plot devices stretched credulity, the hour had a true-to-life feel -- thanks largely to the efforts of show consultant Sperling, 45, who once attempted a similar feat.

An Ann Arbor, Mich., native who graduated from the University of Minnesota and Yale Law School, Sperling was President Clinton's wunderkind director of the National Economic Council. In that position, he secretly convened the administration's top economic officials to try to seize the initiative on Social Security reform. That led to Clinton's bold "save Social Security first" campaign, which briefly put the use of budget surpluses off-limits to both parties. It also spawned a yearlong bipartisan discussion on Social Security, largely stage-managed by Sperling, that featured appearances by administration officials and key Republicans at regional events and a White House summit, as well as much behind-the-scenes searching for common ground.

Sperling seemed poised to achieve a major breakthrough. But given the policy chasm and the polarizing sideshow of an impeachment trial, the bipartisan bonhomie faded, and the issue lapsed.

"Toby was far more successful in one day than I was in two years," says Sperling. "The hardest thing about Social Security reform -- harder than the ideological fights -- is just convincing people they should take significant political risks on a problem that's not actually going to hit absolute crisis for a few decades."

But don't count him out. An unpaid senior adviser to John Kerry, Sperling would be at the center of any Kerry administration Social Security initiative.

But even if President Bush wins re-election, Sperling -- who is also overseeing the economics shop at the Center for American Progress, a fledgling liberal think tank, and running a project on global education for the Council on Foreign Relations -- will be a player. "If you're a Democrat, one of the first people on your call list will probably be Gene, because he brings all the elements together -- the policy, economics, and politics," said John Rother, director of policy and strategy for AARP.

Eugene Steuerle, Senior Fellow, Urban Institute, 202-833-7200

The Urban Institute's Steuerle brings a quiet intelligence to the Social Security debate. Although he served in previous Republican administrations, Steuerle is considered a centrist.

Alan Cohen, senior budget analyst for the Senate Finance Committee's Democrats, called Steuerle "a tremendous intellect and knowledgeable about Social Security... He's someone people would turn to for intellectual power. He manages to be seen as nonideological."

Steuerle argues that now, when fighting terrorism tops the national agenda and the economy is undergoing fundamental changes, the United States can no longer afford to so generously support the retirement of its healthy, middle-aged, middle-class citizens. Steuerle thinks that Social Security reform must address the declining number of workers relative to beneficiaries, as well as the program's increasing inability to stem poverty among the elderly.

An unassuming man from Louisville, Ky., with just a hint of the South in his voice, Steuerle says Social Security currently encourages workers to retire in late middle age, and that their doing so deprives the economy of their output and the government of revenue at a time when fewer people are entering the workforce than retiring. And many retirees nowadays enjoy benefits for far longer than their predecessors. Steuerle, 57, proposes increasing the age at which retirees can begin to draw partial Social Security benefits and shifting more of a retiree's lifetime benefits to later in life, when benefits tend to be needed most.

Steuerle says the current system fails to meet the needs of the elderly poor and discriminates against single heads of households, most of whom are women. So he believes any reform plan should establish a "decent" minimum benefit and redesign spousal and survivor benefits.

Steuerle, who earned his Ph.D. from the University of Wisconsin, has devoted decades to reforming the federal budget. From 1984 to 1986, he organized and directed the Treasury Department's tax reform effort, and he went on to serve from 1987 to 1989 as deputy assistant secretary of the Treasury for tax analysis before heading to the Urban Institute. Ten years later, he chaired the technical panel that advised the Social Security Administration on its methods and assumptions.