Monday, May 09, 2005
BBN: Bush May Destroy Social Security, Not Fix It: John M. Berry
<DIV><!--StartFragment --><PRE><TT>Bush May Destroy Social Security, Not Fix It: John M. Berry 2005-05-09 00:07 (New York) (Commentary. John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.) By John M. Berry May 9 (Bloomberg) -- When the House Ways and Means Committee reopens hearings on the future of Social Security this week, two ideas members should bury are those offered by President George W. Bush. The sweeping changes Bush has proposed for Social Security, creation of private accounts and progressive indexing of benefits, are far more likely to destroy the program than to fix it. Together, these proposals would so reduce the value of regular benefits that Social Security would become much less important as a source of retirement income for average workers and virtually irrelevant for those with relatively high incomes. Over time, that would undermine Social Security's broad public support by turning it into essentially a welfare program. Of course, that's probably the whole point. Several of the individuals and organizations that have been pushing the idea of private accounts have made no bones that their ultimate goal is to get rid of Social Security and make everyone responsible for financing their own retirement. Take progressive indexing. Today, all workers' benefits rise in line with wages, which routinely increase faster than prices. Under Bush's proposal, individuals making $20,000 or less in today's dollars would continue to see their benefits rise that way. In contrast, workers earning $90,000, the top amount on which Social Security payroll taxes will be paid this year, would have their benefits frozen in real terms. That is, their benefits would reflect only increases in prices, not wages. Reducing Real Value Everyone earning between those amounts would see the real value of their benefits reduced compared with what they would receive under current law. Meanwhile, the wage base itself would continue to increase along with wages. Thus, the real payroll tax burden would rise steadily over time for higher paid workers even though the real value of their eventual benefits would be frozen. How does that square with the arguments made by proponents of private accounts? Most of the analysts who have been urging adoption of private accounts financed by a diversion of up to 4 percentage points of the payroll tax have argued that such accounts are needed because the implicit rate of return on Social Security contributions is very low. Well, for workers earning more than $20,000, the rate of return would decline under progressive indexing. Over time, returns would all but vanish for workers high on the income scale. Undermining the `Stake' Over its six-decade history, Social Security has been so successful precisely because workers at every income level -- and their families -- have had a significant stake in it. That's what Bush's proposal would undermine. Bush floated his progressive indexing proposal at an April 28 news conference. In response to a question, he described the idea as ``a part of the negotiation process. My job is to lay out an idea that I think will make the system more fair.'' Fair? With real benefits for today's $90,000 earner frozen and those for the $20,000 earner rising steadily over time, eventually every worker would get exactly the same benefit even though they would have paid vastly different amounts in payroll taxes. Does the president understand that? Certainly that outcome would sooner or later provoke a political backlash that would spell the end of Social Security. Maybe Bush doesn't understand. Look what he had to say about how a risk-averse worker could be comfortable with a private account. `Investment Options' ``In a reformed Social Security system, voluntary personal retirement accounts would offer workers a number of investment options that are simple and easy to understand,'' Bush said in his opening statement at the press conference. ``I know some Americans have reservations about investing in the stock market, so I propose that one investment option consist entirely of Treasury bonds, which are backed by the full faith and credit of the United States government,'' he said. Earlier Bush and other administration officials had also suggested balanced accounts with investments in equities, corporate bonds and government securities. Unfortunately, any purchase of Treasury securities for an account funded by diversion of a portion of the payroll tax is virtually certain to lose money. Apparently no one ever told the president that. Market Risks The reason is that under Bush's private accounts proposal any payroll tax money diverted must be repaid at retirement through a reduction in a worker's Social Security benefit, with interest charged at a 3 percent inflation-adjusted interest rate. And as economist J. Bradford DeLong of the University of California at Berkeley noted on his Web site recently, you can't earn an inflation-adjusted 3 percent on Treasury securities. For example, the yield on May 6 for a 20-year Treasury inflation-indexed note was 1.89 percent. Still, Bush is right about market risks. All three of the major stock indexes remain well below their peaks of more than five years ago. The Dow Jones industrials are off only 11 percent, while the S&P 500 is down 23 percent and the NASDQ off a whopping 61 percent. How would Congress be responding to complaints from workers whose private accounts had taken a big hit as they neared retirement? Would legislation be pending to help make those accounts whole? That's a type of risk -- a serious political risk -- that advocates of private accounts have not addressed. Having said all that, Social Security does have a long-term problem given the nation's changing demographics and the largely pay-as-you-go nature of the program. Other Alternatives Nevertheless, Social Security is nowhere near ``bankrupt,'' as Bush keeps claiming. According to the estimates on which the administration relies, the system could still pay nearly three- fourths of promised benefits once its trust fund is exhausted. More importantly, those estimates are in some regards excessively conservative, particularly in the assumptions about productivity growth and immigration. The future could easily turn out to be more favorable for Social Security than the estimates indicate. And there are a number of ways in which whatever long-term deficit it faces could be addressed without destroying the essential nature of the system. For instance, one key change favored by Federal Reserve Governor Edward M. Gramlich, who headed a Social Security advisory council a decade ago, would be to tie the eligibility age for full benefits to longevity. Additional revenue could be part of the answer as well. Even Bush hasn't ruled out increases in the wage base. And there are other suggestions, such as retaining the estate tax on very large estates and devoting the revenue to Social Security. In short, you really don't have to destroy Social Security to save it. --Editors: Ahearn, Wolfson Story illustration: For more on the Social Security debate, See {TNI SSA CNG BN <GO>}. For the Web site of the Bush administration's Social Security campaign, see <A href="http://www.strengtheningsocialsecurity.gov/" target=_blank>http://www.strengtheningsocialsecurity.gov/</A> For more on Bush and the White House, see {NI EXE BN <Go>}. To contact the writer of this column: John M. Berry in Washington at (1)(202) 624-1962 or <A href="http://us.f508.mail.yahoo.com/ym/Compose?To=jberry5@bloomberg.net&YY=84673&order=down&sort=date&pos=0&view=a&head=b">jberry5@bloomberg.net</A>. To contact the editor responsible for this column: Bill Ahearn at (1) (212) 893-4197 or <A href="http://us.f508.mail.yahoo.com/ym/Compose?To=bahearn@bloomberg.net&YY=84673&order=down&sort=date&pos=0&view=a&head=b">bahearn@bloomberg.net</A>. [TAGINFO] NI BERRY NI FX NI GOV NI POL NI US NI COS NI TAX NI EXE NI US NI ECO NI FED NI CEN NI SSA NI CNG</TT></PRE></DIV>
