You cannot go anywhere these days without hearing about Social Security. In the first two weeks of March, the New York Times ran more than 50 articles on it. President Bush barnstorms across the country promoting his ideas, while Democrats hold rallies to oppose them. People, such as New Yorker Beatrice Williams Rude, email their stories about Social Security to blogs. She told of her parents who, despite being knowledgeable investors, saw their savings dwindle in the 1980s. “But Social Security was there” and her parents “never stopped blessing FDR for Social Security: retirement with dignity.”
And hundreds of New Yorkers â€“ many of them decades from retirement â€“ packed an auditorium at the New York Ethical Culture Society last week â€“ to cheer, boo and whistle as experts debated the future of a program that, in one way or another, affects almost all Americans.
About 47 million Americans, including 673,000 New York City retirees, receive Social Security. Millions of New Yorkers and other Americans have Social Security taxes deducted from their paychecks and hope to collect benefits some day.
So it is not surprising that any effort to change the program would spark interest and strong emotions. To make the debate even more vehement, there is little common ground here. People disagree over what Social Security is â€“ a pension fund or an insurance program to guarantee some degree of economic security for all. Americans argue over the proper role of government in insuring a decent retirement. They differ over the magnitude of the financial problems confronting Social Security. And they have bitter differences over the best approach to solving the problem â€“ whatever the problem might be.
President Bush has declared Social Security to be in crisis and has made changing the system the focus of domestic policy in his second term. He has argued that the system will be “bankrupt” by 2042 and needs to be fixed “now once and for all.” Bush has pulled out all the stops in pushing for voluntary private accounts where people could put some of the money that goes into Social Security.
But -â€“ and this indicates just how convoluted this whole debate has become -- even the White House admits private accounts will not solve Social Security’s financial problems.
Beyond the discussions of money, this is a political and ideological battle. Bush sees the private accounts as key to creating his “ownership society,” where patients control their health care, parents control their children's education, and workers control their retirement savings.
In a memo written earlier this year, Peter Wehner, a White House aide, called the debate about Social Security “a monumental clash of ideas.” “If we succeed in reforming Social Security, it will rank as one of the most significant conservative governing achievements ever,” he said, emphasizing, “we consider our Social Security reform not simply an economic challenge, but a moral goal and a moral good.”
Opponents see the Bush administration proposal as a dangerous effort to destroy the remaining vestiges of the New Deal and to weaken a program that has kept millions of senior citizens and others out of poverty.
“Our society has decided that everybody â€“ the elderly, the disabled, orphans, and surviving spouses â€“ is morally equal, and â€¦ deserves the peace of mind that is implied by the term â€social security,’” Dan Cantor of the New York Working Families Party wrote recently. “This is moral progress, and Bush is on the other side.”
Democrats and labor unions have launched an all-out attack on the private accounts. They have not, however, agreed on a proposal to solve whatever fiscal problems confront the system. Meanwhile, the public is left trying to sort it all out.
â€˘ HOW IT WORKS
â€˘ THE NEW YORK CONNECTION
â€˘ DEFINING THE PROBLEM
â€˘ PRIVATE ACCOUNTS
â€˘ THE SOLVENCY PROBLEM
â€˘ THE OTHER DEFICITS
â€˘ THE POLITICS
â€˘ A WALL STREET BOOM?
HOW IT WORKS
To finance Social Security, workers pay a tax of 6.2 percent on their earnings up to $90,0000. Their employers pay an equal amount. Though some people still think the money that workers pay in Social Security taxes today is squirreled away for them until they are ready to retire in the future, in fact the money collected today is spent today; it goes to make monthly payments to today’s beneficiaries. (Retirees of the future are supposed to be paid by Social Security taxes collected from workers of the future.) This is sometimes referred to as pay-as-you-go.
Most people receiving Social Security are retirees and their spouses, but benefits also go out to 7 million disabled workers and their dependents and 7 million survivors of deceased workers. In 2004, individual retirees received an average Social Security benefit of $922 a month, with married couples getting an average of $1,523.
