Q & A
A Guide to Issues in Debate Over Social Security Report
By Glenn Kessler
Washington Post Staff Writer
Sunday, July 29, 2001; Page A08
President Bush's Social Security Commission, which is assigned to come up with a plan to add individual accounts to the old-age retirement system, issued a report on the program's future last week that was attacked by many Democrats as alarmist and unbalanced. Here is a guide to the debate.
What is Social Security?
Social Security was created in response to the pervasive poverty during the Great Depression. It is designed to provide workers with a basic level of income in retirement, as well as disability and life insurance while they work. Just over 60 percent of the 45 million beneficiaries are retired workers; the rest are disabled workers, dependents or survivors. The benefits are progressive, meaning lower-income workers get a relatively better deal than higher-income workers; however, workers making above a certain salary ($80,400 this year) don't have to pay as much of their income into the system. The benefits are inflation-adjusted, a feature that is almost impossible to find in the U.S. annuity market.
How is Social Security financed?
About 96 percent of workers must pay a certain amount of their paycheck, generally 6.2 percent, to the system, an amount that is matched by their employers. (Some state and local workers don't participate in Social Security.) Social Security is a pay-as-you-go system, which means that payments collected today are immediately used to pay benefits. Currently, more payments are being collected than are needed for benefits. So, the system is loaning the money to the U.S. government, which is using it to pay down the national debt. In exchange, Social Security receives interest-bearing Treasury securities. The value of those bonds is now about $1.2 trillion.
So what is all the fuss about?
In about 10 years, the baby boom generation will begin retiring, reducing the number of workers per retiree. Meanwhile, people are living longer and thus would collect benefits longer, while parents are not having as many children, which limits the pool of new workers. Under current projections, this means that by the middle of the next decade, payroll collections will not cover anticipated benefits, and Social Security would begin tapping its trust funds. Most experts predict the demographic, life expectancy and fertility trends will continue even after the baby boom generation passes from the scene -- though some say the assumptions are too pessimistic.
Why do some people say the trust funds have nothing but IOUs?
IOU is just a fancy way of saying bond. These bonds are backed by the full faith and credit of the U.S. government. No president or Congress would risk defaulting on these bonds because it would ruin the nation's financial standing.
But then doesn't the government have to pay for them somehow?
This is where it gets confusing. The bonds are a real asset to Social Security, but they also represent an obligation by the rest of the government. Like any entity that issues debt, such as a corporation, the government will have to make good on its obligations, generally by taking the money out of revenue, reducing expenses or issuing new debt. The action taken really depends on the resources available at the time. There is nothing particularly unusual about this, except that the U.S. government is better placed to make good on these obligations than virtually any other debt-issuer. (Consider the plight of purchasers of telecom debt who just lost their shirts.)
Why wasn't the surplus money placed in stocks or something else?
That has been an option discussed from time to time, though some people are worried about government control of corporate assets. But it's important to remember that if the $1.2 trillion now in the Social Security trust funds had been invested in some other security, not only would the value of the trust funds be subject to more volatility (last year's stock market swoon, for example), but all things being equal, the publicly held debt of the United States would be $1.2 trillion higher today. That's because for years, the Social Security surpluses were used to help fund government operations, thus reducing the overall budget deficit, and now are being used to pay down the national debt.
If we've paid off the national debt, what would be wrong with issuing new debt once benefits exceed tax revenue?
There is nothing fundamentally wrong, especially since the national debt is lower today than if Social Security had not been running surpluses. But issuing new debt is a choice with certain consequences. It is one thing to issue debt to build schools; it is another thing to build up debt to finance the expenses of the elderly. Every time the government issues new debt to facilitate consumption, it crowds out capital formation and ultimately passes on a smaller economy to future generations. So policymakers will have to decide whether it is more important to worry about people alive 20 years from now or people 50 years from now. Some believe future generations will be richer and more productive, and thus able to afford the bill. In the end, the ability to pay benefits will be determined by how big the economy is at the time, not necessarily what kinds of assets are held by Social Security.
Would creating individual accounts also require more debt?
Yes. If the accounts are funded out of existing payroll taxes, which is favored by President Bush, then creating the accounts would require Social Security to tap the trust fund even sooner. That is because the system would need to keep paying current beneficiaries, while also funding nascent accounts for people who likely will not retire for decades. If no new source of revenue is added, some sort of loan, potentially worth trillions of dollars, may be needed to help bridge the financing gap in the early decades of the program.
Are there other ways to deal with a financing gap in Social Security?
In the past, payroll taxes have been increased and benefits have been reduced (such as raising the retirement age). President Bush has ruled out any increase in taxes. Participants in an individual-account program likely would be required to accept some benefit cuts to help reduce the transition costs.
It seems like I put a lot of money into Social Security and won't get a lot back.
You are not only paying for retirement benefits, but also disability and life insurance. Moreover, wealthier people are helping subsidize poorer workers. We also are paying for the fact that as the system was set up and expanded, earlier generations of retirees got much more in benefits than they contributed in payroll taxes. The rate of return earned by the Treasury bonds in the trust funds is pretty good. But to talk about the rate of return for individual workers is a bit misleading because Social Security was never intended to generate wealth, but rather to supply an income floor.
Would a plan that included individual accounts give me more in benefits than under the current system?
That's unclear. It really would depend on whether the investments over time would exceed the benefit reductions necessary to bring the traditional system into balance. Also, administrative costs are sure to be higher in an individual-account system, reducing the overall return. Finally, upon retirement, a worker likely would trade in his investment portfolio for an annuity. The payout of that annuity would depend on whether the worker wants the annuity to terminate payments at death or continue making payments to heirs.
Quickly, what is the nub of the political dispute over the Commission report?
The Commission report argued that Social Security is fundamen- tally broken and therefore needs to be restructured into a system that includes individual accounts. The goal is to create a presumption that if nothing is done, any financial imbalance will result in lower benefits. Thus reform plans could be described as increasing benefits relative to this lower benefit standard. Most Democrats by contrast have argued that the system needs only a bit of tinkering. Moreover, they want to create a presumption that legislatively-mandated benefits will be maintained if it becomes necessary to bridge the gap between benefits and revenue. They want to evaluate reform plans against the current benefit package and thus hold the eventual Bush plan to a higher standard.
© 2001 The Washington Post Company