Investor's Business Daily
Monday, May 2, 2005
Bush Social Security Plan Would Not Fully Close Financing Gap
BY JED GRAHAM
INVESTOR'S BUSINESS DAILY
President Bush sought to shake up the Social Security debate Thursday night by touting a plan to protect low earners' benefits by enacting steep cuts for high earners.
The idea would ensure that people who work hard won't retire in poverty and would "solve most of the funding challenges facing Social Security," Bush said.
The prime-time news conference afforded him a second chance to take his ideas for reforming Social Security straight to a national audience in a bid to lift at-best lukewarm public support. Bush used the opportunity to try and dispel fears raised by critics of his agenda and to at least partly fill in one of the biggest blanks in his Social Security plan — how he would restore solvency.
"A variety of options are available to solve the rest of the problem, and I will work with Congress on any good-faith proposal that does not raise the payroll tax rate or harm our economy," Bush said.
The White House later released a fact sheet saying the progressive benefit formula backed by the president would solve about 70% of Social Security's financing shortfall.
That may underestimate the challenge ahead, experts said. That is because any Social Security legislation may well have to meet two tests: restoring the program to sustainable solvency and wiping out its $4.1 trillion, 75-year shortfall.
Bush's plan appears to fall far short of clearing that latter hurdle. And that doesn't factor in the challenge of making good on the IOUs in the so-called trust fund.
The difficulty with closing the 75-year gap comes because of the personal accounts Bush proposes.
While the accounts can be created so as not to worsen the long-term finances of Social Security, they do create a cash-flow challenge in the shorter run.
Consider how the accounts would interact with Social Security's finances. As people fund them with a share of payroll taxes that would otherwise have gone to the trust fund, their future benefits fall in tandem.
A Long, Long Loan
The transaction is similar to a loan that'll be paid off in the form of smaller benefit checks. So at the end of that 75-year actuarial window, millions of people still in the work force or recently retired won't have received enough smaller checks to cover the cost of their diverted payroll taxes.
The progressive benefit formula touted by Bush is the brainchild of Robert Pozen, chairman of MFS Investment Management and a Democratic member of the president's 2001 Social Security panel.
Pozen's idea is a gentler version of the panel's indexing idea, under which initial retirement benefits would only keep up with inflation, rather than keep pace with wage growth as they do currently.
Under Pozen's plan, the benefits of the bottom 30% of wage earners (about $25,000 and below) would still see benefits rise with real pay growth. But benefits for top earners wouldn't rise at all in inflation-adjusted terms. Initial benefits for midlevel earners would grow at a pace between inflation and wages.
Average earners (about $36,500) would see a 28% benefit cut by 2075. The highest earners would face a 42% cut.
But there would be across-the-board benefit cuts without any Social Security reform. After the so-called trust fund runs dry in 2041, the government would be able to pay only 74% of scheduled benefits; by 2079, it could pay just 68%.
The crunch really begins in 2017, when Social Security turns cash-flow negative and the government starts redeeming the Treasuries — IOUs to itself — in the trust fund.
Like Bush, Pozen supports personal accounts to let individuals seek a higher return to compensate for cuts in promised benefits. His plan includes an option for individuals to fund accounts with 2% of payroll.
Social Security's chief actuary found Pozen's plan would restore sustainable solvency within 75 years. But the plan would close only half of the 75-year financing gap. So it would need an infusion of $1.9 trillion in present value over more than four decades to reach solvency.
In an interview, Pozen said the politics make it "just too hard" to get the 75-year gap down to zero. He maintains it isn't necessary to do so, as long as the borrowing ends and solvency is reached within 75 years.
Ed Lorenzen, executive director of Centrists.org, which seeks bipartisan policy-making, said, "You need both 75-year solvency and sustainable solvency to be credible."
While the president's plan isn't an exact replica of Pozen's, the differences suggest it will be harder to fund his plan.
He offers a protection against poverty that appears more generous, and his plan protects all future benefits for the disabled, unlike Pozen's, says Brookings Institution senior fellow Peter Orszag. Bush prefers accounts that let workers contribute 4% of payroll, which creates bigger cash-flow issues.
Orszag figures that Bush's plan may wipe out only 40% of the 75-year shortfall.
"There's a huge chunk that is missing," Orszag said. All the options for filling the gap "involve pain."
For all the questions, some think Bush did boost the chances for Social Security reform Thursday night.
Lorenzen said Bush's support may help strengthen the hands of Sens. Lindsey Graham, R-S.C., and Robert Bennett, R-Utah, as they seek a consensus. Both have incorporated Pozen's ideas into their plans.
Michael Tanner, director of the Cato Institute Project on Social Security Choice, said Bush's support of a specific solvency plan will put pressure on Democrats to come up with their own plan.
"He didn't hit a home run, but there's a man on base," Tanner said.