As Pres. Bush makes his tour dates to preach his foolishness, the Senate seems to understand what the real issues are. Rather pathetic that GWB thinks this is a polaroid moment. Duhhhh....
Politicians to take a hit with any benefits fix
Fri Mar 18, 6:13 AM ET
Politics - USATODAY.com
By Dennis Cauchon, USA TODAY
Federal Reserve Chairman Alan Greenspan) said this week that Social Security "is not a hugely difficult problem to solve."
Senators passed a resolution 100-0 the same day calling on themselves to work together to solve the financial problems confronting the nation's retirement program.
So why the trouble getting anything done? The math is easy. The politics are hard. No matter what the fix, Americans will pay more or get less - possibly both.
"Politicians aren't sure what to do. They're looking for the answer that upsets the fewest voters the least," says Jennifer Duffy, managing editor of The Cook Political Report, a non-partisan newsletter that covers politics. "Tinkering with Social Security has always been politically damaging."
President Bush started a debate in January when he proposed allowing younger workers to divert some of their Social Security taxes into private investment accounts. The discussion has expanded to include a wide range of proposed solutions. All are variations on the same theme: raise taxes or cut benefits. But they vary dramatically in who gets hurt and the political repercussions that may follow.
The financial effects of the proposed changes are clear. Last month, Social Security actuaries estimated how 18 proposals would affect the program's long-term financial health.
Social Security faces a $3.7 trillion shortfall over the next 75 years caused by the retirements of 79 million baby boomers, starting in 2008. That means the benefits paid in future years will exceed the amount of Social Security payroll taxes that finance the program.
"Raising the retirement age and many other options are on the table now that weren't under consideration six months ago," says Maya MacGuineas, fiscal policy director at the New America Foundation, a think tank. "That's a healthy development."
Among the major options:
•Raising the retirement age. A one-year increase in the full retirement age amounts to a 7% cut in lifetime benefits. The full retirement age for 62-year-olds who qualify for Social Security this year is 66, but they can retire early at a reduced monthly benefit. The age for full retirement will rise gradually to 67 in 2022. About 75% of Americans begin receiving Social Security before they reach the full retirement age. The benefit increases slightly each month people delay retirement.
If the full retirement age were increased to 70, Social Security's long-term deficit would be reduced 36%-68%, depending on how fast the change was made and whether the age continued to rise with life expectancies.
"Politically, it would be very difficult to cut everyone's benefit by 7%," says Ron Gebhardtsbauer, a Social Security expert for the American Academy of Actuaries. "But you can get the same result by raising the retirement age, and it still lets people choose their benefit level by deciding when they retire."
Raising the retirement age also leaves Social Security benefits for the disabled untouched, he says.
•Changing the formula used to compute benefits. Social Security now bases benefits on a formula that considers a worker's 35 highest-earning years. Changing this to 40 years - essentially adding 5 low-income years to the calculation - would cut benefits about 4% for new retirees. That would shave 22% off Social Security's long-term shortfall.
The most substantial proposal would base a retiree's initial benefit on a formula that uses inflation, rather than wage growth. This change would wipe out the entire shortfall. Inflation is, on average, about 1 percentage point less than wage growth. Benefits would still increase, but about 1% less per year than under the current formula.
People retiring in the first year after such a change would get a starting benefit 1% less. For example, a person entitled to a $1,000 monthly benefit under the current formula would get $990 instead - or 1% less. A person with the same wage history who retired 10 years after the change would get a starting benefit of $1,305 a month under the inflation-adjusted formula, rather than $1,466 under the wage-growth formula - 10% less than the current formula. All retirees would still get annual cost-of-living increases as they do now.
President Bush's Commission to Strengthen Social Security, created in 2001, listed this as an option in a combination with private accounts.
The United Kingdom made the change in the 1980s, and it has improved the financial health of that country's pension program, Gebhardtsbauer says. But it has brought criticism that benefits are now inadequate, he says.
• Increasing the amount of income subject to the Social Security tax. The Social Security payroll tax of 12.4% will be levied on the first $90,000 of income in 2005. The amount rises annually with inflation. About 16% of all wages are untaxed.
An ABC/Washington Post poll this week showed that raising the cap on taxable wages is the most popular option to improve Social Security's finances. President Bush says he will consider it, but Republican leaders in the House of Representatives have ruled it out. The president and congressional leaders have ruled out raising the Social Security tax rate.
The AARP, a lobbying group for people 50 and older, says 43% of the system's deficit would be eliminated by raising the taxable income limit to $140,000. Actuaries say 93% would be eliminated if the cap were removed entirely.
One problem: Social Security bases benefits on a retiree's income that is subject to the Social Security tax.
"The taxable limit is there partly so Social Security doesn't have to cut $100,000 monthly checks to Bill Gates, Warren Buffett and Donald Trump," says David John, a Social Security expert for the conservative Heritage Foundation in Washington.
Sen. Edward Kennedy, D-Mass., and other liberals oppose denying benefits to the affluent because they fear it will change the image of Social Security from a quasi-pension system to a welfare program. That could diminish its broad political support.
Congress has other ways to make the wealthy pay more or get less. It could increase the amount of Social Security benefits subject to the federal income tax. It could change the benefit formula so that higher wages earn less credit for benefits than now.
MacGuineas of the New America Foundation says cutting benefits for the wealthy isn't enough to fix the program. Benefit cuts would have to extend to people who earn $50,000 to $100,000 to make the program sound.
"The fiscal crisis for the whole government revolves around middle class entitlements," MacGuineas says.
She says it would be a mistake to lift the Social Security tax limit without creating private accounts or reforming the way benefits are computed.
Social Security actuaries, in their report, count on Congress repaying $1.7 trillion borrowed from the program's trust fund to pay for other government programs such as defense and education. But the report does not speculate how that money will be raised.
"Voters want the Social Security problem solved - as long as it doesn't affect their lives in any way," political analyst Duffy says. "Legislators have a hard time pleasing voters who want it all."
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