Social Security pickle fuels expert discord

WASHINGTON — In 14 years, the Social Security system is projected to reach a day of reckoning: Retiree benefits will exceed payroll tax receipts, and to pay its bills the system will have to begin redeeming billions of dollars in special Treasury bonds that have piled up in its trust fund.

To redeem those bonds, which represent money taken in years when Social Security ran a surplus and was used for other government operations, the federal government would likely have to cut other programs, raise taxes or borrow more money.

To President Bush, this is a crisis, worth nothing short of dramatic structural changes to a social-insurance system that since 1940 has lifted the elderly and disabled from poverty. To those who wish to preserve the system, it is merely the day Congress must own up to its past profligacy and begin repaying Social Security for the trillions of dollars it has borrowed to fund immediate tax cuts and spending.

How this debate is resolved could decide the fate of Bush's plan to revamp Social Security.

"In 2018, Social Security has a legal claim above and beyond the revenues it is collecting," said Charles Blahous, the White House's point person on Social Security. "The question is: What is the most sensible policy going forward so costs and benefits are spread out as equitably as possible."

In late December, Bush warned Congress: "Many times, legislative bodies will not react unless the crisis is ... upon them. I believe that crisis is [upon them]."

Three competing plans Three camps have emerged in the debate over Social Security's future: the "partial privatizers," who would use personal investment accounts to ease the pain of benefit cuts; the "balancers," who would use benefit cuts and tax increases in equal measure; and the "tinkerers," who would use an array of tweaks to improve the system's solvency without fundamental changes. The Partial Privatizers: President Bush's Social Security Commission Plan 2 Allow workers to divert 4 percentage points of their 12.4 percent payroll tax, up to $1,000 a year, into a personal investment account. Initial benefits would rise with the consumer-price index, not the rise of wages, which now sets benefit levels. A retiree in 2032 would see scheduled benefits cut 18.2 percent. A retiree in 2052 would have promised benefits cut 32.5 percent. Guaranteed benefits would be cut further by the amount contributed to personal accounts. Low-wage workers would be guaranteed a minimum benefit of 120 percent of the poverty line. The Balancers: Plan drafted by Democratic economists Peter Diamond and Peter Orszag Gradually increase payroll tax to 12.7 percent in 20 years, 13.2 percent in 30 years and 13.7 percent in 40 years. Apply 3 percent surtax to incomes above the Social Security tax cap, currently about $90,000. Trim benefits from promised levels, by 3.7 percent for a retiree in 2032 and 12 percent for a retiree in 2052. The Tinkerers: Former Social Security Commissioner Robert Ball's plan Adjust standard inflation measure to slow the annual cost-of-living adjustment. Raise the portion of taxable wages from 85 percent of national payroll to 90 percent. Include all newly hired state and local government employees in the Social Security system and begin taxing their wages. Devote an inheritance tax on estates worth at least $3.5 million to Social Security. Source: The Washington Post

Peter Orszag, a Brookings Institution economist who heads the Pew Charitable Trusts' bipartisan Retirement Security Project, countered that there are less drastic ways to cover the cost of trust-fund redemptions than Bush is contemplating.

The White House could consider rolling back its tax cuts, the size of which, he said, dwarfs Social Security's funding deficit. Over 75 years, the president's tax cuts will cost the Treasury $11 trillion, nearly triple Social Security's gap during that time.

"I do think they are trying to create an artificial sense of crisis," Orszag said.

Few economists or politicians question the demographic challenge to a system that supports 47.4 million Americans. A wave of baby boomers will begin drawing Social Security benefits as soon as 2008, putting unprecedented demands on the New Deal-era system that has become the nation's main retirement program. The ratio of workers to Social Security retirees has been declining steadily since the system began, and it is down to 3-to-1. It is expected to fall to 2-to-1 in the next 30 years or so.

But there is considerable debate about how dire the problem is. For example, the scope of Social Security's "problem" may be as much as $10.4 trillion or as little as $3.7 trillion, depending on whether the analysis extends infinitely into the future, as the White House prefers, or extends to 75 years, the standard actuarial window.

Also, even by midcentury, when Social Security is likely to have depleted its trust fund of Treasury bonds, it would still be able to pay 73 percent of promised benefits out of the payroll taxes. Bush asserts the system will then be "bankrupt," but opponents question that terminology.

Blahous focuses his attention on 2018, when the Social Security payroll tax receipts will not cover benefit payments. "The government does have to come up with more money after 2018; that is the fiscal reality," he said.

By that time, spending on Social Security will have climbed steadily, from the current $492 billion, or 4.3 percent of the total economy, to nearly $1.3 trillion, or 5.3 percent of the economy, according to Social Security trustees.

To finance a bill of that magnitude would amount to a massive shift of wealth from younger generations to the elderly, those who want to revamp the system say.

To those resistant to substantial changes in Social Security, redeeming the bonds shouldn't be the problem.

"These 'IOUs' are Treasury bonds, one of the world's safest investments," said Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities. "The Treasury, the White House and Congress cannot choose not to pay interest on the bonds or not to redeem them — unless they're willing to have the U.S. government default for the first time in history."

The problem, rather, is facing the whole government, not just Social Security. When payroll taxes were last raised, in 1983, Congress knew that new revenue would be used to reduce the budget deficit, not saved to fund future obligations. But when the time came to pay back Social Security, it was understood that the burden would be shared by taxpayers and the government at large, said Dean Baker, co-director of the Center for Economic and Policy Research, who dubbed Social Security "the phony crisis" in a 1999 book by that title.

"They deliberately raised the Social Security tax, an extremely regressive tax, to supposedly pre-fund Social Security," Baker said. "If Congress had said that money would be used to fund the government, then cut from Social Security when the time came to redeem those bonds, they would have been run out of town."

Resolving whether and how to fund the debt owed to Social Security is critical. If the system is allowed to redeem all of its IOUs, it would remain healthy for decades to come. The trustees put the date of trust fund "exhaustion" at 2042.

But that date has proved extremely sensitive to economic conditions. In 1994, the Social Security trustees projected the system would run out of IOUs to redeem in 2029, 35 years into the future. But economic growth steadily pushed that date further out. By 2000, the date of exhaustion was 2037. By 2003, it was 2042.

It could be even further than that. The Congressional Budget Office this summer projected the date of exhaustion to be 2052, a 10-year difference stemming from very small changes in economic assumptions. Many economists — conservative and liberal — say the economic future is considerably brighter still.

The trustees assume annual economic growth will slow to a crawl by 2015 and will remain at an anemic 1.8 percent through 2080. That is about half the growth rate the United States has averaged since the Civil War, said James Glassman, senior U.S. economist at J.P. Morgan Chase, who sees no reason why that would happen.

"There still are problems, but it's not the fiscal doomsday that people imagine," said Glassman.