Today's "Pay-As-You-Go" Social Security System
Illustration from Cato Institute's A Community Leader's Guide to Social Security Choice
For about two thirds of beneficiaries, Social Security provides at least 50 percent of their incomes. For about 20 percent, it accounts for virtually all their income. A new study by the Center for Budget and Policy Priorities found that without Social Security, 44.4 percent of senior citizens in New York State would have incomes below the poverty line. With Social Security, the number drops to 8.4 percent, meaning that Social Security keeps almost 900,000 New Yorkers out of poverty.
The size of the monthly check depends upon how much money a person paid into the system, which, in turn, is based on how much the person earned and how long he or she worked.
A person who spent years at a high-paying job will get a larger check than someone who earned a low wage, but because the government intended that Social Security keep elderly and disabled people out of poverty, the less affluent get a higher rate of return on the money they put into Social Security than richer Americans. According to figures compiled by the Century Foundation, low-wage workers who retired at 65 in 2004 received Social Security checks equivalent to almost 85 percent of their wages; people who earned higher salaries saw only 45 percent of their wages replaced by Social Security.
And because the checks keep coming from retirement to death, people who live longer -- or whose spouses live longer -- do better with Social Security than those who die shortly after retiring. The government adjusts the benefits to keep pace with inflation.
Social Security operates through the federal budget, but the Social Security Trust Fund is a distinct entity. When there is a surplus â€“- when more money is coming in in payroll taxes than going out in benefits -â€“ it is credited to the Social Security Trust Fund. The federal government borrows the money to pay for other programs and must then pay the Trust Fund back with interest. This year, for example, the money left over from Social Security reduced the current federal budget deficit by more than $170 billion. The federal debt held by the Trust Fund is currently about $1.8 trillion.
So even though Social Security’s revenue will fall short of benefits in 2018, Social Security can fill that gap with the money the federal government owes to the Trust Fund until 2042. It is then, when the Trust Fund is depleted, that the president says the Social Security system will be “bankrupt.”
THE NEW YORK CONNECTION
The idea for such a Social Security system came largely from three New Yorkers in the 1930s: President Franklin Roosevelt, Senator Robert Wagner, and Labor Secretary Frances Perkins, according to Maura Moynihan, daughter of the late New York Senator Daniel Patrick Moynihan. Some 50 years later, Senator Moynihan, along with Republican Senator Robert Dole of Kansas, spearheaded the 1983 adjustments to Social Security that saved the system from imminent collapse by reducing some benefits, gradually increasing the retirement age from 65 to 67, hiking some taxes and delaying cost of living increases.
This year, Representative Charles Rangel of New York has emerged as a key opponent of the president’s plan because of his position as the senior Democrat on the House Ways and Means Committee, which will have to review any legislation on Social Security. And, when Democrats kicked off their offensive in the hottest domestic political fight of the year, they came to Pace University in New York City. New York Senator Hillary Clinton sponsored the rally where New York’s other senator, Charles Schumer, also spoke.
But not all New Yorkers agree with them. Some members of one of the city’s leading industries â€“ the securities industry â€“ hope the president’s plan for Social Security will pump more money into stocks and provide billions in fees for some investment firms.
DEFINING THE PROBLEM
To spur his proposed changes, the president has painted a frightening scenario for Social Security’s future. According to the White House, in 2018, the government will begin to pay out more in Social Security benefits than it collects in payroll taxes. Unless the government takes action, by 2027, the shortfall will reach $200 billion a year and, by 2042 â€“- when today’s 28-year-olds reach 65 -- the system will be bankrupt.
With birth rates down and the baby boom generation retiring, 21st century workers simply cannot keep up with the demand for benefits, the administration says. In 1950, each Social Security recipient was supported by the Social Security taxes collected from 16 workers. Today's Social Security recipient depends on only 3.3 workers.
“If we do not act to fix Social Security now, the only solutions will be dramatically higher taxes, massive new borrowing or sudden and severe cuts in Social Security benefits or other government programs,” the president has said.
But many of Bush’s critics dismiss such dire predictions. “The most successful safety net program in human history is currently sitting on $1.7 trillion in reserve funds and faces a possible shortfall decades from now, which minor corrections to the program could prevent,” wrote Robert Scheer in The Nation.
