Friday, December 03, 2004

Warning on Social Security

The New York Times
December 3, 2004

From Bush Aide, Warning on Social Security

WASHINGTON, Dec. 2 - Calling the current system of Social Security benefits unsustainable, a top economic adviser to President Bush on Thursday strongly implied that any overhaul of the system would have to include major cuts in guaranteed benefits for future retirees.

"Let me state clearly that there are no free lunches here," said N. Gregory Mankiw, chairman of the Council of Economic Advisers, at a conference on tax policy here.

"The benefits now scheduled for future generations under current law are not sustainable given the projected path of payroll tax revenue," he added. "They are empty promises."

Mr. Mankiw's remarks suggested that President Bush's plan to let people put some of their Social Security taxes into "personal savings accounts" would have to be accompanied by changes in the current system of benefits.

Throughout the presidential campaign and in remarks after he was re-elected, Mr. Bush focused almost exclusively on these accounts as a crucial way to shore up Social Security. Most experts have said that the accounts must be accompanied by other belt-tightening measures. When asked about cuts in future benefits, Mr. Bush, however, has said only that any overhaul should make no changes in the benefits for people in retirement or near retirement. The president has said that overhauling the Social Security system would involve "costs," but so far he has not indicated what those might be.

In his speech, Mr. Mankiw flatly rejected raising taxes as a means of saving the federal retirement system, which government actuaries say is on track to become insolvent by 2042 if no changes are made to the current law. Instead, he took particular aim at a specific feature of current law under which retirement benefits are linked to the rise in wages rather than the rise in consumer prices.

"Each generation of retirees receives higher real benefits than the generation before it," Mr. Mankiw said. Because wages typically climb faster than inflation, he said, an average worker retiring in 2050 would get benefits that are 40 percent higher, after inflation, than a comparable worker who retires this year.

Mr. Mankiw emphasized that Mr. Bush has yet to decide on a specific proposal for fixing Social Security, except that it would have to include personal accounts and that it would not include raising taxes. But the issue he highlighted is at the center of a major debate within the administration and among Congressional Republicans.

Policy analysts say changing the way benefits are calculated could save trillions of dollars in decades to come. But it would imply significant reductions from the benefits promised under today's laws. The idea behind personal accounts is that workers, by making investments in stocks and bonds, could more than make up the difference with extra earnings.

In what seemed an effort to anticipate complaints that a new system would reduce future benefits, Mr. Mankiw warned that the benefits promised under current law are fictitious because they cannot be afforded.

"Be wary of comparisons between a new, reformed Social Security system and current law," Mr. Mankiw said. "Unless a listener is discerning, empty promises will always have a superficial appeal."

Claire Buchan, a White House spokeswoman, said Mr. Bush had not decided on a specific plan and refused to comment on any need for reductions in future benefits.

"The president is committed to strengthening Social Security for younger workers so they don't face the massive tax increases or benefit reductions that are certain with inaction," Ms. Buchan said.

The specific issue that Mr. Mankiw highlighted on Thursday, though seemingly obscure, involves the level at which a person's initial benefit is set at the time he or she retires. Under the current formula, which was established by Congress in 1978, the annual benefit is pegged to increases in average wages while the person was working.

The idea was to keep retirement incomes in line with overall wages from generation to generation, and analysts said the formula was far more generous than simply pegging benefits to inflation.

Kent Smetters, a former Treasury official under President Bush who is now an associate professor at the Wharton School of Business, said linking benefits to inflation would in itself save trillions of dollars. But Professor Smetters said the idea was not as tame as it sounded. Although retirement incomes would not be eroded by inflation, the guaranteed benefits of retired people would be lower, and lower than average incomes, as time went on.