Bush Makes Social Security Centerpiece of State of the Union

When President Bush addressed Congress and the nation on the evening of Feb. 2, he devoted much of his address to his proposed changes to Social Security, yet declined to provide the American people with details regarding exactly which reforms he plans to pursue. Many believe this strategy is to avoid what President Clinton faced when he tried to reform health care a decade ago. Clinton had submitted a heavily detailed proposal to members of Congress, who were then able to pick it apart and subsequently defeat it. Bush’s deliberate vagueness allows him to sell his plan to the nation conceptually, while leaving us to guess what the true consequences of his reforms might be.

President Bush began his discussion of Social Security with a laundry list of statistics about the system and where it is heading if nothing is done about it. While stating the facts Bush used some potentially misleading rhetoric. He said, “by the year 2042, the entire system [will] be exhausted and bankrupt.” The words “exhausted and bankrupt” do not accurately describe the situation. The White House’s own Social Security Trustees have predicted a 27 percent benefits cut by the year 2042 if no reforms to the program are passed. The nonpartisan Congressional Budget Office (CBO) has predicted a 22 percent benefits cut by the year 2052 if no reforms are passed. This one-quarter cut to benefits is not the same as “exhausted and bankrupt.” By then our surplus will be exhausted, not the entire trust fund.

Bush used these words to make the situation appear more dire than it actually is and to gain more support for his plan to overhaul what is, in fact, a financially sound program. [1] Additionally, the projected cuts do not come close to the size of the cuts projected if future workers participate in private accounts in an economy seriously burdened with debt. (For details on the subject see this recent report [2] from the Center on Budget and Policy Priorities.)

While discussing the future of Social Security, Bush went into detail regarding the shortfall that lies ahead. He said, “For example, in the year 2027, the government will somehow have to come up with an extra $200 billion to keep the system afloat - and by 2033, the annual shortfall will be more than $300 billion.” These numbers may be accurate, however the context in which Bush used them is misleading. To begin with, the shortfall created by Bush’s 2001 and 2003 tax cuts is significantly larger than any Social Security could create. In fact, in 2027, the tax cuts are projected to cost approximately $345 billion, and in 2033, $375 billion. The Social Security shortfall “crisis” could easily be avoided if this administration had more fiscally responsible tax policies. Secondly, by proposing to divert revenue from Social Security to private accounts, the president will end up adding approximately $100 billion to the amount of the shortfall by decreasing the amount of money available in the general fund needed to pay out benefits.

In discussing solutions, the president noted many options were on the table regarding which plans to pursue. He mentioned eliminating Social Security payments to the wealthy and invoked ideas supported in the past by Democrats such as the late Sen. Daniel Patrick Moynihan of New York. After listing a number of ideas, however, Bush spent a good deal of time discussing the benefits of personal accounts. The few details he provided included that he will never raise payroll taxes to address the upcoming shortfall, unlike President Reagan who surprisingly did in 1983. Instead, Bush said he supports a plan which would divert 4 percent of income — about 35 percent of the amount of personal funds currently going towards the payroll tax — into private accounts to be invested in stocks, bonds and mutual funds. The 4 percentage points outlined by Bush are in fact almost two-thirds of the 6.2 percent currently paid by workers into the system. The ideology behind this proposal is that investment as opposed to taxes could potentially yield higher returns for some beneficiaries as well as avoid a shortfall by moving a chunk of the payments from government funds to private stocks and bonds.

This plan fails to take into account two major details. One is that moving this money from government revenue to financial markets adds an extreme level of risk to the amount of money recipients will end up collecting. Social Security money is currently invested in government bonds, which are risk-free. Moving that investment to the financial markets opens the door to the possibility that people will collect less than they would under our current, straightforward social insurance program. Secondly, there has been little discussion of the fact that diverting revenue from taxes going to the government to financial markets significantly impacts the ability of the government to continue to pay Social Security benefits. A shortfall in these funds would mean that the date at which Social Security benefits are scheduled to exceed payments will come sooner.

According to the CBO, in the year 2020, tax revenues will no longer be sufficient to pay benefits and the program will have to start using interest it has accrued on the trust fund. If significant levels of revenue are diverted from the trust fund beginning in 2009, this date will move up to 2012, as estimated by the Center on Budget and Policy Priorities. The projected shortfall that Bush claims to fear so greatly would occur significantly sooner under his plan.

Senate Democrats did respond to the comments Bush made about Social Security in the State of the Union address. All but one signed onto a letter to the president addressing the problems they see. The letter stated, “According to most estimates, setting aside 4 percentage points of the 12.4 percent Social Security payroll tax — nearly one-third of the tax — would require the government to borrow close to $2 trillion over the next 10 years in order to pay scheduled benefits to current and near-retirees. Adding this borrowing to the policy changes above would bring the per capita share of the debt to close to $30,000 by 2015, the end of the ten-year budget window.”

The senators make an important point in their letter. If 6.2 percent of workers’ incomes are currently going towards general national revenue, and then 4 percent is diverted to the private sector, the government loses out on a large sum of money that otherwise would have been there. This accounts for the high level of debt that many predict such a policy will create. If the plan goes into effect in 2009, from that year until 2018, the plan is expected to generate $1.3 trillion worth of debt for the American people. From 2019–2028, it would cost an extra $3.3 trillion. Bush and others who support private investment accounts have made it clear they are pursuing these reforms because the retirement security of their children and grandchildren depend on it, not to mention the solvency of Social Security.

Bush has said, “Leaving our children with such a mess would be a generational betrayal.” But personal investment accounts in place of guaranteed, government-funded benefits will provide neither security nor solvency. They will instead further lead the program towards bankruptcy, all while placing trillions of dollars worth of debt onto the shoulders of the next generation. When Bush and GOP members of Congress discuss “doing this for the children,” remember this: Their irresponsible fiscal policies are putting “their children” further into debt. If Bush succeeds in reforming Social Security in the way he wants, every child born in this country starting in 2015 will be born $30,000 in debt.

It is no secret America’s economic system does not provide equally, adequately or even fairly for all. The existence of a viable safety net is necessary to ensure millions of citizens are able to live their lives with a basic level of quality and dignity. There are many questions the administration and Congress should ponder in deciding whether to dismantle Social Security in favor of private investment accounts.

For more on this topic, see:

• Democrats Take Aim at Social Security Proposal [3]
• Introducing Private Investments to the Safety Net [4]
• Bush Puts Much of Legacy on the Line With Social Security Plan [5]
• Credibility Deficit [6]
• CBO report [7] on long-term projections for Social Security
• An analysis [8] of how Bush’s numbers are misleading, from the Center on Budget and Policy Priorities.