The president has made private accounts the linchpin of his plan for Social Security.
Under this proposal, workers would eventually be able to take the 4 percent of their incomes that is subject to payroll taxes and put it in private accounts, instead of the Social Security. There might be a choice of funds, all run by professional money managers, that would put the money into some combination of stocks and bonds.
The plan would begin in 2009 with workers able to invest up to $1,000 in the private accounts. That would rise by about $100 a year until, after 26 years, it would reach its maximum â€“- $3,600 a year (in today’s dollars). Current retirees and workers aged 55 and over would not be affected.
Many details have yet to be determined, including how the funds would be managed, how many funds would be offered, and what if any the fees would be. The president’s plan does not set out a social safety net, though many of the bills proposed in Congress do. And it does not address how Social Security would handle benefits for people other than retirees -- for disabled workers or survivors of deceased workers.
The plan also presents daunting logistical challenges. “Any system that includes private accounts would require a massive effort to educate the public, enroll workers and answer what experts say could be hundreds of millions of questions,” Tom Lauricella wrote in the Wall Street Journal. “Computer systems to track contributions would have to be designed and built. Money would have to be collected and allocated. And the system would have to be policed for errors to ensure that workers get every penny they are due.”
For the next 45 to 55 years, private accounts could exacerbate Social Security’s fiscal problems. The money that working Americans put into private accounts will not be available to pay retirees’ benefits, since it will not go into the Trust Fund. That will require the government to borrow more money -- trillions some say -- to fill the gap.
Supporters of private accounts say that the government will have to spend huge amounts of money -- either in general funds or from government bonds -- on Social Security in any event. Paying the money to move to private accounts, argues the Heritage Foundation, would be more cost effective in the long run “than to continue to fund the system as it is currently designed.”
With private accounts, future Social Security benefit levels become unpredictable. The amount of money diverted to the private funds and the cost of borrowing money to fill the gap during the transition to personal accounts would reduce the size of the Trust Fund.
Then there is the biggest unknown: What return will people earn on their private accounts? Some have estimated that workers would have to get more than 3 percent (after inflation) to do better than they would do under the current system.
According to Paul Krugman, an economics professor at Princeton University and columnist for the New York Times, most privatization advocates assume over time a 7 percent return, after an inflation adjustment of 3 percent. In that case, retirees with private accounts would come out ahead.
Getting an account that makes financial sense is “not a slam dunk, but it ought to be attainable,” wrote Newsweek Wall Street editor Allan Sloan. But the accounts have other hitches, Sloan says. You would own them, but not control them (for example, you could not withdraw from them before retirement), and the money paid into these accounts would reduce the size of your conventional Social Security benefit.
Publications by an array of organizations stake out different sides in the heated debate over the future of Social Securit
New York Senator Chuck Schumer has sought to dramatize the risk. His web site allows New Yorkers to compare their retirement benefits under the Bush plan with those under the current system (in inflation-adjusted 2005 dollars).
So, for example, a 40-year old with an average salary of $60,000 who would receive an annual benefit of $23,832 under the current system, and an annual benefit of $19,598 -- an 18 percent cut -- from the Bush plan. To make such calculations, Schumer assumes (In PDF Format) that the private accounts would get an annual return of 3 percent above inflation. A higher rate would produce additional benefits.
The debate over private accounts involves differing ideas of government’s proper role and of what Social Security is. Proponents of private accounts argue that individual Americans should have more control of their retirement funds and should be able to pass their unused retirement funds on to their heirs.
“Social Security turns us all into supplicants,” Michael Tanner of the Cato Institute said at the Ethical Culture Society debate. Private accounts, he said, would provide “a system in which middle and low income people can create a nest egg of real inheritable wealth....It’s about time we gave the doorman the same opportunity to invest as the person who lives in the duplex above.”
But that misses the purpose of Social Security, Krugman countered. “Social Security is not a pension fund, not an investment fund but a social insurance program,” he said
THE SOLVENCY PROBLEM
Whatever else private accounts may â€“ or may not — do, they do not address Social Security’s fiscal health for much of the 21st century. "Personal accounts do not solve the issue," Bush said at his press conference last week.
A number of suggestions have been made about how to do that. They include:
--Limiting benefits for wealthy retirees: Currently a person’s overall wealth has nothing to do with the benefit he or she receives. Some people have suggested changing this, with the president indicating he would consider it.
--Other benefit cuts: Currently, Social Security benefits rise along with wages. Some experts have suggested that the increase instead be tied to rises in prices, which tend to go up more slowly than wages. This could reportedly take care of the solvency problem single-handedly but would also reduce benefits. According to calculations by Representative Anthony Weiner, this would gradually erode the size of benefit checks. The average 48-year-old New Yorker, who can now expect $940 a month, would get only $846. And younger workers would do worse: 18-year-old New Yorkers would see their benefits drop by a third â€“ from an average of $940 to $640 a month.
--Increasing the retirement age: Senator Charles Hagel, an influential Republican and supporter of private accounts, has urged raising the retirement age from 67 to 68 in 2023, largely on the grounds that people live longer now than they did in the 1930s. Opponents of older retirement, such as the influential senior group AARP argue that such a move would disproportionately affect African-American workers, (in pdf format) who have lower life expectancies than whites. They also point out that just because people live longer does not mean they can work longer. Older workers may be unable to do physically demanding work and often face age discrimination that can prevent them from getting or keeping jobs.
--Raising the “wage cap”: Workers and employers only pay Social Security payroll taxes on the first $90,000 of earnings. This creates a maximum tax -- for the worker and employer -â€“ of $5,580 a year. If the cap went up to $140,000, those making that much would have to shell out another $3,100 in payroll taxes. New Yorkers would be disproportionately affected by such a change since salaries tend to be higher here.
-- Increasing the payroll tax rate. A rise of only 7 percent -- from 6.2 percent to 6.65 percent for both employees and employers -- would allow Social Security to pay all its promised benefits at least until 2075, Robert McIntyre of Citizens for Tax Justice has written. But many supporters of lower taxes oppose hikes in either the payroll tax or in the wage cap.
--Investing revenues more profitably: Under federal law, Social Security can invest its funds only in securities issued or guaranteed by the federal government or guaranteed by the federal government. Some groups, such as AARP, have argued that a portion of Social Security funds could be invested more profitably.
THE OTHER DEFICITS
Some observers, notably Democrats, think the whole focus on the fiscal problems of Social Security is misguided at a time of massive federal deficits.
The White House has predicted that the deficit this year will rise to $427 billion. Some experts expect deficits could be far greater after Bush leaves office in 2009 because of tax cuts, the new Medicare prescription drug benefit and, if it passes, his proposal for private Social Security accounts. The Center for Budget and Policy Priorities predicts the Bush tax cuts and the Medicare prescription drug benefit will cost $19.2 trillion through 2078.
"Medicaid expenses in almost every state exceed that state's expenditure on public education: that is a crisis. Medicare has a life expectancy as a program of only about 15 years. So if you want to talk about real crises that the White House should be addressing, you'd start with those two programs,” Democratic Senator Richard Durbin of Illinois has said.
But Senator Rick Santorum of Pennsylvania, a Republican, said it makes sense to take on Social Security first â€“ because it is so much easier to fix that than the health-care programs.
What is missing is a comprehensive plan to control the annual federal budget deficits. As another recent study (In PDF Format) has noted, deficit-reduction plans in 1990 (under a Republican president) and in 1993 (under a Democrat) raised taxes and cut spending. Both were key to the budget surpluses of the late 1990s. No similar move seems underway today.
So far, the public does not seem to buy the conservatives’ arguments for private accounts. A Washington Post-ABC News poll conducted earlier this month found that only 35 percent of those responding approved of Bush’s handling of Social Security, and 58 percent said that the more they heard of his proposal the less they liked it. Two-thirds of them, did, however agree with Bush that Social Security is headed for a crisis.
New Yorkers appear wary of private accounts, according to a poll (in pdf format) conducted last month by the School of Industrial and Labor Relations at Cornell University. Overall, 51 percent of New Yorkers oppose private accounts with 36 percent supporting the idea and the rest undecided. Among so-called Downstate New Yorkers â€“ those living in New York City, Long Island and Westchester â€“ results were more pronounced, with 54 percent opposing the private accounts and only 32 percent supporting them.
Most, if not all, state Democrats adamantly oppose the private accounts, and the one Republican member of New York City’s congressional delegation, Vito Fossella, has reserved judgment. “There are 100 moving parts to Social Security,” his aide, Craig Donner, told the New York Sun. “The White House said that personal accounts by themselves don’t ensure solvency. You have to see what the other 99 parts are before you an judge the plan.”
But even if Bush stumbles badly on this â€“ Democrats fantasize that it could have the same devastating effect on congressional Republicans that the failed Clinton health plan had on congressional Democrats -- the Social Security debate presents hazards for Democrats. The party and many of its members have resisted presenting any solution of their own for Social Security’s problems. “To say there is no problem simply puts Democrats out of the conversation for the great majority of this country,” Democratic political strategists Stan Greenberg and James Carville have written. “Voters are looking for reform, change and new ideas, but Democrats seem stuck in concrete.”
A WALL STREET BOOM?
Regardless of what one thinks about the merits of the plan, if it passed, would it be good for New York? After all, the private accounts will be invested, and New York is the home to the nation’s financial industry. Increased business on Wall Street means more jobs, more salaries and bonuses for workers in the financial industry -- and more tax revenues for the city and the state.
University of Chicago economist Austan Goolsbee predicted(in pdf format) that fees on the accounts would bring Wall Street an additional $940 billion over the next 75 years, "the largest windfall gain in American financial history.” The Bush administration has disputed Goolsbee’s numbers, saying that the accounts would be managed by the federal government, avoiding such high fees.
And a report (in pdf format) by the Security Industry Association last year concluded that “ rather than a â€free lunch,’ Wall Street will realize only modest gains from these accounts.”
Even investment firms that see a big opportunity in the private accounts are soft peddling their support for them, afraid that their support would do more harm than good. "It could be wrongly used against advocates of reform, " Edward L. Yingling, incoming president of the American Bankers Association has said. And they worry about reprisals from unions, which adamantly oppose the accounts and could withdraw their huge pension funds from pro Bush firms.
But Tanner of the Cato Institute said that fees to Wall Street are not the issue. "The question is whether we're giving young workers more of a return [on investment] than they'll be getting today," he told the Washington Post.
For now, the dream of a Wall Street windfall has not swayed one influential New York billionaire and Republican. “I've never thought that privatizing Social Security made a lot of sense," Mayor Michael Bloomberg told reporters "I think what you'd see is that people would invest - some people would invest - unwisely....These are not monies that people should be speculating with."
FOR MORE INFORMATION
The organization of older American opposes private accounts and cuts in benefits. Its web site includes information on Social Security
Cato Institute Project on Social Security Choice
The web site for the libertarian think tank that has been a major force in the push for private accounts.
Democracy for America
The organization, which grew out of Howard Dean’s unsuccessful presidential campaign, offers people the chance to read and submit stories about how Social Security has affected their lives.
Economic Policy Institute
A Guide to Social Security by a group that works to “promote a prosperous, fair, and sustainable economy.”
New Yorkers United to Protect Social Security
A campaign to urge Republican members of Congress from New York to oppose private accounts.
Social Security Choice
A project of the Club for Growth, this group advocate private accounts.
Social Security Online
The official web site of the federal Social Security Administration.
The Social Security Network
A project of the Century Foundation with arguments against private accounts, reports and links t9o news articles.
Strengthening Social Security
The official White House web site on Social Security
Bush's House Of Cards: The Privatization Fraud
Articles from American Prospect on Social Security and President Bush’s plan for private accounts.
Civic Elite Bets Social Security Loophole Loots
Some New Yorkers -- including four City Council members --already have private accounts.
American’s Senior Moment
Paul Krugman’s essay in the New York Review of Books looks at the demographic and fiscal problems facing Social Security and the country as a whole.
Q&A: The great Social Security debateÂ